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Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________to___________________________
Commission file number 0-13507
RURBAN FINANCIAL CORP.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-1395608
- ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
401 Clinton Street, Defiance, Ohio 43512
----------------------------------------
(Address of principal executive offices)
(Zip Code)
(419) 783-8950
----------------------------------------------------
(Registrant's telephone number, including area code)
None
-------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by sections 13 or 15(d) of the Securities Exchange Act of 1934
during the proceeding 12 months (or for such shorter period 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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
Yes [ ] No [X]
The number of common shares of Rurban Financial Corp. outstanding was
4,565,721 on November 1, 2003.
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The interim condensed consolidated financial statements of Rurban Financial
Corp. and Subsidiaries are unaudited; however, the information contained herein
reflects all adjustments which are, in the opinion of management, necessary for
a fair presentation of financial condition and results of operations for the
interim periods presented. All adjustments reflected in these financial
statements are of a normal recurring nature in accordance with Rule 10-01(b)(8)
of Regulation S-X. Results of operations for the three months ended September
30, 2003 are not necessarily indicative of results for the complete year.
2
RURBAN FINANCIAL CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2003, DECEMBER 31, 2002 AND SEPTEMBER 30, 2002
ASSETS
(UNAUDITED) (UNAUDITED)
-----------------------------------------------
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
2003 2002 2002
------------- ------------- -------------
Cash and due from banks $ 16,834,072 $ 37,018,337 $ 25,638,415
Federal funds sold 2,000,000 14,000,000 28,250,000
------------- ------------- -------------
Cash and cash equivalents 18,834,072 51,018,337 53,888,415
Interest-bearing deposits 260,000 260,000 260,000
Available-for-sale securities 99,860,837 115,108,762 90,299,093
Loans held for sale 488,484 63,536,309 44,028,624
Loans, net of unearned income 301,785,352 487,474,626 582,262,740
Allowance for loan losses (11,256,083) (17,693,841) (20,417,569)
Premises and equipment 11,394,579 14,695,613 13,855,679
Federal Reserve and Federal Home Loan Bank stock 3,761,400 3,665,900 3,630,500
Foreclosed assets held for sale, net 1,167,466 1,960,276 305,781
Interest receivable 2,227,737 3,966,721 4,657,102
Deferred income taxes 5,397,313 5,495,812 1,945,129
Goodwill 2,144,303 2,323,643 2,250,599
Core deposits and other intangibles 675,864 770,777 621,859
Other 1,750,376 9,733,744 11,820,203
------------- ------------- -------------
Total assets $ 438,491,700 $ 742,316,679 $ 789,408,155
============= ============= =============
See notes to condensed consolidated financial statements (unaudited)
3
LIABILITIES AND STOCKHOLDERS' EQUITY
(UNAUDITED) (UNAUDITED)
-----------------------------------------------
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
2003 2002 2002
------------- ------------- -------------
LIABILITIES
Deposits
Demand $ 33,773,223 $ 46,114,153 $ 49,968,196
Savings, NOW and money market 106,082,553 117,738,013 196,565,846
Time 187,169,019 404,007,515 400,137,710
------------- ------------- -------------
Total deposits 327,024,795 567,859,681 646,671,752
Deposits held for sale -- 68,175,660 26,238,717
Notes payable 11,239,607 6,000,000 7,000,000
Federal Home Loan Bank advances 37,500,000 47,850,000 49,350,000
Trust preferred securities 10,000,000 10,000,000 10,000,000
Interest payable 2,227,395 2,971,448 3,473,186
Other liabilities 2,563,997 3,077,558 3,469,726
------------- ------------- -------------
Total liabilities 390,555,794 705,934,347 746,203,381
------------- ------------- -------------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Common stock, $2.50 stated value; authorized
10,000,000 shares; issued 4,575,702; outstanding
September 30, 2003 - 4,565,721, December 31,
2002 - 4,565,721 and September 30, 2002 -
4,565,721 shares 11,439,255 11,439,255 11,439,255
Additional paid-in capital 11,009,733 11,009,733 11,009,733
Retained earnings 25,883,039 13,904,212 20,053,821
Unearned employee stock ownership plan (ESOP)
shares (281,447) (320,765) (360,083)
Accumulated other comprehensive income 200,340 664,911 1,377,062
Treasury stock, at cost, 9,981 shares (315,014) (315,014) (315,014)
------------- ------------- -------------
Total stockholders' equity 47,935,906 36,382,332 43,204,774
------------- ------------- -------------
Total liabilities and stockholders' equity $ 438,491,700 $ 742,316,679 $ 789,408,155
============= ============= =============
See notes to condensed consolidated financial statements (unaudited)
Note: The balance sheet at December 31, 2002 has been derived from the
audited consolidated financial statements at that date.
