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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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ----------- to ------------
Commission File Number 0-13507
RURBAN FINANCIAL CORP.
-----------------------------------
(Exact name of Registrant as specified in its charter)
Ohio 34-1395608
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
401 Clinton Street, Defiance, Ohio 43512
- ---------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (419) 783-8950
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Shares,
Without Par Value
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. [X]
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 shares
were last sold as of the last business day of the Registrant's most recently
completed second fiscal quarter was $46,918,138.
The number of common shares of the Registrant outstanding at February 27, 2004
was 4,567,296.
Documents Incorporated by Reference: Portions of the Registrant's definitive
Proxy Statement for its Annual Meeting of Shareholders to be held on April 26,
2004 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 "Company"), 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 Company are located
at 401 Clinton Street, Defiance, Ohio 43512.
Through its direct and indirect subsidiaries, The State Bank and Trust
Company ("State Bank"), RFC Banking Company ("RFCBC"), Rurbanc Data Services,
Inc. ("RDSI"), Rurban Life Insurance Company ("Rurban Life"), Reliance Financial
Services, N.A. ("RFS"), Rurban Mortgage Company ("RMC"), and Rurban Statutory
Trust 1 ("RST"), the Company is engaged in a variety of activities, including
commercial banking, data processing, life and disability reinsurance, and trust
and financial services, as explained in more detail below.
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) and three branch offices in
Fulton County, Ohio (one each in Delta, Lyons and Wauseon). The branch office in
Summit County, Ohio (Westlake) closed during the second quarter of 2003. At
December 31, 2003, State Bank had 145 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; Internet and telephone
banking and other personalized banking services.
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 located in State Bank's main offices in Defiance,
Ohio. At December 31, 2003, RFS had 16.5 full-time equivalent employees.
RMC
RMC is an Ohio corporation and wholly-owned subsidiary of State Bank.
RMC is a mortgage company; however, it ceased originating mortgage loans in the
second quarter of 2000.
At December 31, 2003, RMC had no employees.
RFCBC
On March 28, 2003, the Citizens Savings Banks, a division of RFCBC, was
sold.
2.
On June 6, 2003, the Peoples Banking Company and First Bank of Ottawa,
divisions of RFCBC, were sold.
RFCBC ceased doing banking business in June 2003 following the branch
sales, and formally relinquished its banking powers in September 2003. RFCBC now
operates as a loan subsidiary in servicing and working out the problem loans
that were retained after the branch sales.
RDSI
RDSI is an Ohio state-charted company that commenced operations in June
1976. RDSI has offices in six locations: three offices in Defiance, Ohio, one
office each in Glandorf, Ohio, Fremont, Ohio and Chesterfield, Missouri.
RDSI delivers software systems to the banking industry which provide a
broad range of data processing services in an outsourced environment utilizing
Information Technology Inc. (ITI) software.
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 American General Assurance Company ("AGAC") from
the credit life and disability insurance purchased by customers of State Bank
from AGAC in connection with revolving credit loans secured by mortgages and
with certain installment loans. The operations of Rurban Life do not materially
impact the consolidated results of operations of the Company. As of December 31,
2003, Rurban Life has not accepted any other reinsurance. In August 2000, the
Company's banks ceased issuing credit life and disability insurance contracts
through AGAC. In September 2000, the Company's banks entered into agreements
with Individual Assurance Corporation ("IAC") and began issuing credit life and
disability insurance contract through IAC. At December 31, 2003, Rurban Life had
no employees.
RST
RST is a trust and wholly owned subsidiary of the Company that was
organized in August 2000. In September 2000, RST 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 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.
See Note 26 of the Financials, pages F-38 and F-39, for the Company's segment
information.
Competition
State Bank experiences 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, 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.
State Bank's 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.
3.
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 coverage, 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 Company 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 Company is a bank holding company under the Bank Holding Company
Act of 1956, as amended, which restricts the activities of the Company and the
acquisition by the Company of voting shares or assets of any bank, savings
association or other company. The Company 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
Office of the Comptroller of the Currency (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. The deposits of
State Bank are insured by the FDIC and 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 insured
financial 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, 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.
The Federal Home Loan Banks ("FHLBs") provide credit to their members
in the form of advances. As a member of the FHLB of Cincinnati, State bank must
maintain an investment in the capital stock of the FHLB of Cincinnati in an
amount equal to the greater of 1% of the aggregate outstanding
4.
principal amount of State Bank's residential mortgage loans, home purchase
contracts and similar obligations at the beginning of each year, or 5% of its
advances from the FHLB of Cincinnati. State Bank was in compliance with this
requirement at December 31, 2003.
Upon the origination or renewal of a loan or advance, each FHLB is
required by law to obtain and maintain a security interest in collateral in one
or more of the following categories: fully-disbursed, whole first mortgage loans
on improved residential property not more than 90 days delinquent or securities
representing a whole interest in such loans; securities issued, insured or
guaranteed by the United States Government or an agency thereof; deposits in any
FHLB; or other real estate related collateral acceptable to he applicable FHLB,
if such collateral has a readily ascertainable value and the FHLB can perfect
its security interest in the collateral.
Each FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances from the FHLB. The standards take into account a member's performance
under the Community Reinvestment Act and its record of lending to first-time
home buyers. All long-term advances by each FHLB must be made only to provide
funds for residential housing finance.
Written Agreement
On July 5, 2002, the Company and State Bank entered into a Written
Agreement ("Agreement") with the Federal Reserve Bank of Cleveland and the Ohio
Division of Financial Institutions. The Agreement was the result of an
examination of State Bank as of December 31, 2001, which was conducted in March
and April 2002. A copy of the Agreement was attached as Exhibit 99(b) to the
Form 8-K filed by the Company on July 11, 2002 and is incorporated by reference
as Exhibit 99(b) to this Form 10-K.
As of December 2003, Management believes that the Company and State
Bank were in full compliance with the terms of the Agreement. However, the
Agreement will continue in place until the Federal Reserve Bank of Cleveland and
the Ohio Division of Financial Institutions determine that the Agreement may be
terminated. The Company believes that additional improvement in problem loans,
earnings and operations, as well as other items described in the Agreement, is
necessary before the Agreement may be terminated, and management cannot predict
when that may occur.
Under the terms of the Agreement, State Bank and RFCBC are prohibited
from paying dividends to the Company without prior regulatory approval. The
Agreement also prohibits the Company from paying trust preferred "dividends" and
common stock dividends without prior regulatory approval.
Dividends
Subject to the terms and conditions of the Agreement with the federal
and state banking regulators described above, the ability of the Company to
obtain funds for the payment of dividends and for other cash requirements is
largely dependent on the amount of dividends which may be declared by its
subsidiaries. State Bank may not pay dividends to the Company if, after paying
such dividends, it would fail to meet the required minimum levels under the
risk-based capital guidelines and the minimum leverage ratio requirements. State
Bank must have the approval of their respective regulatory authorities if a
dividend in any year would cause the total dividends for that year to exceed the
sum of the 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 Company's ability to pay dividends on its outstanding common
shares. Moreover, the Federal Reserve Board expects the Company 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 Company.
5.
Transactions with Affiliates, Directors, Executive Officers and Shareholders
Regulation W became effective on April 1, 2003 and 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 covered transactions be on terms
substantially the same, or at least as favorable to the bank
or subsidiary, as those provided to non-affiliates.
The term "covered transaction" includes the making of loans, purchase of assets,
issuance of a guarantee and similar types of transactions.
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 or be made under a benefit or compensation program and
on terms widely available to employees 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 FDIC
has adopted risk-based capital guidelines for non-member banks, including RFCBC.
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 certain amounts of mandatory convertible debt
securities, subordinated debt, preferred stock not qualifying as Tier 1 capital,
an allowance for loan and lease losses and net unrealized, after applicable
taxes, on available-for-sale equity securities with readily determinable fair
values, all subject to limitations established by the guidelines. The Federal
Reserve Board also imposes a minimum leverage ratio (Tier 1 capital to total
assets) of 3% for bank holding companies and state member banks that meet
certain specified conditions, including no operational, financial or supervisory
deficiencies, and including having the highest regulatory rating. The minimum
leverage ratio is 1%-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. 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.
6.
The federal banking regulators have established regulations governing
prompt corrective action to resolve capital deficient banks. The regulations
establish five capital level categories: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized. 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.
The Company, State Bank and RFCBC at year end 2003 were categorized as
well capitalized. The Company and RFCBC at year end 2002 were categorized as
adequately capitalized while State Bank was categorized as well capitalized.
Deposit Insurance Assessments
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 is a member 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 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.
7.
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 Company has opted not to become a
financial holding company. The Company intends to continue to analyze the
proposed advantages and disadvantages of becoming a financial holding company on
a periodic basis.
SARBANES-OXLEY ACT OF 2002 AND RELATED RULES AFFECTING CORPORATE GOVERNANCE
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: increased
responsibilities of 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.
As mandated by the Sarbanes-Oxley Act, the Securities and Exchange
Commission (the "SEC") has adopted rules and regulations governing, among other
issues, corporate governance, auditing and accounting, executive compensation,
and enhanced the timely disclosure of corporate information. The SEC has also
approved corporate governance rules promulgated by the Nasdaq Stock Market, Inc.
("Nasdaq"). The Board of Directors of the Company has taken a series of actions
to comply with the new Nasdaq and SEC rules and to further strengthen its
corporate governance practices. The Company implemented a Code of Conduct and
Ethics in 2003 and a copy of that policy can be found on the Company's website
at www.rurbanfinancial.net under the corporate governance tab.
Statistical Financial Information Regarding the Company
The following schedules and tables analyze certain elements of the
consolidated balance sheets and statements of income of the Company and its
subsidiaries, as required under Exchange Act Industry Guide 3 promulgated by the
SEC, 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 Company and its
subsidiaries included at pages F-1 through F-40 of this Annual Report on Form
10-K.
8.
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:
2003 2002 2001
-----------------------------------------------------------------------------------
Average Avg Average Avg Average Avg
Balance Interest Rate Balance Interest Rate Balance Interest Rate
-----------------------------------------------------------------------------------
(dollars in thousands)
ASSETS:
Securities
Taxable $ 94,771 $ 2,821 2.98% $ 98,383 $ 4,781 4.86% $ 86,093 $ 5,463 6.35%
Non-taxable (1) 4,696 261 5.55% 6,276 333 5.31% 8,390 615 7.33%
Federal funds sold 26,130 386 1.48% 15,146 295 1.95% 4,758 167 3.51%
Loans, net (2) 385,153 24,395 6.33% 627,685 43,295 6.90% 583,239 50,483 8.66%
-----------------------------------------------------------------------------------
Total earning assets 510,750 27,863 5.46% 747,490 48,704 6.52% 682,480 56,728 8.31%
Cash and due from banks 23,580 26,124 24,496
Allowance for loan losses (13,755) (15,801) (7,627)
Premises and equipment 14,089 13,658 12,090
Other assets 14,707 19,620 11,388
--------- --------- ---------
Total assets $ 549,371 $ 791,091 $ 722,827
========= ========= =========
LIABILITIES:
Deposits
Savings and interest-bearing $ 124,828 $ 781 0.63% $ 185,357 $ 2,578 1.39% $ 160,936 $ 4,245 2.64%
Time deposits 267,227 9,244 3.46% 409,363 17,723 4.33% 385,059 22,169 5.76%
Short-term borrowings - - - 17,541 305 1.74% 8,916 302 3.39%
Advances from FHLB 40,809 2,276 5.58% 53,595 2,923 5.45% 51,760 2,987 5.77%
Trust preferred securities 10,000 1,075 10.75% 10,000 1,075 10.75% 9,749 1,048 10.75%
Other borrowed funds 10,314 596 5.78% 5,400 209 3.87% - 27 -
-----------------------------------------------------------------------------------
Total interest-bearing liabilities 453,178 13,972 3.08% 681,256 24,813 3.64% 616,420 30,778 4.99%
-------- -------- --------
Demand deposits 43,729 51,888 47,208
Other liabilities 7,865 13,273 6,491
--------- --------- ---------
Total liabilities 504,772 746,417 670,119
Shareholder's equity 44,599 44,674 52,708
--------- --------- ---------
Total liabilities and shareholders' equity $ 549,371 $ 791,091 $ 722,827
========= ========= =========
Net interest income (tax equivalent basis) $ 13,891 $ 23,891 $ 25,950
======== ======== ========
Net interest income as a percent
of average interest-earning assets 2.72% 3.20% 3.80%
- ----------------------
(1) Interest is computed on a tax equivalent basis using a 34% statutory
tax rate. The tax equivalent adjustment was $89, $110 and $209 in 2003,
2002 and 2001, respectively.
(2) Nonaccruing loans and loans held for sale are included in the average
balances.
9.
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 2003, 2002 and
2001.
