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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, 2002
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.
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(Exact name of Registrant as specified in its charter)
Ohio 34-1395608
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
401 Clinton Street, Defiance, Ohio 43512
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (419) 783-8950
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No X
--- ---
The aggregate market value of the common shares of the Registrant held by
non-affiliates computed by reference to the price at which the common were last
sold as of the last business day of the Registrant's most recently completed
second fiscal quarter was $48,423,314 (the last sale for the second quarter
actually occurred June 28, 2002).
Common Shares, Without Par Value (4,565,721 outstanding at March 3, 2003)
Documents Incorporated by Reference: Portions of the Registrant's definitive
Proxy Statement for its Annual Meeting of Shareholders to be held on April 28,
2003 are incorporated by reference into Part III of this Annual Report on Form
10-K.
Exhibit Index on Page 96 (as numbered sequentially)
1
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, (1) The State Bank and Trust Company, Defiance,
Ohio ("State Bank"), and (2) RFC Banking Company ("RFCBC") which is comprised of
the following divisions: The Peoples Banking Company, Findlay, Ohio ("Peoples
Bank"), The First Bank of Ottawa ("First Bank of Ottawa") 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 American General Assurance Company ("AGAC") from the credit
life and disability insurance. State Bank has two wholly-owned subsidiaries:
Reliance Financial Services, N.A. ("RFS") and Rurban Mortgage Company ("RMC").
RFS is a nationally-chartered trust and financial services company. RMC is an
Ohio corporation and mortgage company with its principle office located in
Defiance, Ohio.
General Description of Holding Company Group
State Bank
State Bank is an Ohio state-chartered bank. State Bank presently operates
six branch offices in Defiance County, Ohio (five in the city of Defiance and
one in Ney), three branch offices in adjacent Paulding County, Ohio (one each in
Paulding, Oakwood and Grover Hill), three branch offices in Fulton County, Ohio
(one in each of Delta, Lyons and Wauseon) and one branch office in Summit County
(Westlake). The Westlake branch will be closed during the second quarter of
2003. At December 31, 2002, State Bank had 102 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; time
certificates of deposit, automatic teller machines; commercial, consumer,
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 RFCBC's three operating
divisions (Peoples Bank, First Bank of Ottawa and Citizens Savings Bank).
RFS
RFS is a nationally-chartered trust and financial services company and a
wholly-owned subsidiary of State Bank. RFS offers various trust and financial
services, including asset management services for individuals and corporate
employee benefit plans as well as brokerage services through Raymond James
Financial, Inc.
RFS has one office. The office is located in State Bank's main offices in
Defiance, Ohio. At December 31, 2002, RFS had 20 full-time equivalent employees.
2
RMC
RMC is an Ohio corporation with its main office located in Defiance, Ohio.
RMC is a wholly-owned subsidiary of State Bank. RMC ceased originating mortgage
loans in the second quarter of 2000.
At December 31, 2002, RMC had no employees.
RFC Banking Company
Effective June 30, 2001, Peoples Bank, First Bank of Ottawa and Citizens
Savings Bank merged to form an Ohio state-chartered bank, RFC Banking Company.
RFCBC provides checking and NOW accounts; passbook savings and money market
accounts; time certificates of deposit; an automatic teller machine; commercial,
consumer, agricultural and residential loans; personal and corporate trust
services; commercial leasing; bank credit card services; safe deposit box
rentals and other personalized banking services. At December 31, 2002, RFCBC had
55 full-time equivalent employees.
On December 30, 2002, an agreement was signed to sell the branches, loans
and deposits of the Citizens Savings Bank division of RFCBC to the Union Bank.
The transaction is expected to close in late March or early April of 2003. The
closing of the transaction is subject to standard closing conditions.
On February 22, 2003, an agreement was signed to sell the branches and
certain performing loans of the Peoples Banking Company and First bank of Ottawa
divisions of RFCBC to First Federal Bank of the Midwest. The transaction is
expected to close in June 2003. The closing of the transaction is subject to
standard closing conditions.
Each of the RFCBC divisions described below maintains the following offices
and operates under the following bank names.
Peoples Bank
The main office of Peoples Bank is located in Findlay, Ohio. Peoples Bank
operates one full-service branch in Findlay and one in McComb, Ohio.
First Bank of Ottawa
The executive offices of First Bank of Ottawa are located at 405 East Main
Street, Ottawa, Ohio. At its present location, First Bank of Ottawa operates
four drive-in teller lanes and an automatic teller machine with a traditional
banking lobby on the first floor. First Bank of Ottawa presently operates no
branch offices.
Citizens Savings Bank
The main office of Citizens Savings Bank is located in Pemberville, Ohio.
Citizens Savings Bank also operates a full-service branch in Gibsonburg, Ohio.
RDSI
Substantially all of RDSI's business is comprised of providing data
processing services to 52 financial institutions in Ohio, Michigan and Indiana
(including State Bank and RFCBC), including information processing for financial
institution customer services, loan and deposit account information and data
analysis. At December 31, 2002, RDSI had 55 full-time equivalent employees.
Rurban Life
Rurban Life commenced its business of transacting insurance as an Arizona
life and disability reinsurer in January, 1988. Rurban Life accepts reinsurance
ceded in part by AGAC from the credit life and disability insurance purchased by
customers of State Bank and RFCBC (through its divisions,
3
Peoples Bank, First Bank of Ottawa and Citizens Savings Bank) from AGAC in
connection with revolving credit loans secured by mortgages and with certain
installment loans made to such customers by State Bank and RFCBC (though its
divisions, Peoples Bank, First Bank of Ottawa 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, 2002, Rurban Life has not
accepted any other reinsurance. In August 2000, the Corporation's banks ceased
issuing credit life and disability insurance contracts through AGAC. In
September 2000, the Corporation's banks entered into agreements with Individual
Assurance Corporation ("IAC") and began issuing credit life and disability
insurance contract through IAC. At December 31, 2002, Rurban Life had no
employees.
Competition
State Bank and RFCBC 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 and RFCBC, 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.
RFS operates in the highly competitive trust services field and its
competition is primarily other Ohio bank trust departments.
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.
Regulation of Bank Holding Companies and Their Subsidiaries in General
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. 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.
RFS, as a nationally-chartered trust company, is regulated by the OCC. As
Ohio state-chartered banks, State Bank and RFCBC are supervised and regulated by
the Ohio Division of Financial Institutions. State Bank is a member of the
Federal Reserve System so its primary federal regulator is the Federal Reserve
Board. RFCBC is not a member of the Federal Reserve System so its primary
federal
4
regulator is the Federal Deposit Insurance Corporation ("FDIC"). The deposits of
State Bank and RFCBC are insured by the FDIC and as such 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.
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.
Various requirements and restrictions under the laws of the United States
and the State of Ohio affect the operations of State Bank and RFCBC 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.
Subject to the terms and conditions of the written agreement with the
federal and state banking regulators described in the paragraph below, the
ability of the Corporation 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 to shareholders of the
Corporation. State Bank and RFCBC 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 and RFCBC 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 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.
Written Agreement
On July 9, 2002, the Corporation and State Bank announced they entered into
a Written Agreement ("Agreement") with the Federal Reserve Bank of Cleveland and
the Ohio Division of Financial Institutions on July 5, 2002. The Agreement was
the result of an examination of State Bank as of December 31, 2001, which was
conducted in March and April 2002.
The results of the November 4, 2002 regulatory examinations indicated that
as of that date, Rurban and State Bank were not in full compliance with certain
provisions of the Agreement. Management expects to be in substantial compliance
with each of the provisions of the Agreement by mid-2003.
The Corporation and RFCBC have been advised by RFCBC's regulators, the FDIC
and the Ohio Division of Financial Institutions, that the preliminary results of
the November 4, 2002 examination of RFCBC indicated that RFCBC may be presented
with a formal agreement based on concerns raised. RFCBC's December 31, 2002
total risk-based capital ratio was 8.1%, above the "adequately capitalized"
5
minimum of 8%. The anticipated March closing of the sale of the Citizens
division (see note 5 to the consolidated financial statements for further
information) is expected to improve the total risk-based capital ratio to
approximately 15%.
State Bank and RFCBC are prohibited from paying dividends to Rurban without
prior regulatory approval. Rurban is prohibited from paying Trust Preferred
"dividends" and common stock dividends without prior regulatory approval.
Transactions with Affiliates, Directors, Executive Officers and Shareholders
On October 31, 2002, the Federal Reserve Board approved Regulation W which
comprehensively implements Sections 23A and 23B of the Federal Reserve Act.
Sections 23A and 23B and Regulation W restrict transactions by banks and their
subsidiaries with their affiliates. An affiliate of a bank is any company or
entity which controls, is controlled by or is under common control with the
bank.
Generally, Sections 23A and 23B and Regulation W:
- limit the extent to which a bank or its subsidiaries may engage in
"covered transactions" with any one affiliate to an amount equal to
10% of that bank's capital stock and surplus (i.e., tangible capital);
- limit the extent to which a bank or its subsidiaries may engage in
"covered transactions" with all affiliates to 20% of that bank's
capital stock and surplus; and
- require that all such transactions be on terms substantially the same,
or at least as favorable to the bank or subsidiary, as those provided
to a non-affiliate.
The term "covered transaction" includes the making of loans, purchase of assets,
issuance of a guarantee and other similar types of transactions.
Regulation W will become effective on April 1, 2003 and upon its effective
date, all existing Federal Reserve Board interpretations of Sections 23A and 23B
will be rescinded.
A bank's authority to extend credit to executive officers, directors and
greater than 10% shareholders, as well as entities such persons control, is
subject to Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O
promulgated thereunder by the Federal Reserve Board. Among other things, these
loans must be made on terms substantially the same as those offered to
unaffiliated individuals and must not involve a greater than normal risk of
repayment. In addition, the amount of loans a bank may make to these persons is
based, in part, on the bank's capital position, and specified approval
procedures must be followed in making loans which exceed specified amounts.
Regulatory Capital
The Federal Reserve Board has adopted risk-based capital guidelines for
bank holding companies and for state member banks, such as State 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 3% for bank
6
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%-2% 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. State non-member banks such as RFCBC, are
subject to similar capital requirements adopted by the FDIC. 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 Corporation and RFCBC at year end 2002 were categorized as adequately
capitalized while State Bank was categorized as well capitalized. The
Corporation and RFCBC were categorized as well capitalized at year end 2001.
State Bank was categorized as adequately capitalized at year end 2001.
Prompt Corrective Regulatory Action
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
decreases. 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.
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 and RFCBC 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.
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.
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.
Financial Services Modernization Act of 1999
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act, or the Financial Services Modernization Act of 1999,
which, effective March 11, 2000, permits bank holding companies to become
financial holding companies and thereby affiliate with securities firms and
insurance companies and engage in other activities that are financial in nature.
A bank holding company
7
may become a financial holding company if each of its subsidiary banks is well
capitalized under the Federal Deposit Insurance Corporation Act of 1991 prompt
corrective action provisions, is well managed, and has at least a satisfactory
rating under the Community Reinvestment Act by filing a declaration that the
bank holding company wishes to become a financial holding company. No regulatory
approval will be required for a financial holding company to acquire a company,
other than a bank or savings association, engaged in activities that are
financial in nature or incidental to activities that are financial in nature, as
determined by the Federal Reserve Board.
The Financial Services Modernization Act defines "financial in nature" to
include: (i) securities underwriting, dealing and market making; (ii) sponsoring
mutual funds and investment companies; (iii) insurance underwriting and agency;
(iv) merchant banking activities; and (v) activities that the Federal Reserve
Board has determined to be closely related to banking.
As of the date of this Form 10-K, the Corporation has opted not to become a
financial holding company. The Corporation intends to continue to analyze the
proposed advantages and disadvantages of becoming a financial holding company on
a periodic basis.
RECENT LEGISLATION
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of
2002 (the "Sarbanes-Oxley Act"). The stated goals of the Sarbanes-Oxley Act are
to increase corporate responsibility, to provide for enhanced penalties for
accounting and auditing improprieties at publicly traded companies and to
protect investors by improving the accuracy and reliability of corporate
disclosures made pursuant to the securities laws. The changes are intended to
allow shareholders to monitor the performance of companies and directors more
easily and efficiently.
The Sarbanes-Oxley Act generally applies to all companies, both U.S. and
non-U.S., that file or are required to file periodic reports with the SEC under
the Exchange Act. Further, the Sarbanes-Oxley Act includes very specific
additional disclosure requirements and new corporate governance rules, requires
the SEC, securities exchanges and The NASDAQ Stock Market to adopt extensive
additional disclosure, corporate governance and other related rules and mandates
further studies of certain issues by the SEC and the Comptroller General of the
United States. Given the extensive SEC role in implementing rules relating to
many of the Sarbanes-Oxley Act's new requirements, the final scope of many of
these requirements remains to be determined.
The Sarbanes-Oxley Act addresses, among other matters: audit committees;
corporate responsibility for financial reports; a requirement that chief
executive and chief financial officers forfeit certain bonuses and profits if
their companies issue an accounting restatement as a result of misconduct; a
prohibition on insider trading during pension fund black out periods; disclosure
of off-balance sheet transactions; conditions for the use of pro forma financial
information; a prohibition on personal loans to directors and executive officers
(excluding loans by insured depository institutions that are subject to the
insider lending restrictions of the Federal Reserve Act); expedited filing
requirements for stock transaction reports by officers and directors; the
formation of the Public Company Accounting Oversight Board; auditor
independence; and various increased criminal penalties for violations of
securities laws.
The Board of Directors of the Corporation is in the process of reviewing
the requirements of the Sarbanes-Oxley Act and the rules and regulations
promulgated by the SEC implementing the Sarbanes-Oxley Act as well as the rules
proposed by Nasdaq related to corporate governance matters. The Board of
Directors intends to take appropriate action to comply with Nasdaq and SEC rules
as those rules are finalized and implemented.
8
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 Operations and the Consolidated Financial
Statements of the Corporation and its subsidiaries included at pages F-1 through
F-39 of this Annual Report on Form 10-K.
9
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL
The following are the condensed average balance sheets for the years ending
December 31 and the interest earned or paid on such amounts and the average
interest rate thereon:
2002 2001 2000
----------------------------- ------------------------------- -----------------------------
Average Avg Average Avg Average Avg
Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------------------------------------------------------------------------------------------
(dollars in thousands)
ASSETS:
Securities (1)
Taxable $98,383 $4,781 4.86% $86,093 $5,463 6.35% $76,005 $4,978 6.55%
Non-taxable (2) 6,276 333 5.31% 8,390 615 7.33% 11,907 897 7.53%
Federal funds sold 15,146 295 1.95% 4,758 167 3.51% 842 48 5.70%
Loans, net (3) 627,685 43,295 6.90% 583,239 50,483 8.66% 542,412 50,405 9.29%
---------- --------- -------- ----------- ---------- -------- ---------- --------- --------
Total earning assets 747,490 48,704 6.52% 682,480 56,728 8.31% 631,166 56,328 8.92%
Cash and due from banks 26,124 24,496 18,474
Allowance for loan losses (15,801) (7,627) (6,652)
Premises and equipment 13,658 12,090 10,960
Other assets 19,620 11,388 11,575
---------- ----------- ----------
Total assets $791,091 $722,827 $665,523
========== =========== ==========
LIABILITIES:
Deposits
Savings and interest-
Bearing
Demand deposits $185,357 $2,578 1.39% $160,936 $4,245 2.64% $167,697 $5,858 3.49%
Time deposits 409,363 17,723 4.33% 385,059 22,169 5.76% 326,957 19,034 5.82%
Short-term borrowings 17,541 305 1.74% 8,916 302 3.39% 19,961 1,359 6.81%
Advances from FHLB 53,595 2,923 5.45% 51,760 2,987 5.77% 43,769 2,707 6.18%
Junior subordinated
debentures 10,000 1,075 10.75% 10,000 1,048 10.48% 3,230 336 10.40%
Other borrowed funds 5,400 209 3.87% - 27 - 4,315 341 -
---------- --------- --------- ---------- ---------- --------- ---------- --------- --------
Total interest 681,197 24,813 3.64% 616,373 30,778 4.99% 565,929 29,635 5.24%
--------- ---------- ---------
- --------------------------------------------------------------------------------
(1) Securities averages include fair value adjustments.
(2) Interest is computed on a tax equivalent basis using a 34% statutory tax
rate. The tax equivalent adjustment was $113, $209 and $305 in 2002, 2001
and 2000.
(3) Nonaccruing loans and loans held for sale are included in the average
balances.
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---------- --------- --------- ---------- ---------- --------- ---------- --------- --------
bearing
liabilities
--------- --------- ---------
Demand deposits 51,888 47,208 43,773
Other liabilities 13,273 6,240 9,194
---------- ---------- ----------
Total liabilities 746,417 670,119 618,896
Shareholder's equity 44,674 52,708 46,627
---------- ---------- ----------
Total liabilities and
shareholders' equity $791,091 $722,827 $665,523
========== ========== ==========
Net interest income (tax
equivalent basis) $23,891 $25,950 $26,693
========= ========== =========
Net interest income as a
percent
Of average interest-earning 3.20% 3.80% 4.23%
assets
- --------------------------------------------------------------------------------
(1) Securities averages include fair value adjustments.
(2) Interest is computed on a tax equivalent basis using a 34% statutory tax
rate. The tax equivalent adjustment was $113, $209 and $305 in 2002, 2001
and 2000.
(3) Nonaccruing loans and loans held for sale are included in the average
balances.
11
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL (Continued)
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 2002, 2001 and 2000.
Total
Variance Variance Attributable To
2002/2001 Volume Rate
--------- ------ ----
INTEREST INCOME (dollars in thousands)
Securities
Taxable $ (682) $ 711 $ (1,393)
Non-taxable (282) (135) (147)
Federal funds sold 128 230 (102)
Loans, net of unearned income
and deferred loan fees (7,188) 3,634 (10,822)
--------------- -------------- -----------------
(8,024) 4,440 (12,464)
--------------- -------------- -----------------
INTEREST EXPENSE
Deposits
Savings and interest-bearing
demand deposits (1,667) 570 (2,237)
Time deposits (4,446) 1,329 (5,775)
Short-term borrowings 3 198 (195)
Advances from FHLB (64) 104 (168)
Junior subordinated debentures 27 0 27
Other borrowed funds 182 182 0
-------------- -------------- ----------------
(5,965) 2,383 (8,348)
--------------- -------------- -----------------
NET INTEREST INCOME $ (2,059) $ 2,057 $ (4,116)
=============== ============== =================
12
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL (Continued)
Total
Variance Variance Attributable To
2001/2000 Volume Rate
--------- ------ ----
INTEREST INCOME (dollars in thousands)
Securities
Taxable $ 485 $ 644 $ (159)
Non-taxable (282) (258) (24)
Federal funds sold 119 144 (25)
Loans, net of unearned income
and deferred loan fees 78 3,658 (3,580)
-------------- -------------- ----------------
400 4,188 (3,788)
-------------- -------------- -----------------
INTEREST EXPENSE
Deposits
Savings and interest-bearing
demand deposits (1,613) (228) (1,385)
Time deposits 3,136 3,347 (212)
Short-term borrowings (1,057) (554) (503)
Advances from FHLB 279 470 (190)
Junior subordinated debentures 712 709 3
Other borrowed funds (314) (157) (157)
-------------- -------------- ----------------
1,143 3,587 (2,444)
-------------- -------------- ----------------
NET INTEREST INCOME $ (743) $ 601 $ (1,344)
============== ============== ================
13
II. INVESTMENT PORTFOLIO
A. The book value of securities available for sale as of December 31 are
summarized as follows:
2002 2001 2000
---- ---- ----
(dollars in thousands)
U.S. Treasury and Government agencies $ 54,801 $ 16,881 $ 22,896
Mortgage-backed securities 55,643 62,981 49,931
State and political subdivisions 4,518 4,798 12,575
Marketable equity securities 97 300 358
Mutual Funds - 10,000 -
Other securities 50 6,180 -
--------------- --------------- ----------------
$ 115,109 $ 101,140 $ 85,760
=============== =============== ================
B. The maturity distribution and weighted average yield of securities
available for sale at December 31, 2002 are as follows:
-----------------------------Maturing--------------------------
After One Year After Five Years
Within But Within But Within After
One Year Five Years Ten Years Ten Years
-------- ---------- --------- ---------
U.S. Treasury and Government agencies $ 44,943 $ 8,652 $ 1,206 $ -
States and political
subdivisions 10 1,094 2,098 1,316
Mortgage-backed securities 770 1,217 13,200 40,456
Other securities 50
------------- --------------- ------------- --------------
$ 45,723 $ 11,013 $ 16,504 $ 41,772
============= =============== ============= ==============
Weighted average yield (1) 1.37% 2.40% 5.16% 4.54%
(1) Yields are not presented on a tax-equivalent basis.
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
other securities of any one issuer which exceeded 10% of the
shareholders' equity of the Corporation at December 31, 2002.