4
RURBAN FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002
------------- -------------
INTEREST INCOME
Loans $ 4,770,009 $ 10,998,762
Securities
Taxable 583,157 1,096,742
Tax-exempt 44,351 53,985
Other 85,760 114,297
------------- -------------
Total interest income 5,483,277 12,263,786
INTEREST EXPENSE
Deposits 1,778,586 5,119,229
Notes payable 180,270 84,149
Federal Home Loan Bank advances 548,888 749,095
Trust preferred 270,889 270,889
------------- -------------
Total interest expense 2,778,633 6,223,362
------------- -------------
NET INTEREST INCOME 2,704,644 6,040,424
PROVISION FOR LOAN LOSSES - 2,007,000
------------- -------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,704,644 4,033,424
------------- -------------
NONINTEREST INCOME
Data service fees 2,267,758 2,051,794
Trust fees 559,327 591,289
Customer service fees 454,778 643,534
Net gains on loan sales 88,555 175,551
Net realized gains (losses) on sales of
available-for-sale securities - 135,847
Loan servicing fees 81,602 58,731
Gain (loss) on sale of assets 54,969 5,479
Other 76,977 195,767
------------- -------------
Total noninterest income 3,583,966 3,857,992
------------- -------------
See notes to condensed consolidated financial statements (unaudited)
5
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
SEPTEMBER 30, SEPTEMBER 30,
2003 2002
------------- -------------
NONINTEREST EXPENSE
Salaries and employee benefits $ 2,869,095 $ 3,961,120
Net occupancy expense 245,853 376,807
Equipment expense 1,060,990 1,005,193
Data processing fees 125,132 100,815
Professional fees 683,673 812,374
Marketing expense 119,580 129,978
Printing and office supplies 100,587 141,924
Telephone and communications 166,048 194,102
Postage and delivery expense 102,069 169,835
State, local and other taxes 149,584 196,118
Other 388,450 586,538
------------- -------------
Total noninterest expense 6,011,061 7,674,804
------------- -------------
INCOME BEFORE INCOME TAX 277,549 216,612
PROVISION FOR INCOME TAXES 77,754 51,151
------------- -------------
NET INCOME $ 199,795 $ 165,461
============= =============
BASIC EARNINGS PER SHARE $ 0.04 $ 0.04
============= =============
DILUTED EARNINGS PER SHARE $ 0.04 $ 0.04
============= =============
See notes to condensed consolidated financial statements (unaudited)
6
RURBAN FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002
------------- -------------
INTEREST INCOME
Loans $ 19,922,237 $ 33,585,934
Securities
Taxable 2,033,479 3,754,254
Tax-exempt 128,667 167,649
Other 365,989 152,882
------------ -------------
Total interest income 22,450,372 37,660,719
------------ -------------
INTEREST EXPENSE
Deposits 8,505,206 15,698,459
Notes payable 424,283 392,457
Federal Home Loan Bank advances 1,802,190 2,211,502
Trust preferred 803,833 803,833
------------ -------------
Total interest expense 11,535,512 19,106,251
------------ -------------
NET INTEREST INCOME 10,914,860 18,554,468
PROVISION FOR LOAN LOSSES 1,494,000 15,991,000
------------ -------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 9,420,860 2,563,468
------------ -------------
NONINTEREST INCOME
Data service fees 6,677,203 5,620,560
Trust fees 1,827,260 1,961,055
Customer service fees 1,650,070 1,924,544
Net gains on loan sales 390,965 359,357
Net realized gains (losses) on sales of
available-for-sale securities 23,632 (1,682,091)
Loan servicing fees 310,540 258,915
Gain (loss) on sale of assets 20,005,581 3,713
Other 365,514 525,260
------------ -------------
Total noninterest income 31,250,765 8,971,313
------------ -------------
See notes to condensed consolidated financial statements (unaudited)
7
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
SEPTEMBER 30, SEPTEMBER 30,
2003 2002
------------- -------------
NONINTEREST EXPENSE
Salaries and employee benefits $ 10,394,061 $ 11,723,153
Net occupancy expense 945,422 1,018,631
Equipment expense 3,177,615 2,854,179
Data processing fees 344,212 387,004
Professional fees 3,492,915 2,267,028
Marketing expense 313,111 365,058
Printing and office supplies 399,047 560,721
Telephone and communications 550,406 585,782
Postage and delivery expense 434,019 469,063
State, local and other taxes 477,014 551,301
Other 2,006,099 1,849,095
------------- -------------
Total noninterest expense 22,533,921 22,631,015
------------- -------------
INCOME BEFORE INCOME TAX 18,137,704 (11,096,234)
PROVISION FOR INCOME TAXES 6,158,877 (3,837,959)
------------- -------------
NET INCOME $ 11,978,827 $ (7,258,275)
============= =============
BASIC EARNINGS PER SHARE $ 2.64 $ (1.60)
============= =============
DILUTED EARNINGS PER SHARE $ 2.63 $ (1.60)
============= =============
See notes to condensed consolidated financial statements (unaudited)
8
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY (UNAUDITED)
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, 2003 September 30, 2002 September 30, 2003 September 30, 2002
Total Total Total Total
Shareholders' Shareholders' Shareholders' Shareholders'
Equity Equity Equity Equity
------------------ ------------------ ------------------ ------------------
Balance at beginning of period $ 48,157,091 $ 42,807,182 $ 36,382,332 $ 50,829,332
Net Income (loss) 199,975 165,461 11,978,827 (7,258,275)
Other comprehensive income (loss):
Net change in unrealized gains (losses)
on securities available for sale, net (421,160) 181,889 (464,571) 655,211
------------------ ------------------ ----------------- ------------------
Total comprehensive income (loss) (221,185) 347,350 11,514,256 (6,603,064)
Cash dividends declared - - - (1,186,930)
Proceeds from sale of treasury stock - - - 13,373
Paydown of ESOP loan - 50,242 39,318 152,063
------------------ ------------------ ----------------- ------------------
Balance at end of period $ 47,935,906 $ 43,204,774 $ 47,935,906 $ 43,204,774
================== ================== ================= ==================
9
RURBAN FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002
------------- -------------
OPERATING ACTIVITIES
Net income $ 11,978,827 $ (7,258,275)
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 1,755,265 1,642,285
Provision for loan losses 1,494,000 15,991,000
ESOP shares earned 39,318 152,063
Amortization of premiums and discounts
on securities 735,074 1,807,661
Amortization of intangible assets 274,253 159,620
Deferred income taxes 98,499 --
Proceeds from sale of loans held for
sale 36,497,316 15,984,195
Originations of loans held for sale (36,106,351) (15,686,476)
Gain on sale of branch (19,995,365) --
Gain from sale of loans (390,965) (359,357)
Gain on sales of fixed assets (17,595) (3,713)
Net realized gains on
available-for-sale securities (23,632) (125,570)
Changes in
Interest receivable 1,738,984 846,683
Other assets 7,789,651 (5,763,692)
Interest payable and other liabilities (1,243,497) 623,792
------------- -------------
Net cash provided by operating
activities 4,623,782 8,010,216
------------- -------------
INVESTING ACTIVITIES
Purchases of available-for-sale securities (114,036,714) (54,518,393)
Proceeds from maturities of
available-for-sale securities 110,473,918 40,580,590
Proceeds from the sales of
available-for-sale securities 17,634,708 41,965,756
Net change in loans 102,355,764 632,540
Purchase of premises and equipment (1,046,046) (3,777,259)
Purchase of Federal Home Loan Federal
Reserve Bank stock (95,500) --
Sale of foreclosed assets 792,810 --
Payment of assumption of liability from
sale of branch (70,452,850) --
Proceeds from assumption of net
liabilities in business acquisition -- 40,069,328
------------- -------------
Net cash provided by investing
activities $ 45,626,090 $ 64,952,562
------------- -------------
10
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SEPTEMBER 30, SEPTEMBER 30,
2003 2002
------------- -------------
FINANCING ACTIVITIES
Net increase in demand deposits, money market,
NOW and savings accounts $ 31,605,311 $ 6,385,895
Net decrease in certificates of deposit (108,929,055) (36,260,288)
Net decrease in federal funds purchased -- (14,850,000)
Repayment of Federal Home Loan Bank advances (10,350,000) (9,925,069)
Proceeds of Federal Home Loan Bank advances -- 5,000,000
Proceeds of note payable 5,239,607 7,000,000
Dividends paid -- (1,780,317)
Proceeds from sale of 1,208 shares of treasury stock -- 13,373
------------- -------------
Net cash used in financing activities (82,434,137) (44,416,406)
------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (32,184,265) 28,546,372
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 51,018,337 25,342,043
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 18,834,072 $ 53,888,415
============= =============
SUPPLEMENTAL CASH FLOWS INFORMATION
Interest paid $ 12,279,565 $ 19,263,688
Income taxes paid (net of refunds) $ (2,168,512) --
See notes to condensed consolidated financial statements (unaudited)
11
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The financial
statements reflect all adjustments that are in the opinion of management,
necessary to fairly present the financial position, results of operations and
cash flows of the Company. Those adjustments consist only of normal recurring
adjustments.