Total Variance Attributable To
Variance --------------------------------
2003/2002 Volume Rate
-------------- --------------- -------------
(dollars in thousands)
INTEREST INCOME
Securities
Taxable $ (1,960) $ (170) $ (1,790)
Non-taxable (72) (87) 15
Federal funds sold 91 175 (84)
Loans, net of unearned income
and deferred loan fees (18,900) (15,600) (3,300)
-------------- --------------- -------------
(20,841) (15,682) (5,159)
-------------- --------------- -------------
INTEREST EXPENSE
Deposits
Savings and interest-bearing
demand deposits (1,797) (669) (1,128)
Time deposits (8,479) (5,370) (3,109)
Short-term borrowings (305) (305) 0
Advances from FHLB (647) (712) 65
Trust preferred securities 0 6 (6)
Other borrowed funds 387 251 136
-------------- --------------- -------------
(10,841) (6,799) (4,042)
-------------- --------------- -------------
NET INTEREST INCOME $ (10,000) $ (8,883) $ (1,117)
============== =============== =============
10.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL (Continued)
Total Variance Attributable To
Variance ------------------------
2002/2001 Volume Rate
--------- -------- ---------
(dollars in thousands)
INTEREST INCOME
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)
Trust preferred securities 27 27 0
Other borrowed funds 182 179 3
--------- -------- ---------
(5,965) 2,407 (8,372)
--------- -------- ---------
NET INTEREST INCOME $ (2,059) $ 2,033 $ (4,092)
========= ======== =========
11.
II. INVESTMENT PORTFOLIO
A. The book value of securities available for sale as of December
31 in each of the following years are summarized as follows:
2003 2002 2001
--------------- --------------- ----------------
(dollars in thousands)
U.S. Treasury and government agencies $ 43,868 $ 54,771 $ 16,881
State and political subdivisions 4,203 4,309 4,798
Mortgage-backed securities 59,238 54,875 62,981
Other securities 50 50 6,180
Mutual funds - - 10,000
Marketable equity securities 35 96 300
--------------- --------------- ----------------
Total $ 107,394 $ 114,101 $ 101,140
=============== =============== ================
B. The maturity distribution and weighted average yield of
securities available for sale at December 31, 2003 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 $ 34,569 $ 4,299 $ 5,000 $ -
Obligations of states and political
subdivisions 500 1,765 1,568 370
Mortgage-backed securities 18,100 29,058 8,700 3,380
Other securities 50
Mutual Funds
Marketable equity securities 35
------------- -------------- ---------------- ---------
$ 53,204 $ 35,172 $ 15,268 $ 3,750
============= ============== ================ =========
Weighted average yield (1) 2.43% 3.42% 4.57% 4.40%
(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 Company at
December 31, 2003.
12.
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:
2003 2002 2001 2000 1999
---------------- ----------- ----------- ----------- -----------
(dollars in thousands)
Commercial and
agricultural $ 188,532 $ 321,726 $ 388,673 $ 362,928 $ 326,564
Real estate
mortgage 46,718 84,432 106,689 107,718 80,704
Consumer
loans to
individuals 37,310 60,139 76,513 81,063 77,110
Leases 11,775 21,509 28,752 25,279 17,300
---------------- ----------- ----------- ----------- ----------
Total loans $ 284,335 $ 487,806 $ 600,627 $ 576,988 $ 501,678
================ =========== =========== =========== ==========
Real estate
mortgage
loans held
for resale $ 219 $ 63,536 $ 440 $ 1,167 $ 7,150
================ =========== =========== =========== ==========
Concentrations of Credit Risk: The Company grants commercial, real estate and
installment loans to customers mainly in northwest Ohio. Commercial loans
include loans collateralized by commercial real estate, business assets and, in
the case of agricultural loans, crops and farm equipment. As of December 31,
2003, commercial and agricultural loans made up approximately 66.3% of the loan
portfolio and the loans are expected to be repaid from cash flow from operations
of businesses. As of December 31, 2003, residential first mortgage loans made up
approximately 16.4% of the loan portfolio and are collateralized by first
mortgages on residential real estate. As of December 31, 2003, consumer loans to
individuals make up approximately 17.3% 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, 2003
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 $ 73,802
After one year but within five years 54,560
After five years 60,170
---------------
Total commercial and agricultural loans $ 188,532
===============
13.
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 $ 22,785 $ 31,775 $ 54,560
Due after five years 9,594 50,576 60,170
---------------- --------------- ---------------
Total $ 32,379 $ 82,351 $ 114,730
================ =============== ===============
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 in each of the
following years.
2003 2002 2001 2000 1999
--------- ---------- --------- --------- ---------
(dollars in thousands)
(a) Loans accounted for on a
nonaccrual basis $ 18,352 $ 18,259 $ 12,557 $ 2,950 $ 1,403
(b) Accruing loans which
are contractually
past due 90 days or
more as to interest
or principal payments - 476 2,131 1,927 809
(c) Loans not included in (a)
which are "Troubled
Debt Restructurings" as
defined by Statement of
Financial Accounting
Standards No. 15 5,058 - - 3,911 -
--------- ---------- --------- --------- ---------
Total non-performing
loans $ 23,410 $ 18,735 $ 14,688 $ 8,788 $ 2,212
========= ========== ========= ========= =========
(d) Other loans defined as
impaired $ 9,099 $ 3,166 $ - $ 1,624 $ 1,103
========= ========== ========= ========= =========
14.
III. LOAN PORTFOLIO (Continued)
Management believes the allowance for loan losses at December 31, 2003 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.
2003
--------------
(In thousands)
Gross interest income that would have been recorded in 2003 on impaired
loans outstanding at December 31, 2003 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 $ 1,187
Interest income actually recorded on impaired loans and included in net
income for the period 1,076
--------------
Interest income not recognized during the period $ 111
==============
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, 2003, in addition to the
$23,410,000 of loans reported under Item III. C. 1.
(which includes all loans classified by management as
doubtful or loss), there are approximately
$34,357,000 in other outstanding loans where known
information about possible credit problems of the
borrowers causes management to have concerns 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.
15.
III. LOAN PORTFOLIO (Continued)
3. Foreign Outstandings
None
4. Loan Concentrations
At December 31, 2003, loans outstanding related to
agricultural operations or collateralized by
agricultural real estate aggregated approximately
$36,722,000.
D. Other Interest-Bearing Assets
There are no other interest-bearing assets as of December 31,
2003 which are required to be disclosed under Item III. C. 1
or Item III. C. 2. if such assets were loans.
16.
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:
2003 2002 2001 2000 1999
------------- ------------- ----------- ------------- ------------
(dollars in thousands)
LOANS
Loans outstanding at end of period (1) $ 284,323 $ 551,011 $ 600,731 $ 577,803 $ 508,481
============= ============= =========== ============= ============
Average loans outstanding during period (1) $ 385,153 $ 627,685 $ 583,239 $ 542,412 $ 461,343
============= ============= =========== ============= ============
ALLOWANCE FOR LOAN LOSSES
Balance at beginning of period $ 17,694 $ 9,239 $ 7,215 $ 6,194 $ 5,409
Balance, Oakwood 1,427
Loans charged-off
Commercial and agricultural loans (10,089) (19,584) (6,089) (641) (578)
Real estate mortgage (195) (496) (54) (22) (25)
Consumer loans to individuals (1,570) (1,693) (1,030) (906) (489)
------------- ------------- ----------- ------------- ------------
(11,854) (21,773) (7,173) (1,569) (1,092)
Recoveries of loans previously charged-off
Commercial and agricultural loans 2,497 892 110 106 327
Real estate mortgage 86 28 1 23 72
Consumer loans to individuals 556 351 353 362 263
------------- ------------- ----------- ------------- ------------
3,139 1,271 464 491 662
------------- ------------- ----------- ------------- ------------
Net loans charged-off (8,715) (20,502) (6,709) (1,079) (430)
Provision for loan losses 1,202 27,530 8,733 2,100 1,215
------------- ------------- ----------- ------------- ------------
Balance at end of period $ 10,181 $ 17,694 $ 9,239 $ 7,215 $ 6,194
============= ============= =========== ============= ============
Ratio of net charge-offs during the period to
average loans outstanding during the period 2.26% 3.27% 1.15% .20% .09%
============= ============= =========== ============= ============
(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 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.
17.
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, 2003 December 31, 2002 December 31, 2001*
---------------------- ---------------------- ----------------------
(dollars in thousands)
Commercial and agricultural $ 9,649 66.3% $ 16,518 66.0% $ 8,222 64.7%
Residential first mortgage 75 16.4 204 17.3 126 17.8
Consumer loans to
individuals 457 17.3 972 16.7 891 17.5
Unallocated - N/A - N/A * N/A
--------- ------- --------- ----- --------- -----
$ 10,181 100.0% $ 17,694 100.0% $ 9,239 100.0%
========= ======= ========= ===== ========= =====
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
Amount Loans Amount Loans
--------- ----------- --------- -----------
December 31, 2000 December 31, 1999
---------------------- ----------------------
(dollars in thousands)
Commercial and agricultural $ 5,365 62.9% $ 4,371 65.1%
Residential first mortgage 202 18.7 93 16.1
Consumer loans to
individuals 814 18.4 553 18.8
Unallocated 834 N/A 1,177 N/A
--------- ------- ------- -----
$ 7,215 100.0% $ 6,194 100.0%
========= ======= ======= =====
* 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 and its subsidiaries 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.
18.
V. DEPOSITS
The average amount of deposits and average rates paid are summarized as
follows for the years ended December 31:
2003 2002 2001
--------------------- -------------------- ---------------------
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
------------ ------- ----------- ------- ------------ -------
(dollars in thousands)
Savings and interest-bearing demand deposits $ 124,828 0.63% $ 185,357 1.39% $ 160,936 2.64%
Time deposits 267,227 3.46 409,363 4.33 385,059 5.76
Demand deposits (noninterest-bearing) 43,729 - 51,888 - 47,208 -
------------ ----------- ------------
$ 435,784 $ 646,608 $ 593,203
============ =========== ============
Maturities of time certificates of deposit and other time deposits of
$100,000 or more outstanding at December 31, 2003 are summarized as
follows:
Amount
------------
Three months or less $ 11,456
Over three months and through six months 26,060
Over six months and through twelve months 15,972
Over twelve months 1,370
------------
$ 54,858
============
19.
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:
2003 2002 2001
----------------- ---------------------- ------------------
(dollars in thousands)
Average total assets $ 549,371 $ 791,091 $ 722,827
================= ================== ==================
Average shareholders' equity $ 44,599 $ 44,674 $ 52,708
================= ================== ==================
Net income $ 12,305 $ (13,408) $ 2,253
================= ================== ==================
Cash dividends declared $ - $ 1,187 $ 2,158
================= ================== ==================
Return on average total assets 2.24% (1.69)% .31%
================= ================== ==================
Return on average share-
holders' equity 27.59% (30.01)% 4.27%
================= ================== ==================
Dividend payout ratio (1) N/A N/A 95.80%
================= ================== ==================
Average shareholders' equity
to average total assets 8.12% 5.65% 7.29%
================= ================== ==================
(1) Cash dividends declared divided by net income.
VII. SHORT-TERM BORROWINGS
The Company 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
2003 and 2002:
2003 2002
----------------- -------------------
(dollars in thousands)
Amount outstanding at end of year $ 13,924 $ 6,000
================= ===================
Weighted average interest rate at end of year 1.08% 5.25%
================= ===================
Maximum amount outstanding at any month end $ 15,765 $ 30,800
================= ===================
Average amount outstanding during the year $ 11,144 $ 24,041
================= ===================
Weighted average interest rate during the year 1.17% 2.70%
================= ===================
20.
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 Company and its
subsidiaries. The Company believes that the nature of the operations of its
subsidiaries has little, if any, environmental impact. The Company, therefore,
anticipates no material capital expenditures for environmental control
facilities for its current fiscal year or for the foreseeable future. The
Company'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. State Bank's 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 Company. The main office was
remodeled in 2002. (Banking, Data Processing, Other)
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. (Banking)
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. (Banking)
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. (Banking)
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.
(Banking)
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. (Banking)
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.
(Banking)
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. (Banking)
21.
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.
(Banking)
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. (Banking)
11. A full service branch office located at 218 North First
Street, Oakwood, Ohio containing 3,226 square feet of space
was acquired from the FDIC in 2002. (Banking)
12. 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. (Banking)
RFCBC is headquartered at 401 Clinton Street, Defiance Ohio with
operations being located at Gemini Tower One, Suite 204, 1991 Crocker Rd.,
Westlake, Ohio.
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, 4,774 square foot office
space located at 517 Clinton Street, Defiance, Ohio, 2,880 square foot office
space located at 1804 East State Street, Fremont, Ohio and 2,958 square foot
office space located at 135 South Main, Glandorf, Ohio.
Item 3. Legal Proceedings.
There are no pending legal proceedings to which the Company or any of
its subsidiaries is a party or to which any of their property is subject, except
routine legal proceedings incidental to their business. None of such proceedings
are considered by the Company to be material.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
22.
Executive Officers of the Registrant.
The following table lists the names and ages of the executive
officers of the Company 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 Company.
Position(s) Held with the Company and
Name Age its Subsidiaries and Principal Occupation(s)
- ------------------- --- ---------------------------------------------
Steven D. VanDemark 51 Chairman of the Board of Directors of the
Company; Chairman of the Board of Directors
of State Bank; Chairman of the Board of
Directors of RFCBC until June 2003; Director
of RDSI; General Manager of Defiance
Publishing Company, Defiance, Ohio, a
newspaper publisher.