14
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:
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(dollars in thousands)
Commercial and
agricultural $ 321,726 $ 388,673 $ 362,928 $ 326,564 $ 248,841
Real estate
mortgage 84,432 106,689 107,718 80,704 72,225
Consumer
loans to
individuals 60,139 76,513 81,063 77,110 60,224
Lease financing 21,509 28,752 25,279 17,300 13,021
---------------- ---------------- ----------------- ----------------- -----------------
$ 487,806 $ 600,627 $ 576,988 $ 501,678 $ 394,311
================= ================ ================= ================= =================
Loans held
for resale $ 63,536 $ 0 $ 0 $ 0 $ 0
================ ================ ================= ================= =================
Real estate
mortgage
loans held
for resale $ 0 $ 440 $ 1,167 $ 7,150 $ 18,509
================ ================ ================= ================= =================
Concentrations of Credit Risk: The Corporation grants commercial, real estate
and installment loans to customers mainly in northern Ohio. Commercial loans
include loans collateralized by commercial real estate, business assets and
agricultural loans collateralized by crops and farm equipment. As of December
31, 2002, commercial and agricultural loans make up approximately 66% of the
loan portfolio and the loans are expected to be repaid from cash flow from
operations of businesses. As of December 31, 2002, residential first mortgage
loans make up approximately 17% of the loan portfolio and are collateralized by
first mortgages on residential real estate. As of December 31, 2002, consumer
loans to individuals make up approximately 17% 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 and agricultural
loans outstanding as of December 31, 2002 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 commercial and agricultural loans due
after one year. (Variable-rate loans are those loans with floating or
adjustable interest rates.)
Commercial and
Maturing Agricultural
-------- ------------
Within one year $ 122,279
After one year but within five years 106,923
After five years 92,524
--------------
$ 321,726
==============
15
III. LOAN PORTFOLIO (Continued)
Commercial and Agricultural
Interest Sensitivity
--------------------
Fixed Variable
Rate Rate Total
---- ---- -----
(dollars in thousands)
Due after one year but
within five years $ 45,673 $ 61,250 $ 106,923
Due after five years 15,013 77,511 92,524
---------------- --------------- ---------------
$ 60,686 $ 138,761 $ 199,447
================ =============== ===============
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.
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(dollars in thousands)
(a) Loans accounted for on a
nonaccrual basis $ 18,259 $ 12,557 $ 2,950 $ 1,403 $ 1,880
(b) Accruing loans which
are contractually
past due 90 days or
more as to interest
or principal payments 476 2,131 1,927 809 (1) 1,742
(c) Loans not included in (a)
which are "Troubled
Debt Restructurings" as
defined by Statement of
Financial Accounting
Standards No. 15 - - 3,911 - -
---------- ---------- ---------- ---------- ----------
Total non-performing
loans $ 18,735 $ 14,688 $ 8,788 $ 2,212 $ 3,622
---------- ---------- ---------- ---------- ----------
(d) Other loans defined as
impaired $ 3,166 $ - $ 1,624 $ 1,103 $ -
========== ========== ========== ========== ==========
16
III. LOAN PORTFOLIO (Continued)
Management believes the allowance for loan losses at December 31, 2002 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 probable 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.
2002
----
(In thousands)
Gross interest income that would have been recorded in
2002 on nonaccrual loans outstanding at December 31,
2002 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 $2,234
Interest income actually recorded on nonaccrual loans and
included in net income for the period 694
---------
Interest income not recognized during the period $ 1,540
=========
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, 2002, in addition to the $18,735,000 of
loans reported under Item III. C. 1. (which includes all
loans classified by management as doubtful or loss), there
are approximately $58,802,000 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 (loans classified as substandard by
management) and which may result in disclosure of such loans
pursuant to Item III. C. 1. at some future date. In regard
to loans classified as substandard, management believes that
such potential problem loans have been adequately evaluated
in the allowance of loan losses.
17
III. LOAN PORTFOLIO (Continued)
3. Foreign Outstandings
None
4. Loan Concentrations
At December 31, 2002, loans outstanding related to agricultural
operations or collateralized by agricultural real estate
aggregated approximately $68,954,000.
D. Other Interest-Bearing Assets
There are no other interest-bearing assets as of December 31, 2002
which are required to be disclosed under Item III. C. 1 or Item III.
C. 2. if such assets were loans.
18
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:
2002 2001 2000
---- ---- ----
(dollars in thousands)
LOANS
Loans outstanding at end of period (1) $ 551,011 $ 600,731 $ 577,803
================== ================ ================
Average loans outstanding during period (1) $ 627,685 $ 583,239 $ 542,412
================== ================ ================
ALLOWANCE FOR LOAN LOSSES
Balance at beginning of period $ 9,239 $ 7,215 $ 6,194
Assumed in acquisition 1,427
Loans charged-off
Commercial and agricultural loans (19,584) (6,089) (641)
Real estate mortgage (496) (54) (22)
Consumer loans to individuals (1,693) (1,030) (906)
------------------ ---------------- ----------------
(21,773) (7,173) (1,569)
Recoveries of loans previously charged-off
Commercial and agricultural loans 892 110 106
Real estate mortgage 28 1 23
Consumer loans to individuals 351 353 362
----------------- ---------------- ----------------
1,271 464 491
----------------- ---------------- ----------------
Net loans charged-off (20,502) (6,709) (1,079)
Provision for loan losses (27,530) 8,733 2,100
------------------ ---------------- ----------------
Balance at end of period $ 17,694 $ 9,239 $ 7,215
================== ================ ================
Ratio of net charge-offs during the period to
average loans outstanding during the period 3.27% 1.15% .20%
==== ==== ===
1999 1998
---- ----
(dollars in thousands)
LOANS
Loans outstanding at end of period (1) $ 508,481 $ 412,479
================= ================
Average loans outstanding during period (1) $ 461,343 $ 376,126
================= ================
ALLOWANCE FOR LOAN LOSSES
Balance at beginning of period $ 5,409 $ 5,240
Assumed in acquisition
Loans charged-off
Commercial and agricultural loans (578) (885)
Real estate mortgage (25) (60)
Consumer loans to individuals (489) (390)
----------------- ----------------
(1,092) (1,335)
Recoveries of loans previously charged-off
Commercial and agricultural loans 327 248
Real estate mortgage 72 4
Consumer loans to individuals 263 173
----------------- ----------------
662 425
----------------- ----------------
Net loans charged-off (430) (911)
Provision for loan losses 1,215 1,080
----------------- ----------------
Balance at end of period $ 6,194 $ 5,409
================= ================
Ratio of net charge-offs during the period to
average loans outstanding during the period .09% .24%
=== ===
(1) Net of unearned income and deferred loan fees, including loans held for
sale
The allowance for loan losses balance and the provision for loan losses 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 in 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, 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.
19
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 Percentage
of Loans of Loans of Loans
In Each In Each In Each
Category to Category To Category to
Allowance Total Allowance Total Allowance Total
Amount Loans --------- Amount Loans Amount
------ ----- ----- ------ -----
Loans
December 31, 2002 December 31, 2001* December 31, 2000
----------------- ----------------- -----------------
Commercial, and agricultural $ 16,518 66.0% $ 8,222 64.7% $ 5,365 62.9%
Residential first mortgage 204 17.3 126 17.8 202 18.7
Consumer loans to
individuals 972 16.7 891 17.5 814 18.4
Unallocated - N/A * N/A 834 N/A
-------------- ---- ------------- ---- -------------- ----
$ 17,694 100.0% $ 9,239 100.0% $ 7,215 100.0%
============== ===== ============= ===== ============== =====
----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
Loans Amount Loans Amount
------ ----- ------ -----------
December 31, 1999 December 31, 1998
----------- -----------------
(dollars in thousands)
Commercial, and agricultural $ 4,371 65.1% $ 2,704 63.1%
Residential first mortgage 93 16.1 144 18.3
Consumer loans to
individuals 553 18.8 1,026 18.6
Unallocated 1,177 N/A 1,535 N/A
------------- ---- ------------- ----
$ 6,194 100.0% $ 5,409 100.0%
============= ===== ============= =====
* In 2001, management established a revised methodology for allocating the
allowance for loan losses which includes identifying specific allocations
for impaired and problem loans and quantifying general allocations for
other loans based on a detailed evaluation of historical loss ratios.
Adjustments are then made to these amounts based on various quantifiable
information related to individual portfolio risk factors. Additional
adjustments are made based on a local and national economic trends and
their estimated impact on the industries to which the Company extends
credit. Prior to 2001, individual portfolio risk factors allocations were
made on a more subjective basis. Management believes the new methodology
more appropriately allocates the allowance for known and inherent risks
within the individual loan portfolios.
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.
20
V. DEPOSITS
The average amount of deposits and average rates paid are summarized as
follows for the years ended December 31:
2 0 0 2 2 0 0 1 2 0 0 0
------- ------- -------
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(dollars in thousands)
Savings and interest-bearing demand deposits $ 185,357 1.39% $ 160,936 2.64% $ 167,697 3.49%
Time deposits 409,363 4.33% 385,059 5.76 326,957 5.82
Demand deposits (noninterest-bearing) 51,888 47,208 - 43,773 -
--------------- -------------- ---------------
$ 646,608 $ 593,203 $ 538,427
=============== ============== ===============
Maturities of time certificates of deposit and other time deposits of
$100,000 or more outstanding at December 31, 2002 are summarized as
follows:
Amount
Three months or less $ 36,253
Over three months and through six months 33,644
Over six months and through twelve months 42,082
Over twelve months 60,076
---------------
$ 172,055
===============
21
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:
2002 2001 2000
---- ---- ----
(dollars in thousands)
Average total assets $ 791,091 $ 722,827 $ 665,523
================= ================== ==================
Average shareholders' equity $ 44,674 $ 52,708 $ 46,627
================= ================== ==================
Net income $ (13,408) $ 2,253 $ 6,086
================== ================== ==================
Cash dividends declared $ 1,187 $ 2,158 $ 1,888
================= ================== ==================
Return on average total assets (1.69)% .31% .91%
====== === ===
Return on average share-
holders' equity (30.01)% 4.27% 13.05%
======= ==== =====
Dividend payout ratio (1) N/A 95.80% 31.02%
===== =====
Average shareholders' equity
to average total assets 5.65% 7.29% 7.01%
==== ==== ====
(1) Cash 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 2001 was 30 percent or more of
shareholders' equity at the end of the reported period.
The following information is reported for short-term borrowings for 2002
and 2000:
2002 2000
---- ----
(dollars in thousands)
Amount outstanding at end of year $ 6,000 $ 13,200
================= ===================
Weighted average interest rate at end of year 5.25% 6.44%
==== ========
Maximum amount outstanding at any month end $ 30,800 $ 31,005
================= ===================
Average amount outstanding during the year $ 24,041 $ 19,961
================= ===================
Weighted average interest rate during the year 2.70% 6.81%
==== ====
22
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 2,023 square feet on the second floor are leased to
RDSI, 7,294 square feet on the second floor are leased to RFS and
2,868 square feet on the lower level are leased to the Corporation.
The main office was remodeled in 2002.
2. A drive through 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. The branch was remodeled in 2000.
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 and remodeled in 1998. It is a free standing structure located
in front of a shopping center.
6. 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. The branch was most recently remodeled in 2002.
7. 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.
8. 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.
9. 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. This office was remodeled in 1998.
23
10. 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. This office was remodeled in
2001.
11. A full service branch office located at 1991 Crocker Road, Suite 204,
Westlake, Ohio containing 1,364 square feet was opened in 1998. State
Bank leases the space in which this branch is located. This office was
remodeled in 2001. This branch will close in the second quarter of
2003.
12. A full service branch office located at 218 North First Street,
Oakwood, Ohio containing 3,226 square feet of space was acquired from
the Federal Deposit Insurance Corporation ("FDIC") in 2002.
13. A full service branch office located at 100 South Main Street, Grover
Hill, Ohio containing 1,556 square feet of space was acquired from the
FDIC in 2002.
The following is a listing and brief description of the properties owned by
RFCBC used in its business:
Peoples Bank
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. This office was remodeled in 2001.
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 at 101 N. Main Street, Arcadia, Ohio was
opened in August 2002. It contains approximately 1,750 square feet of
floor space. RFCBC leases the space in which this branch is located.
First Bank of Ottawa
The real property owned by First Bank of Ottawa is the location of the Bank
at 405 East Main Street, Ottawa, Ohio. First Bank of Ottawa'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.
Citizens Savings Bank
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.
RMC is the master lessee of Oak Creek Offices. This office space is located
at Estancia Boulevard, Suite 202, Clearwater, Florida. This space is leased to
various tenants. State Bank obtained this property in 2003. RMC vacated in March
2003 and the property is being offered for sale.
RDSI leases a 5,616 square foot office space located at 2010 South
Jefferson, Defiance, Ohio. This office was first leased on December 21, 1999.
RDSI also leases 2,023 square feet on the second floor of the State Bank
building located at 401 Clinton Street, Defiance, Ohio.
24
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.
25
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.
Position(s) Held with the Corporation and
Name Age its Subsidiaries and Principal Occupation(s)
---- --- --------------------------------------------
Steven D. VanDemark 50 Chairman of the Board of Directors of the Corporation;
Chairman of the Board of Directors of State Bank; Chairman of
the Board of Directors of RFCBC; Director of RDSI; General
Manager of Defiance Publishing Company, Defiance, Ohio, a
newspaper publisher.
Kenneth A. Joyce 55 President and Chief Executive Officer of the Company since
August 2002; Chairman and Chief Executive Officer of RDSI since
October 1997; Director of State Bank since 2002; Director of
RFCBC since 2002.
Robert W. Constien 50 Senior Executive Vice President & Chief Operating Officer
since November 22, 2000; Executive Vice President of the
Corporation from March, 1997 to November 2000; Vice President
of the Corporation from 1994 to March, 1997; Chief Executive
Officer and a Director of RFS since March, 1997; Director of
State Bank since 1996; President and Chief Executive Officer of
State Bank since April, 2002; Executive Vice President of State
Bank from 1994 to 1997, Senior Vice President of State Bank
from 1991 to 1993 and Vice President of State Bank from 1987 to
1991.
Richard C. Warrener 58 Executive Vice President of the Corporation since December
1997; Chief Financial Officer of the Corporation since December
31, 1996; Senior Vice President of the Corporation from
December 31, 1996 to December 1997; Senior Vice President and
Chief Financial Officer of FirstMerit Bank, N.A. from March
1994 to December 1996. Richard Warrener has announced his
decision to retire from the Corporation effective March 31,
2003. The Corporation intends to retain Mr. Warrener as a
consultant for a non-specified period of time thereafter.
26
Position(s) Held with the Corporation and
Name Age its Subsidiaries and Principal Occupation(s)
---- --- --------------------------------------------
James E. Adams 58 Chief Financial Officer of the Corporation since March 31,
2003; Executive Vice President, Chief Financial Officer and
Corporate Secretary of Integra Bank in Evansville, Indiana from
1999 through 2001; Executive Vice President and Chief Financial
Officer at MainStreet Financial Corporation in Martinsville,
Virginia from 1994 to 1999.
27
PART II
Item 5. Market for Registrant's Common Shares and Related Shareholder Matters.
The common shares of the Company are traded on the NASDAQ National Market,
(symbol "RBNF") effective November 6, 2001. Prior to that date, the common
shares of the Company were traded on the OTC Bulletin Board. The table below
sets forth the high and low closing prices and the cash dividends declared with
respect to the common shares of the Company for the indicated periods. The high
and low closing prices reflect actual prices for purchases and sales of the
Company's common shares as reported by NASDAQ and not inter-dealer prices. The
per share amounts have been restated for the 5% stock dividend declared in 2001.
Per Share Per Share
Closing Prices Dividends
2001 High Low Declared
---- ---- --- --------
First Quarter $ 12.38 $ 11.07 $ .114
Second Quarter 13.33 11.78 .114
Third Quarter 14.75 12.85 .114
Fourth Quarter 15.29 13.45 .130
2002
----
First Quarter $ 13.95 $ 12.90 $ .130
Second Quarter 13.60 12.00 .130
Third Quarter 13.02 8.00 .000
Fourth Quarter 10.84 9.00 .000
There can be no assurance as to the amount of dividends which will be declared
with respect to the common shares of the Company in the future, since such
dividends are subject to the discretion of the Company's Board of Directors,
cash needs, general business conditions, dividends from the subsidiaries and
applicable governmental regulations and policies. The Company is prohibited from
payment of common stock dividends without prior regulatory approval by the terms
of the Written Agreement.
The approximate number of holders of outstanding common shares of the Company,
based upon the number of record holders as of March 3, 2003, is 1,484.
FORM 10-K
THE COMPANY WILL PROVIDE WITHOUT CHARGE TO EACH SHAREHOLDER, UPON WRITTEN
REQUEST TO RURBAN FINANCIAL CORP., P.O. BOX 467, DEFIANCE, OHIO 43512,
ATTENTION: SANDRA STOCKHORST, INVESTOR RELATIONS DEPARTMENT, A COPY OF THE
COMPANY'S ANNUAL REPORT ON FORM 10-K, INCLUDING THE FINANCIAL STATEMENTS AND
SCHEDULES THERETO REQUIRED TO BE FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION, FOR THE COMPANY'S MOST RECENT FISCAL YEAR.
28
Item 6. Selected Financial Data.
SUMMARY OF SELECTED FINANCIAL DATA
(Dollars in thousands except per share data)
Year Ended December 31, 2002 2001 2000 1999 1998
---- ---- ---- ---- ----
EARNINGS
Total interest income $ 48,591 $ 56,519 $ 56,023 $ 44,953 $ 39,293
Total interest expense 24,813 30,778 29,635 21,744 18,743
Net interest income 23,778 25,741 26,388 23,209 20,550
Provision for loan losses 27,531 8,733 2,100 1,215 1,080
Total noninterest income 13,779 14,162 11,273 11,064 10,511
Total noninterest expense 30,479 28,018 26,754 25,466 23,630
Provision (credit) for income taxes (7,044) 899 2,721 2,361 2,073
Net income (loss) (13,408) 2,253 6,086 5,231 4,278
- -------------------------------------------------------------------------------------------------------------------
PER SHARE DATA (1)
Basic earnings $ (2.95) $ .50 $ 1.35 $ 1.16 $ .95
Diluted earnings (2.95) .50 1.35 1.16 .94
Cash dividends declared .26 .47 .42 .37 .36
- -------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES
Average shareholders'
equity $ 46,320 $ 52,708 $ 46,627 $ 42,967 $ 40,431
Average total assets 795,125 722,827 665,523 580,200 493,957
- -------------------------------------------------------------------------------------------------------------------
RATIOS
Return on average
shareholders' equity - 4.27% 13.05% 12.17% 10.58%
Return on average total
assets - .31 .91 .90 .87
Cash dividend payout
ratio (cash dividends
divided by net income) - 92.61 31.02 32.36 38.83
Average shareholders'
equity to average total
assets 5.84 7.29 7.01 7.41 8.19
- -------------------------------------------------------------------------------------------------------------------
PERIOD END TOTALS
Total assets $ 742,317 $ 746,209 $ 700,818 $ 627,784 $ 537,155
Total loans and leases 551,342 600,627 576,988 501,678 394,311
Total deposits 636,035 610,860 566,321 519,296 450,813
Advances from FHLB 47,850 54,275 52,164 40,035 28,890
Junior subordinated
debentures 10,000 10,000 10,000 - -
Shareholders' equity 36,382 50,829 50,140 43,900 41,903
Shareholders' equity
per share (1) 8.01 11.14 10.98 9.62 9.18
- -------------------------------------------------------------------------------------------------------------------
29
Per share data restated for two-for-one stock split declared in 1998, 5% stock
dividend declared in 2000 and 5% stock dividend declared in 2001.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Rurban Financial Corp. ("Rurban") or ("Company") was incorporated on February
23, 1983, under the laws of the State of Ohio. Rurban is a bank holding company
registered with the Federal Reserve Board under the Bank Holding Company Act of
1956, as amended. Rurban's subsidiaries, The State Bank and Trust Company
("State Bank") and RFC Banking Company ("RFCBC") are engaged in the industry
segment of commercial banking. RFCBC was created June 30, 2001 through the
merger of The Peoples Banking Company, The First National Bank of Ottawa and The
Citizens Savings Bank Company, which were wholly owned subsidiaries of Rurban
prior to the merger, and now operate as separate divisions. Rurban's subsidiary,
Rurbanc Data Services, Inc. ("RDSI"), provides computerized data processing
services to community banks and businesses including Rurban's subsidiary banks.
Rurban's subsidiary, Rurban Life Insurance Company ("Rurban Life") has a
certificate of authority from the State of Arizona to transact insurance as a
domestic life and disability insurer. Rurban's subsidiary, Rurban Statutory
Trust I ("RST") was established in September 2000 for the purpose of managing
the Company's junior subordinated debentures. Reliance Financial Services, N.A.
("Reliance"), a wholly owned subsidiary of State Bank, provides trust and
financial services to customers nationwide.
The following discussion is intended to provide a review of the consolidated
financial condition and results of operations of Rurban. This discussion should
be read in conjunction with the consolidated financial statements and related
footnotes.
This section may contain statements that are forward-looking as defined by the
Securities and Exchange Commission in its rules, regulations and releases. The
Company intends that such forward-looking statements be subject to the safe
harbors created thereby. All forward-looking statements are based on current
expectations regarding important risk factors including those identified in the
Company's most recent periodic report and other filings with the Securities and
Exchange Commission. Accordingly, actual results may differ materially from
those expressed in the forward-looking statements, and the making of such
statements should not be regarded as a representation by the Company, or any
other person, that the results expressed therein will be achieved.
EARNINGS SUMMARY
The net loss for the year was $13.4 million, or $2.95 per diluted share,
compared with net income of $2.3 and $6.1 million, or $.50 and $1.35 per diluted
share, reported for 2001 and 2000, respectively. Cash dividends declared per
share decreased to $.26 for 2002 compared to $.47 in 2001 and $.42 in 2000. Per
share data has been adjusted to reflect the 5% stock dividends paid in September
2001 and 2000.