The condensed consolidated balance sheet of the Company as of December 31, 2002
has been derived from the audited consolidated balance sheet of the Company as
of that date.
For further information, refer to the consolidated financial statements and
footnotes included in the Company's Annual Report on Form 10-k for the year
ended December 31, 2002.
NOTE B--EARNINGS PER SHARE
Earnings per share have been computed based on the weighted average number of
shares outstanding during the periods presented. For the periods ended September
30, 2003 and 2002, stock options totaling 184,267 and 246,027 shares of common
stock were not considered in computing EPS as they were anti-dilutive. The
weighted average number of shares used in the computation of basic and diluted
earnings per share was:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
Basic earnings per share 4,549,413 4,539,601 4,545,162 4,539,601
Diluted earnings per share 4,555,614 4,539,601 4,547,599 4,539,601
12
NOTE C - LOANS, RISK ELEMENTS AND ALLOWANCE FOR LOAN LOSSES
Total loans on the balance sheet are comprised of the following classifications
at:
September 30, December 31, September 30,
2003 2002 2002
---- ---- ----
Commercial $ 96,565,587 $ 123,053,492 $ 139,173,186
Commercial real estate 67,588,490 129,718,943 144,690,881
Agricultural 39,428,802 68,953,865 77,665,779
Residential real estate 46,157,257 84,431,599 119,475,874
Consumer 38,574,070 60,138,463 76,549,325
Lease financing 13,697,236 21,509,394 25,049,972
---------------- ---------------- -------------
Total loans 302,011,442 487,805,756 582,605,017
Less
Net deferred loan fees, premiums and discounts (226,090) (331,130) (342,277)
---------------- ---------------- -------------
Net loans $ 301,785,352 $ 487,474,626 $ 582,262,740
================ ================ =============
The following is a summary of the activity in the allowance for loan losses
account for the nine months ended September 30, 2003 and 2002 and the year ended
December 31, 2002.
September 30, December 31, September 30,
2003 2002 2002
---- ---- ----
Balance, beginning of year $ 17,693,841 $ 9,238,936 $ 9,238,936
Amounts assumed in acquisition -- 1,427,000 1,427,000
Transfer to loans held for sale -- -- (428,000)
Sale of Citizens Banking Co. (232,000) -- --
Provision charged to expense 1,494,000 27,530,583 15,991,000
Recoveries 1,926,438 1,270,773 1,036,195
Loans charged off (9,626,196) (21,773,451) (6,847,562)
--------------- --------------- --------------
Balance, end of year $ 11,256,083 $ 17,693,841 $ 20,417,569
=============== =============== ==============
13
The following schedule summarizes nonaccrual, past due and impaired loans at:
September 30, December 31, September 30,
2003 2002 2002
---- ---- ----
Loans accounted for on a nonaccrual basis $ 18,857,000 $ 18,259,000 $ 20,706,000
Accruing loans which are contractually
past due 90 days or more as to interest or
principal payments - 476,000 2,779,000
--------------- --------------- ------------
Total non-performing loans $ 18,857,000 $ 18,735,000 $ 23,485,000
=============== =============== ============
Individual loans determined to be impaired were as follows:
September 30, December 31, September 30,
2003 2002 2002
---- ---- ----
Loans with no allowance for loan losses allocated $ 280,000 $ 1,186,000 $ 1,159,000
Loans with allowance for loan losses allocated 18,137,000 13,736,000 21,728,000
--------------- --------------- ------------
Total impaired loans $ 18,417,000 $ 14,922,000 $ 22,888,000
=============== =============== ============
Amount of allowance allocated $ 5,315,000 $ 5,067,000 $ 9,427,000
=============== =============== ============
14
NOTE D - 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 September 30, 2003, December 31, 2002
and September 30, 2002, 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, 2010 at a premium, or on or
after September 7, 2020 at par; 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.
On July 9, 2003, the Trustee was notified that the Company elected to defer the
semi-annual distributions which would have been due on September 7, 2003, until
March 7, 2004.
NOTE E - NOTE PAYABLE
RFC Banking Company has a note payable to The Union Bank Company secured by the
stock of RFC Banking Company and Rurbanc Data Services, Inc., payable in equal
quarterly principal installments of $300,000 together with interest at a
variable rate. During the third quarter, RFC Banking Company elected to prepay
$2,500,000 of this note. The note balance was $6,200,000 as of September 30,
2003. The Company also has a line of credit with The Union Bank Company for
$2,000,000. The line of credit balance was $0 as of September 30, 2003.
RFC Banking Company has a note payable to First Federal Bank of the Midwest
secured by specific loans of RFC Banking Company, payable in equal monthly
installments of $100,000 together with interest at a variable rate. The note
balance was $4,033,668 as of September 30, 2003.
RDSI had a note payable to RFC Banking Company in the amount of $1,098,000. This
note was acquired by First Federal Bank of the Midwest upon their acquisition of
the branches sold during the second quarter. The note balance was $1,005,939 as
of September 30, 2003.
15
NOTE F - 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, if undertaken, and 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 September
30, 2003, the Company and the subsidiary banks meet all "well-capitalized"
requirements to which they are subject.
16
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 September 30, 2003
Total Capital
(to Risk-Weighted Assets)
Consolidated $ 58.9 18.9% $ 25.0 8.0% $ -- N/A
State Bank 36.1 12.8 22.6 8.0 28.3 10.0
RFCBC (1) 18.6 65.7 2.3 8.0 2.8 10.0
Tier I Capital
(to Risk-Weighted Assets)
Consolidated 54.9 17.6 12.5 4.0 -- N/A
State Bank 32.6 11.5 11.3 4.0 17.0 6.0
RFCBC (1) 18.2 64.3 1.1 4.0 1.7 6.0
Tier I Capital
(to Average Assets)
Consolidated 54.9 11.9 18.6 4.0 -- N/A
State Bank 32.6 7.7 17.0 4.0 21.3 5.0
RFCBC (1) 18.2 49.8 1.5 4.0 1.8 5.0
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 (1) 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 (1) 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 (1) 12.4 4.2 11.7 4.0 14.6 5.0
(1) During the quarter, the Company received approval from the FDIC for its
request that the insurance be cancelled for RFC Banking Company. This request
and subsequent approval resulted in the sale of all the insured deposits of RFC
Banking Company. This will be the last quarter that RFC Banking Company will be
included in this table.