Kenneth A. Joyce 56 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 51 President and Chief Executive Officer of
State Bank since April, 2002; Senior
Executive Vice President & Chief Operating
Officer of State Bank from November 2000 to
April 2003; Executive Vice President of the
Company from March 1997 to November 2000;
Vice President of the Company from 1994 to
March 1997; Chief Executive Officer and a
Director of RFS since March 1997; Director
of State Bank since 1996; Executive Vice
President of State Bank from 1994 to 1997;
Senior Vice President of State Bank from
1991 to 1993; Vice President of State Bank
from 1987 to 1991.
Henry R. Thiemann 57 Executive Vice President & Operations
Manager of State Bank since 2002; President
& Chief Executive Officer of RFCBC since May
2002; Director of RFCBC since August 2003;
President of RMC since August 1999; Director
of RMC since August 1999. Prior to August
1999, Mr. Thiemann was self-employed as an
independent consultant in the financial
service industry.
23.
Position(s) Held with the Company and
Name Age its Subsidiaries and Principal Occupation(s)
- ------------------- --- ---------------------------------------------
James E. Adams 59 Executive Vice President, Chief Financial
Officer of the Company since March 17, 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 Company in Martinsville, Virginia
from 1994 to 1999.
24.
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"). 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.
Per Share Per Share
Closing Prices Dividends
High Low Declared
-------- -------- ---------
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
2003
First Quarter $ 10.10 $ 9.00 $ .000
Second Quarter 12.94 9.65 .000
Third Quarter 14.00 11.52 .000
Fourth Quarter 14.60 13.78 .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 under the
terms of the Agreement. The Company also 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, 2004. During any interest deferral period,
the Trust Preferred Indenture prohibits the payment of a common stock dividend.
The approximate number of holders of outstanding common shares of the Company,
based upon the number of record holders as of February 27, 2004, is 1,443.
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.
25.
Item 6. Selected Financial Data.
SUMMARY OF SELECTED FINANCIAL DATA
(Dollars in thousands except per share data)
Year Ended December 31
----------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- ------- -------- --------
EARNINGS
Interest income $ 27,774 $ 48,591 $ 56,519 $ 56,023 $ 44,953
Interest expense 13,972 24,813 30,778 29,635 21,744
Net interest income 13,802 23,778 25,741 26,388 23,209
Provision for loan losses 1,202 27,531 8,733 2,100 1,215
Noninterest income 34,687 13,779 14,162 11,273 11,064
Noninterest expense 28,678 30,479 28,018 26,754 25,466
Provision (credit)
for income taxes 6,303 (7,044) 899 2,721 2,361
Net income (loss) 12,305 (13,408) 2,253 6,086 5,231
- -----------------------------------------------------------------------------------------------
PER SHARE DATA (1)
Basic earnings $ 2.71 $ (2.95) $ 0.50 $ 1.35 $ 1.16
Diluted earnings 2.70 (2.95) 0.50 1.35 1.16
Cash dividends declared N/A 0.26 0.47 0.42 0.37
- -----------------------------------------------------------------------------------------------
AVERAGE BALANCES
Average shareholders' equity $ 44,599 $ 44,674 $ 52,708 $ 46,627 $ 42,967
Average total assets 549,371 791,091 722,827 665,523 580,200
- -----------------------------------------------------------------------------------------------
RATIOS
Return on average
shareholders' equity 27.59% (30.01)% 4.27% 13.05% 12.17%
Return on average total assets 2.24 (1.69) 0.31 0.91 0.90
Cash dividend payout
ratio (cash dividends
divided by net income) N/A N/A 95.80 31.02 32.36
Average shareholders'
equity to average total
assets 8.12 5.65 7.29 7.01 7.41
- -----------------------------------------------------------------------------------------------
PERIOD END TOTALS
Total assets $435,312 $742,317 $746,209 $700,818 $627,784
Total investments and
fed funds sold 117,699 129,109 101,140 88,905 83,130
Total loans and leases 284,323 551,011 600,731 577,803 508,481
Total deposits 317,475 636,035 610,860 566,321 519,296
Notes Payable 10,328 6,000 - - -
Advances from FHLB 39,000 47,850 54,275 52,164 40,035
Trust Preferred Securities 10,000 10,000 10,000 10,000 -
Shareholders' equity 48,383 36,382 50,829 50,140 43,900
Shareholders' equity
per share (1) 10.63 8.01 11.14 10.98 9.62
- -----------------------------------------------------------------------------------------------
(1) Per share data restated for 5% stock dividend declared in 2000 and 2001.
26.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company is a bank holding company registered with the Federal Reserve Board
under the Bank Holding Company Act of 1956, as amended. Through its direct and
indirect subsidiaries, the Company is engaged in commercial banking,
computerized data processing, life and disability insurance and trust and
financial services.
The following discussion is intended to provide a review of the consolidated
financial condition and results of operations of the Company. This discussion
should be read in conjunction with the consolidated financial statements and
related footnotes in the Company's 2003 Form 10-K filed with the SEC.
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, 2003. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions. The
Company's 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.
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, 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
subjective 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 also 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.
27.
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 judgments
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.
IMPACT OF ACCOUNTING CHANGES
In May 2003, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. SFAS
150 establishes standards for classification and measurement in the statement of
financial position of certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability. The FASB's Staff Position
150-3 deferred indefinitely the guidance in SFAS No. 150 on certain mandatorily
redeemable noncontrolling interests. The Company has determined that it has no
such instruments covered by the SFAS No. 150 and Staff Position 150-3.
In April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement clarifies
reporting of contracts as either derivatives or hybrid instruments. The Company
has determined that all derivatives or hybrid instruments covered under this
statement have been properly reported under SFAS No. 149.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities. FIN 46 provides guidance with
respect to variable interest entities and when the assets, liabilities,
noncontrolling interest and results of operations of a variable interest entity
need to be included in a company's consolidated financial statements. A variable
interest entity exists when either the total equity investment at risk is not
sufficient to permit the entity to finance its activities by itself, or the
equity investors lack one of three characteristics associated with owning a
controlling financial interest. Those characteristics are the direct or indirect
ability to make decisions about an entity's activities through voting rights or
similar rights, the obligation to absorb the expected losses of an entity if
they occur and the right to receive the expected residual returns of the entity
if they occur.
In December 2003, the FASB deferred certain effective dates for FIN 46. For all
variable interest entities other than special purpose entities, the revised
Interpretation is effective for periods ending after Mach 15, 2004. For variable
interest entities meeting the definition of special purpose entities under
earlier accounting rules, the Interpretation remains effective for periods
ending December 31, 2003. The Company has determined that its variable interest
entity under FIN 46 is not material for disclosure.
In November 2002, FASB Interpretation No. 45 ("FIN 45"), Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others was issued. FIN 45 requires the disclosures to be made by
a guarantor in its financial statements about its obligation under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The most significant FIN 45
instruments of the Company are standby letters of credit. The Company has
determined that its standby letters of credit obligations under FIN 45 are not
material for disclosure.
28.
EARNINGS SUMMARY
Net income for the year was $12.3 million, or $2.70 per diluted share, compared
with a net loss of $13.4 million or $2.95 per diluted share and net income of
$2.3 million or $.50 per diluted share, reported for 2002 and 2001,
respectively. Cash dividends per share were $.26 in 2002 and $.47 in 2001. No
cash dividends were paid in 2003. Per share data has been adjusted to reflect
the 5% stock dividends paid in September 2001.
Net income in 2003 was primarily a result of the gains associated with the sale
of selected branches undertaken in order to replenish capital levels and to
restructure and rebuild the Company. The loss in 2002 was directly attributable
to the discovery of underwriting deficiencies in the loan portfolio resulting in
a loan loss provision of $27.5 million. The discovery process which began during
late 2001 and initially led to a fourth quarter 2001 loan loss provision of $5.6
million, broadened during 2002 and culminated at year-end 2002 with the
finalization of extensive loan reviews, both internally and externally. As
relevant data became available on each borrower, judgments concerning collateral
values and probable loss estimates were continually updated and reserve levels
appropriately adjusted. At each quarter end, the Company applied 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.
29.
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 2002 and 2003.
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.
On May 22, 2002, the Company announced that 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 that RDSI had acquired the principal
assets of Northwest Financial Services, Inc. (Northwest). Northwest provided
item processing and imaging services for eight RDSI client banks. This
acquisition provided item processing and imaging critical mass allowing RDSI to
provide cost effective additional services to its existing 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 at a price SUBSTANTIALLY
in excess of their book value. The transaction was closed in March 2003.
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. 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 at a price SUBSTANTIALLY in excess of their book value. The
transaction closed in June 2003.
On March 28, 2003, the Citizens Savings Banks, a division of RFC Banking
Company, was sold. As of March 28, 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 from the sale.
On June 6, 2003, the Peoples Banking Company and First Bank of Ottawa, divisions
of RFC Banking Company, were sold. As of June 6, these branches had total loans
of $76.6 million, total fixed assets (net of accumulated depreciation) of $1.4
million and total deposits of $166.2 million. A pre-tax gain of approximately
$12.0 million was recorded in June from the sale.
In June 2003, RFCBC obtained two loans in the amount of $13.4 million to fund
its loan servicing and work out operations. As of December 31, 2003, the loan
balances were $9.6 million. RFCBC also has a line of credit for $2.0 million
with a balance of $0 as of December 31, 2003. The Company's note with The
Northern Trust Company of $5.5 million was paid off with a portion of these
proceeds.
On July 9, 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 September 7, 2003. During any interest deferral period,
the Trust Preferred Indenture prohibits the payment of a common stock dividend.
In September 2003, the banking charter of RFCBC, which was primarily engaged in
providing a full range of banking and financial services, was relinquished.
RFCBC now operates as a loan subsidiary that continues to administer classified
loans that were not included in the sale of the branches in 2003.
30.
On January 28, 2004, 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, 2004. During any interest deferral period, the
Trust Preferred Indenture prohibits the payment of a common stock dividend.
RESULTS OF OPERATIONS
Year Ended Year Ended
December 31, December 31,
--------------------------------- -----------------------------------
2003 2002 % Change 2002 2001 % Change
---------- ---------- -------- ---------- ---------- --------
(dollars in thousands except per share data)
Total Assets $ 435,312 $ 742,317 -41% $ 742,317 $ 746,209 -1%
Total Securities $ 107,699 $ 115,109 -6% $ 115,109 $ 104,376 +10%
Loans Held for Sale 219 63,536 N/A 63,536 440 N/A
Loans (Net) 273,923 469,781 -42% 469,781 591,052 -21%
Allowance for Loan Losses 10,181 17,694 -42% 17,694 9,239 +92%
Total Deposits 317,475 567,860 -44% 567,860 610,860 -7%
Total Revenues (Net) 48,489 37,557 +29% 37,557 39,903 -6%
Net Interest Income 13,802 23,778 -42% 23,778 25,741 -8%
Loan Loss Provision 1,202 27,531 -96% 27,531 8,733 +215%
Noninterest Income 34,687 13,779 +152% 13,779 14,162 -3%
Noninterest Expense 28,678 30,479 -6% 30,479 28,018 +9%
Net Income 12,305 (13,408) N/A (13,408) 2,253 N/A
Basic Earnings per Share $ 2.71 $ (2.95) N/A $ (2.95) $ .50 N/A
Diluted Earnings per Share $ 2.70 $ (2.95) N/A $ (2.95) $ .50 N/A
NET INTEREST INCOME
Year Ended Year Ended
December 31, December 31,
--------------------------------- -----------------------------------
2003 2002 % Change 2002 2001 % Change
---------- ---------- -------- ---------- ---------- --------
(dollars in thousands)
Net Interest Income $ 13,802 $ 23,778 -42% $ 23,778 $ 25,741 -8%
NET INTEREST INCOME declined $10.0 million from 2002 to $13.8 million in 2003.
The net interest margin for 2003 was 2.72% compared to 3.17% for the previous
year. The 45 basis point decline in the net interest margin was largely due to a
101 basis point decrease in the yield on earning assets from 6.47% to 5.46%
which was partially offset by a 56 basis point decrease in the Company's
effective cost of funds. The major reasons for the reduction in net interest
income were a reduced level of earning assets due to the sale of the RFCBC
branches combined with declines in average loan balances due to the Company's
intent to exit from out of market loans and interest income foregone on
non-performing loans. Contributing to the decline in the yield on average
earning assets was the higher liquidity level necessary to fund the cash
transferred in the branch sales.
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 reasons for the reductions in net interest income and in the
yield on earning assets were the
31.
continued decline in market interest rates and the loss of interest income on
non-performing loans of approximately $1.1 million.
LOAN LOSS PROVISION
THE PROVISION FOR LOAN LOSSES was $1.2 million in 2003 compared to $27.5 million
in 2002. The allowance for loan losses at December 31, 2003 was 3.58% of loans
compared to 3.21% at December 31, 2002. The decrease in the provision was the
result of the continued review and determination of the level of reserves
necessary to absorb probable losses in the loan portfolio. Non-performing loans
decreased to $18.4 million at December 31, 2003 versus $18.7 million at December
31, 2002.
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 an intensified review of the underwriting criteria and the risk
characteristics of the loan portfolio which culminated in 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.