The primary reason for the loss in 2002 and the reduced level of earnings in
2001 was the discovery of extensive underwriting deficiencies in the loan
portfolio which resulted in a loan loss provision of $27.5 million in 2002 and
$5.6 million in the fourth quarter of 2001. The discovery process began during
late
30
2001, broadened during 2002 and culminated at year-end with the completion of
extensive loan reviews both internally and by auditors, consultants and
regulators. By year-end 2002, the Company had reviewed nearly every commercial
and agricultural loan greater than $100,000 and identified the problem loans.
Those loan reviews also resulted in considerable progress in identifying the
level of both the potential and probable losses in each of the problem loans.
However, assessing and reserving for probable losses on problem loans is in part
a judgmental process and a moving target. As additional information about a
borrower's recent and future operations and collateral values becomes available,
judgments and loss estimates change. At each quarter end, the Company applies
judgment to the best information then available to determine the appropriate
level of the allowance for loan losses and the resulting loan loss provision
required to bring the allowance to the appropriate level. These issues are
discussed further in the sections on Loan Loss Provision, Asset Quality and
Allowance for Loan Losses.
SIGNIFICANT EVENTS OF 2002 AND 2003
In addition to the discussion which follows of the results of operations which
affected the income statement and balance sheet; several other significant
events occurred during and subsequent to 2002.
On February 2, 2002, the Company acquired certain loans and insured deposits of
the failed Oakwood Deposit Bank from the FDIC. The operations of the two Oakwood
branches made a positive contribution to the Company's bottom line. Refer to
note 21 to the consolidated financial statements for further information.
On May 22, 2002, the Company announced its technology group, RDSI Banking
Systems Inc. (RDSI), had acquired the principal assets of BancServ, Inc., a data
services company jointly owned by National Bank of Oak Harbor and Genoa Bank.
BancServ provided data processing, item processing and imaging to these two
independent banks located in North Central Ohio. These services are now being
provided by RDSI.
On July 25, 2002, the Company announced its technology group, RDSI Banking
Systems Inc. (RDSI), had acquired the principal assets of Northwest Financial
Services, Inc. (Northwest). Northwest was a limited liability corporation
providing item processing and imaging services for eight RDSI client banks. This
acquisition, which provides item processing and imaging critical mass, will
increase RDSI's franchise value by providing additional services to its client
base.
On December 30, 2002, an agreement was signed to sell the branches, loans and
deposits of the Citizens Savings Bank division of RFCBC to the Union Bank at a
price substantially in excess of their book value. The transaction is expected
to close in March 2003. Refer to note 5 to the consolidated financial statements
for further information.
On February 12, 2003, the Company notified the trustee of its Trust Preferred
securities of its election to defer the semi-annual interest payment, which
would have been due on March 7, 2003, until no sooner than September 7, 2003.
During any interest deferral period, the Trust Preferred indenture prohibits the
payment of a common stock dividend.
On February 22, 2003, an agreement was signed to sell the branches, deposits and
certain performing loans of the Peoples Banking Company and First Bank of Ottawa
divisions of RFCBC to First Federal Bank of the Midwest at a price substantially
in excess of their book value. The transaction is expected to close in June
2003. Refer to note 27 to the consolidated financial statements for further
information.
RESULTS OF OPERATIONS
31
Year Ended Year Ended
December 31, December 31,
----------- -----------
2002 2001 %Change 2001 2000 %Change
-----------------------------------------------------------------------------
(dollars in thousands except per share data)
-----------------------------------------------------------------------------
Total Assets $742,317 $746,209 -1% $746,209 $700,818 +6%
Loans Held for Sale 63,536 440 - 440 1,167 -62%
Loans (Net) 469,781 591,052 -21% 591,052 569,421 +4%
Allowance for Loan Losses 17,694 9,239 +92% 9,239 7,215 +28%
Total Deposits 567,860 610,860 -7% 610,860 566,321 +8%
Total Revenues (Net) 37,557 39,903 -6% 39,903 37,661 +6%
Net Interest Income 23,778 25,741 -8% 25,741 26,388 -2%
Loan Loss Provision 27,531 8,733 +215% 8,733 2,100 +316%
Noninterest Income 13,779 14,162 -3% 14,162 11,273 +26%
Noninterest Expense 30,479 28,018 +9% 28,018 26,754 +5%
Net Income (13,408) 2,253 -695% 2,253 6,086 -63%
Basic Earnings per Share $(2.95) $.50 -695% $.50 $1.35 -63%
Diluted Earnings per Share $(2.95) $.50 -695% $.50 $1.35 -63%
32
NET INTEREST INCOME
Year Ended Year Ended
December 31, December 31,
----------- -----------
2002 2001 % Change 2001 2000 % Change
-------------------------------------------------------------------------------
(dollars in thousands)
-------------------------------------------------------------------------------
Net Interest Income $23,778 $25,741 -8% $25,741 $26,388 -2%
NET INTEREST INCOME declined $2.0 million from 2001 to $23.8 million in 2002.
The net interest margin for 2002 was 3.17% compared to 3.81% for the previous
year. The 64 basis point decline in the net interest margin was largely due to a
187 basis point decrease in the yield on earning assets from 8.34% to 6.47%
which was not fully offset by a 117 basis point decrease in the Company's cost
of funds. The major reason for the reductions in net interest income and in
earning asset yield was a $1.1 million increase in the loss of interest income
on non-performing and charged off loans. The decline in asset yield was also the
result of higher liquidity and a corresponding higher average balance of funds
invested in lower yielding investments.
NET INTEREST INCOME declined $647,000 from 2000 to $25.7 million in 2001 despite
a 4% growth in the net loan portfolio. The decrease was a direct result of the
effect on the Company's asset sensitive balance sheet of 11 rate decreases which
reduced the prime rate from 9.50% to 4.75%. The net interest margin for 2001 was
3.81% compared to 4.23% for the previous year. The unprecedented steep decline
in the prime rate compressed the net interest margin as the decline in interest
income on loans exceeded the pace of the decline in funding costs. The 42 basis
point decline in the net interest margin was largely due to a 58 basis point
decrease in the yield on earning assets from 8.92% to 8.34% which was not fully
offset by a 25 basis point decrease in the Company's cost of funds.
LOAN LOSS PROVISION
THE PROVISION FOR LOAN LOSSES was $27.5 million in 2002 compared to $8.7 million
in 2001. The allowance for loan losses at December 31, 2002 was 3.21% of loans
compared to 1.54% at December 31, 2001. The increase in the provision resulted
primarily from net chargeoffs of $20.5 million of loans in 2002 and from
nonperforming loans increasing to $18.7 million at December 31, 2002 versus
$14.7 million at December 31, 2001.
THE PROVISION FOR LOAN LOSSES was $8.7 million in 2001 compared to $2.1 million
in 2000. The allowance for loan losses at December 31, 2001 was 1.54% of loans
compared to 1.25% at December 31, 2000. The increase in the provision resulted
primarily from net chargeoffs of $6.7 million of loans in 2001 and from
nonperforming loans increasing to $14.7 million at December 31, 2001 versus $8.8
million at December 31, 2000.
30
NONINTEREST INCOME
Year Ended Year Ended
December 31, December 31,
----------- -----------
2002 2001 % Change 2001 2000 % Change
-----------------------------------------------------------------------------
(dollars in thousands)
-----------------------------------------------------------------------------
Total Noninterest Income $13,779 $ 14,162 -3% $ 14,162 $ 11,273 +26%
- Data Service Fees $ 7,816 $ 6,126 +28% $ 6,126 $ 5,124 +20%
- Deposit Service Fees $ 2,618 $ 2,593 +1% $ 2,593 $ 1,744 +49%
- Gains on Sale of Loans $ 759 $ 889 -15% $ 889 $ 387 +130%
- Gains on Sale of Securities $ (834) $ 490 -270% $ 490 $ (81) --
TOTAL NONINTEREST INCOME decreased $383,000 to $13.8 million in 2002 from $14.2
million in 2001. The decrease was primarily due to a $1.7 million loss on the
sale of the Company's investment in WorldCom bonds, which resulted in a $1.1
million after tax loss in the second quarter of 2002. This decrease was offset
by data service fees which increased $1.7 million or 28% to $7.8 million in 2002
compared to $6.1 million in 2001.
NONINTEREST INCOME increased $2.9 million, or 26%, from 2000 to $14.2 million in
2001. The increase was primarily due to a $1.0 million increase in data service
fees from the Company's bank data processing subsidiary, Rurbanc Data Services,
Inc. ("RDSI"), an $849,000 increase in deposit service fees due to a new product
introduction, and a $1.1 million increase in gains on sale of loans and
securities.
RURBANC DATA SERVICES, INC. ("RDSI")
Year Ended Year Ended
December 31, December 31,
----------- -----------
2002 2001 % Change 2001 2000 % Change
-------------------------------------------------------------------------------
(Dollars in thousands)
-------------------------------------------------------------------------------
Data Service Fees $7,816 $6,126 +28% $6,126 $5,124 +20%
DATA SERVICE FEES increased $1.7 million or 28% to $7.8 million from $6.1
million in 2001 and $1.0 million or 20% from 2000 to 2001. The primary reasons
for these increases were increases in the number of customer accounts processed
and in the level of sales of complementary data processing products. The
increase in the number of accounts was primarily the result of customer account
growth at client banks and the addition of new client banks.
RDSI PROVIDES data processing services for nearly 60 community banks in Ohio,
Michigan and Indiana. RDSI differentiates itself from its competition through
the quality of its products and the excellence of its customer service. The
applications utilized by RDSI are driven by world-class software used by over
3,600 banks nationwide. Customer service encompasses on-time delivery every
morning and a discipline of responding to and resolving customer questions and
issues within one hour in excess of 95% of the time. RDSI provides turnkey
solutions for its clients through its partnerships with vendors experienced in a
full array of banking products.
RDSI'S GROWTH comes from both new and existing clients. In the past five years,
the number of bank clients has more than doubled. Equally important is the
growth of client banks, both in their number of customer accounts and in the
breadth of services provided. Network services, internet banking and other
technical services are a rapidly growing part of RDSI's revenue.
31
NONINTEREST EXPENSE
Year Ended Year Ended
December 31, December 31,
----------- -----------
2002 2001 %Change 2001 2000 %Change
-------------------------------------------------------------------------------
(dollars in thousands)
-------------------------------------------------------------------------------
Total Noninterest Expense $30,479 $28,018 +9% $28,018 $26,754 +5%
- Salaries & Employee Benefits $15,720 $15,448 +2% $15,448 $15,095 +2%
- Professional Fees 3,130 1,712 +83% 1,712 1,263 +36%
- All Other $11,629 $10,858 +7% $10,858 $10,396 +4%
NONINTEREST EXPENSE for the year 2002 was $30.5 million, up $2.5 million or 9%
from $28.0 million in 2001. Professional fees increased $1.4 million due to
increased consulting, legal and auditing fees associated with the evaluation and
management of the Company's problem loans. The noninterest expenses of the
acquired Oakwood branches and the data processing acquisitions were $1.2
million. Excluding the professional fees associated with problem loans and
acquired entity expenses; noninterest expense declined $132,000.
NONINTEREST EXPENSE for the year 2001 was $28.0 million, up 5% from $26.8
million in 2000. The noninterest expense increase was limited to 5% as incentive
compensation declined by $750,000, resulting in an increase in compensation of
less than 1%. Employee benefits increased $270,000 or 9% primarily due to a
$224,000 or 28% increase in group insurance. Noninterest expense other than
salaries and benefits increased $911,000 or 8%.
LOANS
Period Ended
% of % of % % of %
12/31/02 Total 12/31/01 Total Inc/(Dec) 12/31/00 Total Inc/(Dec)
-----------------------------------------------------------------------------------------------
(dollars in thousands)
-----------------------------------------------------------------------------------------------
Commercial $123,053 25% $185,654 31% (34)% $176,911 31% 5%
Commercial real 129,719 27% 135,883 23% (5)% 123,758 21% 10%
estate
Agricultural 68,954 14% 67,136 11% 3% 62,259 11% 8%
Residential 84,432 17% 106,689 18% (21)% 107,718 19% (1)%
Consumer 60,139 12% 76,512 12% (21)% 81,064 14% (6)%
Leasing loans 21,509 5% 28,752 5% (25)% 25,278 4% 14%
-------------- -------------- --------------
Loans $487,806 $600,626 (19)% $576,988 4%
Loans held for sale 63,536 440 1,167
-------------- -------------- --------------
Total $551,342 $601,066 $578,155
LOANS declined $113 million to $488 million at December 31, 2002, due to an
increase in loans held for sale of $63 million, reduced new loan demand and $21
million of charged off loans. The increase in loans held for sale is due to a
December 30, 2002 agreement to sell the Citizens Savings Bank division of RFCBC,
to the Union Banking Company. This transaction is scheduled to close in late
March 2003. Refer to note 5 to the consolidated financial statements for further
information. Commercial, commercial real estate, residential, consumer and
leasing loans declined 34%, 5%, 21%, 21% and 25%, respectively for the year
while agricultural loans increased 3%.
In 2001, loans increased $24 million or 4% to $601 million.
32
ASSET QUALITY
Period Ended December 31,
-------------------------
(dollars in millions)
---------------------
Change in Change in
Dollars/ Dollars/
12/31/02 12/31/01 Percentages 12/31/00 percentages
-------- -------- ----------- -------- -----------
Non-performing loans $ 18.7 $14.7 $ 4.0 $ 8.8 $5.9
Non-performing assets $ 20.8 $15.0 $ 5.8 $ 8.9 $6.1
Non-performing assets/loans
Plus OREO 4.25% 2.49% 1.76% 1.55% .94%
Non-performing assets/total
assets 2.80% 2.00% .80% 1.27% .73%
Net chargeoffs $20.5 $ 6.7 $ 13.8 $ 1.1 $5.6
Net chargeoffs/total loans 4.20% 1.12% 3.08% .19% .93%
Loan loss provision $27.5 $ 8.7 $ 18.8 $ 2.1 $6.6
Allowance for loan losses $17.7 $ 9.2 $ 8.5 $ 7.2 $2.00
Allowance/loans 3.21% 1.54% 1.67% 1.25% .29%
Allowance/non-performing
Loans 95% 63% 32% 82% -19%
Allowance/non-performing
Assets 85% 62% 23% 81% -19%
ASSET QUALITY statistics reflect a significant increase in both nonperforming
assets and chargeoffs during 2002 compared to 2001 and 2001 compared to 2000.
Non-performing assets at December 31, 2002 were $20.8 million or 2.80% of total
assets, versus $15.0 million or 2.00% at December 31, 2001 and $8.9 million or
1.27% at year-end 2000. Annual net chargeoffs for 2002 were $20.5 million or
4.20% of total loans compared to $6.7 million or 1.12% for 2001. The ratio of
the allowance for loan losses to nonperforming loans was 95% at December 31,
2002 compared to 63% at December 31, 2001.
ALLOWANCE FOR LOAN LOSSES
The Company grades its loans using a seven grade system. Problem loans are
classified as either:
- Grade 5 - Substandard: Inadequately protected, with well-defined
weakness that jeopardize liquidation of debt
- Grade 6 - Doubtful: Inherent weaknesses well-defined and high
probability of loss (impaired)
- Grade 7 - Loss: Considered uncollectible. May have recovery or salvage
value with future collection efforts (these loans are either fully
reserved or charged off)
The Company's ALLOWANCE FOR LOAN LOSSES has four components. Those components
are shown in the following table. Commercial, commercial real estate and
agricultural loans of over $100,000 are individually reviewed and assessed
regarding the need for an individual allocation.
33
----------12/31/02----------- -----------12/31/01----------- ---INCREASE (DECREASE)---
ALLOCATION ALLOCATION ALLOCATION
LOAN ---------- LOAN ---------- LOAN ----------
BALANCE $ % BALANCE $ % BALANCE $ %
----------- -------- ---------- ------------ -------- ---------- ------------ -------- --------
Allocations for individual loans $14.9 $5.1 34.23% $11.1 $3.6 32.94% $7.4 $1.9 -8.44%
graded doubtful (impaired)
Allocations for individual loans 57.7 6.6 11.44 29.3 2.3 7.85 28.4 4.3 3.59
graded substandard
"General" allowance based on 478.7 5.2 1.09 560.7 2.9 0.52 -85.6 1.9 0.51
chargeoff history of nine
categories of loans
Allocation based on current risk -- 0.8 -- -- 0.4 -- -- 0.4 --
factor statistics as compared to
historical risk factor statistics
----------- -------- ---------- ------------ -------- ---------- ------------ -------- --------
TOTAL $551.3 $17.7 3.21% $601.1 $9.2 1.54% $-49.8 $8.5 1.67%
In 2002, the amount of loans classified as doubtful increased $3.8 to $14.9
million and substandard loans increased $28.4 to $57.7 million. Allowance
allocations on doubtful loans increased $1.9 million while allowance
allocations on substandard loans increased $4.3 million. The allowance for
loan losses at December 31, 2002 was $17.7 million or 3.21% of loans
compared to $9.2 million or 1.54% at December 31, 2001.
While the amount of doubtful and substandard loans and their related
allowance allocations increased during 2002, the pace of increase has
slowed. Management believes that these problem loan statistics have peaked
and that workout efforts will begin to reduce these balances in 2003.
Management's estimate of the allowance for loan losses includes judgments
related to the following factors:
- Borrower financial information received;
- Physical inspections of collateral securing loans performed, new
appraisals of collateral securing loans received, and other
information regarding borrower collateral levels; and
- Consideration of exposures to industries potentially most affected by
current risks in the economic and political environment.
The results of the Company's extensive, ongoing loan review and workout
process suggest that the volume of potential problem loans, nonperforming
loans and charge-offs were attributable to a combination of entering higher
risk lines of business, ineffective oversight and a few lenders neglecting
basic lending fundamentals required by the Company's lending policies and
procedures.
In order to assure that new loan underwriting is prudent and in compliance
with policy and procedures, the following actions were taken during the
past year:
- Several lending officers were terminated
- The presidents of the banks and the holding company were replaced
- The senior credit administration officer was replaced
- A new loan policy and loan procedures were adopted
- Loan officer training was dramatically increased
- The independence of the internal loan review staff was improved
by the creation of a Loan Review Committee of the board of
directors which the loan review manager reports to
- The independence of the internal audit function was improved by:
34
- The hiring of a staff internal audit manager
- The separation of the internal audit outsourcing firm and the
independent audit firm
- Loan officer and loan committee authorization limits were reduced
- A plan was put in place to exit the Cleveland lending market and other
loan relationships outside of northwestern Ohio.
In regard to the effort to reduce the volume of substandard and doubtful
(classified loans), the following actions were taken during the past year:
- The Company's loan workout group was increased to four staff employees
and two consultants
- The planned creation of a loan subsidiary to manage the classified
loans of RFCBC will focus the efforts of four additional staff
employees on the workout of that group of loans
- Most classified loans are now assigned to a loan workout specialist
These actions are intended to assure that the loan workout effort can be
concluded within a one and one-half to three year period and that every effort
can be made to minimize losses and maximize associated recoveries.
CAPITAL RESOURCES
STOCKHOLDERS' EQUITY at December 31, 2002 decreased to $36.3 million or 4.57% of
average total assets as compared to $50.8 million or 7.03% of average total
asset at December 31, 2001. The Company and RFCBC exceed all
"adequately-capitalized" regulatory capital benchmarks while State Bank exceeded
all "well-capitalized" regulatory capital benchmarks. Banking regulatory
authorities periodically perform examinations of the Company's subsidiary banks
and, as an integral part of the examination process, periodically review the
allowance for loan losses. Such authorities may require additions to the
allowance for loan losses based upon their judgment of the information available
to them at the time of their examination. Such authorities may also require
other adjustments or place various restrictions on the activities of the
Company's subsidiary banks.
TOTAL REGULATORY (RISK-BASED) CAPITAL was $49.4 million at December 31, 2002 and
$67.4 million at December 31, 2001. The excess of total regulatory capital over
total shareholder equity is primarily due to the $10.0 million of junior
subordinated debentures (trust preferred securities) which qualify as Tier 1
capital, and the allowance for loan losses which qualifies as Tier 2 capital
subject to certain limitations.
The Company's business plan includes strategies to sell the branches of RFCBC
and use that bank's current capital and the gain on sale which would result from
the branch sales as the capital and primary funding source for a non-banking
subsidiary. This subsidiary would manage RFCBC's classified loans that are not
included in the sale agreements. Cash flow from the principal and interest
payments as well as the payoffs of classified loans would be available to repay
debt of the loan subsidiary and to dividend to Rurban the cash for resumption of
the Trust Preferred interest payments, common stock dividends and ultimately to
reinvest in the expansion of Rurban's banking and data processing operations.
PLANNED PURCHASES OF PREMISES AND EQUIPMENT
MANAGEMENT PLANS TO PURCHASE additional premises and equipment to meet the
current and future needs of the Company's customers. These purchases, including
buildings and improvements and furniture and equipment (which includes computer
hardware, software, office furniture and license agreements), are currently
expected to total approximately $6 million over the next year.
WRITTEN AGREEMENT
On July 9, 2002, the Company and State Bank announced they entered into a
Written Agreement ("Agreement") with the Federal Reserve Bank of Cleveland and
the Ohio Division of Financial Institutions on July 5, 2002. The Agreement was
the result of an examination of State Bank as of December 31, 2001, which was
conducted in March and April 2002.