17
NOTE G - CONTINGENT LIABILITIES
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 adverse effect on the Company's consolidated
financial condition or results of operations.
NOTE H - NEW ACCOUNTING PRONOUNCEMENTS
On November 25, 2002, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN No. 45)
which expands on the accounting guidance of Statements No. 5, 57 and 107 and
incorporates without change the provisions of FASB Interpretation No. 34, which
is being superseded.
FIN No. 45, which is applicable to public and non-public entities, will
significantly change current practice in the accounting for, and disclosure of,
guarantees. Each guarantee meeting the characteristics described in FIN No. 45
is to be recognized and initially measured at fair value, which will be a change
from current practice for most entities. In addition, guarantors will be
required to make significant new disclosures, even if the likelihood of the
guarantor making payments under the guarantee is remote, which represents
another change from current general practice.
FIN No. 45's disclosure requirements became effective for financial statements
of interim or annual periods ending after December 15, 2002, while the initial
recognition and initial measurement provisions are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. The Company has
changed its method of accounting and financial reporting for standby letters of
credit by adopting the provisions of FIN No. 45 effective January 1, 2003. There
was no material impact of the adoption on the financial statements.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities". FIN 46 requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns, or both. FIN 46 also requires disclosures about
variable interest entities that a Company is not required to consolidate, but in
which it has a significant variable interest. The consolidation requirements of
FIN 46 apply immediately to variable interest entities created after January 31,
2003. The consolidation requirements apply to existing entities in the first
fiscal year or interim period beginning after June 15, 2003. Certain of the
disclosure requirements apply in all financial statements issued after January
31, 2003, regardless of when the variable interest entity was established. FIN
46 is not expected to have a material effect on the Company's consolidated
financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain embedded derivatives, and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities". This
Statement amends SFAS No. 133 to reflect the decisions made as part of the
Derivatives Implementation Group (DIG) and in other FASB projects or
deliberations. SFAS No. 149 is
18
effective for contracts entered into or modified after June 30, 2003, and for
hedging relationships designated after June 30, 2003. Adoption of this standard
is not expected to have a material effect on the Company's consolidated
financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". This Statement
establishes standards for how an entity classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
Statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. Adoption of this standard did not have a
material effect on the Company's consolidated financial statements.
NOTE I - BRANCH SALES
On March 28, 2003, the Citizens Savings Bank, a division of RFC Banking Company,
was sold to The Union Bank Company. As of March 28, 2003, Citizens had total
loans of $57.2 million, total fixed assets (net of accumulated depreciation) of
$869,000 and total deposits of $70.8 million. A pre-tax gain of approximately
$8.0 million was recorded in March 2003 from the sale.
On June 6, 2003, the Peoples Banking Company and First Bank of Ottawa, divisions
of RFC Banking Company, were sold to First Federal Bank of the Midwest. As of
June 6, 2003, these branches had total loans of approximately $76.6 million,
total fixed assets (net of accumulated depreciation) of approximately $1.4
million and total deposits (including accrued interest) of approximately $166.2
million. A pre-tax gain of approximately $12.0 million was recorded in June 2003
from the sale.
The Company does not maintain a separate statement of operations for each
division.
19
NOTE J - STOCK OPTIONS
The Company accounts for its stock option 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.
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
--------- --------- ------------ ------------
Net income (loss), as reported $ 199,795 $ 165,461 $ 11,978,827 $ (7,258,275)
Less: Total stock-based employee
compensation cost determined under
the fair value based method, net of
income taxes (15,777) (19,746) (47,331) (59,238)
--------- --------- ------------ ------------
Pro forma net income $ 184,018 $ 145,715 $ 11,931,496 $ (7,317,513)
========= ========= ============ ============
Earnings per share:
Basic - as reported $ 0.04 $ 0.04 $ 2.64 $ (1.60)
Basic - pro forma $ 0.04 $ 0.03 $ 2.63 $ (1.61)
Diluted - as reported $ 0.04 $ 0.04 $ 2.63 $ (1.60)
Diluted - proforma $ 0.04 $ 0.03 $ 2.62 $ (1.61)
NOTE K - COMMITMENTS AND CREDIT RISK
Loan commitments and unused lines of credit totaled $50,806,000 and standby
letters of credit totaled $426,000 as of September 30, 2003.
NOTE L - SEGMENT INFORMATION
The reportable segments are determined by the products and services offered,
primarily distinguished between banking and data processing operations. Other
segments include the accounts of the holding company, Rurban Financial Corp.,
which provides management and operational services to its subsidiaries; Reliance
Financial Services, N.A., which provides trust and financial services to
customers nationwide; Rurban Life, which provides insurance products to
customers of the Company's subsidiary banks; and Rurban Statutory Trust 1, which
manages the Company's junior subordinated debentures. Information reported
internally for performance assessment follows.
20
NOTE L -- SEGMENT INFORMATION (Continued)
As of and for the nine months ended September 30, 2003
Data Total Intersegment Consolidated
Banking Processing Other Segments Elimination Totals
------------- ------------- ------------- ------------- ------------- -------------
Income statement information:
Net interest income (expense) $ 12,170,045 $ (222,417) $ (919,203) $ 11,028,425 $ (113,565) $ 10,914,860
Noninterest income - external
customers 21,568,214 6,677,203 1,879,690 30,125,107 - 30,125,107
Noninterest income - other segments - 1,252,124 2,817,661 4,069,785 (2,944,127) 1,125,658
------------- ------------- ------------- ------------- ------------- -------------
Total revenue 33,738,259 7,706,910 3,778,148 45,223,317 (3,057,692) 42,165,625
Noninterest expense 16,351,936 6,033,616 4,218,154 26,603,706 (4,069,785) 22,533,921
Significant non-cash items:
Depreciation and amortization 465,224 1,187,674 102,367 1,755,265 - 1,755,265
Provision for loan losses 1,494,000 - - 1,494,000 - 1,494,000
Income tax expense (benefit) 5,577,266 568,920 (337,048) 5,809,138 349,739 6,158,877
Segment profit (loss) 10,849,140 1,104,374 (653,591) 11,299,923 678,904 11,978,827
Balance sheet information:
Total assets 438,235,888 8,695,716 3,193,885 450,125,489 (11,633,789) 438,491,700
Goodwill and intangibles 2,820,167 - - 2,820,167 - 2,820,167
Premises and equipment
expenditures, net (1,755,767) 832,994 (123,273) (1,046,046) - (1,046,046)
21
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements within this document, which are not statements of historical
fact constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements involve
risks and uncertainties and actual results may differ materially from those
predicted by the forward-looking statements. These risks and uncertainties
include, but are not limited to, risks and uncertainties inherent in the
national and regional banking, insurance and mortgage industries, competitive
factors specific to markets in which Rurban and its subsidiaries operate, future
interest rate levels, legislative and regulatory actions, capital market
conditions, general economic conditions, geopolitical events, the loss of key
personnel and other factors.