NON-INTEREST INCOME
Year Ended Year Ended
December 31, December 31,
--------------------------------- -----------------------------------
2003 2002 % Change 2002 2001 % Change
---------- ---------- -------- ---------- ---------- --------
(dollars in thousands)
Total Non-interest Income $ 34,687 $ 13,779 +152% $ 13,779 $ 14,162 -3%
- - Data Service Fees $ 8,972 $ 7,816 +15% $ 7,816 $ 6,126 +28%
- - Trust Fees $ 2,602 $ 2,468 +5% $ 2,468 $ 2,745 -10%
- - Deposit Service Fees $ 2,179 $ 2,618 -17% $ 2,618 $ 2,593 +1%
- - Gains on Sale of Loans $ 416 $ 759 -45% $ 759 $ 889 -15%
- - Gains on Sale of Branches $ 19,901 - N/A - - N/A
- - Gains on Sale of Securities $ 24 $ (834) N/A $ (834) $ 490 N/A
- - Other $ 593 $ 952 -38% $ 952 $ 1,319 -28%
TOTAL NONINTEREST INCOME increased $20.9 million to $34.7 million in 2003 from
$13.8 million in 2002. The increase is primarily the result of recording
approximately $20.0 million in net pre-tax gains from the branch sales. The
increase was also due to the sale of the Company's investment in WorldCom bonds
in the second quarter of 2002, which resulted in a $1.7 million pre-tax loss.
Data service fees increased $1.2 million or 15% to $9.0 million in 2003 compared
to $7.8 million in 2002 and trust fees increased $134,000 or 5% to $2.6 million
in 2003 compared to $2.5 million in 2002.
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. 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.
32.
RURBANC DATA SERVICES, INC. ("RDSI")
Year Ended Year Ended
December 31, December 31,
--------------------------------- -----------------------------------
2003 2002 % Change 2002 2001 % Change
---------- ---------- -------- ---------- ---------- --------
(Dollars in thousands)
Data Service Fees $ 8,972 $ 7,816 +15% $ 7,816 $ 6,126 +28%
DATA SERVICE FEES increased $1.2 million or 15% to $9.0 million from $7.8
million in 2002 and $1.7 million or 28% from 2001 to 2002. The increases in 2003
and 2002 were mainly driven by RDSI's entry into the item processing market,
additions of new bank clients and the result of customer account growth at
client banks. The revenue gains in 2003 were partially offset by revenue lost
due to the sale of banking assets of RFC Banking Company which was serviced by
RDSI.
RDSI PROVIDES data processing services for 55 community banks in Ohio, Michigan,
Indiana and Missouri. 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 increased by 50%. Equally important is the
organic growth of existing client banks, both in their number of customer
accounts and in the breadth of services provided. Network services, internet
banking, imaging, and other technical services are a rapidly growing part of
RDSI's revenue. RDSI's revenue grew 15% in 2003 even though a significant piece
of their business was lost due to the sale of the banking assets of RFC Banking
Company.
RELIANCE FINANCIAL SERVICES, N.A. ("RELIANCE")
TRUST FEES increased $134,000 or 5% to $2.6 million from $2.5 million in 2002.
The primary reason for this increase was the upward trend in the markets from
2002 levels. Reliance has also grown through the development of new products
such as the "Tactical Asset Allocation Portfolio" and by providing back office
support to other trust companies.
NON-INTEREST EXPENSE
Year Ended Year Ended
December 31, December 31,
--------------------------------- -----------------------------------
2003 2002 % Change 2002 2001 % Change
---------- ---------- -------- ---------- ---------- --------
(dollars in thousands)
Total Non-interest Expense $ 28,678 $ 30,479 -6% $ 30,479 $ 28,018 +9%
- - Salaries & Employee Benefits $ 13,428 $ 15,720 -15% $ 15,720 $ 15,448 +2%
- - Professional Fees $ 4,172 $ 3,130 +33% $ 3,130 $ 1,712 +83%
- - All Other $ 11,078 $ 11,629 -5% $ 11,629 $ 10,858 +7%
NON-INTEREST EXPENSE for the year 2003 was $28.7 million, down $1.8 million or
6% from $30.5 million in 2002. Professional fees increased $1.0 million due to
increased consulting, legal and auditing fees associated with the Company's
problem loan workouts and the branch divestitures. Salaries and
33.
employee benefits decreased $2.3 million due to the disposition of the branches
and staff reductions at most subsidiaries.
NON-INTEREST 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 non-interest 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, non-interest expense declined $132,000.
LOANS
Period Ended
12/31/03 % of Total 12/31/02 % of Total % Inc/(Dec) 12/31/01 % of Total % Inc/(Dec)
-------- ---------- -------- ---------- ----------- -------- ---------- -----------
(dollars in thousands)
Commercial $ 89,471 31% $123,053 25% (27)% $185,654 31% (34)%
Commercial r.e. 62,340 22% 129,719 27% (52)% 135,883 23% (5)%
Agricultural 36,722 13% 68,954 14% (47)% 67,136 11% 3%
Residential 46,718 16% 84,432 17% (45)% 106,689 18% (21)%
Consumer 37,310 13% 60,139 12% (38)% 76,512 12% (21)%
Leases 11,774 5% 21,509 5% (45)% 28,752 5% (25)%
-------- -------- --------
Loans $284,335 $487,806 (42)% $600,626 (19)%
Loans held for sale 219 63,536 440
-------- -------- --------
Total $284,554 $551,342 $601,066
LOANS declined $203 million to $284 million at December 31, 2003, due to the
branch sales, the Company's effort to exit from out-of-market loans, shrinking
loan demand and $12 million of gross charged off loans. The increase in loans
held for sale in 2002 was due to a December 30, 2002 agreement to sell the
Citizens Savings Bank division of RFCBC. This transaction closed on March 28,
2003.
In 2002, loans decreased $113 million or 19% to $488 million due to an increase
in loans held for sale of $63 million, reduced new loan demand and $22 million
of gross charged off loans. The increase in loans held for sale was due to a
December 30, 2002 agreement to sell the Citizens Savings Bank division of RFCBC.
This transaction closed March 28, 2003.
34.
ASSET QUALITY
Period Ended December 31,
-------------------------
(dollars in millions)
---------------------
Change in Change in
Dollars/ Dollars/
12/31/03 12/31/02 percentages 12/31/01 percentages
-------- -------- ----------- -------- -----------
Non-performing loans $ 18.4 $ 18.7 $ -0.3 $ 14.7 $ 4.0
Non-performing assets $ 19.9 $ 20.8 $ -0.9 $ 15.0 $ 5.8
Non-performing assets/loans
plus OREO 6.96% 4.25% 2.71% 2.49% 1.76%
Non-performing assets/total
assets 4.57% 2.80% 1.77% 2.00% .80%
Net chargeoffs $ 8.7 $ 20.5 $ -11.8 $ 6.7 $ 13.8
Net chargeoffs/total loans 3.06% 4.20% -1.14% 1.12% 3.08%
Loan loss provision $ 1.2 $ 27.5 $ -26.3 $ 8.7 $ 18.8
Allowance for loan losses $ 10.2 $ 17.7 $ 1.2 $ 9.2 $ 8.50
Allowance/loans 3.58% 3.21% 0.37% 1.54% 1.67%
Allowance/non-performing
loans 55% 95% -40% 63% 32%
Allowance/non-performing
assets 51% 85% -34% 62% 23%
ASSET QUALITY statistics reflect a decrease in both nonperforming assets and
chargeoffs during 2003 compared to 2002 and an increase from 2002 compared to
2001. Non-performing assets at December 31, 2003 were $19.9 million or 4.57% of
total assets, versus $20.8 million or 2.80% at December 31, 2002 and $15.0
million or 2.00% at year-end 2001. Annual net chargeoffs for 2003 were $8.7
million or 3.06% of total loans compared to $20.5 million or 4.20% for 2002
resulting in the allowance to non-performing loans to decrease to 55% at
December 31, 2003 compared to 95% at December 31, 2002. The ratio of the
allowance for loan losses to nonperforming loans was 55% at December 31, 2003
compared to 95% at December 31, 2002.
ALLOWANCE FOR LOAN LOSSES
The Company grades its loans using an eight grade system. Problem loans are
classified as either:
- Grade 5 - Special Mention: Potential weaknesses that deserve
management's close attention
- Grade 6 - Substandard: Inadequately protected, with
well-defined weakness that jeopardize
liquidation of debt
- Grade 7 - Doubtful: Inherent weaknesses well-defined and high
probability of loss (impaired)
- Grade 8 - 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.
35.
12/31/03 12/31/02 INCREASE (DECREASE)
------------------------ ------------------------ -----------------------
ALLOCATION ALLOCATION ALLOCATION
LOAN -------------- LOAN -------------- LOAN -------------
BALANCE $ % BALANCE $ % BALANCE $ %
------- ------- ----- ------- ------- ----- ------- ----- ------
Allocations for individual loans graded doubtful
(impaired) $ 19.7 $ 5.7 28.93% $ 14.9 $ 5.1 34.23% $ 4.8 $ 0.6 -5.30%
Allocations for individual loans graded substandard 33.4 2.5 7.49 57.7 6.6 11.44 -24.3 -4.1 -3.95
Allocations for individual loans graded special
mention* 21.0 0.6 2.86 61.1 1.8 2.95 -40.1 -1.2 -0.09
"General" allowance based on chargeoff history of
nine categories of loans 210.5 1.4 0.67 417.6 4.2 1.01 -207.1 -2.8 -0.34
------- ------- ----- ------- ------- ----- ------- ----- ------
TOTAL $ 284.6 $ 10.2 3.58% $ 551.3 $ 17.7 3.21% $-266.7 $-7.5 0.37%
* The Company changed its methodology during 2003. Special Mention loans are now
allocated at 3%. The December 31, 2002 table has been updated to reflect the new
methodology.
In 2003, the amount of loans classified as doubtful increased $4.8 to $19.7
million and substandard loans decreased $24.3 to $33.4 million. Allowance
allocations on doubtful loans increased $0.6 million while allowance allocations
on substandard loans decreased $4.1 million. Non-performing loan balances
remained relatively the same compared to the prior year but the allowance for
loan losses decreased significantly due to total loans decreasing $266.7 million
and the total of doubtful, substandard and special mention loans declining $59.6
million. The allowance for loan losses at December 31, 2003 was $10.2 million or
3.58% of loans compared to $17.7 million or 3.21% at December 31, 2002.
While the amount of doubtful loans and the related allowance allocation
increased during 2003, the pace of increase has slowed dramatically. These
doubtful loans are either written down to a conservative estimated collateral
value or reserved to reflect that collateral value. Management believes that
these problem loan statistics have peaked and that workout efforts will begin to
reduce these balances in 2004. The amount of substandard loans has declined by
42% from $57.7 million to $33.4 million reflective of the results of the
Company's workout efforts and the amount of special mention loans has
dramatically declined from $61.1 million to $21.0 million.
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.
- - See Critical Accounting Policies, starting on page 27.
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 actions prior to mid-2002 such as 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.
36.
In regard to the effort to reduce the volume of substandard and doubtful
(classified loans), the following actions were taken during the past year:
- Development of a loan subsidiary to manage the classified
loans of RFCBC to-focus efforts on the workout of that group
of loans
- All classified loans are now assigned to loan workout
specialists unless there is a strong reason for an alternative
assignment.
These actions were 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, 2003 was $48.4 million or 8.81% of average
total assets compared to $36.3 million or 4.57% of average total asset at
December 31, 2002. The Company and State Bank each exceeded the
"well-capitalized" regulatory capital benchmarks at December 31, 2003.
TOTAL CONSOLIDATED REGULATORY (RISK-BASED) CAPITAL was $59.2 million at December
31, 2003 and $49.4 million at December 31, 2002. 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.
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 $3.4 million over the next year.
WRITTEN AGREEMENT
On July 5, 2002, the Company and State Bank entered into a Written Agreement
("Agreement") with the Federal Reserve Bank of Cleveland and the Ohio Division
of Financial Institutions. The Agreement was the result of an examination of
State Bank as of December 31, 2001, which was conducted in March and April 2002.
A copy of the Agreement was attached as Exhibit 99(b) to the Form 8-K filed by
the Company on July 11, 2002 and is incorporated by reference as Exhibit 99(b)
to this Form 10-K.
As of December 2003, Management believes that the Company and State Bank were in
full compliance with the terms of the Agreement. However, the Agreement will
continue in place until the Federal Reserve Bank of Cleveland and the Ohio
Division of Financial Institutions determine that the Agreement may be
terminated. The Company believes that additional improvement in problem loans,
earnings and operations, as well as other items described in the Agreement, is
necessary before the Agreement may be terminated, and management cannot predict
when that may occur.
Under the terms of the Agreement, State Bank and RFCBC are prohibited from
paying dividends to the Company without prior regulatory approval. The Agreement
also prohibits the Company from paying trust preferred "dividends" and common
stock dividends without prior regulatory approval.
37.
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, federal
funds sold, 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 $132.4 million at December 31,
2003 compared to $230.0 million at December 31, 2002. The Company views this
level of liquidity as appropriate.
THE COMPANY'S RESIDENTIAL FIRST MORTGAGE PORTFOLIO of $46.7 million at December
31, 2003 and $84.4 million at December 31, 2002, which can and has been readily
used to collateralize borrowings, is an additional source of liquidity.
Management believes the Company's current liquidity level, without these
borrowings, is sufficient to meet its liquidity needs. At December 31, 2003, 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 2003, 2002 and 2001 follows.
THE COMPANY EXPERIENCED positive cash flows from operating activities in 2003,
2002 and 2001. Net cash from operating activities was $5.7 million, $15.3
million and $8.4 million for the years ended December 31, 2003, 2002 and 2001,
respectively.