35
The results of the November 4, 2002 regulatory examinations indicated that as of
that date, Rurban and State Bank were not in full compliance with certain
provisions of the Agreement. Management expects to be in substantial compliance
with each of the provisions of the Agreement by mid-2003.
The Company and RFCBC have been advised by RFCBC's regulators, the FDIC and the
Ohio Division of Financial Institutions, that the preliminary results of the
November 4, 2002 examination of RFCBC indicated that the Bank may be presented
with a formal agreement based on concerns raised. RFCBC's December 31, 2002
total risk-based capital ratio was 8.1%, above the "adequately capitalized"
minimum of 8%. The anticipated March closing of the sale of the Citizens
division (see note 5 to the consolidated financial statements for further
information) is expected to improve the total risk-based capital ratio to
approximately 15%.
State Bank and RFCBC are prohibited from paying dividends to Rurban without
prior regulatory approval. Rurban is prohibited from paying Trust Preferred
"dividends" and common stock dividends without prior regulatory approval.
LIQUIDITY
LIQUIDITY RELATES PRIMARILY to the Company'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 and due from banks, interest
earning deposits in other financial institutions, securities available-for sale
and loans held for sale. These assets are commonly referred to as liquid assets.
Liquid assets were $235.9 million at December 31, 2002 compared to $130 million
at December 31, 2001.
THE COMPANY'S RESIDENTIAL FIRST MORTGAGE PORTFOLIO of $84.4 million at December
31, 2002 and $106.7 million at December 31, 2001, which can and has been readily
used to collateralize borrowings, is an additional source of liquidity.
Management believes its current liquidity level is sufficient to meet its
liquidity needs. At December 31, 2002, all eligible mortgage loans were pledged
under an FHLB blanket lien.
THE CASH FLOW STATEMENTS for the periods presented provide an indication of the
Company's sources and uses of cash as well as an indication of the ability of
the Company to maintain an adequate level of liquidity. A discussion of the cash
flow statements for 2002, 2001 and 2000 follows.
THE COMPANY EXPERIENCED a net increase in cash from operating activities in
2002, 2001 and 2000. Net cash from operating activities was $15.3 million, $8.5
million and $13.0 million for the years ended December 31, 2002, 2001 and 2000,
respectively.
NET CASH FLOW FROM INVESTING ACTIVITIES was $94.0 million, $(47.8) million and
$(75.7) million for the years ended December 31, 2002, 2001 and 2000,
respectively. The changes in net cash from investing activities for 2002 include
a reduction in loan growth and cash received for the net liabilities from the
Oakwood acquisition. The changes in net cash from investing activities for 2001
and 2000 include loan growth, as well as normal maturities and reinvestments of
securities and premises and equipment expenditures. In 2002, 2001 and 2000, the
Company received $81.9 million, $19.0 million and $9.1 million, respectively,
from sales of securities available for sale, while proceeds from repayments,
maturities and calls of securities were $53.9 million, $38.1 million and $8.8
million in 2002, 2001 and 2000, respectively.
NET CASH FLOW FROM FINANCING ACTIVITIES was $(83.6) million, $46.2 million, and
$62.6 million for the years ended December 31, 2002, 2001 and 2000,
respectively. The net cash decrease was primarily due to a reduction in total
deposits of $(66.6) million in 2002. The net cash increase in 2001 and 2000 was
primarily attributable to growth in total deposits of $44.5 million and $47.0
million, respectively. Other significant changes in 2002, 2001 and 2000 included
$(6.4) million, $2.1 million and $12.1 million in net borrowings from the
Federal Home Loan Bank.
36
OFF-BALANCE-SHEET BORROWING ARRANGEMENTS:
Significant additional off-balance-sheet liquidity is available in the form of
FHLB advances, unused federal funds lines from correspondent banks, and the
national certificate of deposit market. While such additional off-balance-sheet
liquidity is available, the Written Agreement between Rurban, State Bank, the
Federal Reserve Bank of Cleveland and the Ohio Division of Financial
Institutions requires Rurban and State Bank to obtain written approval of the
Federal Reserve Bank of Cleveland and the Ohio Division of Financial
Institutions prior to directly or indirectly incurring any debt.
Approximately $62.6 million residential first mortgage loans of the Company's
$84.4 million portfolio qualify to collateralize FHLB borrowings and have been
pledged to meet FHLB collateralization requirements as of December 31, 2002. In
addition to residential first mortgage loans, $14.9 million in investment
securities are pledged to meet FHLB collateralization requirements. Based on the
current collateralization requirements of the FHLB, approximately $6.0 million
of additional borrowing capacity existed at December 31, 2002. Subsequent to
year-end, all loans originated at RFC Banking Company were designated as held
for sale and no longer qualified as collateral for FHLB advances. These loans
have been replaced with investment securities to meet FHLB collateralization
requirements.
At December 31, 2001, the Company had unused federal funds lines totaling
approximately $32.2 million from five correspondent banks. As of December 31,
2002, the Company had unused federal funds lines totaling approximately $26
million from 2 correspondent banks. Federal funds borrowed were $0 at December
31, 2002 and $14.9 million at December 31, 2001.
Because RFCBC was not classified as well capitalized at December 31, 2002, it
required approval from its respective regulatory agencies prior to accepting any
new brokered certificates of deposit. At December 31, 2002, RFCBC had
approximately $40.1million in certificates of deposit which have been accepted
from brokers. Approximately $22.6 million of those certificates of deposit
mature within the next year.
Approximately $16.4 million performing commercial loans and $5 million in
investment securities are pledged to the Federal Reserve Discount Window to
establish additional borrowing capacity of $15.9 million. Such loans are pledged
for contingency funding purposes and to date this borrowing capacity has not
been used. Totals do not include $5 million in securities pledged for daylight
overdraft (Payments System Risk).
37
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
--------------------------------------------------------------------------------
PAYMENT DUE BY PERIOD
--------------------------------------------------------------------------------
LESS MORE
THAN 1 1 - 3 3 - 5 THAN 5
CONTRACTUAL OBLIGATIONS TOTAL YEAR YEARS YEARS YEARS
- ----------------------- ----------------- ---------------- --------------- ------------ ----------------
Long-Term Debt Obligations $63,850,000 $18,350,000 $5,000,000 $0 $40,500,000
Capital Lease Obligations 0 0 0 0 0
Operating Lease Obligations 896,400 99,600 199,200 199,200 398,400
Purchase Obligations 0 0 0 0
Other Long-Term Liabilities
Reflected on the Registrant's
Balance Sheet under GAAP 0 0 0 0 0
----------------- ---------------- --------------- ------------ ----------------
Total $64,746,400 $18,449,600 $5,199,200 $199,200 $40,898,400
The Company's contractual obligations as of December 31, 2002 were evident in
long-term debt obligations and operating lease obligations. The long-term debt
obligations were comprised of FHLB Advances of $47,850,000, Trust Preferred
securities of $10,000,000 and Note Payable of $6,000,000. The operating lease
obligation is a lease on the RDSI building of $99,600 a year.
ASSET LIABILITY MANAGEMENT
ASSET LIABILITY MANAGEMENT involves developing and monitoring strategies to
maintain sufficient liquidity, maximize net interest income and minimize the
impact that significant fluctuations in market interest rates would have on
earnings. The business of the Company and the composition of its balance sheet
consists of investments in interest-earning assets (primarily loans,
mortgage-backed securities, and securities available for sale) which are
primarily funded by interest-bearing liabilities (deposits and borrowings). With
the exception of loans which are originated and held for sale, all of the
financial instruments of the Company are for other than trading purposes. All of
the Company's transactions are denominated in U.S. dollars with no specific
foreign exchange exposure. In addition, the Company has limited exposure to
commodity prices related to agricultural loans. The impact of changes in foreign
exchange rates and commodity prices on interest rates are assumed to be
insignificant. The Company's financial instruments have varying levels of
sensitivity to changes in market interest rates resulting in market risk.
Interest rate risk is the Company's primary market risk exposure; to a lesser
extent, liquidity risk also impacts market risk exposure.
INTEREST RATE RISK is the exposure of a banking institution's financial
condition to adverse movements in interest rates. Accepting this risk can be an
important source of profitability and stockholder value; however, excessive
levels of interest rate risk could pose a significant threat to the Company's
earnings and capital base. Accordingly, effective risk management that maintains
interest rate risks at prudent levels is essential to the Company's safety and
soundness.
EVALUATING A FINANCIAL INSTITUTION'S EXPOSURE to changes in interest rates
includes assessing both the adequacy of the management process used to control
interest rate risk and the organization's quantitative level of exposure. When
assessing the interest rate risk management process, the Company seeks to ensure
that appropriate policies, procedures, management information systems, and
internal controls are in place to maintain interest rate risks at prudent levels
of consistency and continuity. Evaluating the quantitative level of interest
rate risk exposure requires the Company to assess the existing and potential
future effects of changes in interest rates on its consolidated financial
condition, including capital adequacy, earnings, liquidity, and asset quality
(when appropriate).
THE FEDERAL RESERVE BOARD together with the Office of the Comptroller of the
Currency and the Federal Deposit Insurance Company, adopted a Joint Agency
Policy Statement on interest rate risk effective June
38
26, 1996. The policy statement provides guidance to examiners and bankers on
sound practices for managing interest rate risk, which will form the basis for
ongoing evaluation of the adequacy of interest rate risk management at
supervised institutions. The policy statement also outlines fundamental elements
of sound management that have been identified in prior Federal Reserve guidance
and discusses the importance of these elements in the context of managing
interest rate risk. Specifically, the guidance emphasizes the need for active
Board of Director and Senior Management oversight and a comprehensive risk
management process that effectively identifies, measures, and controls interest
rate risk.
FINANCIAL INSTITUTIONS derive their income primarily from the excess of interest
collected over interest paid. The rates of interest an institution earns on its
assets and owes on its liabilities generally are established contractually for a
period of time. Since market interest rates change over time, an institution is
exposed to lower profit margins (or losses) if it cannot adapt to interest rate
changes. For example, assume that an institution's assets carry intermediate or
long term fixed rates and that those assets are funded with short-term
liabilities. If market interest rates rise by the time the short-term
liabilities must be refinanced, the increase in the institution's interest
expense on its liabilities may not be sufficiently offset if assets continue to
earn at the long-term fixed rates. Accordingly, an institution's profits could
decrease on existing assets because the institution will either have lower net
interest income or possibly, net interest expense. Similar risks exist when
assets are subject to contractual interest rate ceilings, or rate sensitive
assets are funded by longer-term, fixed-rate liabilities in a declining rate
environment.
SEVERAL WAYS an institution can manage interest rate risk include: 1) matching
repricing periods for new assets and liabilities, for example, by shortening
terms of new loans or investments; 2) selling existing assets or repaying
certain liabilities; and 3) hedging existing assets, liabilities, or anticipated
transactions. An institution might also invest in more complex financial
instruments intended to hedge or otherwise change interest rate risk. Interest
rate swaps, futures contacts, options on futures contracts, and other such
derivative financial instruments can be used for this purpose. Because these
instruments are sensitive to interest rate changes, they require management's
expertise to be effective. The Company has not purchased derivative financial
instruments in the past and does not presently intend to purchase such
instruments.
QUANTITATIVE MARKET RISK DISCLOSURE. The following table provides information
about the Company's financial instruments used for purposes other than trading
that are sensitive to changes in interest rates as of December 31, 2002. It does
not present when these items may actually reprice. For loans receivable,
securities, and liabilities with contractual maturities, the table presents
principal cash flows and related weighted-average interest rates by contractual
maturities as well as the Company's historical experience of the impact of
interest rate fluctuations on the prepayment of loans and mortgage backed
securities. For core deposits (demand deposits, interest-bearing checking,
savings, and money market deposits) that have no contractual maturity, the table
presents principal cash flows and, as applicable related weighted-average
interest rates based upon the Company's historical experience, management's
judgment and statistical analysis, as applicable, concerning their most likely
withdrawal behaviors. The current historical interest rates for core deposits
have been assumed to apply for future periods in this table as the actual
interest rates that will need to be paid to maintain these deposits are not
currently known. Weighted average variable rates are based upon contractual
rates existing at the reporting date.
39
PRINCIPAL/NOTIONAL AMOUNT MATURING OR ASSUMED TO WITHDRAW IN:
(DOLLARS IN THOUSANDS)
2003 2004 2005 2006 2007 Thereafter Total
-------- -------- -------- -------- -------- ---------- --------
RATE-SENSITIVE ASSETS
Variable rate loans $132,683 $ 21,066 $ 11,726 $ 8,053 $ 3,467 $ 7,642 $184,638
Average interest rate 5.72% 5.36% 5.42% 6.61% 5.40% 5.72% 5.69%
Adjustable rate loans $ 27,380 $ 22,398 $ 16,344 $ 13,646 $ 12,881 $ 87,460 $180,109
Average interest rate 7.08% 7.08% 6.93% 6.92% 7.18% 6.56% 6.81%
Fixed rate loans $ 75,736 $ 36,031 $ 25,125 $ 15,582 $ 6,635 $ 27,486 $186,595
Average interest rate 6.81% 7.42% 7.08% 6.99% 6.80% 5.66% 6.81%
Total loans $235,799 $ 79,495 $ 53,195 $ 37,281 $ 22,983 $122,588 $551,342
Average interest rate 6.22% 6.78% 6.67% 6.88% 6.80% 6.31% 6.44%
Fixed rate investment securities $ 67,275 $ 13,226 $ 3,404 $ 5,373 $ 2,505 $ 26,993 $118,776
Average interest rate 2.47% 3.47% 4.46% 3.04% 4.60% 4.60% 3.20%
Variable rate investment securities $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Average interest rate 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Federal Funds Sold & Other $ 14,100 $ 160 $ 0 $ 0 $ 0 $ 0 $ 14,260
Average interest rate 1.24% 3.64% 0.00% 0.00% 0.00% 0.00% 1.26%
Total rate sensitive assets $317,174 $ 92,881 $ 56,599 $ 42,654 $ 25,488 $149,581 $684,378
Average interest rate 5.20% 6.30% 6.54% 6.40% 6.59% 6.00% 5.76%
RATE SENSITIVE LIABILITIES:
Demand - non interest-bearing $ 10,440 $ 9,224 $ 9,224 $ 9,224 $ 7,915 $ 87 $ 46,114
Demand - interest bearing $ 12,855 $ 12,811 $ 12,811 $ 12,811 $ 12,638 $ 0 $ 63,926
Average interest rate 1.67% 1.67% 1.67% 1.67% 1.67% 0.00% 1.67%
Money market accounts $ 21,663 $ 18,071 $ 18,071 $ 18,071 $ 14,298 $ 0 $ 90,174
Average interest rate 1.49% 1.24% 0.83% 0.83% 0.83% 0.00% 1.07%
Savings $ 6,652 $ 6,300 $ 6,300 $ 6,300 $ 6,233 $ 457 $ 32,242
Average interest rate 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Certificates of deposit $247,372 $114,664 $ 21,575 $ 10,621 $ 7,430 $ 1,917 $403,579
Average interest rate 3.59% 4.01% 4.09% 4.23% 4.70% 0.25% 3.75%
Fixed rate FHLB advances $ 12,350 $ 5,000 $ 0 $ 0 $ 0 $ 30,500 $ 47,850
Average interest rate 6.39% 6.70% 0.00% 0.00% 0.00% 5.31% 5.73%
Variable rate FHLB advances $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Average interest rate 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Fixed rate debentures $ 0 $ 0 $ 0 $ 0 $ 0 $ 10,000 $ 10,000
Average interest rate 0.00% 0.00% 0.00% 0.00% 0.00% 10.60% 10.60%
Note payable $ 6,000 $ 0 $ 0 $ 0 $ 0 $ 0 $ 6,000
Average interest rate 4.25% 0.00% 0.00% 0.00% 0.00% 0.00% 4.25%
Total rate sensitive liabilities $317,332 $166,070 $ 67,981 $ 57,027 $ 48,514 $ 42,961 $699,885
Average interest rate 3.24% 3.12% 1.56% 1.11% 1.03% 2.48% 2.67%
40
PRINCIPAL/NOTIONAL AMOUNT MATURING OR ASSUMED TO WITHDRAW IN:
(DOLLARS IN THOUSANDS)
Comparison of 2002 to 2001: First Years
Total rate-sensitive assets: Year 2 - 5 Thereafter Total
---------------------------- ---- ----- ---------- -----
At December 31, 2002 $ 317,174 $ 217,623 $ 149,581 $ 684,378
At December 31, 2001 304,536 297,113 103,614 705,263
----------- ----------- ----------- -----------
Increase (decrease) $ 12,638 $ (79,490) $ 45,967 $ (20,885)
Total rate-sensitive liabilities:
At December 31, 2002 $ 317,332 $ 339,592 $ 42,961 $ 699,885
At December 31, 2001 371,811 199,079 119,095 689,985
----------- ----------- ----------- -----------
Increase (decrease) $ (54,479) $ 140,513 $ (76,134) $ 9,900
THE ABOVE TABLE reflects expected maturities, not expected repricing. The
contractual maturities adjusted for anticipated prepayments and anticipated
renewals at current interest rates, as shown in the preceding table, are only
part of the Company's interest rate risk profile. Other important factors
include the ratio of rate-sensitive assets to rate sensitive liabilities (which
takes into consideration loan repricing frequency but not when deposits may be
repriced) and the general level and direction of market interest rates. For core
deposits, the repricing frequency is assumed to be longer than when such
deposits actually reprice. For some rate sensitive liabilities, their repricing
frequency is the same as their contractual maturity. For variable rate loans
receivable, repricing frequency can be daily or monthly and for adjustable rate
loans receivable, repricing can be as frequent as annually for loans whose
contractual maturities range from one to thirty years. While increasingly
aggressive local market competition in lending rates has pushed loan rates
lower; the Company's increased reliance on non-core funding sources has
restricted the Company's ability to reduce funding rates in concert with
declines in lending rates. Therefore, tax equivalent net interest income as a
percentage of average interest earning assets declined from 4.23% in 2000 and
3.81% in 2001 to 3.18% in 2002.
THE COMPANY 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 with similar time frames. Such strategies include;
1) loans receivable which are renewed (and repriced) annually, 2) variable rate
loans, 3) certificates of deposit with terms from one month to six years and 4)
securities available for sale which mature at various times primarily from one
through ten years 5) federal funds borrowings with terms of one day to 90 days,
and 6) Federal Home Loan Bank borrowings with terms of one day to ten years.
IMPACT OF INFLATION AND CHANGING PRICES
THE MAJORITY OF ASSETS AND LIABILITIES of the Company are monetary in nature and
therefore the Company 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
Company'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.
41
FORWARD-LOOKING STATEMENTS
WHEN USED IN THIS FILING and in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phases, "anticipate,"
"would be," "will allow," "intends to," "will likely result," "are expected to,"
"will continue," "is anticipated," "estimated," "project," or similar
expressions are intended to identify, "forward looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
are subject to risks and uncertainties, including but not limited to changes in
economic conditions in the Company's market area, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans in the
Company's market area, and competition, all or some of which could cause actual
results to differ materially from historical earnings and those presently
anticipated or projected.
THE COMPANY WISHES TO CAUTION readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and advise
readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investing activities, and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially form those
anticipated or projected.
THE COMPANY DOES NOT UNDERTAKE, and specifically disclaims any obligation, to
update any forward looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The disclosures required by this item appear in this Annual Report on
Form 10-K under the caption "Asset Liability Management" contained in the
Management's Discussion and Analysis section of this Annual Report on Form
10-K.
Item 8. Financial Statements and Supplementary Data.
The Consolidated Balance Sheets of the Corporation and its
subsidiaries as of December 31, 2002 and December 31, 2001, 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,
2002, the related Notes to Consolidated Financial Statements and the Report
of Independent Auditors, appear on pages F-1 through F-39 of this Annual
Report on Form 10-K.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
On September 24, 2002, the Company announced that it had retained BKD,
LLP ("BKD") as its principal accountants and independent auditors effective
November 15, 2002. BKD replaced Crowe, Chizek and Company LLP ("Crowe")
which had served as the company's independent auditor since 1988. The
Company filed a Form 8-K with the Securities and Exchange Commission
disclosing the change as required by federal securities law.
The decision was not the result of any disagreement between Rurban and
Crowe on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure. The change in
independent auditors was recommended by Rurban's Audit Committee and
approved by the Board of Directors on September 18, 2002. BKD was selected
based on the results of an extensive proposal and interview process to
evaluate several well qualified accounting firms.
The Company also retained the services of Plante & Moran, LLP to
perform an independent loan review. Plante & Moran was selected by the
Audit Committee and approved by the Board of Directors
42
based on the results of a similar search process which involved the review
of proposals and interviews of several well-qualified firms.
43
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, 2003,
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, Item 4 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, 2003,
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, 2003, 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, 2003,
under the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT."
Equity Plan Information
The following table provides information regarding certain equity
plans of the Corporation:
44
(a) (b) (c)
Plan Category Number of securities to be Weighted-average Number of securities
issued upon exercise of exercise price of remaining available for
outstanding options, outstanding options, future issuance under
warrants and rights warrants and rights equity compensation
plans (excluding
securities reflected in
column (a))
Equity compensation plans 241,289 $13.02 199,711
approved by security holders
(1)
Equity compensation plans N/A N/A N/A
not approved by security
holders (2)
Total 241,289 $13.02 199,711
(1) Information relates to the 1997 Rurban Financial Corp. Stock Option
Plan.