Forward-looking statements speak only as of the date on which they are made, and
the Company undertakes no obligation to update any forward-looking statement to
reflect events or circumstances after the date on which the statement is made.
All subsequent written and oral forward-looking statements attributable to the
Company or any person acting on our behalf are qualified by these cautionary
statements.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Rurban Financial Corp. ("Rurban" or "the 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. As of June 6, 2003, RFCBC completed the sale of
all its active banking locations, retaining only selected loans. RFCBC has
ceased doing a banking business and will operate as a loan subsidiary of Rurban
in servicing and working out the retained loans. 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 in Rurban's 2002 Form 10-K filed with the Securities and Exchange
Commission.
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.
CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of the Company are in accordance with
accounting principles generally accepted in the United States and conform to
general practices within the banking industry. The Company's significant
accounting policies are described in detail in the notes to the Company's
consolidated financial statements for the year ended December 31, 2002. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions. The
financial position and results of operations can be affected by these estimates
and assumptions and are integral to the understanding of reported results.
Critical accounting policies are those policies that management believes are the
most important to the portrayal of the Company's financial condition and
results, and they require management to make estimates that are difficult,
subjective, or complex.
23
ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses provides coverage for
probable losses inherent in the Company's loan portfolio. Management evaluates
the adequacy of the allowance for loan losses each quarter based on changes, if
any, in underwriting activities, the loan portfolio composition (including
product mix and geographic, industry or customer-specific concentrations),
trends in loan performance, regulatory guidance and economic factors. This
evaluation is inherently subjective, as it requires the use of significant
management estimates. Many factors can affect management's estimates of specific
and expected losses, including volatility of default probabilities, rating
migrations, loss severity and economic and political conditions. The allowance
is increased through provisions charged to operating earnings and reduced by net
charge-offs.
The Company determines the amount of the allowance based on relative risk
characteristics of the loan portfolio. The allowance recorded for commercial
loans is based on reviews of individual credit relationships and an analysis of
the migration of commercial loans and actual loss experience. The allowance
recorded for homogeneous consumer loans is based on an analysis of loan mix,
risk characteristics of the portfolio, fraud loss and bankruptcy experiences,
and historical losses, adjusted for current trends, for each homogeneous
category or group of loans. The allowance for credit losses relating to impaired
loans is based on the loan's observable market price, the collateral for certain
collateral-dependent loans, or the discounted cash flows using the loan's
effective interest rate.
Regardless of the extent of the Company's analysis of customer performance,
portfolio trends or risk management processes, certain inherent but undetected
losses are probable within the loan portfolio. This is due to several factors
including inherent delays in obtaining information regarding a customer's
financial condition or changes in their unique business conditions, the
judgmental nature of individual loan evaluations, collateral assessments and the
interpretation of economic trends. Volatility of economic or customer-specific
conditions affecting the identification and estimation of losses for larger
non-homogeneous credits and the sensitivity of assumptions utilized to establish
allowances for homogenous groups of loans are among other factors. The Company
estimates a range of inherent losses related to the existence of these
exposures. The estimates are based upon the Company's evaluation of imprecise
risk associated with the commercial and consumer allowance levels and the
estimated impact of the current economic environment.
GOODWILL AND OTHER INTANGIBLES - The Company records all assets and liabilities
acquired in purchase acquisitions, including goodwill and other intangibles, at
fair value as required by SFAS 141. Goodwill is subject, at a minimum, to annual
tests for impairment. Other intangible assets are amortized over their estimated
useful lives using straight-line and accelerated methods, and are subject to
impairment if events or circumstances indicate a possible inability to realize
the carrying amount. The initial goodwill and other intangibles recorded and
subsequent impairment analysis requires management to make subjective judgements
concerning estimates of how the acquired asset will perform in the future.
Events and factors that may significantly affect the estimates include, among
others, customer attrition, changes in revenue growth trends, specific industry
conditions and changes in competition.
QUARTERLY AND YEAR-TO-DATE EARNINGS SUMMARY
Net income for the quarter was $199,795, or $0.04 per diluted share, versus
$165,461, or $0.04 per diluted share, for the third quarter 2002. Net income for
the nine months was $12.0 million, or $2.63 per diluted share, versus a net loss
of $7.3 million, or $(1.60) per diluted share for the same period in
24
2002. The year-to-date net income was primarily driven by the sale of the
branches of RFC Banking Company resulting in a pre-tax gain of approximately
$21.0 million.
Net interest income declined $3.3 million to $2.7 million for the three months
ended September 30, 2003 compared to $6.0 million for the third quarter 2002.
The decline in net interest income is due to a lower level of earning assets,
declining market rates, a higher level of non-accrual loans and increased
balance sheet liquidity as the Company focused on strengthening its risk based
capital ratios. The decrease in earning assets is principally attributable to
the sale of assets associated with the disposition of the RFCBC branches.
The provision for loan losses was $0 for the third quarter of 2003 compared to
$2.0 million for the third quarter of 2002.
Noninterest income decreased $300,000 to $3.6 million in the third quarter of
2003 compared to $3.9 million for the third quarter of 2002. The decrease in
noninterest income was mainly the result of the branch sales in 2003. Data
processing fees increased $216,000 for the third quarter 2003 from the third
quarter 2002.
Noninterest expense decreased $1.7 million to $6.0 million for the third quarter
of 2003 compared to $7.7 million for the third quarter of 2002. This was mainly
due to the branch sales in 2003.
CHANGES IN FINANCIAL CONDITION
At September 30, 2003, total assets were $438.5 million, a decrease of $303.8
million from December 31, 2002. The decrease was primarily attributable to
decreases in loans of $185.8 million, loans held for sale of $63.0 million,
available for sale securities of $15.2 million, other assets of $8.0 million and
federal funds sold of $12.0 million.
At September 30, 2003, the decreases in total liabilities and stockholders'
equity was mainly attributable to decreases in deposits of $240.8 million,
deposits held for sale of $68.2 million and FHLB Advances of $10.4 million. The
decreases were partially offset by an increase in retained earnings of $12.0
million.
The decrease in the balance sheet is the direct result of the sale of the RFCBC
branches in the first and second quarters of 2003. Also impacting the results
were reductions in loan balances due to residential loan refinancings, and the
Company's decision to exit the Cleveland market.