NET CASH FLOW FROM INVESTING ACTIVITIES was $60.3 million, $94.0 million and
$(47.7) million for the years ended December 31, 2003, 2002 and 2001,
respectively. The changes in net cash from investing activities for 2003 include
a reduction in loan growth and cash payments for the net liabilities from the
branch sales. 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. In 2003, 2002 and 2001, the Company received $17.6 million,
$81.9 million and $19.1 million, respectively, from sales of securities
available for sale, while proceeds from repayments, maturities and calls of
securities were $121.6 million, $53.9 million and $38.1 million in 2003, 2002
and 2001, respectively.
NET CASH FLOW FROM FINANCING ACTIVITIES was $(92.8) million, $(83.6) million,
and $46.2 million for the years ended December 31, 2003, 2002 and 2001,
respectively. The net cash decrease was primarily due to a reduction in total
deposits of $(87.8) million in 2003 and $(66.6) million in 2002. Other
significant changes in 2003, 2002 and 2001 included $(8.8) million, $(6.4)
million and $2.1 million in net borrowings from the FHLB.
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 the Company, State Bank,
the Federal Reserve Bank of Cleveland and the Ohio Division of Financial
Institutions requires the Company and State Bank to obtain written approval from
the Federal Reserve Bank of Cleveland and the Ohio Division of Financial
Institutions prior to directly or indirectly incurring any debt with the
exception of federal funds and FHLB borrowings at State Bank.
Approximately $37.3 million residential first mortgage loans of the Company's
$46.7 million portfolio qualify to collateralize FHLB borrowings and have been
pledged to meet FHLB collateralization requirements as of December 31, 2003. In
addition to residential first mortgage loans, $26.1 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 December 31, 2003.
38.
At December 31, 2003, the Company had no unused federal funds lines. As of
December 31, 2002, the Company had unused federal funds lines totaling
approximately $26.0 million from 2 correspondent banks. Federal funds borrowed
were $0 at December 31, 2003 and December 31, 2002.
Approximately $9.7 million performing commercial loans are pledged to the
Federal Reserve Discount Window to establish additional borrowing capacity of
$6.7 million. Such loans are pledged for contingency funding purposes and to
date this borrowing capacity has not been used.
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 $ 39,000,000 $ 10,000,000 0 $ 5,000,000 $ 24,000,000
Other Debt Obligations 20,327,599 2,644,796 7,682,803 0 10,000,000
Capital Lease Obligations 0 0 0 0 0
Operating Lease Obligations 796,800 99,600 199,200 199,200 298,800
Purchase Obligations 0 0 0 0 0
Other Long-Term Liabilities
Reflected on the Registrant's
Balance Sheet under GAAP 174,668,570 122,908,519 42,870,943 8,448,933 440,175
------------ ------------ ------------ ------------ ------------
Total $234,792,969 $135,652,915 $ 50,752,946 $ 13,648,133 $ 34,738,975
The Company's contractual obligations as of December 31, 2003 were evident in
long-term debt obligations, other debt obligations, operating lease obligations
and other long-tern liabilities. The long-term debt obligations is comprised of
FHLB Advances of $39,000,000. The other debt obligations is comprised of Trust
Preferred securities of $10,000,000 and Notes Payable of $10,327,599. The
operating lease obligation is a lease on the RDSI building of $99,600 a year.
The other long-term liabilities is comprised of time deposits of $174,668,570.
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
consist 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 specific 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 shareholder value;
39.
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 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 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, 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 historical 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,
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
40.
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.
41.
PRINCIPAL/NOTIONAL AMOUNT MATURING OR ASSUMED TO BE WITHDRAWN IN:
(DOLLARS IN THOUSANDS)
2004 2005 2006 2007 2008 Thereafter Total
- ----------------------------------------------------------------------------------------------------------------------
Rate-sensitive assets
- ----------------------------------------------------------------------------------------------------------------------
Variable rate loans $ 56,729 $ 11,466 $ 7,800 $ 4,825 $ 3,018 $ 10,087 $ 93,926
- ----------------------------------------------------------------------------------------------------------------------
Average interest rate 5.12% 5.12% 5.21% 5.17% 5.40% 5.70% 5.20%
- ----------------------------------------------------------------------------------------------------------------------
Adjustable rate loans $ 33,050 $ 19,036 $ 10,820 $ 8,210 $ 5,591 $ 14,123 $ 90,830
- ----------------------------------------------------------------------------------------------------------------------
Average interest rate 6.49% 6.45% 6.29% 6.25% 6.28% 6.15% 6.37%
- ----------------------------------------------------------------------------------------------------------------------
Fixed rate loans $ 46,189 $ 19,394 $ 10,662 $ 5,887 $ 1,956 $ 15,710 $ 99,798
- ----------------------------------------------------------------------------------------------------------------------
Average interest rate 5.47% 6.19% 5.88% 5.61% 5.28% 3.90% 5.41%
- ----------------------------------------------------------------------------------------------------------------------
Total loans $135,968 $ 49,896 $ 29,282 $ 18,922 $ 10,565 $ 39,920 $284,554
- ----------------------------------------------------------------------------------------------------------------------
Average interest rate 5.57% 6.04% 5.85% 5.78% 5.84% 5.15% 5.65%
- ----------------------------------------------------------------------------------------------------------------------
Fixed rate investment securities $ 5,342 $ 2,872 $ 7,673 $ 22,094 $ 14,888 $ 30,102 $ 82,971
- ----------------------------------------------------------------------------------------------------------------------
Average interest rate 2.79% 3.65% 2.70% 2.25% 3.10% 4.00% 3.16%
- ----------------------------------------------------------------------------------------------------------------------
Variable rate investment securities $ 952 $ 1,174 $ 1,013 $ 1,046 $ 1,080 $ 22,207 $ 27,472
- ----------------------------------------------------------------------------------------------------------------------
Average interest rate 3.14% 3.35% 3.15% 3.16% 3.17% 3.32% 3.30%
- ----------------------------------------------------------------------------------------------------------------------
Federal Funds Sold & Other $ 10,260 $ 0 $ 0 $ 0 $ 0 $ 0 $ 10,260
- ----------------------------------------------------------------------------------------------------------------------
Average interest rate 1.01% 0.00% 0.00% 0.00% 0.00% 0.00% 1.01%
- ----------------------------------------------------------------------------------------------------------------------
Total rate sensitive assets $152,522 $ 53,942 $ 37,968 $ 42,062 $ 26,533 $ 92,229 $405,257
- ----------------------------------------------------------------------------------------------------------------------
Average interest rate 5.15% 5.85% 5.14% 3.86% 4.20% 4.33% 4.86%
- ----------------------------------------------------------------------------------------------------------------------
RATE SENSITIVE LIABILITIES:
- ----------------------------------------------------------------------------------------------------------------------
Demand - non interest-bearing $ 9,273 $ 9,226 $ 9,226 $ 9,226 $ 9,134 $ 0 $ 46,085
- ----------------------------------------------------------------------------------------------------------------------
Demand - interest bearing $ 6,696 $ 6,696 $ 6,696 $ 6,696 $ 6,629 $ 0 $ 33,413
- ----------------------------------------------------------------------------------------------------------------------
Average interest rate 0.43% 0.43% 0.43% 0.43% 0.43% 0.00% 0.43%
- ----------------------------------------------------------------------------------------------------------------------
Money market accounts $ 9,876 $ 9,876 $ 8,996 $ 9,876 $ 9,774 $ 0 $ 48,398
- ----------------------------------------------------------------------------------------------------------------------
Average interest rate 0.88% 0.71% 0.45% 0.25% 0.20% 0.00% 0.50%
- ----------------------------------------------------------------------------------------------------------------------
Savings $ 3,084 $ 2,964 $ 2,964 $ 2,964 $ 2,934 $ 0 $ 14,910
- ----------------------------------------------------------------------------------------------------------------------
Average interest rate 0.05% 0.05% 0.05% 0.05% 0.05% 0.00% 0.05%
- ----------------------------------------------------------------------------------------------------------------------
Certificates of deposit $122,771 $ 27,540 $ 15,212 $ 6,307 $ 2,140 $ 699 $174,669
- ----------------------------------------------------------------------------------------------------------------------
Average interest rate 2.77% 3.35% 2.85% 4.81% 2.95% 0.68% 2.93%
- ----------------------------------------------------------------------------------------------------------------------
Fixed rate FHLB advances $ 0 $ 0 $ 0 $ 0 $ 5,000 $ 24,000 $ 29,000
- ----------------------------------------------------------------------------------------------------------------------
Average interest rate 0.00% 0.00% 0.00% 0.00% 5.53% 4.64% 4.79%
- ----------------------------------------------------------------------------------------------------------------------
Variable rate FHLB advances $ 10,000 $ 0 $ 0 $ 0 $ 0 $ 0 $ 10,000
- ----------------------------------------------------------------------------------------------------------------------
Average interest rate 1.21% 0.00% 0.00% 0.00% 0.00% 0.00% 1.21%
- ----------------------------------------------------------------------------------------------------------------------
Fixed rate Notes Payable $ 0 $ 0 $ 96 $ 402 $ 0 $ 10,272 $ 10,770
- ----------------------------------------------------------------------------------------------------------------------
Average interest rate 0.00% 0.00% 8.50% 7.65% 0.00% 10.52% 10.40
- ----------------------------------------------------------------------------------------------------------------------
Variable rate Notes Payable $ 2,400 $ 2,400 $ 2,400 $ 1,258 $ 1,100 $ 0 $ 9,558
- ----------------------------------------------------------------------------------------------------------------------
Average interest rate 5.50% 5.50% 5.50% 6.41% 6.50% 0.00% 5.73%
- ----------------------------------------------------------------------------------------------------------------------
Fed Funds Purchased & Repos $ 3,924 $ 0 $ 0 $ 0 $ 0 $ 0 $ 3,924
- ----------------------------------------------------------------------------------------------------------------------
Average interest rate 0.75% 0.00% 0.00% 0.00% 0.00% 0.00% 0.75%
- ----------------------------------------------------------------------------------------------------------------------
Total rate sensitive liabilities $168,024 $ 58,702 $ 45,590 $ 36,729 $ 36,712 $ 34,970 $380,727
- ----------------------------------------------------------------------------------------------------------------------
Average interest rate 2.26% 1.97% 1.41% 1.28% 1.25% 6.29% 2.29%
- ----------------------------------------------------------------------------------------------------------------------
42.
PRINCIPAL/NOTIONAL AMOUNT MATURING OR ASSUMED TO BE WITHDRAWN IN:
(DOLLARS IN THOUSANDS)
First Years
Comparison of 2003 to 2002: Year 2 - 5 Thereafter Total
--------- --------- --------- ---------
Total rate-sensitive assets:
At December 31, 2003 $ 152,522 $ 160,505 $ 92,229 $ 405,257
At December 31, 2002 317,174 217,623 149,581 684,378
--------- --------- --------- ---------
Increase (decrease) $(164,652) $ (57,118) $ (57,352) $(279,121)
Total rate-sensitive liabilities:
At December 31, 2003 $ 168,024 $ 177,733 $ 34,970 $ 380,727
At December 31, 2002 317,332 339,592 42,961 699,885
--------- --------- --------- ---------
Increase (decrease) $(149,308) $(161,859) $ (7,991) $(319,158)
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. 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 3.80% in 2001 and
3.17% in 2002 to 2.72% in 2003.
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, 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.
43.
FORWARD-LOOKING STATEMENTS
WHEN USED IN THIS FILING and in future filings by the Company with the SEC, 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.
44.
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 of Financial Condition and Results of
Operations section of this Annual Report on Form 10-K.
Item 8. Financial Statements and Supplementary Data.
The Consolidated Balance Sheets of the Company and its subsidiaries as
of December 31, 2003 and December 31, 2002, 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, 2003, the related Notes to
Consolidated Financial Statements and the Report of Independent Auditors, appear
on pages F-1 through F-40 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not Applicable.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
With the participation of the President and Chief Executive Officer
(the principal executive officer) and the Executive Vice President and Chief
Financial Officer (the preincipal financial officer) of the Company, the
Company's management evaluated the effectiveness of the Company's disclosure and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934, as amended (the "Exchange Act") as of the end of the period covered by
this Annual Report on Form 10-K. Based on that evaluation, the Company's
President and Chief Executive Officer and Executive Vice President and Chief
Financial Officer concluded that:
- information required to be disclosed by the Company in this
Annual Report on Form 10-K would be accumulated and
communicated to the Company's management, including its
principal executive officer and principal financial officer,
as appropriate to allow timely decisions regarding required
disclosures;
- information required to be disclosed by the Company in this
Annual Report on Form 10-K would be recorded, processed,
summarized and reported within the time periods specified in
the SEC's rules and forms; and
- the Company's disclosure controls and procedures are effective
as of the end of the period covered by this Annual Report on
Form 10-K to ensure that material information relating to the
Company and its consolidated subsidiaries is made known to
them, particularly during the period for which the Company's
periodic reports, including this Annual Report on Form 10-K,
are being prepared.
Changes in Internal Controls
No changes were made in the Company's internal control over financial
reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred
during the Company's fiscal quarter ended December 31, 2003, that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
45.