(2) The Corporation has an employee stock purchase plan. All employees of
the Corporation and its subsidiaries are eligible to participate subject to
the completion of three (3) months employment with the Corporation or one
of its subsidiaries. Participants are allowed to deduct from their
compensation for each payroll period an amount to be used to purchase
common shares of the Corporation. These funds are forwarded to Registrar
and Transfer Company at the end of each payroll period and Registrar &
Transfer uses the funds to purchase common shares of the Corporation on the
open market for the participants. The Corporation's employee stock purchase
plan was not approved by shareholders of the Corporation.
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, 2003,
under the caption "TRANSACTIONS INVOLVING MANAGEMENT."
Item 14. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Within the 90 day period prior to the filing date of this Annual
Report on Form 10-K, the Corporation, under the supervision, and with the
participation, of its management, including its principal executive officer
and principal financial officer, performed an evaluation of the
Corporation's disclosure controls and procedures, as contemplated by Rule
13a-15 under the Securities Exchange Act of 1934, as amended. Based on that
evaluation, the Corporation's principal executive officer and principal
financial officer concluded that such disclosure controls and procedures
are effective to ensure that material
45
information relating to the Corporation, including its consolidated
subsidiaries, is made known to them, particularly during the period for
which the periodic reports are being prepared.
Changes in Internal Controls
No significant changes were made in the Corporation's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation performed pursuant to Rule 13a-15
under the Securities Exchange Act of 1934, as amended, referred to above.
PART IV
Item 15. 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
57.
(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 96. 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.
46
Executive Compensation Plans and Arrangements
Exhibit No. Description Location
- ----------- ----------- --------
10(a) Employees' Stock Ownership Plan of Rurban Incorporated herein by reference to the
Financial Corp. 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 Ownership Incorporated herein by reference to the
Plan of Rurban Financial Corp., dated June 14, Corporation's Annual Report on Form 10-K
1993 and made to be effective as of January 1, for the fiscal year ended December 31,
1993 1993 (File No. 0-13507) [Exhibit 10(b)].
10(c) Second Amendment to Employees' Stock Ownership Incorporated herein by reference to the
Plan of Rurban Financial Corp., dated March 14, Corporation's Annual Report on Form 10-K
1994 and made to be effective as of January 1, for the fiscal year ended December 31,
1993 1993 (File No. 0-13507) [Exhibit 10(c)].
10(d) Third Amendment to Employees' Stock Ownership Incorporated herein by reference to the
Plan of Rurban Financial Corp., dated March 13, Corporation's Annual Report on Form 10-K
1995 for the fiscal year ended
December 31, 1994 (File No. 0-13507)
[Exhibit 10(d)].
10(e) Fourth Amendment to Employees' Stock Ownership Incorporated herein by reference to the
Plan of Rurban Financial Corp., dated June 10, Corporation's Annual Report on Form 10-K
1995 and made to be effective as of January 1, for the fiscal year ended December 31,
1995 1995 (File No. 0-13507) [Exhibit 10(e)].
10(f) The Rurban Financial Corp. Savings Plan and Incorporated herein by reference to the
Trust 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 Corp. Incorporated herein by reference to the
Savings Plan and Trust, dated December 10, 1990 Corporation's Annual Report on Form 10-K
and effective January 1, 1990 for the fiscal year ended December
31, 1990 (File No. 0-13507)
[Exhibit 10(g)].
10(h) Second Amendment to The Rurban Financial Corp. Incorporated herein by reference to the
Savings Plan and Trust, dated March 11, 1991, Corporation's Annual Report on Form 10-K
effective February 1, 1991 for the fiscal year ended December 31,
1992 (File No. 0-13507) [Exhibit 10(d)].
47
Exhibit No. Description Location
- ----------- ----------- --------
10(i) Third Amendment to The Rurban Financial Corp. Incorporated herein by reference to the
Savings Plan and Trust, dated June 11, 1991 Corporation's Annual Report on Form 10-K
for the fiscal year ended December 31,
1992 (File No. 0-13507) [Exhibit 10(e)].
10(j) Fourth Amendment to The Rurban Financial Corp. Incorporated herein by reference to the
Savings Plan and Trust, dated July 14, 1992, Corporation's Annual Report on Form 10-K
effective May 1, 1992 for the fiscal year ended December 31,
1992 (File No. 0-13507) [Exhibit 10(f)].
10(k) Fifth Amendment to The Rurban Financial Corp. Incorporated herein by reference to the
Savings Plan and Trust, dated March 14, 1994 Corporation's Annual 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 Corp. Incorporated herein by reference to the
Savings Plan and Trust dated May 1, 1995 Corporation's Annual 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 of State Incorporated herein by reference to the
Bank 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 Trust Incorporated herein by reference to the
Department of State Bank for the benefit of Corporation's Annual Report on Form 10-K
Robert W. Constien in his capacity as Manager for the fiscal year ended December 31,
of the Trust Department 1991 (File No. 0-13507) [Exhibit 10(e)].
10(o) Summary of Bonus Program for the Trust Incorporated herein by reference to the
Department of State Bank Corporation's Annual Report on Form 10-K
for the fiscal year ended December 31,
1992 (File No. 0-13507) [Exhibit 10(i)].
10(p) Summary of Sales Bonus Program of State Bank Incorporated herein by reference 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)].
48
Exhibit No. Description Location
- ----------- ----------- --------
10(q) Summary of Rurban Financial Corp. Bonus Plan Incorporated herein by reference 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 Agreement, dated Incorporated herein by reference to the
December 15, 1994, between Rurban Financial Corporation's Annual Report on Form 10-K
Corp. and Richard C. Burrows for the fiscal year ended
December 31, 1994 (File No. 0-13507)
[Exhibit 10(p)].
10(s) Executive Salary Continuation Agreement, dated Included in this Annual Report on Form
December 3, 2001, between Rurban Financial 10-K as Exhibit 10(s).
Corp. and Kenneth A. Joyce; and Amended
Schedule A to Exhibit 10(s) identifying other
identical Executive Salary Continuation
Agreements between executive officers of Rurban
Financial Corp. and Rurban Financial Corp.
10(t) Split-Dollar Dollar Insurance Agreement, dated Included in this Annual Report on Form
April 3, 1992, between Robert Constein and 10-K as Exhibit 10(s).
Rurban Financial Corp.
10(u) Rurban Financial Corp. Stock Option Plan Incorporated herein by reference to the
Corporation's Annual Report on Form 10-K
for the fiscal year ended
December 31, 1996 (File No. 0-13507)
[Exhibit 10(u)].
10(v) Rurban Financial Corp. Plan to Allow Directors Incorporated herein by reference to the
to Elect to Defer Compensation Corporation's Annual Report on Form 10-K
for the fiscal year ended
December 31, 1996 (File No. 0-13507)
[Exhibit 10(v)].
10(w) Form of Non-Qualified Stock Option Agreement Incorporated herein by reference to the
Corporation's Annual Report on Form 10-K
for the fiscal year ended December 31,
1997 (File No. 0-13507 [Exhibit 10(w)].
10(x) Form of Incentive Stock Option Agreement Incorporated herein by reference to the
Corporation's Annual Report on Form 10-K
for the fiscal year ended December 31,
1997 (File No. 0-13507 [Exhibit 10(x)].
49
Exhibit No. Description Location
- ----------- ----------- --------
10(y) Employees' Stock Ownership and Savings Plan Incorporated herein by reference to the
of Rurban Financial Corp. Corporation's Annual Report on Form 10-K
for the fiscal year ended December 31,
1999 (File No. 0-13507 [Exhibit 10(y)].
10(z) Rurban Financial Corp. Employee Stock Included in this Annual Report on Form
Purchase Plan 10-K as Exhibit 10(z)
(b) Reports on Form 8-K
Form 8-K filed on September 25, 2002 regarding "Changes in
Registrant's Certifying Accountant."
(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
96.
(d) Financial Statement Schedules.
None.
50
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 28, 2003 By: Richard C. Warrener, Executive Vice President,
-------------- Chief Financial Officer & Chief
Accounting Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each undersigned officer and/or
director of Rurban Financial Corp., an Ohio corporation which is about to file
with the Securities and Exchange Commission, Washington, D.C., under the
provisions of the Securities Exchange Act of 1934, as amended, the Annual Report
on Form 10-K for the fiscal year ended December 31, 2002, hereby constitutes and
appoints Kenneth A. Joyce and Richard C. Warrener as his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign both the Annual Report on Form 10-K and any and all
amendments and documents related thereto, and to file the same, and any and all
exhibits, financial statements and schedules related thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and substitute or substitutes,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them or his or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
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
- ---- ---- --------
/s/ Kenneth A. Joyce March 28, 2003 President, Chief Executive Officer, Principal
- -------------------- -------------- Executive Officer and Director
Kenneth A. Joyce
/s/ Thomas A. Buis March 28, 2003 Director
- ------------------ --------------
Thomas A. Buis
/s/ Thomas M. Callan March 28, 2003 Director
- -------------------- --------------
Thomas M. Callan
/s/ John R. Compo March 28, 2003 Director
- ----------------- --------------
John R. Compo
/s/ John Fahl March 28, 2003 Director
- ------------- --------------
John Fahl
/s/ Robert A. Fawcett, Jr. March 28, 2003 Director
- -------------------------- --------------
Robert A. Fawcett, Jr.
51
/s/ Eric C. Hench March 28, 2003 Director
- ----------------- --------------
Eric C. Hench
/s/ Gary A. Koester March 28, 2003 Director
- ------------------- --------------
Gary A. Koester
/s/ Steven D. VanDemark March 28, 2003 Director
- ----------------------- --------------
Steven D. VanDemark
/s/ J. Michael Walz, D.D.S March 28, 2003 Director
- -------------------------- --------------
J. Michael Walz, D.D.S
/s/ Richard C. Warrener March 28, 2003 Executive Vice President, Chief Financial
- --------------------------- -------------- Officer and Chief Accounting Officer
Richard C. Warrener
Date: March 28, 2003
--------------
52
CERTIFICATION
I, Kenneth A, Joyce, certify that:
1. I have reviewed this annual report on Form 10-K of Rurban Financial
Corp.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
53
Dated: March 28, 2003 By: /s/ Kenneth A. Joyce
----------------------
Kenneth A. Joyce
President and Chief Executive Officer
54
CERTIFICATION
I, Richard C. Warrener, certify that:
1. I have reviewed this annual report on Form 10-K of Rurban Financial
Corp.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
55
Dated: March 28, 2003 By: /s/ Richard C. Warrener
------------------------------------------
Richard C. Warrener
Executive Vice President, Chief Financial
Officer and Chief Accounting Officer
56
RURBAN FINANCIAL CORP.
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 2002
INDEX TO FINANCIAL STATEMENTS
Pages in this
Annual Report
Description on Form 10-K
- ----------- ------------
Report of Independent Auditors................................................................... F-1
Consolidated Balance Sheets at December 31, 2002
and 2001.................................................................................... F-2 to F-3
Consolidated Statements of Income for the years
ended December 31, 2002, 2001 and 2000...................................................... F-4 to F-5
Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 2002, 2001 and 2000................................. F-6
Consolidated Statements of Cash Flows for the
years ended December 31, 2002, 2001 and 2000................................................ F-7 to F-8
Notes to Consolidated Financial Statements....................................................... F-9 to F-39
57
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors
Rurban Financial Corp.
Defiance, Ohio
We have audited the accompanying consolidated balance sheet of Rurban Financial
Corp. and subsidiaries as of December 31, 2002, and the related consolidated
statements of income, stockholders' equity, and cash flows for the year ended
December 31, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements described above present
fairly, in all material respects, the consolidated financial position of Rurban
Financial Corp. and subsidiaries as of December 31, 2002, and the results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ BKD, LLLP
Cincinnati, Ohio
February 14, 2003,
except for note 27, for which the date is February 22, 2003
F-1
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
ASSETS
2002 2001
-----------------------------------
Cash and due from banks $ 37,018,337 $ 25,342,043
Federal funds sold 14,000,000 --
--------------- ---------------
Cash and cash equivalents 51,018,337 25,342,043
--------------- ---------------
Interest-bearing deposits 260,000 260,000
Available-for-sale securities 115,108,762 101,139,636
Mortgage loans held for sale -- 439,991
Loans held for sale 63,536,309 --
Loans, net of allowance for loan losses of $17,693,841 and
$9,238,936 at December 31, 2002 and 2001 469,780,785 591,051,994
Premises and equipment 13,786,408 11,491,056
Premises and equipment held for sale 909,205 --
Federal Reserve and Federal Home Loan Bank stock 3,665,900 3,235,915
Foreclosed assets held for sale, net 1,960,276 325,501
Interest receivable 3,966,721 4,939,741
Deferred income taxes 5,148,523 3,784,701
Goodwill 2,323,643 179,339
Core deposits and other intangibles 770,777 --
Other 10,081,033 4,019,176
--------------- ---------------
Total assets $ 742,316,679 $ 746,209,093
=============== ===============
See Notes to Consolidated Financial Statements
F-2
LIABILITIES AND STOCKHOLDERS' EQUITY
2002 2001
----------------------------------------
LIABILITIES
Deposits
Demand $ 46,114,153 $ 52,830,193
Savings, NOW and money market 117,738,013 177,688,506
Time 404,007,515 380,341,110
--------------- ---------------
Total deposits 567,859,681 610,859,809
--------------- ---------------
Deposits held for sale 68,175,660 --
Federal funds purchased -- 14,850,000
Note payable 6,000,000 --
Federal Home Loan Bank advances 47,850,000 54,275,069
Trust preferred securities 10,000,000 10,000,000
Interest payable 2,971,448 3,630,623
Other liabilities 3,077,558 1,764,260
--------------- ---------------
Total liabilities 705,934,347 695,379,761
--------------- ---------------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Common stock, $2.50 stated value; authorized 10,000,000 shares; issued
4,575,702; outstanding 2002 - 4,565,721 shares, 2001 -
4,564,513 shares 11,439,255 11,439,255
Additional paid-in capital 11,009,733 11,013,284
Retained earnings 13,904,212 28,499,026
Unearned employee stock ownership plan (ESOP) shares (320,765) (512,146)
Accumulated other comprehensive income 664,911 721,851
Treasury stock, at cost
Common; 2002 - 9,981 shares, 2001 - 11,189 shares (315,014) (331,938)
--------------- ---------------
Total stockholders' equity 36,382,332 50,829,332
--------------- ---------------
Total liabilities and stockholders' equity $ 742,316,679 $ 746,209,093
=============== ===============
See Notes to Consolidated Financial Statements
F-3
RURBAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
-------------------------------------------
INTEREST INCOME
Loans $ 43,294,773 $ 50,482,611 $ 50,404,396
Securities
Taxable 4,781,105 5,462,886 4,978,266
Tax-exempt 219,713 406,199 592,240
Other 295,053 167,133 48,035
------------ ------------ ------------
Total interest income 48,590,644 56,518,829 56,022,937
------------ ------------ ------------
INTEREST EXPENSE
Deposits 20,300,799 26,414,346 24,892,370
Short-term borrowings 514,515 328,340 1,699,687
Federal Home Loan Bank advances 2,923,090 2,986,829 2,707,345
Junior subordinated debentures 1,074,577 1,048,109 335,667
------------ ------------ ------------
Total interest expense 24,812,981 30,777,624 29,635,069
------------ ------------ ------------
NET INTEREST INCOME 23,777,663 25,741,205 26,387,868
PROVISION FOR LOAN LOSSES 27,530,583 8,733,000 2,100,000
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES (3,752,920) 17,008,205 24,287,868
------------ ------------ ------------
NONINTEREST INCOME
Data service fees 7,815,589 6,125,970 5,123,805
Trust fees 2,468,159 2,744,743 2,635,047
Customer service fees 2,617,708 2,592,704 1,744,446
Net gains on loan sales 758,663 889,462 387,493
Net realized gains (losses) on sales of
available-for-sale securities (833,515) 489,641 (80,540)
Loan servicing fees 402,143 559,648 662,665
Other 550,521 759,445 799,945
------------ ------------ ------------
Total noninterest income 13,779,268 14,161,613 11,272,861
------------ ------------ ------------
See Notes to Consolidated Financial Statements
F-4
2002 2001 2000
-----------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits $ 15,719,892 $ 15,448,319 $ 15,094,596
Net occupancy expense 1,349,537 1,210,915 1,137,377
Equipment expense 3,960,712 3,488,586 3,347,608
Data processing fees 492,534 473,196 551,200
Professional fees 3,129,592 1,712,161 1,263,095
Marketing expense 487,754 612,234 513,411
Printing and office supplies 755,814 705,583 615,660
Telephone and communications 792,168 681,450 590,345
Postage and delivery expense 625,173 590,570 545,648
State, local and other taxes 780,515 641,452 611,481
Other 2,385,029 2,453,828 2,483,596
--------------- --------------- ---------------
Total noninterest expense 30,478,720 28,018,294 26,754,017
--------------- --------------- ---------------
INCOME BEFORE INCOME TAX (20,452,372) 3,151,524 8,806,712
PROVISION (CREDIT) FOR INCOME TAXES (7,044,488) 898,566 2,720,534
--------------- --------------- ---------------
NET INCOME (LOSS) $ (13,407,884) $ 2,252,958 $ 6,086,178
=============== =============== ===============
BASIC EARNINGS (LOSS) PER SHARE $ (2.95) $ 0.50 $ 1.35
=============== =============== ==============
DILUTED EARNINGS (LOSS) PER SHARE $ (2.95) $ 0.50 $ 1.35
=============== =============== ==============
See Notes to Consolidated Financial Statements
F-5
RURBAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
ACCUMULATED
ADDITIONAL UNEARNED OTHER
COMMON PAID-IN RETAINED ESOP COMPREHENSIVE TREASURY
STOCK CAPITAL EARNINGS SHARES INCOME (LOSS) STOCK TOTAL
---------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 2000 $11,439,255 $11,518,469 $30,047,158 $(908,014) $(1,533,547) $(6,662,850) $43,900,471
Comprehensive income
Net income 6,086,178 6,086,178
Change in unrealized
gain (loss) on
securities
available for
sale, net of
reclassification
adjustment and tax
effect 1,862,037 1,862,037
---------
Total
comprehensive
income 7,948,215
---------
Dividends on common
stock, $0.42 per
share (1,888,104) (1,888,104)
Declaration of 5%
stock dividend net
of cash paid in lieu
of fractional shares
and issuance of
206,520 treasury
shares (405,129) (2,794,988) 3,193,149 (6,968)
ESOP shares earned 186,572 186,572
----------- ----------- ----------- --------- --------- --------- -----------
BALANCE, DECEMBER 31,
2000 11,439,255 $11,113,340 $31,450,244 $(721,442) $328,490 $(3,469,701) $50,140,186
Comprehensive income
Net income 2,252,958 2,252,958
Change in unrealized
gain (loss) on
securities
available for
sale, net of
reclassification
adjustment and tax
effect 393,361 393,361
---------
Total
comprehensive
income 2,646,319
---------
Dividends on common
stock, $0.47 per
share (2,158,392) (2,158,392)
Purchase of stock
(3,049 shares) (45,400) (45,400)
Stock options
exercised 3,580
treasury shares) (4,180) 50,162 45,982
Declaration of 5%
stock dividend net
of cash paid in lieu
of fractional shares
and issuance of
216,744 treasury
shares (95,876) (3,045,784) 3,133,001 (8,659)
ESOP shares earned 209,296 209,296
----------- ----------- ----------- --------- --------- --------- -----------
BALANCE, DECEMBER 31,
2001 11,439,255 11,013,284 28,499,026 (512,146) 721,851 (331,938) 50,829,332
Comprehensive income
Net loss (13,407,884) (13,407,884)
Change in unrealized
gain (loss) on
securities
available for
sale, net of
reclassification
adjustment and tax
effect (56,940) (56,940)
---------
Total
comprehensive
income (13,464,82)
----------
Dividends on common
stock, $0.26 per
share (1,186,930) (1,186,930
Stock options
exercised (1,208
treasury shares) (3,551) 16,924 13,373
ESOP shares earned 191,381 191,381
----------- ----------- ----------- --------- --------- --------- -----------
BALANCE, DECEMBER 31,
2002 $11,439,255 $11,009,733 $13,904,212 $(320,765) $ 664,911 $(315,014) $36,382,332
=========== =========== =========== ========= ========= ========= ===========
See Notes to Consolidated Financial Statements
F-6
RURBAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
-----------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ (13,407,884) $ 2,252,958 $ 6,086,178
Items not requiring (providing) cash
Depreciation and amortization 2,277,322 1,942,325 1,893,129
Provision for loan losses 27,530,583 8,733,000 2,100,000
ESOP shares earned 191,381 209,296 186,572
Amortization of premiums and discounts on
securities 1,963,325 -- --
Amortization of intangible assets 138,284 120,661 210,000
Deferred income taxes (1,334,489) (2,078,874) (1,479,825)
Proceeds from sale of loans held for sale 37,748,464 31,467,939 14,102,762
Originations of loans held for sale (36,549,810) (29,851,752) (13,076,583)
(Gain) loss from sale of loans (758,663) (889,462) (387,493)
Net realized (gains) losses on
available-for-sale securities 833,515 (489,641) 80,540
Changes in
Interest receivable 1,674,277 776,307 (1,568,727)
Other assets (6,050,115) 63,385 2,543,351
Interest payable and other liabilities 1,060,273 3,669,980 2,275,289
--------------- --------------- ---------------
Net cash provided by (used in)
operating activities 15,316,463 8,459,392 12,965,193
--------------- --------------- ---------------
INVESTING ACTIVITIES
Net change in interest-bearing deposits -- (150,000) --
Purchases of available-for-sale securities (134,355,439) (71,576,221) (20,954,482)
Proceeds from maturities of
available-for-sale securities 53,890,402 38,131,013 8,845,593
Proceeds from the sales of
available-for-sale securities 81,916,528 19,060,258 9,063,566
Net change in loans 59,829,614 30,363,739 71,039,406
Purchase of premises and equipment (6,910,438) (2,856,133) (1,655,551)
Purchase of Federal Home Loan and Federal
Reserve Bank stock (433,000) -- --
Proceeds from assumption of net liabilities
in business acquisition 40,069,328 -- --
--------------- --------------- ---------------
Net cash provided by (used in)
investing activities 94,006,995 47,754,822 75,740,280
--------------- --------------- ---------------
See Notes to Consolidated Financial Statements
F-7
2002 2001 2000
-----------------------------------------------------------
FINANCING ACTIVITIES
Net increase (decrease) in demand deposits,
money market, NOW and savings accounts $ (43,508,229) $ 19,808,390 $ (9,696,444)
Net increase (decrease) in certificates of
deposit (23,096,882) 24,730,658 56,721,121
Net increase (decrease) in federal funds
purchased (14,850,000) 1,650,000 2,300,000
Proceeds from Federal Home Loan Bank advances 5,000,000 16,500,000 20,000,000
Repayment of Federal Home Loan Bank advances (11,425,069) (14,388,845) (7,871,389)
Proceeds from note payable 6,000,000 -- --
Proceeds from junior subordinated debentures -- -- 10,000,000
Repayment of advances on line of credit -- -- (7,000,000)
Proceeds from stock options exercised 13,373 45,982 --
Purchase of treasury stock -- (45,400) --
Dividends paid (1,780,317) (2,086,370) (1,822,218)
Cash paid in lieu of fractional shares for
5% stock dividend -- (8,659) (6,968)
--------------- --------------- ---------------
Net cash provided by (used in)
financing activities (83,647,124) 46,205,756 62,624,102
--------------- --------------- ---------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 25,676,334 6,910,326 (150,985)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 25,342,043 18,431,717 18,582,702
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 51,018,377 $ 25,342,043 $ 18,431,717
=============== =============== ===============
SUPPLEMENTAL CASH FLOWS INFORMATION
Interest paid $ 25,472,126 $ 31,760,174 $ 27,535,694
Income taxes paid (net of refunds) -- 5,250,000 1,961,537
See Notes to Consolidated Financial Statements
F-8
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Rurban Financial Corp. ("Company") is a bank holding company whose
principal activity is the ownership and management of its wholly-owned
subsidiaries, The State Bank and Trust Company ("State Bank"), RFC
Banking Company ("RFCBC") collectively (Banks), Rurbanc Data Services,
Inc. ("RDSI"), Rurban Life Insurance Company ("Rurban Life") and Rurban
Statutory Trust 1 ("RST"). State Bank owns all of the outstanding stock
of Reliance Financial Services, N.A. ("RFS") and Rurban Mortgage Company
("RMC"). The Banks are primarily engaged in providing a full range of
banking and financial services to individual and corporate customers in
northern Ohio. The Banks are subject to competition from other financial
institutions. The Banks are subject to the regulation of certain federal
and state agencies and undergo periodic examinations by those regulatory
authorities. RDSI provides data processing services to financial
institutions located in Ohio, Michigan and Indiana. Rurban Life provides
credit life and disability insurance to customers. RFS offers a
diversified array of trust and financial services to customers
nationwide. RST is a trust which was organized in 2000 to manage the
Company's trust preferred securities.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company, the Banks, RDSI, Rurban Life, RST, RFS and RMC. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for loan losses (and
the valuation of real estate acquired in connection with foreclosures or
in satisfaction of loans). In connection with the determination of the
allowance for loan losses (and the valuation of foreclosed assets held
for sale), management obtains independent appraisals for significant
properties.