LINKED QUARTER COMPARISON
The Company reported a net profit for the third quarter of 2003 of $199,795, or
$0.04 per diluted share, versus a net profit of $6.5 million, or $1.42 per
diluted share, for the second quarter of 2003. The third quarter profit was
mainly due to a continuous effort to reduce non-recurring operating expenses.
The second quarter profit was mainly driven by the sale of the Peoples Banking
Company and First Bank of Ottawa, divisions of RFC Banking Company, on June 6,
2003 for a net pre-tax gain of approximately $12.0 million.
25
A comparison of financial results for the quarter ended September 30, 2003 to
the previous quarter ended June 30, 2003 is as follows:
Linked
Three Months Ended Quarter Annualized
09/30/03 06/30/03 % Change % Change
--------- --------- --------- ----------
(dollars in millions, except per share data)
Total Assets $ 438 $ 493 -11% -45%
Loans Held for Sale 0.5 -- -- --
Loans (Gross) 302 326 -7% -29%
Allowance for Loan Losses 11.3 12.3 -8% -33%
Total Deposits 327 365 -10% -42%
Total Revenue 6.3 19.0 -67% -267%
Net interest Income 2.7 3.3 -19% -73%
Loan Loss Provision -- 0.3 -- --
Noninterest Income 3.6 15.7 -77% -308%
Noninterest Expense 6.0 8.9 -32% -130%
Net Income 0.2 6.5 -- --
Basic Earnings Per Share $ 0.04 $ 1.42 -- --
Diluted Earnings Per Share $ 0.04 $ 1.42 -- --
On a linked quarter basis, loans declined $24 million and total assets declined
$55 million. The decline in loans was primarily due to reductions in loan
balances due to residential loan refinancings, the Company's lower level of
production of new loans and the Company's decision to exit the Cleveland market.
The loans sold due to the branch sales in the second quarter of 2003 were
held-for-sale as of March 31, 2003.
NET INTEREST INCOME
Three Months Ended
09/30/03 06/30/03 $Change %Change
--------- --------- --------- ----------
(dollars in thousands)
Net Interest Income $ 2,705 $ 3,320 $ -615 -19%
Net interest income decreased $615,000 or 19% to $2.7 million for the three
months ended September 30, 2003 compared to $3.3 million for the second quarter
of 2003 principally as a result of the second quarter branch sales. The net
interest margin on a fully taxable equivalent basis for the third quarter was
2.50% compared to 2.40% for the second quarter of 2003.
LOAN LOSS PROVISION
The provision for loan losses was $0 for the third quarter of 2003 compared to
$300,000 for the second quarter of 2003. Management determined that the
Allowance for Loan Losses was adequate, and therefore no loan loss provision was
recorded in the third quarter of 2003.
26
NONINTEREST INCOME
Three Months Ended
09/30/03 06/30/03 $Change %Change
-------- -------- -------- --------
(dollars in thousands)
Total Noninterest Income $ 3,584 $ 15,671 $-12,087 -77%
- Gains on Sale of Assets 55 11,915 -11,860 -
- Data Service Fees 2,268 2,186 82 4%
- Trust Fees 559 596 -37 -6%
- Deposit Service Fees 455 559 -104 -19%
- Gains on Sale of Loans 89 151 -62 -41%
- Gain (Loss) on Securities - (3) 3 -
Noninterest income decreased by $12.1 million to $3.6 million in the third
quarter of 2003. The third quarter decrease was primarily the result of the
pre-tax gain of $12.0 million on the Hancock and Putnam County branches reported
during the second quarter. Data service fees reflected a modest increase of
$82,000 from second quarter levels which was partially offset by a $37,000
decline in trust fees which mirrored the down market movement in the third
quarter. Deposit fees fell $104,000 primarily as a result of the branch sales
during the second quarter coupled with a reduction in existing transaction
account balances in the third quarter. Gain on sale of loans declined $62,000
from the second quarter resulting from the decrease in consumer refinance
activity in the real estate market as long term mortgage rates began to rise.
NONINTEREST EXPENSE
Three Months Ended
09/30/03 06/30/03 $Change %Change
-------- -------- -------- --------
(dollars in thousands)
Total Noninterest Expense $ 6,011 $ 8,853 $-2,842 -32%
- Salaries & Employee Benefits 2,869 3,710 -841 -23%
- Equipment Expense 1,061 1,057 4 -
- Professional Fees 684 2,035 -1,351 -66%
- All Other 1,397 2,051 -654 -32%
Noninterest expense for the third quarter of 2003 was $6.0 million compared to
$8.9 million for the second quarter of 2003, a decrease of $2.8 million or 32%.
Instrumental to this decline were the elimination of salary and benefit
expenses, professional fees and other volume related processing costs that were
associated with the disposition of the branches during the second quarter.
27
LOANS
As Of Inc
% of % of -----
09/30/03 Total 06/30/03 Total (Dec)
-------- -------- -------- -------- --------
(dollars in millions)
Commercial $ 96 32% $ 104 32% $ (8)
Commercial real estate 68 23% 77 24% (9)
Agricultural 39 13% 40 12% (1)
Residential 46 15% 48 15% (2)
Consumer 39 13% 41 13% (2)
Leasing 14 4% 16 4% (2)
-------- -------- --------
Total $ 302 $ 326 $ (24)
Loans held for sale 0.5 - 0.5
-------- -------- --------
Total $ 302 $ 326 $ (24)
Loans decreased $24 million to $302 million at September 30, 2003. The decline
in loans was primarily due to planned reductions in out of market loan balances
and the Company's lower level of production of new loans.
ASSET QUALITY
As Of And For The Quarter Ended
-------------------------------
(dollars in millions)
09/30/03 06/30/03 Change
-------- -------- --------
Non-performing loans $ 18.9 $ 20.3 $ -1.4
Non-performing assets 20.2 21.9 -1.7
Nonperforming assets/ loans plus OREO 6.63% 6.70% -.07%
Nonperforming assets/ total assets 4.60% 4.44% +.15%
Net chargeoffs 1.0 1.5 --
Net chargeoffs (annualized)/ total loans 1.8% 1.8% --
Loan loss provision -- 0.3 --
Allowance for loan loss - $ 11.3 12.3 -1.0
Allowance for loan loss - % 3.73% 3.78% -.05%
Allowance/nonperforming loans 60% 61% --
Allowance/nonperforming assets 56% 56% --
Non-performing assets at September 30, 2003 decreased to $20.2 million or 6.63%
of loans plus OREO, versus $21.9 million, or 6.70% at June 30, 2003, a decrease
of $1.7 million. Net chargeoffs for the third quarter of 2003 were $1.0 million
compared to $1.5 million in the second quarter of 2003.