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 Company's definitive
Proxy Statement, filed with the SEC pursuant to Regulation 14A of the General
Rules and Regulations under the Securities Exchange Act of 1934, relating to the
Company's Annual Meeting of Shareholders to be held on April 26, 2004 (the "2004
Proxy Statement"), under the captions "ELECTION OF DIRECTORS" and "SECTION 16(a)
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE." In addition, certain information
concerning the executive officers of the Company called for in this Item 10 is
set forth at the end of Part I of this Annual Report on Form 10-K under the
caption "Executive Officers of the Registrant" in accordance with General
Instruction G(3).
In 2003, the Company implemented a Code of Conduct and Ethics that
applies to its principal executive officer, principal financial officer and
principal accounting officer. A copy of that policy can be found on the
Company's website at www.rurbanfinancial.net under the corporate governance tab.
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 information
contained in the Company's 2004 Proxy Statement 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 Company's 2004 Proxy Statement 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 information
contained in the Company's 2004 Proxy Statement under the caption "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
46.
Equity Compensation Plan Information
The following table provides information regarding certain equity
compensation plans of the Company:
(c)
Number of securities
(a) (b) remaining available for
Number of securities to be Weighted-average exercise future issuance under
issued upon exercise of price of outstanding equity compensation plans
outstanding options, options, warrants and (excluding securities
Plan Category warrants and rights rights reflected in column (a))
- --------------------------------------------------------------------------------------------------------------------
Equity compensation plans 183,510 $13.07 257,490
approved by security holders
(1)
- --------------------------------------------------------------------------------------------------------------------
Equity compensation plans not N/A N/A N/A
approved by security holders
(2)
- --------------------------------------------------------------------------------------------------------------------
Total 183,510 $13.07 257,490
- --------------------------------------------------------------------------------------------------------------------
(1) Information relates to the 1997 Rurban Financial Corp. Stock Option Plan.
(2) The Company has an employee stock purchase plan. All employees of the
Company and its subsidiaries are eligible to participate subject to the
completion of three (3) months employment with the Company 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
Company. 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 Company on the open market for the participants. The
Company's employee stock purchase plan was not approved by shareholders of the
Company.
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 information
contained in the Company's 2004 Proxy under the caption "TRANSACTIONS INVOLVING
MANAGEMENT."
Item 14. Principal Accounting Fees
In accordance with General Instruction G(3), the information called for
in this Item 14 is incorporated herein by reference to the information contained
in the Company's 2004 Proxy under the caption "AUDIT COMMITTEE MATTERS" provided
that the "Report of the Audit Committee" included in the 2004 Proxy Statement
shall not be deemed to be incorporated herein by reference.
47.
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 55.
(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.
48.
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. Company'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, Company's Annual Report on Form 10-K for
1993 and made to be effective as of January 1, 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, Company's Annual Report on Form 10-K for
1994 and made to be effective as of January 1, 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, Company's Annual Report on Form 10-K for
1995 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, Company's Annual Report on Form 10-K for
1995 and made to be effective as of January 1, 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 Company'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 Company's Annual Report on Form 10-K for
and effective January 1, 1990 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, Company's Annual Report on Form 10-K for
effective February 1, 1991 the fiscal year ended December 31, 1992
(File No. 0-13507) [Exhibit 10(d)].
49.
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 Company'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, Company's Annual Report on Form 10-K for
effective May 1, 1992 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 Company'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 Company'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 Company'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 Company's Annual Report on Form 10-K for
Robert W. Constien in his capacity as Manager the fiscal year ended December 31, 1991
of the Trust Department (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 Company'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
Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994
(File No. 0-13507) [Exhibit 10(n)].
50.
Exhibit No. Description Location
- ----------- ----------- --------
10(q) Summary of Rurban Financial Corp. Bonus Plan Incorporated herein by reference to the
Company'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 Company's Annual Report on Form 10-K for
Corp. and Richard C. Burrows the fiscal year ended December 31, 1994
(File No. 0-13507) [Exhibit 10(p)].
10(s) Executive Salary Continuation Agreement, dated Incorporated herein by reference to the
December 3, 2001, between Rurban Financial Company's Annual Report on Form 10-K for
Corp. and Kenneth A. Joyce; and Amended the fiscal year ended December 31, 2002
Schedule A to Exhibit 10(s) identifying other (File No. 0-13507) [Exhibit 10(s)].
identical Executive Salary Continuation
Agreements between executive officers of Rurban
Financial Corp. and Rurban Financial Corp.
10(t) Split-Dollar Dollar Insurance Agreement, dated Incorporated herein by reference to the
April 3, 1992, between Robert Constien and Company's Annual Report on Form 10-K for
Rurban Financial Corp. the fiscal year ended December 31, 2002
(File No. 0-13507) [Exhibit 10(t)].
10(u) Rurban Financial Corp. Stock Option Plan Incorporated herein by reference to the
Company'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 Company'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
Company'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
Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997
(File No. 0-13507 [Exhibit 10(x)].
51.
Exhibit No. Description Location
- ----------- ----------- --------
10(y) Employees' Stock Ownership and Savings Plan Incorporated herein by reference to the
of Rurban Financial Corp. Company'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 Incorporated herein by reference to the
Purchase Plan Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2002
(File No. 0-13507) [Exhibit 10(z)].
10(aa) Change in Control Agreement, dated March 14, Included in this Annual Report on Form
2001, between Rurban Financial Corp. and 10-K as Exhibit 10(aa).
Kenneth A. Joyce; and Schedule A to Exhibit
10(aa) identifying other substantially
identical agreements between Rurban Financial
Corp. and certain executive officers of Rurban
Financial Corp.
10(bb) Supplemental Severance Agreement, dated June Included in this Annual Report on Form
25, 2002, between Rurban Financial Corp. and 10-K as Exhibit 10(bb).
Robert W. Constien; and Schedule A to Exhibit
10(bb) identifying other substantially
identical agreements between Rurban Financial
Corp. and certain executive officers of Rurban
Financial Corp.
(b) Reports on Form 8-K
Not Applicable.
(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.
(c) Financial Statement Schedules.
(d) None.
52.
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/ James E. Adams
-------------------------------
Date: March 30, 2004 By: James E. Adams, 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 Company 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, 2003, hereby constitutes and
appoints Kenneth A. Joyce and James E. Adams 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 30, 2004 President, Chief Executive Officer, Principal
- -------------------- Executive Officer and Director
Kenneth A. Joyce
/s/ Thomas A. Buis March 30, 2004 Director
- ------------------
Thomas A. Buis
/s/ Thomas M. Callan March 30, 2004 Director
- --------------------
Thomas M. Callan
/s/ John R. Compo March 30, 2004 Director
- -----------------
John R. Compo
/s/ John Fahl March 30, 2004 Director
- -------------
John Fahl
/s/ Robert A. Fawcett, Jr. March 30, 2004 Director
- --------------------------
Robert A. Fawcett, Jr.
53.
/s/ Eric C. Hench March 30, 2004 Director
- -----------------
Eric C. Hench
/s/ Steven D. VanDemark March 30, 2004 Director
- -----------------------
Steven D. VanDemark
/s/ J. Michael Walz, D.D.S March 30, 2004 Director
- --------------------------
J. Michael Walz, D.D.S
Date: March 30, 2004
54.
RURBAN FINANCIAL CORP.
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 2003
INDEX TO FINANCIAL STATEMENTS
CONTENTS
INDEPENDENT ACCOUNTANTS' REPORT.................................................................... F-1
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets................................................................................. F-2 to F-3
Statements of Income........................................................................... F-4 to F-5
Statements of Stockholders' Equity............................................................. F-6
Statements of Cash Flows....................................................................... F-7 to F-8
Notes to Financial Statements.................................................................. F-9 to F-40
55.
312 Walnut Street,
Cincinnati, Oh 45202
513 621-8300 Fax 513 621-
[BKD LLP LOGO]
8345
BKD.COM
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors
Rurban Financial Corp.
Defiance, Ohio
We have audited the accompanying consolidated balance sheets of Rurban Financial
Corp. as of December 31, 2003 and 2002, and the related consolidated statements
of income, stockholders' equity, and cash flows for the years ended December 31,
2003 and 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. The consolidated financial
statements of Rurban Financial Corp. as of and for the year ended December 31,
2001, were audited by other auditors whose opinion dated April 8, 2002 was
unqualified.
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. as of December 31, 2003 and 2002, and the results of its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ BKD, LLP
Cincinnati, Ohio
February 11, 2004
[MRI LOGO]
F-1.
RURBAN FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
2003 2002
-----------------------------------
ASSETS
Cash and due from banks $ 14,176,952 $ 37,018,337
Federal funds sold 10,000,000 14,000,000
---------------- ----------------
Cash and cash equivalents 24,176,952 51,018,337
---------------- ----------------
Interest-bearing deposits 260,000 260,000
Available-for-sale securities 107,698,595 115,108,762
Loans held for sale 218,753 63,536,309
Loans 284,104,311 487,474,626
Allowance for loan losses (10,181,135) (17,693,841)
---------------- ----------------
Net loans 273,923,176 469,780,785
---------------- ----------------
Premises and equipment 11,145,499 13,786,408
Premises and equipment held for sale -- 909,205
Federal Reserve and Federal Home Loan Bank stock 2,744,900 3,665,900
Foreclosed assets held for sale, net 1,390,552 1,960,276
Interest receivable 2,000,732 3,966,721
Deferred income taxes 2,304,264 5,148,523
Goodwill 2,144,304 2,323,643
Core deposits and other intangibles 644,987 770,777
Other 6,659,158 10,081,033
---------------- ----------------
Total assets $ 435,311,872 $ 742,316,679
================ ================
See Notes to Consolidated Financial Statements
F-2.
2003 2002
-----------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Demand $ 46,084,861 $ 46,114,153
Savings, NOW and money market 96,721,318 117,738,013
Time 174,668,570 404,007,515
---------------- ----------------
Total deposits 317,474,749 567,859,681
---------------- ----------------
Deposits held for sale -- 68,175,660
Securities sold under agreements to repurchase 3,923,754 --
Notes payable 10,327,599 6,000,000
Federal Home Loan Bank advances 39,000,000 47,850,000
Trust preferred securities 10,000,000 10,000,000
Interest payable 2,347,303 2,971,448
Other liabilities 3,855,711 3,077,558
---------------- ----------------
Total liabilities 386,929,116 705,934,347
---------------- ----------------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Common stock, $2.50 stated value; authorized 10,000,000 shares;
issued 4,575,702 shares; outstanding 2003 - 4,565,879 shares,
2002 - 4,565,721 shares 11,439,255 11,439,255
Additional paid-in capital 11,009,268 11,009,733
Retained earnings 26,209,444 13,904,212
Unearned employee stock ownership plan (ESOP) shares (163,493) (320,765)
Accumulated other comprehensive income 201,082 664,911
Treasury stock, at cost
Common; 2003 - 9,823 shares, 2002 - 9,981 shares (312,800) (315,014)
---------------- ----------------
Total stockholders' equity 48,382,756 36,382,332
---------------- ----------------
Total liabilities and stockholders' equity $ 435,311,872 $ 742,316,679
================ ================
See Notes to Consolidated Financial Statements
F-3.
RURBAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31
2003 2002 2001
------------------------------------------------------
INTEREST INCOME
Loans $ 24,394,714 $ 43,294,773 $ 50,482,611
Securities
Taxable 2,805,614 4,781,105 5,462,886
Tax-exempt 172,063 219,713 406,199
Other 401,459 295,053 167,133
---------------- ---------------- ----------------
Total interest income 27,773,850 48,590,644 56,518,829
---------------- ---------------- ----------------
INTEREST EXPENSE
Deposits 10,024,718 20,300,799 26,414,346
Notes payable 596,418 514,515 328,340
Federal Home Loan Bank advances 2,276,439 2,923,090 2,986,829
Trust preferred securities 1,074,722 1,074,577 1,048,109
---------------- ---------------- ----------------
Total interest expense 13,972,297 24,812,981 30,777,624
---------------- ---------------- ----------------
NET INTEREST INCOME 13,801,553 23,777,663 25,741,205
PROVISION FOR LOAN LOSSES 1,202,000 27,530,583 8,733,000
---------------- ---------------- ----------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 12,599,553 (3,752,920) 17,008,205
---------------- ---------------- ----------------
NONINTEREST INCOME
Data service fees 8,971,632 7,815,589 6,125,970
Trust fees 2,602,270 2,468,159 2,744,743
Customer service fees 2,179,036 2,617,708 2,592,704
Net gains on loan sales 415,851 758,663 889,462
Net realized gains (losses) on sales of
available-for-sale securities 23,632 (833,515) 489,641
Loan servicing fees 394,647 402,143 559,648
Gain on sale of branches 19,900,945 -- --
Other 199,343 550,521 759,445
---------------- ---------------- ----------------
Total noninterest income 34,687,356 13,779,268 14,161,613
---------------- ---------------- ----------------
See Notes to Consolidated Financial Statements
F-4.