CASH EQUIVALENTS
The Company considers all liquid investments with original maturities of
three months or less to be cash equivalents except for short-term U.S.
Treasury securities which are classified as available-for-sale
securities.
(Continued)
F-9
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
SECURITIES
Available-for-sale securities, which include any security for which the
Company has no immediate plan to sell but which may be sold in the
future, are carried at fair value. Unrealized gains and losses are
recorded, net of related income tax effects, in other comprehensive
income.
Held-to-maturity securities, which include any security for which the
Company has the positive intent and ability to hold until maturity, are
carried at historical cost adjusted for amortization of premiums and
accretion of discounts.
Amortization of premiums and accretion of discounts are recorded as
interest income from securities. Realized gains and losses are recorded
as net security gains (losses). Gains and losses on sales of securities
are determined on the specific-identification method.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans originated and intended for sale in the secondary market
are carried at the lower of cost or fair value in the aggregate. Net
unrealized losses, if any, are recognized through a valuation allowance
by charges to income.
LOANS
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoffs are reported at their
outstanding principal balances adjusted for any charge-offs, the
allowance for loan losses, any deferred fees or costs on originated
loans and unamortized premiums or discounts on purchased loans. Interest
income is reported on the interest method and includes amortization of
net deferred loan fees and costs over the loan term. Generally, loans
are placed on non-accrual status not later than 91 days past due and
interest is considered a loss, unless the loan is well-secured and in
the process of collection.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established as losses are estimated to
have occurred through a provision for loan losses charged to income.
Loan losses are charged against the allowance when management believes
the uncollectibility of a loan balance is probable. Subsequent
recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the
collectibility of the loans in light of historical experience, the
nature and volume of the loan portfolio, adverse situations that may
affect the borrower's ability to repay, estimated value of any
underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as new information becomes
available.
(Continued)
F-10
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
A loan is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by
management in determining impairment include payment status, collateral
value and the probability of collecting scheduled principal and interest
payments when due. Loans that experience insignificant payment delays
and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration each of
the circumstances surrounding the loan and the borrower, including the
length of the delay, the reasons for the delay, the borrower's prior
payment record and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan-by-loan
basis for commercial, agricultural, and construction loans by either the
present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's obtainable market price or the fair
value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogenous loans are collectively
evaluated for impairment. Accordingly, the Bank does not separately
identify individual consumer and residential loans for impairment
measurements.
PREMISES AND EQUIPMENT
Depreciable assets are stated at cost less accumulated depreciation.
Depreciation is charged to expense using the straight-line method for
buildings and the declining balance method for equipment over the
estimated useful lives of the assets.
FEDERAL RESERVE AND FEDERAL HOME LOAN BANK STOCK
Federal Reserve and Federal Home Loan Bank stock are required
investments for institutions that are members of the Federal Reserve and
Federal Home Loan Bank systems. The required investment in the common
stock is based on a predetermined formula.
FORECLOSED ASSETS HELD FOR SALE
Assets acquired through, or in lieu of, loan foreclosure are held for
sale and are initially recorded at fair value at the date of
foreclosure, establishing a new cost basis. Subsequent to foreclosure,
valuations are periodically performed by management and the assets are
carried at the lower of carrying amount or fair value less cost to sell.
Revenue and expenses from operations related to foreclosed assets and
changes in the valuation allowance are included in net income or expense
from foreclosed assets.
(Continued)
F-11
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
GOODWILL
Goodwill is tested for impairment annually. If the implied fair value of
goodwill is lower than its carrying amount, goodwill impairment is
indicated and goodwill is written down to its implied fair value.
Subsequent increases in goodwill value, if any, are not recognized in
the financial statements.
INTANGIBLE ASSETS
Intangible assets are being amortized on an accelerated basis over
periods ranging from one to seven years. Such assets are periodically
evaluated as to the recoverability of their carrying value.
MORTGAGE SERVICING RIGHTS
Mortgage servicing rights on originated loans that have been sold are
capitalized by allocating the total cost of the mortgage loans between
the mortgage servicing rights and the loans based on their relative fair
values. Capitalized servicing rights are amortized in proportion to and
over the period of estimated servicing revenues. Impairment of
mortgage-servicing rights is assessed based on the fair value of those
rights. Fair values are estimated using discounted cash flows based on a
current market interest rate. For purposes of measuring impairment, the
rights are stratified based on the predominant risk characteristics of
the underlying loans. The predominant characteristic currently used for
stratification is type of loan. The amount of impairment recognized is
the amount by which the capitalized mortgage servicing rights for a
stratum exceed their fair value.
TREASURY STOCK
Treasury stock is stated at cost. Cost is determined by the first-in,
first-out method.
STOCK OPTIONS
At December 31, 2002, the Company has a stock-based employee
compensation plan, which is described more fully in Note 19. The Company
accounts for this plan under the recognition and measurement principles
of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. No stock-based employee compensation cost is
reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock
on the grant date. The following table illustrates the effect on net
income and earnings per share if the company had applied the fair value
provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.
(Continued)
F-12
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
2002 2001 2000
-----------------------------------------------------------
Net income (loss), as reported $ (13,407,884) $ 2,252,958 $ 6,086,178
Less: Total stock-based employee
compensation cost determined under
the fair value based method, net of
income taxes (78,974) (148,908) (142,744)
--------------- --------------- ---------------
Pro forma net income $ (13,486,858) $ 2,104,050 $ 5,943,434
=============== =============== ===============
Earnings per share:
Basic - as reported $ (2.95) $ 0.50 $ 1.35
=============== =============== ===============
Basic - pro forma $ (2.97) $ 0.46 $ 1.32
=============== =============== ===============
Diluted - as reported $ (2.95) $ 0.50 $ 1.35
=============== =============== ===============
Diluted - pro forma $ (2.97) $ 0.46 $ 1.32
=============== =============== ===============
INCOME TAXES
Deferred tax assets and liabilities are recognized for the tax effects
of differences between the financial statement and tax bases of assets
and liabilities. A valuation allowance is established to reduce deferred
tax assets if it is more likely than not that a deferred tax asset will
not be realized. The Company files consolidated income tax returns with
its subsidiaries.
EARNINGS AND DIVIDENDS PER SHARE
Earnings per share have been computed based upon the weighted-average
common shares outstanding during each year. Unearned ESOP shares which
have not vested have been excluded from the computation of average
shares outstanding.
Earnings and dividends per share are restated for all stock dividends.
RECLASSIFICATIONS
Certain reclassifications have been made to the 2001 and 2000 financial
statements to conform to the 2002 financial statement presentation.
These reclassifications had no effect on net income.
NOTE 2: RESTRICTION ON CASH AND DUE FROM BANKS
The Banks are required to maintain reserve funds in cash and/or on
deposit with the Federal Reserve Bank. The reserve required at December
31, 2002, was $5,283,000.
(Continued)
F-13
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTE 3: SECURITIES
The amortized cost and approximate fair values of securities were as
follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAINS LOSSES FAIR VALUE
------------------------------------------------------------------------
AVAILABLE-FOR-SALE SECURITIES:
December 31, 2002:
U.S. Treasury and
government agencies $ 54,770,502 $ 46,271 $ (15,731) $ 54,801,042
Mortgage-backed
securities 54,875,436 796,267 (28,713) 55,642,990
State and political
subdivision 4,308,675 209,346 -- 4,518,021
Equity securities 96,709 -- -- 96,709
Other securities 50,000 -- -- 50,000
------------- ------------- -------------- -------------
$ 114,101,322 $ 1,051,884 $ (44,444) $ 115,108,762
============= ============= ============== =============
December 31, 2001:
U.S. Treasury and
government agencies $ 16,663,883 $ 231,951 $ (14,716) $ 16,881,118
Mortgage-backed
securities 61,935,534 1,075,697 (30,185) 62,981,046
State and political
subdivisions 4,859,755 46,343 (108,236) 4,797,862
Mutual funds 10,050,505 -- (50,505) 10,000,000
Corporate securities 6,236,118 -- (56,635) 6,179,483
Other securities 300,127 -- -- 300,127
------------- ------------- -------------- -------------
$ 100,045,922 $ 1,353,991 $ (260,277) $ 101,139,636
============= ============= ============== =============
(Continued)
F-14
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
The amortized cost and fair value of securities available for sale at
December 31, 2002, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
AVAILABLE FOR SALE
AMORTIZED FAIR
COST VALUE
----------------------------------------
Within one year $ 48,873,840 $ 48,890,532
One to five years 6,952,792 7,004,237
Five to ten years 3,119,899 3,279,971
After ten years 279,355 291,032
--------------- ---------------
59,225,886 59,465,772
Mortgage-backed securities 54,875,436 55,642,990
--------------- ---------------
Totals $ 114,101,322 $ 115,108,762
=============== ===============
The carrying value of securities pledged as collateral, to secure public
deposits and for other purposes, was $91,330,997 at December 31, 2002,
and $76,471,000 at December 31, 2001.
Gross gains of $1,117,251, $666,458 and $6,080 and gross losses of
$1,950,766, $176,817 and $86,620 resulting from sales of
available-for-sale securities were realized for 2002, 2001 and 2000,
respectively.
NOTE 4: LOANS AND ALLOWANCE FOR LOAN LOSSES
Categories of loans at December 31, include:
2002 2001
----------------------------------------
Commercial $ 123,053,492 $ 185,654,185
Commercial real estate 129,718,943 135,882,972
Agricultural 68,953,865 67,136,182
Residential real estate 84,431,599 106,689,148
Consumer 60,138,463 76,512,215
Leasing loans 21,509,394 28,752,169
--------------- ---------------
Total loans 487,805,756 600,626,871
Less
Net deferred loan fees, premiums and discounts (331,130) (335,941)
Allowance for loan losses (17,693,841) (9,238,936)
--------------- ---------------
Net loans $ 469,780,785 $ 591,051,994
=============== ===============
(Continued)
F-15
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
Activity in the allowance for loan losses was as follows:
2002 2001 2000
------------------------------------------------------
Balance, beginning of year $ 9,238,936 $ 7,214,970 $ 6,193,712
Amounts assumed in acquisition 1,427,000 -- --
Provision charged to expense 27,530,583 8,733,000 2,100,000
Recoveries 1,270,773 463,923 490,752
Losses charged off (21,773,451) (7,172,957) (1,569,494)
------------- ------------- -------------
Balance, end of year $ 17,693,841 9,238,936 $ 7,214,970
============= ============= =============
Individual loans determined to be impaired were as follows:
2002 2001 2000
-----------------------------------------------------------
Year-end impaired loans with no allowance
for loan losses allocated $ 1,186,000 $ 1,937,000 $ 4,189,000
Year-end loans with allowance for loan
losses allocated 13,736,000 9,134,000 3,923,000
-------------- -------------- ---------------
Total impaired loans $ 14,922,000 $ 11,071,000 $ 8,112,000
============== ============== ===============
Amount of allowance allocated $ 5,067,000 $ 3,647,000 $ 2,410,000
Average of impaired loans during the year $ 17,340,000 $ 7,999,000 $ 6,020,000
Interest income recognized during
impairment $ 718,626 $ 421,000 $ 416,000
Cash-basis interest income recognized $ 693,390 $ 412,000 $ 89,000
At December 31, 2002 and 2001, accruing loans delinquent 90 days or more
totaled $476,000 and $2,131,000, respectively. Non-accruing loans at
December 31, 2002 and 2001 were $18,259,000 and $12,557,000,
respectively.
NOTE 5: ASSETS AND LIABILITIES HELD FOR SALE
On December 30, 2002, an agreement was signed to sell the branches of
RFCBC which comprise the Citizens Savings Bank division to the Union
Banking Company. As of December 31, 2002, these branches had total loans
of $63,536,309, total fixed assets (net of accumulated depreciation) of
$909,205 and total deposits of $68,175,660. This transaction is
scheduled to close late March 2003. The Company does not maintain a
separate statement of operations for each division.
(Continued)
F-16
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTE 6: PREMISES AND EQUIPMENT
Major classifications of premises and equipment including those held for
sale, stated at cost, were as follows:
2002 2001
----------------------------------------
Land $ 1,021,212 $ 1,056,691
Buildings and improvements 8,252,239 7,845,265
Equipment 14,955,945 10,711,339
--------------- ---------------
24,229,396 19,613,295
Less accumulated depreciation (9,533,783) (8,122,239)
--------------- ---------------
Net premises and equipment $ 14,695,613 $ 11,491,056
=============== ===============
NOTE 7: GOODWILL
During 2002, the Company changed its method of accounting and financial
reporting for goodwill and other intangible assets by adopting the
provisions of Statement of Financial Accounting Standards No. 142. There
was no material impact of the adoption on the financial statements.
The changes in the carrying amount of goodwill for the years ended
December 31, 2002 and 2001, were:
2002 2001 2000
-----------------------------------------------------------
Balance as of January 1 $ 179,339 $ 276,731 $ 374,123
Goodwill acquired during the year 2,144,304 -- --
Impairment losses -- -- --
Amortization -- (97,392) (97,392)
--------------- --------------- ---------------
Balance as of December 31 $ 2,323,643 $ 179,339 $ 276,731
=============== =============== ===============
All goodwill is allocated to the banking segment of the business.
(Continued)
F-17
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTE 8: OTHER INTANGIBLE ASSETS
The carrying basis and accumulated amortization of recognized intangible
assets at December 31, 2002 and 2001, were:
2002 2001
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------------------------------------------------------------------------------
Core deposits $ 708,435 $ (119,042) $ 568,000 $ 568,000
Other 200,627 (19,243) -- --
--------------- --------------- --------------- ---------------
$ 909,062 $ (138,285) $ 568,000 $ 568,000
=============== =============== =============== ===============
Amortization expense for the years ended December 31, 2002 and 2001, was
$138,285 and $23,269, respectively. Estimated amortization expense for
each of the following five years is:
2003 $ 148,472
2004 144,429
2005 142,678
2006 141,165
2007 139,991
NOTE 9: LOAN SERVICING
Mortgage loans sold to and serviced for others are not included in the
accompanying consolidated balance sheets. The unpaid principal balances
of mortgage loans serviced for others were $32,057,079 and $40,767,177
at December 31, 2002 and 2001, respectively.
(Continued)
F-18
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTE 10: INTEREST-BEARING DEPOSITS
Interest-bearing deposits in denominations of $100,000 or more were
$172,055,000 on December 31, 2002, and $164,043,000 on December 31,
2001. Certificates of deposit obtained from brokers totaled
approximately $93,045,000 and $70,426,000 at December 31, 2002 and 2001,
respectively.
At December 31, 2002, the scheduled maturities of time deposits were as
follows:
2003 $ 247,652,215
2004 114,812,993
2005 21,574,935
2006 10,620,204
2007 7,430,444
Thereafter 1,916,724
---------------
$ 404,007,515
================
In August 2002, RFCBC received approval from FDIC to issue up to $10.5
million in broker certificates of deposit to replace maturing brokered
deposits. That waiver expired October 31, 2002. At December 31, 2002,
RFCBC had approximately $40 million in certificates of deposit which
have been accepted from brokers. Approximately $22.6 million of those
certificates of deposit mature within the next year.
NOTE 11: NOTE PAYABLE
The Company has a note payable to The Northern Trust Company, secured by
stock in the Company's subsidiaries, payable in equal monthly principal
installments of $166,667 together with interest at a variable rate.
Final payment is due March 31, 2003.
The stock of the Banks and RDSI is pledged as security for the note. The
Company is negotiating with the lender to extend the maturity of the
note to June 30, 2003 and plans to refinance the note with another
lender as part of the financing of a loan subsidiary to be created upon
the sale of RFCBC's deposits, branches, and performing loans.
(Continued)
F-19
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTE 12: FEDERAL HOME LOAN BANK ADVANCES
The Federal Home Loan Bank advances were secured by mortgage loans and
investment securities totaling $62,572,861 at December 31, 2002.
Advances, at interest rates from 4.52 to 7.02 percent are subject to
restrictions or penalties in the event of prepayment.
Aggregate annual maturities of Federal Home Loan Bank advances at
December 31, 2002, are:
DEBT
--------------------
2003 $ 12,350,000
2004 5,000,000
2005 --
2006 --
2007 --
Thereafter 30,500,000
---------------
$ 47,850,000
================
NOTE 13: TRUST PREFERRED SECURITIES
On September 7, 2000, Rurban Statutory Trust 1 ("RST"), a wholly owned
subsidiary of the Company, closed a pooled private offering of 10,000
Capital Securities with a liquidation amount of $1,000 per security. The
proceeds of the offering were loaned to the Company in exchange for
junior subordinated debentures with terms similar to the Capital
Securities. The sole assets of RST are the junior subordinated debentures
of the Company and payments thereunder. The junior subordinated
debentures and the back-up obligations, in the aggregate, constitute a
full and unconditional guarantee by the Company of the obligations of RST
under the Capital Securities. Distributions on the Capital Securities are
payable semi-annually at the annual rate of 10.6% and are included in
interest expense in the consolidated financial statements. These
securities are considered Tier 1 capital (with certain limitations
applicable) under current regulatory guidelines. As of December 31, 2002
and 2001, the outstanding principal balance of the Capital Securities was
$10,000,000.