28
ALLOWANCE FOR LOAN LOSSES
The Company grades its loans using an eight grade system. Problem loans are
classified as either:
Substandard: Inadequately protected, with well-defined weakness that
jeopardize liquidation of debt
Doubtful: Inherent weaknesses well-defined and high probability of loss
(impaired)
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:
---------09/30/03---------- ----------06/30/03---------
LOAN ALLOCATION LOAN ALLOCATION
----------------- -----------------
BALANCE $ % BALANCE $ %
------- ------- ------- ------- ------- -------
Allocations for individual
commercial loans graded doubtful
(impaired) $ 18.4 $ 5.3 28.80% $ 19.0 $ 5.3 27.89%
Allocations for individual
commercial loans graded
substandard 40.5 3.6 8.88 36.5 3.7 10.14
"General" allowance based on
chargeoff history of nine
categories of loans 213.9 1.6 0.75 236.9 2.3 1.00
Allocation based on special
mention loan balance 25.9 0.8 -- 33.2 1.0 --
------- ------- ------- ------- ------- -------
TOTAL $ 302.0 $ 11.3 3.73% $ 325.6 $ 12.3 3.78%
The amount of loans classified as doubtful decreased $0.6 million to $18.4
million while substandard loans increased $4.0 million to $40.5 million.
Allowance allocations on doubtful loans were flat while allowance allocations on
substandard loans decreased $0.1 million from June 30, 2003. The allowance for
loan losses at September 30, 2003 was $11.3 million or 3.73% of loans compared
to $12.3 million or 3.78% at June 30, 2003.
CAPITAL RESOURCES
At September 30, 2003, actual capital levels (in millions) and minimum required
levels were:
Minimum Required
Minimum Required To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
-------------- ----------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- -------- ------ ------ -----
Total capital (to risk weighted assets)
Consolidated $ 58.9 18.9% $ 25.0 8.0% $ - N/A
State Bank 36.1 12.8 22.6 8.0 28.3 10.0
RFC Banking Company 18.6 65.7 2.3 8.0 2.8 10.0
The Company, State Bank and RFCBC were categorized as well capitalized at
September 30, 2003.
29
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.
The results of the November 4, 2002 regulatory examinations indicated that as of
that date, Rurban and State Bank were in compliance with most provisions of the
Agreement. Management believes that Rurban is currently in substantial
compliance with each of the provisions of the Agreement.
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.
GOALS FOR 2003 AND 2004
The Company's near term goals include:
- Focus on the quality of the loan underwriting process
- Continued focus on Customer Relationship Management (CRM)
- Completion of the centralization of operations functions
- Continued monitoring of all corrective actions necessary to
achieve the release from the Written Agreement
- Restoring earnings to a level sufficient to resume the payment
of a dividend
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 $117.0 million at September 30, 2003 compared to $106.6
million at June 30, 2003.
The Company's residential first mortgage portfolio of $46.2 million at September
30, 2003 and $48.1 million at June 30, 2003, a portion of 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 September 30, 2003, all eligible mortgage loans were pledged
under a Federal Home Loan Bank ("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 at September 30, 2003 and 2002 follows.
The Company experienced a net increase in cash from operating activities at
September 30, 2003 and 2002. Net cash from operating activities was $4.6 million
and $8.0 million, respectively, at September 30, 2003 and 2002.
30
Net cash flow from investing activities was $45.6 million and $65.0 million at
September 30, 2003 and 2002 respectively. The changes in net cash from investing
activities at September 30, 2003 include a decrease in securities of $(14.1)
million, a decrease in loans of $(102.4) million, a decrease from the sale of
the RFC Banking Company branches of $(70.5) million as well as changes in
interest-bearing deposits, purchases of premises and equipment and other
investing activities. The changes in net cash from investing activities at
September 30, 2002 include a decrease in securities of $(28.0) million and the
purchase of net liabilities from the Oakwood acquisition of $40.1 million.
Net cash flow from financing activities was $(82.4) million and $(44.4) million
at September 30, 2003 and 2002, respectively. The net cash decrease was
primarily due to a reduction in total deposits of $(77.3) million at September
30, 2003 compared to $(29.9) at September 30, 2002. Other changes included
decreases in Federal Home Loan Bank (FHLB) advances of $(10.4) million and a
note payable increase of $5.2 million at September 30, 2003 compared to a $(9.9)
decrease in FHLB advances, an increase of $7.0 million for a note payable and
payment of dividends of $(1.8) million at September 30, 2002.
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 $36.8 million residential first mortgage loans of the Company's
$46.2 million portfolio qualify to collateralize FHLB borrowings and have been
pledged to meet FHLB collateralization requirements as of September 30, 2003. In
addition to residential first mortgage loans, $24.2 million in investment
securities are pledged to meet FHLB collateralization requirements. Based on the
current collateralization requirements of the FHLB, approximately $5.5 million
of additional borrowing capacity existed at September 30, 2003.
As of September 30, 2003 and June 30, 2003, the Company had unused federal funds
lines totaling approximately $8.0 million from one correspondent bank. There
were no federal funds borrowed at September 30 or June 30.
Approximately $10.2 million performing commercial loans are pledged to the
Federal Reserve Discount Window to establish additional borrowing capacity of
$7.1 million. Such loans are pledged for contingency funding purposes and to
date this borrowing capacity has not been used.
31
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
PAYMENT DUE BY PERIOD
-------------------------------------------------------------------
LESS MORE
THAN 1 1 - 3 3 - 5 THAN 5
TOTAL YEAR YEARS YEARS YEARS
Contractual Obligations ----------- ----------- ----------- ----------- -----------
FHLB Advances $37,500,000 $ 8,500,000 $ 0 $ 4,000,000 $25,000,000
Other Debt Obligations 21,239,607 0 11,239,607 0 10,000,000
Capital Lease Obligations 0 0 0 0 0
Operating Lease Obligations 821,700 99,600 199,200 199,200 323,700
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 $59,561,307 $ 8,599,600 $11,438,807 $ 4,199,200 $35,323,700
The Company's contractual obligations as of September 30, 2003 were comprised of
FHLB Advances, other debt obligation and operating lease obligations. Other debt
obligations include notes payable to The Union Bank Company and First Federal.
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 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 foreign exchange exposure. The impact of
changes in 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
32
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 an Inter-Agency
Policy Statement on interest rate risk effective June 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.
There are several ways an institution can manage interest rate risk including:
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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 September 30, 2003. 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.