2003 2002 2001
------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits $ 13,428,366 $ 15,719,892 $ 15,448,319
Net occupancy expense 1,183,569 1,349,537 1,210,915
Equipment expense 4,201,260 3,960,712 3,488,586
Data processing fees 435,700 492,534 473,196
Professional fees 4,171,758 3,129,592 1,712,161
Marketing expense 397,137 487,754 612,234
Printing and office supplies 472,193 755,814 705,583
Telephone and communications 716,227 792,168 681,450
Postage and delivery expense 540,339 625,173 590,570
State, local and other taxes 617,036 780,515 641,452
Other 2,514,750 2,385,029 2,453,828
---------------- ---------------- ----------------
Total noninterest expense 28,678,335 30,478,720 28,018,294
---------------- ---------------- ----------------
INCOME BEFORE INCOME TAX 18,608,574 (20,452,372) 3,151,524
PROVISION (CREDIT) FOR INCOME TAXES 6,303,342 (7,044,488) 898,566
---------------- ---------------- ----------------
NET INCOME (LOSS) $ 12,305,232 $ (13,407,884) $ 2,252,958
================ ================ ================
BASIC EARNINGS (LOSS) PER SHARE $ 2.71 $ (2.95) $ 0.50
================ ================ ================
DILUTED EARNINGS (LOSS) PER SHARE $ 2.70 $ (2.95) $ 0.50
================ ================ ================
See Notes to Consolidated Financial Statements
F-5.
RURBAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31
ACCUMULATED
ADDITIONAL UNEARNED OTHER
COMMON PAID-IN RETAINED ESOP COMPREHENSIVE TREASURY
STOCK CAPITAL EARNINGS SHARES INCOME (LOSS) STOCK TOTAL
----------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 2001 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 (3,049
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 (13,464,824)
------------
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
Comprehensive income
Net income 12,305,232 12,305,232
Change in unrealized gain (loss)
on securities available for
sale, net of reclassification
adjustment and tax effect (463,829) (463,829)
------------
Total comprehensive
income 11,841,403
------------
Stock options exercised (158
treasury shares) (465) 2,214 1,749
ESOP shares earned 157,272 157,272
---------- ----------- ------------ ---------- ------------ ----------- ------------
BALANCE, DECEMBER 31, 2003 11,439,255 $11,009,268 $ 26,209,444 $ (163,493) $ 201,082 $ (312,800) $ 48,382,756
========== =========== ============ ========== ============ =========== ============
See Notes to Consolidated Financial Statements
F-6.
RURBAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
2003 2002 2001
------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ 12,305,232 $ (13,407,884) $ 2,252,958
Items not requiring (providing) cash
Depreciation and amortization 2,310,122 2,277,322 1,942,325
Provision for loan losses 1,202,000 27,530,583 8,733,000
ESOP shares earned 157,272 191,381 209,296
Amortization of premiums and discounts on
securities 1,049,838 1,963,325 --
Amortization of intangible assets 125,790 138,284 120,661
Deferred income taxes 3,083,200 (1,334,489) (2,078,874)
Proceeds from sale of loans held for sale 39,124,752 37,748,464 31,467,939
Originations of loans held for sale (38,927,654) (36,549,810) (29,851,752)
Gain from sale of loans (415,851) (758,663) (889,462)
Gain on sale of branches (19,900,945) -- --
Loss on sale of foreclosed assets 248,951 -- --
Gain on sales of fixed assets (79,084) -- --
Net realized (gains) losses on
available-for-sale securities (23,632) 833,515 (489,641)
Changes in
Interest receivable 1,965,989 1,674,277 776,307
Other assets 3,218,909 (6,050,115) (70,265)
Interest payable and other liabilities 237,820 1,060,233 (3,679,000)
---------------- ---------------- ----------------
Net cash provided by operating
activities 5,682,709 15,316,423 8,443,492
---------------- ---------------- ----------------
INVESTING ACTIVITIES
Net change in interest-bearing deposits -- -- (150,000)
Purchases of available-for-sale securities (133,540,054) (134,355,439) (71,576,221)
Proceeds from maturities of
available-for-sale securities 121,586,538 53,890,402 38,131,013
Proceeds from the sales of
available-for-sale securities 17,634,708 81,916,528 19,060,258
Net change in loans 127,071,877 59,829,614 (30,347,839)
Purchase of premises and equipment (2,851,908) (6,910,438) (2,856,133)
Proceeds from sales of premises and equipment 1,561,574 -- --
Proceeds from sale of foreclosed assets 2,577,604 -- --
Purchase of Federal Home Loan and Federal
Reserve Bank stock (120,400) (433,000) --
Proceeds from sale of Federal Home Loan Bank
stock 1,041,400 -- --
Proceeds from assumption of net liabilities
in business acquisition -- 40,069,328 --
Payments for assumption of liabilities in
branch sales (74,680,022) -- --
---------------- ---------------- ----------------
Net cash provided by (used in)
investing activities 60,281,317 94,006,995 (47,738,922)
---------------- ---------------- ----------------
See Notes to Consolidated Financial Statements
F-7.
2003 2002 2001
------------------------------------------------------
FINANCING ACTIVITIES
Net increase (decrease) in demand deposits,
money market, NOW and savings accounts $ 33,380,843 $ (43,508,229) $ 19,808,390
Net increase (decrease) in certificates of 24,730,658
deposit (121,226,188) (23,096,882)
Net increase in securities sold under
agreements to repurchase 3,923,754 -- --
Net increase (decrease) in federal funds
purchased -- (14,850,000) 1,650,000
Proceeds from Federal Home Loan Bank advances 10,000,000 5,000,000 16,500,000
Repayment of Federal Home Loan Bank advances (18,850,000) (11,425,069) (14,388,845)
Proceeds from notes payable 10,097,881 6,000,000 --
Repayment of notes payable (10,133,450) -- --
Proceeds from stock options exercised 1,749 13,373 45,982
Purchase of treasury stock -- -- (45,400)
Dividends paid -- (1,780,317) (2,086,370)
Cash paid in lieu of fractional shares for
5% stock dividend -- -- (8,659)
---------------- ---------------- ----------------
Net cash provided by (used in)
financing activities (92,805,411) (83,647,124) 46,205,756
---------------- ---------------- ----------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (26,841,385) 25,676,294 6,910,326
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 51,018,337 25,342,043 18,431,717
---------------- ---------------- ----------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 24,176,952 $ 51,018,337 $ 25,342,043
================ ================ ================
SUPPLEMENTAL CASH FLOWS INFORMATION
Interest paid $ 14,596,442 $ 25,472,126 $ 31,760,174
Income taxes paid (net of refunds) $ (1,602,512) $ -- $ 5,250,000
Note payable in lieu of cash as
consideration in branch sale $ 4,363,168 $ -- $ --
Transfer of loans to foreclosed assets $ 2,256,831 $ -- $ --
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"), 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"). State Bank is primarily engaged in providing a full range of
banking and financial services to individual and corporate customers
in northern Ohio. State Bank is subject to competition from other
financial institutions. State Bank is subject to the regulation of
certain federal and state agencies and undergo periodic examinations
by those regulatory authorities. RFCBC was primarily engaged in
providing a full range of banking and financial services until the
completion of the branch sales in June 2003. RFCBC formally
relinquished its banking powers in September 2003. RFCBC now operates
as a loan subsidiary that continues to administer classified loans
that were not included in the sale of branches in 2003. RDSI provides
data processing services to financial institutions located in Ohio,
Michigan, Indiana, and Missouri. 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, State Bank, RFCBC, 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.
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
(Continued)
F-10.
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
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.
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
weighted-average periods ranging from one to seven years. Such assets
are periodically evaluated as to the recoverability of their carrying
value.
(Continued)
F-11.
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
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, 2003, 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.
2003 2002 2001
---------------- ---------------- ----------------
Net income (loss), as reported $ 12,305,232 $ (13,407,884) $ 2,252,958
Less: Total stock-based employee
compensation cost determined under
the fair value based method, net of
income taxes (63,108) (78,974) (148,908)
---------------- ---------------- ----------------
Pro forma net income $ 12,242,124 $ (13,486,858) $ 2,104,050
================ ================ ================
Earnings per share:
Basic - as reported $ 2.71 $ (2.95) $ 0.50
================ ================ ================
Basic - pro forma $ 2.69 $ (2.97) $ 0.46
================ ================ ================
Diluted - as reported $ 2.70 $ (2.95) $ 0.50
================ ================ ================
Diluted - pro forma $ 2.69 $ (2.97) $ 0.46
================ ================ ================
(Continued)
F-12.
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
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.
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, 2003, was $4,068,000.
(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, 2003:
U.S. Treasury and
government agencies $ 43,867,812 $ 63,023 $ (11,746) $ 43,919,089
Mortgage-backed
securities 59,237,791 339,412 (317,253) 59,259,950
State and political
subdivision 4,202,856 232,199 (965) 4,434,090
Equity securities 35,466 -- -- 35,466
Other securities 50,000 -- -- 50,000
-------------- -------------- --------------- --------------
$ 107,393,925 $ 634,634 $ (329,964) $ 107,698,595
============== ============== =============== ==============
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
============== ============== =============== ==============
The amortized cost and fair value of securities available for sale at
December 31, 2003, 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.
(Continued)
F-14.
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
AVAILABLE FOR SALE
AMORTIZED FAIR
COST VALUE
---------------- ----------------
Within one year $ 35,104,084 $ 35,142,311
One to five years 6,113,997 6,206,394
Five to ten years 6,567,595 6,709,601
After ten years 370,458 380,339
---------------- ----------------
48,156,134 48,438,645
Mortgage-backed securities 59,237,791 59,259,950
---------------- ----------------
Totals $ 107,393,925 $ 107,698,595
================ ================
The carrying value of securities pledged as collateral, to secure
public deposits and for other purposes, was $71,606,721 at December
31, 2003, and $91,330,997 at December 31, 2002.
Gross gains of $42,051, $1,117,251 and $666,458 and gross losses of
$18,419, $1,950,766 and $176,817 resulting from sales of
available-for-sale securities were realized for 2003, 2002 and 2001,
respectively. The tax expense for net security gains (losses) for
2003, 2002 and 2001 was $8,000, $(283,000), and $166,000,
respectively.
Certain investments in debt securities are reported in the financial
statements at an amount less than their historical cost. Total fair
value of these investments at December 31, 2003, was $38,728,336,
which is approximately 36% of the Company's available-for-sale
investment portfolio. These declines primarily resulted from recent
increases in market interest rates and failure of certain investments
to maintain consistent credit quality ratings.
Based on evaluation of available evidence, including recent changes in
market interest rates, credit rating information and information
obtained from regulatory filings, management believes the declines in
fair value for these securities are temporary.
Should the impairment of any of these securities become other than
temporary, the cost basis of the investment will be reduced and the
resulting loss recognized in net income in the period the
other-than-temporary impairment is identified.
(Continued)
F-15.
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
Securities with unrealized losses at December 31, 2003 are as follows:
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
-------------------------- ------------------------- ---------------------------
UNREALIZED UNREALIZED UNREALIZED
FAIR VALUE LOSSES FAIR VALUE LOSSES FAIR VALUE LOSSES
------------- ---------- ----------- ----------- ------------- -----------
AVAILABLE-FOR-SALE
SECURITIES:
U.S. Treasury
and government
agencies $ 3,370,349 $ (11,746) $ -- $ -- $ 3,370,349 $ (11,746)
Mortgage-backed
securities 33,512,674 (299,388) 1,726,820 (17,865) 35,239,494 (317,253)
State and
political
subdivisions 118,493 (965) -- -- 118,493 (965)
------------- ---------- ----------- ----------- ------------- -----------
$ 37,001,516 $ (312,099) $ 1,726,820 $ (17,865) $ 38,728,336 $ (329,964)
============= ========== =========== =========== ============= ===========
NOTE 4: LOANS AND ALLOWANCE FOR LOAN LOSSES
Categories of loans at December 31, include:
2003 2002
---------------- ----------------
Commercial $ 89,470,661 $ 123,053,492
Commercial real estate 62,339,628 129,718,943
Agricultural 36,721,822 68,953,865
Residential real estate 46,717,917 84,431,599
Consumer 37,309,999 60,138,463
Leasing 11,774,730 21,509,394
---------------- ----------------
Total loans 284,334,757 487,805,756
Less
Net deferred loan fees, premiums and discounts (230,446) (331,130)
Allowance for loan losses (10,181,135) (17,693,841)
---------------- ----------------
Net loans $ 273,923,176 $ 469,780,785
================ ================
(Continued)
F-16.
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
Activity in the allowance for loan losses was as follows:
2003 2002 2001
-------------- -------------- --------------
Balance, beginning of year $ 17,693,841 $ 9,238,936 $ 7,214,970
Amounts assumed in acquisition -- 1,427,000 --
Provision charged to expense 1,202,000 27,530,583 8,733,000
Recoveries 3,139,534 1,270,773 463,923
Losses charged off (11,854,240) (21,773,451) (7,172,957)
-------------- -------------- --------------
Balance, end of year $ 10,181,135 $ 17,693,841 9,238,936
============== ============== ==============
Individual loans determined to be impaired were as follows:
2003 2002 2001
--------------- --------------- ---------------
Year-end impaired loans with no allowance
for loan losses allocated $ 153,000 $ 1,186,000 $ 1,937,000
Year-end loans with allowance for loan
losses allocated 19,685,000 13,736,000 9,134,000
--------------- --------------- ---------------
Total impaired loans $ 19,838,000 $ 14,922,000 $ 11,071,000
=============== =============== ===============
Amount of allowance allocated $ 5,651,000 $ 5,067,000 $ 3,647,000
Average of impaired loans during the year $ 18,633,000 $ 17,340,000 $ 7,999,000
Interest income recognized during
impairment $ 1,186,762 $ 718,626 $ 421,000
Cash-basis interest income recognized $ 1,076,397 $ 693,390 $ 412,000
At December 31, 2003 and 2002, accruing loans delinquent 90 days or
more totaled $0 and $476,000, respectively. Non-accruing loans at
December 31, 2003 and 2002 were $18,352,000 and $18,259,000,
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. 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. When this transaction was closed in
March 2003, assets purchased and liabilities assumed included loans of
approximately $57,200,000, fixed assets (net of accumulated
depreciation) of approximately $869,000, and deposits of approximately
$70,800,000. A net gain of $7,776,166 was recorded on this
transaction.