The junior subordinated debentures are subject to mandatory redemption,
in whole or in part, upon repayment of the Capital Securities at maturity
or their earlier redemption at the liquidation amount. Subject to the
Company having received prior approval of the Federal Reserve, if then
required, the Capital Securities are redeemable prior to the maturity
date of September 7, 2030, at the option of the Company; on or after
September 7, 2020 at par; or on or after September 7, 2010 at a premium,
or upon occurrence of specific events defined within the trust indenture.
The Company has the option to defer distributions on the Capital
Securities from time to time for a period not to exceed 10 consecutive
semi-annual periods.
On February 12, 2003, the Trustee was notified that the Company elected
to defer the semi-annual distributions which would have been due on March
7, 2003, until September 7, 2003.
(Continued)
F-20
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTE14: INCOME TAXES
The provision (credit) for income taxes includes these components:
2002 2001 2000
-----------------------------------------------------------
Taxes currently payable $ (5,709,999) $ 2,977,440 $ 4,200,359
Deferred income taxes (1,334,489) (2,078,874) (1,479,825)
--------------- --------------- ---------------
Income tax expense (credit) $ (7,044,488) $ 898,566 $ 2,720,534
=============== =============== ===============
A reconciliation of income tax expense at the statutory rate to the
Company's actual income tax expense is shown below:
2002 2001 2000
-----------------------------------------------------------
Computed at the statutory rate (34%) $ (6,953,806) $ 1,071,518 $ 2,994,282
Increase (decrease) resulting from
Tax exempt interest (115,581) (162,859) (268,587)
Nondeductible expenses 24,899 (10,093) (5,161)
--------------- --------------- ---------------
Actual tax expense (credit) $ (7,044,488) $ 898,566 $ 2,720,534
=============== =============== ===============
The tax effects of temporary differences related to deferred taxes shown
on the balance sheets are:
2002 2001
----------------------------------------
Deferred tax assets
Allowance for loan losses $ 5,692,566 $ 3,752,000
Mark to market adjustment 342,530 371,863
Accrued compensation and benefits 284,979 395,970
Net deferred loan fees 112,584 102,277
ESOP contributions -- 70,071
Other 52,709 21,281
--------------- ---------------
6,485,368 4,713,462
--------------- ---------------
Deferred tax liabilities
Depreciation (831,950) (368,411)
Mortgage servicing rights (70,649) (131,215)
Purchase accounting adjustments (43,742) (49,210)
Other (47,974) (8,062)
Unrealized gains on available-for-sale securities (342,530) (371,863)
--------------- ---------------
(1,336,845) (928,761)
--------------- ---------------
Net deferred tax asset $ 5,148,523 $ 3,784,701
=============== ===============
(Continued)
F-21
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTE 15: OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) components and related taxes are as
follows:
2002 2001 2000
-----------------------------------------------------------
Unrealized gains (losses) on securities
available for sale $ (919,788) $ 1,085,643 $ 2,740,727
Reclassification for realized amount
included in income 833,515 (489,641) 80,540
--------------- --------------- ---------------
Other comprehensive income (loss),
before tax effect (86,273) 596,002 2,821,267
Tax expense (benefit) (29,333) 202,641 959,230
--------------- --------------- ---------------
Other comprehensive income (loss) $ (56,940) $ 393,361 $ 1,862,037
=============== =============== ===============
NOTE 16: REGULATORY MATTERS
The Company and the subsidiary banks are subject to various regulatory
capital requirements administered by the federal and state banking
agencies. Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on
the Company's financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company
and the subsidiary banks must meet specific capital guidelines that
involve quantitative measures of assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the subsidiary banks to maintain
minimum amounts and ratios (set forth in the table below) of total and
Tier I capital (as defined in the regulations) to risk-weighted assets
(as defined), and of Tier I capital (as defined) to average assets (as
defined). Management believes, as of December 31, 2002, that the Company
and the subsidiary banks meet all capital adequacy requirements to which
they are subject.
As of December 31, 2002, the most recent notification to the regulators
categorized the Company as adequately capitalized, State Bank as well
capitalized, and RFCBC as adequately capitalized under the regulatory
framework for prompt corrective action. To be categorized, the Company
must maintain capital ratios as set forth in the table. There are no
conditions or events since that notification that management believes
have changed the Company's category.
(Continued)
F-22
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
The Company and significant subsidiary banks' actual capital amounts (in
millions) and ratios are also presented in the following table.
TO BE WELL CAPITALIZED
FOR CAPITAL ADEQUACY UNDER PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------------------------------------------------------------------------------
As of December 31, 2002
Total Capital
(to Risk-Weighted Assets)
Consolidated $ 49.4 9.2% $ 43.0 8.0% $ -- N/A
State Bank 36.2 10.2 28.5 8.0 35.6 10.0
RFCBC 14.8 8.1 14.6 8.0 18.2 10.0
Tier I Capital
(to Risk-Weighted Assets)
Consolidated 42.6 7.9 21.5 4.0 -- N/A
State Bank 31.7 8.9 14.3 4.0 21.4 6.0
RFCBC 12.4 6.8 7.3 4.0 10.9 6.0
Tier I Capital
(to Average Assets)
Consolidated 42.6 5.4 31.7 4.0 N/A
State Bank 31.7 6.7 19.1 4.0 23.8 5.0
RFCBC 12.4 4.2 11.7 4.0 14.6 5.0
As of December 31, 2001
Total Capital
(to Risk-Weighted Assets)
Consolidated $ 67.4 10.9% $ 49.5 8.0% -- N/A
State Bank 35.3 9.7 29.2 8.0 36.5 10.0
RFCBC 25.7 10.2 20.0 8.0 25.1 10.0
Tier I Capital
(to Risk-Weighted Assets)
Consolidated 59.6 9.6 24.7 4.0 -- N/A
State Bank 30.1 8.3 14.5 4.0 21.9 6.0
RFCBC 22.6 9.0 10.0 4.0 15.1 6.0
Tier I Capital
(to Average Assets)
Consolidated 59.6 8.1 29.5 4.0% -- N/A
State Bank 30.1 7.0 17.2 4.0 21.5 5.0
RFCBC 22.6 7.5 12.0 4.0 15.0 5.0
(Continued)
F-23
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
On July 9, 2002, the Company and State Bank announced they entered into
a Written Agreement (Agreement) with the Federal Reserve Bank of
Cleveland and the Ohio Division of Financial Institutions on July 5,
2002. The Agreement was the result of an examination of State Bank as of
December 31, 2001, which was conducted in March and April 2002.
The results of the November 4, 2002 regulatory examination indicated
that as of that date, Rurban and State Bank were not in full compliance
with certain provisions of the Written Agreement. Management expects to
be in substantial compliance with each of the provisions of the Written
Agreement by mid-2003.
The Company and RFCBC have been advised by RFCBC's regulators, the FDIC
and the Ohio Division of Financial Institutions, that the preliminary
results of the November 4, 2002 examination of RFCBC indicated that the
Bank may be presented with a formal agreement based on concerns raised.
State Bank and RFCBC are prohibited from paying dividends to Rurban
without prior regulatory approval. Rurban is prohibited from paying
Trust Preferred "dividends" and common stock dividends without prior
regulatory approval.
NOTE 17: RELATED PARTY TRANSACTIONS
Certain directors, executive officers and principal shareholders of the
Company, including associates of such persons, are loan customers. A
summary of the related party loan activity, for loans aggregating
$60,000 or more to any one related party, follows for the years ended
December 31, 2002 and 2001:
2002 2001
-------------------------------------------
Balance, January 1 $ 7,614,000 $ 4,678,000
New loans 1,777,000 875,000
Repayments (1,595,000) (1,494,000)
Previously existing loans to new directors -- 3,668,000
Other changes (261,000) (113,000)
--------------- ---------------
Balance, December 31 $ 7,535,000 $ 7,614,000
=============== ===============
In regard to the 2002 related party loan activity, in management's
opinion, such loans and other extensions of credit and deposits were
made in the ordinary course of business and were made on substantially
the same terms (including interest rates and collateral) as those
prevailing at the time for comparable transactions with other persons.
Further, in management's opinion, these loans did not involve more than
normal risk of collectibility or present other unfavorable features.
Deposits from related parties held by the Bank(s) at December 31, 2002
and 2001 totaled $3,213,000 and $3,094,000, respectively.
F-24
NOTE 18: EMPLOYEE BENEFITS
The Company has retirement savings 401(k) plans covering substantially
all employees. Employees may contribute up to 6% of their compensation
with the Company matching 50% of the employee's contribution. Employee
contributions are vested immediately and the Company's matching
contributions are fully vested after three years. Employer contributions
charged to expense for 2002, 2001 and 2000 were $285,000, $297,000, and
$278,000 respectively.
Also, the Company has deferred compensation agreements with certain
active and retired officers. The agreements provide monthly payments for
up to 15 years that equal 15% of average compensation prior to
retirement or death. The charge to expense for the current agreements
was $164,000, $192,000, and $236,000 for 2002, 2001 and 2000
respectively. In 2002, previously accrued benefits under the agreements
in the amount of $489,000 were reversed and credited to expense as a
result of termination of certain officers. Such charges reflect the
straight-line accrual over the period until full eligibility of the
present value of benefits due each participant on the full eligibility
date, using a 6% discount factor.
Life insurance plans are provided for certain executive officers on a
split-dollar basis. The Company 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, not to exceed the employee's
portion of the death benefit. The Company is entitled to the portion of
the death proceeds which equates to the cash surrender value less any
loans on the policy and unpaid interest or cash withdrawals previously
incurred by the Company. 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 and
life insurance policies related to the Company's supplemental retirement
plan totaled approximately $2,731,911 less policy loans of $1,014,523 at
December 31, 2002 and $2,610,000 at December 31, 2001, and is included
in other assets in the consolidated balance sheets.
The Company has a noncontributory employee stock ownership plan ("ESOP")
covering substantially all employees of the Company and its
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. The Company's contributions to the
account of each employee become fully vested after three years of
service.
During 1986, the ESOP acquired 103,368 shares of the Company common
stock at a weighted-average cost of $14.57 per share with funds provided
by a loan from the Company. Accordingly, the $1,505,527 of common stock
acquired by the ESOP was shown as a reduction of stockholders' equity.
Shares are released to participants proportionately as the loan is
repaid. Dividends on allocated shares are recorded as dividends and
charged to retained earnings. Dividends on unallocated shares are used
to repay the loan or distributed to participants and are treated as
compensation expense. Compensation expense is recorded equal to the fair
market value of the stock when contributions, which are determined
annually by the Board of Directors of the Company, are made to the ESOP.
(Continued)
F-25
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
ESOP expense for the years ended December 31, 2002, 2001 and 2001 was
$503,000, $886,000 and $967,000.
2002 2001
----------------------------------------
Allocated shares 716,289 735,258
Unearned shares 24,811 26,514
-------------- --------------
Total ESOP shares 741,100 761,772
============== ==============
Fair value of unearned shares at December 31 $ 230,246 $ 362,738
============== ==============
NOTE 19: STOCK OPTION PLAN
The Company has a fixed option plan under which the Company may grant
options that vest over five years to selected employees for up to
441,000 shares of common stock. The exercise price of each option is
intended to equal the fair value of the Company's stock on the date of
grant. An option's maximum term is ten years.
A summary of the status of the plan at December 31, 2002, 2001 and 2000,
and changes during the years then ended is presented below:
2002 2001 2000
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
----------------------------------------------------------------------------------
Outstanding,
beginning of year 326,732 $ 12.96 332,797 $ 13.00 241,107 $ 13.77
Granted 3,500 10.51 8,313 13.62 95,703 11.08
Exercised (1,208) 11.07 (3,580) 13.11
Forfeited (87,735) 12.85 (10,798) 14.12 (4,013) 13.85
------- -------- -----------
Outstanding, end of
year 241,289 13.02 326,732 12.96 332,797 13.00
======= ======== ===========
Options exercisable,
end of year 186,113 13.29 184,581 13.31 122,210 13.45
======= ======== ===========
(Continued)
F-26
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
The fair value of options granted is estimated on the date of the grant
using an option-pricing model with the following weighted-average
assumptions:
2002 2001 2000
-----------------------------------------------------------
Dividend yields 3.41% 3.77% 3.54%
Volatility factors of expected market price
of common stock 15.00% 10.84% 17.35%
Risk-free interest rates 1.50% 4.78% 5.68%
Expected life of options 10 years 8 years 10 years
Weighted-average fair value of options
granted during the year $ 0.92 $ 1.69 $ 2.37
The following table summarizes information about stock options under the
plan outstanding at December 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------- ------------------------------------
WEIGHTED-AVERAGE
RANGE OF EXERCISE NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ----------------------------------------------------------------------------------------------------------------------
$9.90 to $11.07 65,423 8.09 years $ 11.02 24,969 $ 11.07
$12.87 to $14.00 136,253 5.23 years $ 12.90 129,903 $ 12.88
$15.20 to $16.78 39,613 6.06 years $ 16.75 31,241 $ 16.77
(Continued)
F-27
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTE 20: EARNINGS PER SHARE
Earnings per share (EPS) are computed as follows:
YEAR ENDED DECEMBER 31, 2002
WEIGHTED-AVERAGE
INCOME SHARES PER SHARE AMOUNT
-----------------------------------------------------------
Basic earnings per share
Net loss available to common
stockholders $ (13,407,884) 4,539,720 $ (2.95)
==============
Effect of dilutive securities
Stock options -- --
--------------- ---------------
Diluted earnings per share
Income available to common stockholders
and assumed conversions $ (13,407,884) 4,539,720 $ (2.95)
=============== =============== ==============
Options to purchase 241,289 shares of common stock at $9.90 to $16.78
per share were outstanding at December 31, 2002, but were not included
in the computation of diluted EPS because the options' exercise price
was greater than the average market price of the common shares.
YEAR ENDED DECEMBER 31, 2001
WEIGHTED-AVERAGE
INCOME SHARES PER SHARE AMOUNT
-----------------------------------------------------------
Basic earnings per share
Net income available to common
stockholders $ 2,252,958 4,525,714 $ .50
==============
Effect of dilutive securities
Stock options -- 18,737
--------------- ---------------
Diluted earnings per share
Income available to common stockholders
and assumed conversions $ 2,252,958 4,544,451 $ .50
=============== =============== ==============
(Continued)
F-28
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
Options to purchase 143,685 shares of common stock were outstanding at
December 31, 2001, but were not included in the computation of diluted
EPS because the options' exercise price was greater than the average
market price of the common shares.
YEAR ENDED DECEMBER 31, 2000
WEIGHTED-AVERAGE
INCOME SHARES PER SHARE AMOUNT
-----------------------------------------------------------
Basic earnings per share
Net income available to common
stockholders $ 6,086,178 4,510,504 $ 1.35
==============
Effect of dilutive securities
Stock options -- 208
--------------- ---------------
Diluted earnings per share
Income available to common stockholders
and assumed conversions $ 6,086,178 4,510,712 $ 1.35
=============== =============== ==============
Options to purchase 237,148 shares of common stock were outstanding at
December 31, 2000, but were not included in the computation of diluted
EPS because the options' exercise price was greater than the average
market price of the common shares.
NOTE 21: BUSINESS ACQUISITIONS
On February 2, 2002, the Company acquired certain assets and assumed
certain liabilities of the Oakwood Deposit Bank Company of Oakwood, Ohio
("Oakwood") from the FDIC following the Ohio Superintendent of Financial
Institutions placing Oakwood in receivership and appointing the FDIC as
receiver for a net premium of approximately $2.0 million. As a result of
the acquisition, the Company will have an opportunity to increase its
deposit base and reduce transaction costs. The Company also expects to
reduce costs through economies of scale.
(Continued)
F-29
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition.
Securities available for sale $ 18,271,342
Loans 29,625,297
Core deposit and other intangibles 909,062
Goodwill 2,144,304
Accrued interest receivable 701,257
Other assets 247,290
---------------
Total assets acquired 51,898,552
---------------
Deposits 91,780,643
Accrued interest payable 187,237
---------------
Total liabilities acquired 91,967,880
---------------
Net liabilities assumed $ (40,069,328)
===============
The difference between the book value of assets acquired and liabilities
assumed from the FDIC was paid to the Company in cash, which was used to
fund withdrawals of insured deposits from non-local depositors.
The only significant intangible assets acquired were the core deposit
base and customer relationships, which has a useful life of
approximately seven years and will be amortized using the accelerated
method. The $2,144,304 of goodwill was assigned entirely to the banking
segment of the business and is expected to be deductible for tax
purposes.
The proforma disclosures to depict the results of operations as though
the merger had taken place at the beginning of each period are not
presented as records are not available from the FDIC for prior periods.
NOTE 22: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents estimated fair values of the Company's
financial instruments. The fair values of certain of these instruments
were calculated by discounting expected cash flows, which involves
significant judgments by management and uncertainties. Fair value is the
estimated amount at which financial assets or liabilities could be
exchanged in a current transaction between willing parties, other than
in a forced or liquidation sale. Because no market exists for certain of
these financial instruments and because management does not intend to
sell these financial instruments, the Company does not know whether the
fair values shown below represent values at which the respective
financial instruments could be sold individually or in the aggregate.
(Continued)
F-30
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
DECEMBER 31, 2002 DECEMBER 31, 2001
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-----------------------------------------------------------------
Financial assets
Cash and cash equivalents $ 51,018,337 $ 51,018,000 $ 25,342,043 $ 25,342,043
Interest-bearing deposits 260,000 260,000 260,000 260,000
Available-for-sale securities 115,108,762 115,109,000 101,139,636 101,139,636
Loans including loans held for
sale, net 533,317,094 540,143,000 591,491,985 595,917,000
Stock in FRB and FHLB 3,665,900 3,666,000 3,235,915 3,235,915
Cash surrender value of life
insurance 1,017,573 1,018,000 2,610,000 2,610,000
Interest receivable 3,966,721 3,967,000 4,939,741 4,939,741
Financial liabilities
Deposits including deposits held
for sale 636,035,341 641,643,000 610,859,809 615,804,000
Federal funds purchased 14,850,000 14,850,000
FHLB advances 47,850,000 52,474,000 54,275,069 57,165,000
Trust preferred securities 10,000,000 11,444,000 10,000,000 10,202,000
Note payable 6,000,000 6,000,000 -- --
Interest payable 2,971,448 2,971,448 3,630,623 3,630,623
For purposes of the above disclosures of estimated fair value, the
following assumptions were used as of December 31, 2002 and 2001. The
estimated fair value for cash and cash equivalents, interest-bearing
deposits, FRB and FHLB stock, cash surrender value of life insurance,
accrued interest receivable, demand deposits, savings accounts, NOW
accounts, certain money market deposits, short-term borrowings, interest
payable and advances by borrowers for taxes and insurance is considered
to approximate cost. The estimated fair value for securities is based on
quoted market values for the individual securities or for equivalent
securities. The estimated fair value for loans receivable, including
loans held for sale, net, is based on estimates of the rate the Bank
would charge for similar loans at December 31, 2002 and 2001 applied for
the time period until the loans are assumed to reprice or be paid. The
estimated fair value for fixed-maturity time deposits as well as
borrowings is based on estimates of the rate the Bank would pay on such
liabilities at December 31, 2002 and 2001, applied for the time period
until maturity. The fair value of commitments is estimated using the
fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present
creditworthiness of the counterparties. The estimated fair value for
other financial instruments and off-balance sheet loan commitments
approximate cost at December 31, 2002 and 2001 and are not considered
significant to this presentation.
(Continued)
F-31
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTE 23: COMMITMENTS AND CREDIT RISK
The Bank grants commercial, agribusiness, consumer and residential loans
to customers throughout the state. Although the Bank has a diversified
loan portfolio, agricultural loans comprised approximately 11% of the
portfolio as of December 31, 2002 and 2001, respectively.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since a portion of
the commitments may expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. Each customer's creditworthiness is evaluated on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary, is based on management's credit evaluation of the
counterparty. Collateral held varies, but may include accounts
receivable, inventory, property, plant and equipment, commercial real
estate and residential real estate.
Letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing and similar
transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loans to customers.
Lines of credit are agreements to lend to a customer as long as there is
no violation of any condition established in the contract. Lines of
credit generally have fixed expiration dates. Since a portion of the
line may expire without being drawn upon, the total unused lines do not
necessarily represent future cash requirements. Each customer's
creditworthiness is evaluated on a case-by-case basis. The amount of
collateral obtained, if deemed necessary, is based on management's
credit evaluation of the counterparty. Collateral held varies but may
include accounts receivable, inventory, property, plant and equipment,
commercial real estate and residential real estate. Management uses the
same credit policies in granting lines of credit as it does for
on-balance-sheet instruments.
2002 2001
-------------------------------------------
Loan commitments and unused lines of credit $ 97,937,000 $ 152,106,000
Standby letters of credit 1,349,000 1,795,000
Commercial letters of credit 11,000 11,000
--------------- ---------------
$ 99,297,000 $ 153,912,000
=============== ===============
At December 31, 2002, the Banks had committed to purchase $13,800,000 of
Agency mortgage backed securities.
(Continued)
F-32
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
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 Company's consolidated financial condition or results of
operations.
Salary continuation agreements with certain executive officers contain
provisions regarding certain events leading to separation from the
Company, before the executive officer's normal retirement date, which
could result in cash payments in excess of amounts accrued.