33
PRINCIPAL/NOTIONAL AMOUNT MATURING OR ASSUMED TO WITHDRAW IN:
(DOLLARS IN THOUSANDS)
First Years
Year 2 - 5 Thereafter Total
--------- --------- ---------- ---------
Comparison of 2003 to 2002:
Total rate-sensitive assets:
At September 30, 2003 $ 153,157 $ 161,005 $ 94,220 $ 408,382
At December 31, 2002 317,174 217,623 149,581 684,378
--------- --------- ---------- ---------
Increase (decrease) $(164,017) $ (56,618) $ (55,361) $(275,996)
Total rate-sensitive liabilities:
At September 30, 2003 $ 178,660 $ 170,813 $ 36,291 $ 385,764
At December 31, 2002 317,332 339,592 42,961 699,885
--------- --------- ---------- ---------
Increase (decrease) $(138,672) $(168,779) $ (6,670) $(314,121)
Total rate sensitive assets decreased approximately $276.0 million and rate
sensitive liabilities decreased approximately $314.1 million for the nine months
ended September 30, 2003 due primarily to the sale of the loans ($164.2 million)
and deposits ($244.4 million) of RFC Banking Company.
Currently, the Company is paying down maturing broker CD's and FHLB advances.
During the nine months ended September 30, 2003, $27.6 million in broker CD's
and $8.4 million in FHLB advances were paid off. The Cleveland office has also
been closed resulting in a reduction of $20.2 million in loans and $9.3 million
in deposits.
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,
repricing frequency can be daily or monthly and for adjustable rate loans,
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 prior
increased reliance on non-core funding sources has restricted the Company's
ability to reduce funding rates in concert with declines in lending rates.
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 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 three days, and 6)
Federal Home Loan Bank borrowings with terms of one day to ten years.
34
ITEM 4. CONTROLS AND PROCEDURES
With the participation of Rurban Financial Corp.'s management, including our
principal executive officer and principal financial officer, we have evaluated
the effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15 and 15d-15 of the Securities Exchange Act of 1934 (the "Exchange Act"))
as of the end of the period covered by this Quarterly Report on Form 10-Q. Based
upon that evaluation, our principal executive officer and principal financial
officer have concluded that the Company's disclosure controls and procedures are
effective as of the end of the period covered by this Quarterly Report on Form
10-Q to ensure that material information relating to Rurban Financial Corp. and
its consolidated subsidiaries is made known to them, particularly during the
period for which our periodic reports, including this Quarterly Report on Form
10-Q, are being prepared.
In addition, there were no significant changes during the period covered by this
Quarterly Report on Form 10-Q in our internal control over financial reporting
(as defined in Rules 13a-15 and 15d-15 of the Exchange Act) that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
35
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
31.1 - Rule 13a-14(a)/15d-14(a) Certification (Chief Executive Officer)
31.2 - Rule 13a-14(a)/15d-14(a) Certification (Chief Financial Officer)
32.1 - Section 1350 Certification (Chief Executive Officer)
32.2 - Section 1350 Certification (Chief Financial Officer)
b. Reports on Form 8-K
A Form 8-K was filed on January 2, 2003 to report information under Item 5
regarding a press release announcing that a "Purchase and Assumption
Agreement" was signed between RFC Banking Company, Rurban Financial
Corp.'s wholly-owned subsidiary, and The Union Bank Company on December
30, 2002. The press release was included as Exhibit 99.
A Form 8-K was filed on January 21, 2003 to report information under Item
5 regarding a press release announcing that Rurban Financial Corp. and its
wholly owned subsidiary, RFC Banking Company, intend to make available for
purchase RFC Banking Company bank branches located in Hancock and Putnam
Counties. The offices consist of The Peoples Banking Company Division and
the First Bank of Ottawa Division. The press release was included as
Exhibit 99.
A Form 8-K was filed on February 14, 2003 to report information under Item
5 regarding a press release announcing that Rurban Financial Corp. filed a
deferral notice on February 12, 2003 with US Bank, Trustee of Rurban
Financial Corp.'s trust preferred indenture, to
36
defer payments of interest on the debt securities which would have been
due on March 7, 2003. The press release was included as Exhibit 99(a).
A Form 8-K was filed on February 25, 2003 to report information under Item
5 regarding a press release announcing that a "Purchase and Assumption
Agreement" was signed on February 22, 2003 with First Federal Bank of the
Midwest, a wholly owned subsidiary of First Defiance Financial Corp. The
Purchase and Assumption Agreement outlined the sale of assets and
assumption of deposits at RFC Banking Company's Hancock and Putnam County
branches. The Purchase and Assumption Agreement was included as Exhibit 2,
and the press release was included as Exhibit 99.
A Form 8-K was filed on February 26, 2003 to report information under Item
5 regarding a press release announcing the financial results for the
fourth quarter and year ended December 31, 2002. The press release was
included as Exhibit 99.
A Form 8-K was filed on March 18, 2003 to report information under Item 5
regarding a press release announcing the appointment of James E. Adams as
Chief Financial Officer to replace retiring CFO, Richard C. Warrener. The
press release was included as Exhibit 99.
A Form 8-K was filed on April 1, 2003 to report information under Item 5
regarding a press release announcing that RFC Banking Company, a
wholly-owned subsidiary of Rurban Financial Corp., completed the sale of
its Wood and Sandusky County branches located in Pemberville, Gibsonburg
and the Otterbein-Portage Valley Retirement Village to The Union Bank
Company, a wholly-owned subsidiary of United Bancshares, Inc. The press
release was included as Exhibit 99.
A Form 8-K was filed on May 2, 2003 to furnish information under Item 9
(which was also deemed provided under Item 12) regarding the press release
announcing the financial results for the first quarter of 2003 and the
excerpts of a presentation by Kenneth A. Joyce, Chief Executive Officer,
at the Annual Meeting of Shareholders held on April 28, 2003. The press
release was included as Exhibit 99(a), and the excerpts were includeD as
Exhibit 99(b).
A Form 8-K was filed on June 18, 2003 to report under Item 2 that RFC
Banking Company, a wholly-owned subsidiary of Rurban Financial Corp.,
completed the sale of its Findlay, McComb and Ottawa branches to First
Federal Bank of the Midwest, a wholly-owned subsidiary of First Defiance
Financial Corp. A press release announcing the closing of the transaction
was included as Exhibit 99. The required pro forma financial information
will be filed by amendment no later than August 20, 2003.
A Form 8-K was filed on July 30, 2003 to report the announcement of the
financial results for the third quarter of 2003.
A Form 8-K was filed on August 22, 2003 to amend its current report on
Form 8-K filed June 18, 2003 to file information including pro formas for
the year ended December 31, 2002 and for the quarterly periods ended March
31, 2003 and June 30, 2003.
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
RURBAN FINANCIAL CORP.
Date: November 13, 2003 By /S/ Kenneth A. Joyce
--------------------
Kenneth A. Joyce
President & Chief
Executive Officer
By /S/ James E. Adams
-----------------------
James E. Adams
Executive Vice President &
Chief Financial Officer
38