NOTE 24: CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
Presented below is condensed financial information as to financial
position, results of operations and cash flows of the Company:
CONDENSED BALANCE SHEETS
2002 2001
----------------------------------------
ASSETS
Cash and cash equivalents $ 155,892 $ 5,214,886
Investment in common stock of subsidiaries 52,475,247 57,959,883
Loans to banking subsidiaries -- 600,000
Other assets 1,123,426 1,736,930
--------------- ---------------
Total assets $ 53,754,565 $ 65,511,699
=============== ===============
LIABILITIES
Cash dividend payable $ -- $ 593,387
Trust preferred securities 10,000,000 10,000,000
Notes payable 6,000,000 --
Borrowings from nonbanking subsidiaries 310,000 310,000
Other liabilities 1,062,233 3,778,980
--------------- ---------------
Total liabilities 17,372,233 14,682,367
STOCKHOLDERS' EQUITY 36,382,332 50,829,332
--------------- ---------------
Total liabilities and stockholders' equity $ 53,754,565 $ 65,511,699
=============== ===============
(Continued)
F-33
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF INCOME
2002 2001 2000
-----------------------------------------------------------
INCOME
Interest income $ 114,566 $ 187,179 $ 89,644
Dividends from subsidiaries
Banking subsidiaries -- 3,090,000 11,680,000
Nonbanking subsidiaries 1,825,000 300,000 240,000
--------------- --------------- ---------------
Total 1,825,000 3,390,000 11,920,000
Other income 5,356,332 3,775,452 2,726,073
--------------- --------------- ---------------
Total income 7,295,898 7,352,631 14,735,717
--------------- --------------- ---------------
EXPENSES
Interest expense 1,292,416 1,150,382 710,711
Other expenses 7,381,220 5,753,396 5,181,941
--------------- --------------- ---------------
Total expenses 8,673,636 6,903,778 5,892,652
--------------- --------------- ---------------
INCOME (LOSS) BEFORE INCOME TAX AND
EQUITY IN UNDISTRIBUTED INCOME OF
SUBSIDIARIES (1,377,738) 448,853 8,843,065
INCOME TAX EXPENSE (BENEFIT) (1,088,931) 999,990 1,214,076
--------------- --------------- ---------------
INCOME (LOSS) BEFORE EQUITY IN
UNDISTRIBUTED INCOME OF SUBSIDIARIES (288,807) 1,448,843 10,057,141
EQUITY IN UNDISTRIBUTED (EXCESS
DISTRIBUTED) INCOME OF SUBSIDIARIES
Banking subsidiaries (12,827,147) (227) (4,335,143)
Nonbanking subsidiaries (291,930) 804,342 364,180
--------------- --------------- ---------------
Total (13,119,077) 804,115 (3,970,963)
--------------- --------------- ---------------
NET INCOME (LOSS) $ (13,407,884) $ 2,252,958 $ 6,086,178
=============== =============== ===============
(Continued)
F-34
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CASH FLOWS
2002 2001 2000
-----------------------------------------------------------
OPERATING ACTIVITIES
Net income $ (13,407,884) $ 2,252,958 $ 6,086,178
Items not requiring (providing) cash
Equity in (undistributed) excess
distributed net income of subsidiaries 13,119,077 (804,115) 3,970,963
Other assets 613,504 299,526 2,391,288
Other liabilities (3,310,134) 1,292,688 1,803,356
--------------- --------------- ---------------
Net cash provided by (used in) by
operating activities (2,985,437) 3,041,057 14,251,785
--------------- --------------- ---------------
INVESTING ACTIVITIES
Investment in banking subsidiaries (7,500,000) (8,150,000) (2,350,000)
Investment in nonbanking subsidiaries -- -- (310,000)
Proceeds from note payable 6,000,000 -- --
Proceeds from loans to banking
subsidiaries -- (600,000) (7,600,000)
Repayment of loans to banking
subsidiaries 600,000 7,600,000 --
--------------- --------------- ---------------
Net cash provided by (used in)
investing activities (900,000) (1,150,000) (10,260,000)
--------------- --------------- ---------------
FINANCING ACTIVITIES
Net proceeds from issuance of trust
preferred securities -- -- 9,697,385
Proceeds from borrowings from
nonbanking subsidiaries -- -- 310,000
Net proceeds from (repayment of)
advances on line of credit -- -- (7,000,000)
Cash dividends paid (1,186,930) (2,086,370) (1,822,218)
Proceeds from exercise of stock options 13,373 45,982 --
Cash paid for purchase of treasury stock -- (45,400) --
Cash paid in lieu of fractional shares
for 5% stock dividend -- (8,659) (6,968)
--------------- --------------- ---------------
Net cash provided by (used in)
financing activities (1,173,557) (2,094,447) 1,178,199
--------------- --------------- ---------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (5,058,994) (203,390) 5,169,984
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR 5,214,886 5,418,276 248,292
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 155,892 $ 5,214,886 $ 5,418,276
=============== =============== ===============
(Continued)
F-35
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTE 25: SEGMENT INFORMATION
The reportable segments are determined by the products and services
offered, primarily distinguished between banking and data processing
operations. Loans, investments, deposits and financial services provide
the revenues in the banking segment and include the accounts of State
Bank and RFCBC. Service fees provide the revenues in the data processing
operation and include the accounts of RDSI. Other segments include the
accounts of the holding company, Rurban Financial Corp., which provides
management services to its subsidiaries and RFS, which provides trust
and financial services to customers nationwide and Rurban Life, which
provides insurance products to customers of the Company's subsidiary
banks.
The accounting policies used are the same as those described in the
summary of significant accounting policies. Segment performance is
evaluated using net interest income, other revenue, operating expense
and net income. Goodwill is allocated. Income taxes and indirect
expenses are allocated on revenue. Transactions among segments are made
at fair value. The holding company allocates certain expenses to other
segments. Information reported internally for performance assessment
follows.
INTERSEGMENT
2002 BANKING DATA PROCESSING OTHER TOTAL SEGMENTS ELIMINATION CONSOLIDATED TOTALS
--------------------------------------------------------------------------------------------------------
INCOME STATEMENT
INFORMATION:
Net interest income
(expense) $ 25,068,431 $ (150,430) $ (1,107,084) $ 23,810,917 $ -- $ 23,810,917
Other revenue-external
customers 3,362,235 7,815,589 2,601,444 13,779,268 -- 13,779,268
Other revenue-other
segments -- 1,790,381 5,439,203 7,229,584 (7,229,584) --
------------- ------------- ------------- ------------- ------------- -------------
Net interest income and
other revenue 28,430,666 9,455,540 6,933,563 44,819,769 (7,229,584) 37,590,185
Noninterest expense 20,617,085 7,163,698 9,960,774 37,741,557 (7,229,584) 30,511,973
Significant noncash
items:
Depreciation and
amortization 983,411 1,211,934 194,504 2,389,849 -- 2,389,849
Provision for loan losses 27,530,583 -- -- 27,530,583 -- 27,530,583
Income tax expense (6,794,462) 779,226 (1,029,252) (7,044,488) -- (7,044,488)
Segment profit (loss) (12,922,539) 1,512,615 (1,997,960) (13,407,884) -- (13,407,884)
BALANCE SHEET
INFORMATION:
Total assests 732,635,201 9,143,898 2,810,052 744,589,151 (2,272,473) 742,316,679
Goodwill and intangibles 3,094,419 -- -- 3,094,419 -- 3,094,419
Premises and equipment
expenditures, net 2,755,567 3,964,064 240,849 6,960,480 -- 6,960,480
(Continued)
F-36
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
INTERSEGMENT
2001 BANKING DATA PROCESSING OTHER TOTAL SEGMENTS ELIMINATION CONSOLIDATED TOTALS
--------------------------------------------------------------------------------------------------------
INCOME STATEMENT
INFORMATION:
Net interest income
(expense) $ 25,674,656 $ (126,933) $ 193,482 $ 25,741,205 $ -- $ 25,741,205
Other revenue-external
customers 5,088,701 6,125,970 2,946,942 14,161,613 -- 14,161,613
Other revenue-other
segments -- 1,564,758 3,851,576 5,416,334 (5,416,334) --
------------- ------------- ------------- ------------- ------------- -------------
Net interest income and
other revenue 30,763,357 7,563,795 6,992,000 45,319,152 (5,416,334) 39,902,818
Noninterest expense 17,644,172 6,001,048 9,789,408 33,434,628 (5,416,334) 28,018,294
Significant noncash
items:
Depreciation and
amortization 884,466 988,703 198,837 2,072,006 -- 2,072,006
Provision for loan losses 8,733,000 -- -- 8,733,000 -- 8,733,000
Income tax expense 1,318,714 531,334 (951,482) 898,566 -- 898,566
Segment profit (loss) 3,067,471 1,031,413 (1,845,926) 2,252,958 -- 2,252,958
BALANCE SHEET
INFORMATION:
Total assets 739,852,844 5,683,449 9,753,342 755,289,635 (9,080,542) 746,209,093
Goodwill and intangibles 179,339 -- -- 179,339 -- 179,339
Premises and equipment
expenditures, net 594,743 2,142,649 118,741 2,856,133 -- 2,856,133
INTERSEGMENT CONSOLIDATED
2000 BANKING DATA PROCESSING OTHER TOTAL SEGMENTS ELIMINATION TOTALS
-----------------------------------------------------------------------------------------------------
INCOME STATEMENT INFORMATION:
Net interest income (expense) $ 26,156,349 $ (47,415) $ 278,934 $ 26,387,868 $ -- $ 26,387,868
Other revenue-external
customers 3,061,748 5,123,805 3,087,308 11,272,861 -- 11,272,861
Other revenue-other segments -- 1,389,863 2,929,625 4,319,488 (4,319,488) --
------------ ------------ ------------ ------------ ------------ ------------
Net interest income and
other revenue 29,218,097 6,466,253 6,295,867 41,980,217 (4,319,488) 37,660,729
Noninterest expense 16,372,598 5,681,075 9,019,832 31,073,505 (4,319,488) 26,754,017
Significant noncash items:
Depreciation and amortization 959,416 938,102 205,611 2,103,129 -- 2,103,129
Provision for loan losses 2,100,000 -- -- 2,100,000 -- 2,100,000
Income tax expense 3,549,622 266,961 (1,096,049) 2,720,534 -- 2,720,534
Segment profit (loss) 7,195,877 518,217 (1,627,916) 6,086,178 -- 6,086,178
BALANCE SHEET INFORMATION:
Total assets 691,764,552 4,763,318 27,714,578 724,242,448 (23,424,746) 700,817,702
Goodwill and intangibles 300,000 -- -- 300,000 -- 300,000
Premises and equipment
expenditures, net 555,021 916,141 184,389 1,655,551 -- 1,655,551
(Continued)
F-37
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTE 26: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following tables summarize selected quarterly results of operations
for 2002 and 2001.
DECEMBER 31, 2002 MARCH JUNE SEPTEMBER DECEMBER
----- ---- --------- --------
Interest income $ 12,752,703 $ 12,644,230 $ 12,263,786 $ 10,929,925
Interest expense 6,557,632 6,325,257 6,223,362 5,706,730
Net interest income 6,195,071 6,318,973 6,040,424 5,223,195
Provision for loan losses 2,132,000 11,852,000 2,007,000 11,539,583
Noninterest income 3,398,386 1,714,935 3,857,992 4,807,955
Noninterest expense 7,190,342 7,765,869 7,674,804 7,847,705
Income tax expense 64,566 (3,953,676) 51,151 (3,206,529)
Net income 206,549 (7,630,285) 165,461 (6,149,609)
Earnings per share
Basic 0.05 (1.68) 0.04 (1.35)
Diluted 0.05 (1.68) 0.04 (1.35)
Dividends per share 0.130 0.130 -- --
DECEMBER 31, 2001 MARCH JUNE SEPTEMBER DECEMBER
----- ---- --------- --------
Interest income $ 14,840,486 $ 14,507,461 $ 13,947,793 $ 13,223,089
Interest expense 8,189,469 7,955,778 7,635,414 6,996,963
Net interest income 6,651,017 6,551,683 6,312,379 6,226,126
Provision for loan losses 525,000 1,458,000 1,125,000 5,625,000
Noninterest income 3,237,957 3,416,619 3,709,819 3,797,218
Noninterest expense 7,021,012 6,866,523 6,944,282 7,186,477
Income tax expense 748,711 522,662 644,034 (1,016,841)
Net income 1,594,251 1,121,117 1,308,882 (1,771,292)
Earnings per share
Basic 0.35 0.25 0.29 (0.39)
Diluted 0.35 0.25 0.29 (0.39)
Dividends per share 0.114 0.114 0.114 0.130
During the fourth quarters of 2002 and 2001 and the second quarter of
2002, additional provisions for loan losses were recorded due to
identification of increased levels of impaired loans and loan
charge-offs.
During the second quarter of 2002, a loss was recorded to write down the
value of the Company's investment in WorldCom bonds which reduced
noninterest income by $1.7 million.
Noninterest expense increased during the second quarter of 2002 and
succeeding quarters as a result of the expenses of acquisitions.
(Continued)
F-38
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTE 27: SUBSEQUENT EVENT AND MANAGEMENT'S PLAN FOR FUTURE LIQUIDITY NEEDS
On January 15, 2003, as part of the effort to improve the Company's and
RFCBC's capital levels and to provide for future liquidity needs, the
Company's Board of Directors announced that it intended to make
available for purchase its bank branches located in Hancock and Putnam
Counties. These offices comprise the Peoples Banking Company Division
and the First Bank of Ottawa Division.
On February 22, 2003, an agreement was signed to sell the branches,
deposits and certain performing loans of the Peoples Banking Company and
First Bank of Ottawa divisions of RFCBC to First Federal Bank of the
Midwest at a price substantially in excess of their book value. Under
the agreement, First Federal Bank of the Midwest would acquire loans
(including accrued interest) of approximately $116 million, total fixed
assets (net of accumulated depreciation) of approximately $1.5 million
and total deposits (including accrued interest) of approximately $177
million. The transaction is expected to close in May 2003.
The Company's business plan includes strategies to sell all of the
branches of RFCBC and use that bank's current capital and the capital
which would result from the branch sales as the capital and primary
funding source for a non-banking subsidiary. This subsidiary would
manage RFCBC's classified loans that are not included in the sale
agreements. Cash flow from the principal and interest payments as well
as the payoffs of classified loans would be available to repay debt of
the loan subsidiary and to dividend to Rurban the cash for resumption of
the Trust Preferred interest payments, common stock dividends and
ultimately to reinvest in the expansion of Rurban's banking and data
processing operations.
Management believes that cash flows resulting from the planned branch
sales combined with normal operating cash flows will be sufficient to
meet the Company's liquidity needs for the foreseeable future.
(Continued)
F-39
RURBAN FINANCIAL CORP.
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 2002
INDEX TO EXHIBITS
Exhibit No. Description Reference No.
- ----------- ----------- -------------
3(a) Amended Articles of Registrant, as amended Incorporated herein by reference 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 Amended Incorporated herein by reference to
Articles of Rurban Financial Corp. Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31,
1993 (File No. 0-13507) [Exhibit 3(b)].
3(c) Certificate of Amendment to the Amended Incorporated herein by reference to
Articles of Rurban Financial Corp. Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31,
1997 (File No. 0-13507) [Exhibit 3(c)].
3(d) Amended and Restated Articles of Rurban Incorporated herein by reference to
Financial Corp. Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31,
1997 (File No. 0-13507) [Exhibit 3(d)].
3(e) 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 Rurban Incorporated herein by reference to
Financial Corp. 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 to
Ownership Plan of Rurban Financial Corp., Registrant's Annual Report on Form 10-K
dated June 14, 1993 and made to be for the fiscal year ended
effective as of January 1, 1993 December 31, 1993 (File No. 0-13507)
[Exhibit 10(b)].
Exhibit No. Description Reference No.
- ----------- ----------- -------------
10(c) Second Amendment to Employees' Stock Incorporated herein by reference to
Ownership Plan of Rurban Financial Corp., Registrant's Annual Report on Form 10-K
dated March 14, 1994 and made to be for the fiscal year ended
effective as of January 1, 1993 December 31, 1993 (File No. 0-13507)
[Exhibit 10(c)].
10(d) Third Amendment to Employees' Stock Incorporated herein by reference to
Ownership Plan of Rurban Financial Corp., Registrant's Annual Report on Form 10-K
dated March 13, 1995 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 to
Ownership Plan of Rurban Financial Corp., Registrant's Annual Report on Form 10-K
dated June 10, 1995 and made to be for the fiscal year ended December 31,
effective as of January 1, 1995 1995 (File No. 0-13507) [Exhibit 10(e)].
10(f) The Rurban Financial Corp. Savings Plan and Incorporated herein by reference to
Trust 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 Financial Incorporated herein by reference to
Corp. Savings Plan and Trust, dated Registrant's Annual Report on Form 10-K
December 10, 1990 and effective January 1, for the fiscal year ended December
1990 31, 1990 (File No. 0-13507)
[Exhibit 10(g)].
10(h) Second Amendment to The Rurban Financial Incorporated herein by reference to
Corp. Savings Plan and Trust, dated Registrant's Annual Report on Form 10-K
March 11, 1991, effective February 1, 1991 for the 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 to
Corp. Savings Plan and Trust, dated Registrant's Annual Report on Form 10-K
June 11, 1991 for the fiscal year ended December 31,
1992 (File No. 0-13507) [Exhibit 10(e)].
10(j) Fourth Amendment to The Rurban Financial Incorporated herein by reference to
Corp. Savings Plan and Trust, dated Registrant's Annual Report on Form 10-K
July 14, 1992, effective May 1, 1992 for the fiscal year ended December 31,
1992 (File No. 0-13507) [Exhibit 10(f)].
Exhibit No. Description Reference No.
- ----------- ----------- -------------
10(k) Fifth Amendment to The Rurban Financial Incorporated herein by reference to
Corp. Savings Plan and Trust, dated March Registrant's Annual Report on Form 10-K
14, 1994 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 to
Corp. Savings Plan and Trust dated May 1, Registrant's Annual Report on Form 10-K
1995 for the fiscal year ended December 31,
1995 (File No. 0-13507) [Exhibit 10(l)].
10(m) Summary of Incentive Compensation Plan of Incorporated herein by reference to
State Bank 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 the Incorporated herein by reference to
Trust Department of State Bank for the Registrant's Annual Report on Form 10-K
benefit of Robert W. Constien in his for the fiscal year ended December 31,
capacity as Manager of the Trust Department 1991 (File No. 0-13507) [Exhibit 10(e)].
10(o) Summary of Bonus Program for the Trust Incorporated herein by reference to
Department of State Bank Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31,
1992 (File No. 0-13507 [Exhibit 10(i)].
10(p) Summary of Sales Bonus Program of State Bank 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 10(n)].
10(q) Summary of Rurban Financial Corp. Bonus Plan Incorporated herein by reference 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 Agreement, Incorporated herein by reference to
dated December 15, 1994, between Rurban Registrant's Annual Report on Form 10-K
Financial Corp. and Richard C. Burrows for the fiscal year ended December 31,
1994 (File No. 0-13507) [Exhibit 10(p)].
Exhibit No. Description Reference No.
- ----------- ----------- -------------
10(s) Executive Salary Continuation Agreement, Included in this Annual Report on Form
dated December 3, 2001, between Rurban 10-K as Exhibit 10(s).
Financial Corp. and Kenneth A. Joyce; and
Amended Schedule A to Exhibit 10(s)
identifying other identical Executive
Salary Continuation Agreements between
executive officers of Rurban Financial
Corp. and Rurban Financial Corp.
10(t) Split-Dollar Dollar Insurance Agreement, Included in this Annual Report on Form
dated April 3, 2002, between Robert 10-K as Exhibit 10(s).
Constein and Rurban Financial Corp.
10(u) Rurban Financial Corp. Stock Option Plan Incorporated herein by reference to the
Corporation's Annual Report on Form 10-K
for the fiscal year ended
December 31, 1996 (File No. 0-13507)
[Exhibit 10(u)].
10(v) Rurban Financial Corp. Plan to Allow Incorporated herein by reference to the
Directors to Elect to Defer Compensation Corporation's Annual Report on Form 10-K
for the fiscal year ended
December 31, 1996 (File No. 0- 13507)
[Exhibit 10(v)].
10(w) Form of Non-Qualified Stock Option Incorporated herein by reference to
Agreement Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31,
1997 (File No. 0-13507) [Exhibit 10(w)].
10(x) Form of Incentive Stock Option Agreement Incorporated herein by reference to
Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31,
1997 (File No. 0-13507) [Exhibit 10(x)].
10(y) Employees' Stock Ownership and Savings Plan Incorporated herein by reference to
of Rurban Financial Corp. Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31,
1999 (File No. 0-13507) [Exhibit 10(y)].
10(z) Rurban Financial Corp. Employee Stock Included in this Annual Report on Form
Purchase Plan 10-K as Exhibit 10(z).
Exhibit No. Description Reference No.
- ----------- ----------- -------------
11 Statement re: Computation of Per Share Included in Note 1 of the Notes to
Earnings Consolidated Financial Statements of
Registrant in the financial statements
portion of this Annual Report on Form
10-K.
21 Subsidiaries of Registrant Included in this Annual Report on Form
10-K as Exhibit 21.
23 Consent of Independent Auditor Included in this Annual Report on Form
10-K as Exhibit 23.
99(a) Certification of the Chief Executive Included in this Annual Report on Form
Officer and Chief Financial Officer 10-K as Exhibit 99(a).
Pursuant to Title 18, United States Code,
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes -Oxley Act of
2002.
99(b) Report of Independent Auditors for 2001 Included in this Annual Report on Form
and 2000. 10-K as Exhibit 99(b).