(Continued)
F-17.
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
On June 6, 2003 additional branches of RFCBC which comprise the
Peoples Banking Company and First Bank of Ottawa divisions were sold.
Assets purchased and liabilities assumed included loans of
approximately $76,600,000, fixed assets (net of accumulated
depreciation) of approximately $1,400,000 and deposits of
approximately $166,200,000. A net gain of $12,124,779 was recorded on
this transaction.
The Company does not maintain a separate statement of operations for
each division.
NOTE 6: PREMISES AND EQUIPMENT
Major classifications of premises and equipment including those held
for sale, stated at cost, were as follows:
2003 2002
---------------- ----------------
Land $ 695,625 $ 1,021,212
Buildings and improvements 5,259,930 8,252,239
Equipment 14,163,795 14,955,945
---------------- ----------------
20,119,350 24,229,396
Less accumulated depreciation (8,973,851) (9,533,783)
--------------- ----------------
Net premises and equipment $ 11,145,499 $ 14,695,613
================ ================
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, 2003 and 2002, were:
2003 2002 2001
---------------- ---------------- ----------------
Balance as of January 1 $ 2,323,643 $ 179,339 $ 276,731
Goodwill acquired during the year -- 2,144,304 --
Write down due to branch sales (179,339) -- --
Amortization -- -- (97,392)
---------------- ---------------- ----------------
Balance as of December 31 $ 2,144,304 $ 2,323,643 $ 179,339
================ ================ ================
All goodwill is allocated to the banking segment of the business.
(Continued)
F-18.
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTE 8: OTHER INTANGIBLE ASSETS
The carrying basis and accumulated amortization of recognized
intangible assets at December 31, 2003 and 2002, were:
2003 2002
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
---------------- ---------------- ---------------- ----------------
Core deposits $ 708,435 $ (226,224) $ 708,435 $ (119,042)
Other 200,627 (37,851) 200,627 (19,243)
---------------- ---------------- ---------------- ----------------
$ 909,062 $ (264,075) $ 909,062 $ (138,285)
=============== =============== =============== ===============
Amortization expense for the years ended December 31, 2003 and 2002,
was $125,790 and $138,285, respectively. Estimated amortization
expense for each of the following five years is:
2004 $100,397
2005 83,530
2006 69,728
2007 58,535
2008 49,246
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 $22,573,306 and
$32,057,079 at December 31, 2003 and 2002, respectively.
The aggregate fair value of capitalized mortgage servicing rights at
December 31, 2003 and 2002 totaled $150,653 and $207,790,
respectively. Comparable market values and a valuation model that
calculates the present value of future cash flows were used to
estimate fair value. For purposes of measuring impairment, risk
characteristics including product type, investor type, and interest
rates, were used to stratify the originated mortgage servicing rights.
2003 2002
---------------- ----------------
Mortgage servicing rights
Balance, beginning of year $ 207,790 $ 385,927
Servicing rights capitalized -- --
Amortization of servicing rights (57,137) (178,137)
---------------- ----------------
Balance, end of year $ 150,653 $ 207,790
================ ================
(Continued)
F-19.
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTE 10: INTEREST-BEARING DEPOSITS
Interest-bearing deposits in denominations of $100,000 or more were
$54,858,000 on December 31, 2003, and $172,055,000 on December 31,
2002. Certificates of deposit obtained from brokers totaled
approximately $21,892,000 and $93,045,000 at December 31, 2003 and
2002, respectively.
At December 31, 2003, the scheduled maturities of time deposits were
as follows:
2004 $ 122,908,519
2005 27,539,964
2006 15,330,979
2007 6,308,311
2008 2,140,622
Thereafter 440,175
----------------
$ 174,668,570
================
At December 31, 2002, RFCBC had approximately $40 million in
certificates of deposit which had been accepted from brokers. On June
6, 2003, $32.3 million was sold in the branch sales. Of the $21.9
million in brokered deposits held at State Bank at December 31, 2003,
$12.2 million mature within the next year.
NOTE 11: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase consist of obligations
of the Company to other parties and are used by the Company to
facilitate cash management transactions with commercial customers. The
obligations are secured by agency securities and such collateral is
held by The Federal Home Loan Bank. The maximum amount of outstanding
agreements at any month end during 2003 totaled $5,765,000 and the
monthly average of such agreements totaled $1,215,000. The agreements
at December 31, 2003, mature within one month. The Company had no
agreements during 2002.
(Continued)
F-20.
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTE 12: NOTES PAYABLE
Notes payable at December 31, include:
2003 2002
----------- ----------
Note payable in the amount of $9,000,000, secured by the common stock
of RDSI and substantially all assets of RFCBC, principal payments
of $300,000 quarterly together with interest at prime plus 2.5%
(6.5% at December 31, 2003), maturing June 6, 2006 $ 5,900,000 $ --
Revolving Credit Note payable in the amount of $2,000,000,
secured by the common stock of RDSI and substantially all
assets of RFCBC, interest at prime plus 2.5%, maturing
June 6, 2004 -- --
Note payable in the amount of $4,363,168, secured by certain
identified loans held by RFCBC, monthly principal payments equal
to the greater of $100,000 or all payments received by RFCBC on
collateralized loans, with interest at the lesser of prime plus
0.5% (4.5% at December 31, 2003) or 9%, maturing June 6, 2006 3,657,775 --
Note payable in the amount of $870,480, secured by
equipment, monthly payments of $13,416, interest at
7.65%, maturing June 9, 2009 389,673 --
Note payable in the amount of $542,113, secured by
equipment, monthly payments of $10,902, interest at
7.65%, maturing June 10, 2007 380,151 --
Note payable, secured by stock in the Company's
subsidiaries, monthly payments of $166,667 together with
interest at a variable rate (paid in 2003) -- 6,000,000
----------- ----------
$10,327,599 $6,000,000
=========== ==========
(Continued)
F-21.
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
Aggregate annual maturities of notes payable at December 31, 2003,
are:
DEBT
-------------
2004 $ 2,644,796
2005 2,660,661
2006 4,985,877
2007 36,265
-------------
$ 10,327,599
=============
NOTE 13: FEDERAL HOME LOAN BANK ADVANCES
The Federal Home Loan Bank advances were secured by mortgage loans and
investment securities totaling $63,368,569 at December 31, 2003.
Advances, at interest rates from 1.09 to 6.52 percent are subject to
restrictions or penalties in the event of prepayment.
Aggregate annual maturities of Federal Home Loan Bank advances at
December 31, 2003, are:
DEBT
----------------
2004 $ 10,000,000
2005 --
2006 --
2007 --
2008 5,000,000
Thereafter 24,000,000
----------------
$ 39,000,000
================
NOTE 14: 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, 2003 and 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
(Continued)
F-22.
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
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.
The Company elected to defer the semi-annual distributions which would
have been due on March 7, 2003, September 7, 2003, and March 7, 2004.
NOTE 15: INCOME TAXES
The provision (credit) for income taxes includes these components:
2003 2002 2001
---------------- ---------------- ----------------
Taxes currently payable $ 3,220,142 $ (5,709,999) $ 2,977,440
Deferred income taxes 3,083,200 (1,334,489) (2,078,874)
---------------- ---------------- ----------------
Income tax expense (credit) $ 6,303,342 $ (7,044,488) $ 898,566
================ ================ ================
A reconciliation of income tax expense at the statutory rate to the
Company's actual income tax expense is shown below:
2003 2002 2001
---------------- ---------------- ----------------
Computed at the statutory rate (34%) $ 6,326,915 $ (6,953,806) $ 1,071,518
Increase (decrease) resulting from
Tax exempt interest (78,962) (115,581) (162,859)
Nondeductible expenses 55,389 24,899 (10,093)
---------------- ---------------- ----------------
Actual tax expense (credit) $ 6,303,342 $ (7,044,488) $ 898,566
================ ================ ================
(Continued)
F-23.
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
The tax effects of temporary differences related to deferred taxes
shown on the balance sheets are:
2003 2002
---------------- ----------------
Deferred tax assets
Allowance for loan losses $ 3,461,586 $ 5,692,566
Mark to market adjustment 103,588 342,530
Accrued compensation and benefits 310,808 284,979
Net deferred loan fees 78,352 112,584
Other 3,732 52,709
---------------- ----------------
3,958,066 6,485,368
---------------- ----------------
Deferred tax liabilities
Depreciation (1,210,450) (831,950)
Mortgage servicing rights (51,222) (70,649)
Purchase accounting adjustments (193,001) (43,742)
Other (95,541) (47,974)
Unrealized gains on available-for-sale securities (103,588) (342,530)
---------------- ----------------
(1,653,802) (1,336,845)
---------------- ----------------
Net deferred tax asset $ 2,304,264 $ 5,148,523
================ ================
NOTE 16: OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) components and related taxes are as
follows:
2003 2002 2001
---------------- ---------------- ----------------
Unrealized gains (losses) on securities
available for sale $ (679,139) $ (919,788) $ 1,085,643
Reclassification for realized amount
included in income (23,632) 833,515 (489,641)
---------------- ---------------- ----------------
Other comprehensive income (loss),
before tax effect (702,771) (86,273) 596,002
Tax expense (benefit) (238,942) (29,333) 202,641
---------------- ---------------- ----------------
Other comprehensive income (loss) $ (463,829) $ (56,940) $ 393,361
================ ================ ================
NOTE 17: REGULATORY MATTERS
The Company and the subsidiary bank 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
(Continued)
F-24.
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and the subsidiary
bank 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 bank 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, 2003, that the
Company and the subsidiary bank meet all capital adequacy requirements
to which they are subject.
As of December 31, 2003, the most recent notification to the
regulators categorized the State Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized
as well capitalized, the Bank 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 Bank's
category.
The Company and significant subsidiary bank's actual capital amounts
(in millions) and ratios are also presented in the following table.
During 2003, RFCBC's banking powers were relinquished.
(Continued)
F-25.
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
TO BE WELL CAPITALIZED
FOR CAPITAL ADEQUACY UNDER PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
As of December 31, 2003
Total Capital
(to Risk-Weighted Assets)
Consolidated $ 59.2 19.7% $ 24.1 8.0% $ -- N/A
State Bank 37.5 13.7 21.9 8.0 27.3 10.0%
Tier I Capital
(to Risk-Weighted Assets)
Consolidated 55.4 18.4 12.0 4.0 -- N/A
State Bank 34.1 12.5 10.9 4.0 16.4 6.0
Tier I Capital
(to Average Assets)
Consolidated 55.4 12.8 17.4 4.0 -- N/A
State Bank 34.1 8.4 16.3 4.0 20.4 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 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
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.
As of December 2003, Management believes Rurban and State Bank were in
full compliance with the terms of the Agreement. The Agreement will
continue in place until removed by the Regulators and Management makes
no projection of that occurrence.
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.
(Continued)
F-26.
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTE 18: 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, 2003 and 2002:
2003 2002
---------------- ----------------
Balance, January 1 $ 7,535,000 $ 7,614,000
New loans 4,781,000 1,777,000
Repayments (7,889,000) (1,595,000)
Other changes (2,362,000) (261,000)
---------------- ----------------
Balance, December 31 $ 2,065,000 $ 7,535,000
================ ================
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, 2003
and 2002 totaled $1,185,000 and $3,213,000, respectively.
NOTE 19: 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 2003, 2002 and 2001 were
$258,000, $285,000 and $297,000, 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 $145,000, $164,000 and $192,000 for 2003, 2002 and 2001
respectively. In 2003 and 2002, previously accrued benefits under the
agreements in the amount of $33,000 and $489,000, respectively, 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.
(Continued)
F-27.
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
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 $2,826,745 less policy loans of
$1,014,523 at December 31, 2003 and $2,731,911 less policy loans of
$1,014,523 at December 31, 2002, 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.
ESOP expense for the years ended December 31, 2003, 2002 and 2001 was
$440,000, $503,000 and $886,000.
2003 2002
---------------------
Allocated shares 664,086 716,289
Unearned shares 16,308 24,811
-------- --------
Total ESOP shares 680,394 741,100
======== ========
Fair value of unearned shares at December 31 $225,866 $230,246
======== ========
(Continued)
F-28.
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTE 20: 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
522,921 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, 2003, 2002 and
2001, and changes during the years then ended is presented below:
2003 2002 2001
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------------------------------------------------------------------------
Outstanding, beginning of year 241,289 $ 13.02 326,732 $ 12.96 332,797 $ 13.00
Granted -- 3,500 10.51 8,313 13.62
Exercised (158) 11.07 (1,208) 11.07 (3,580) 13.11
Forfeited (57,547) 12.89 (87,735) 12.85 (10,798) 14.12
--------- --------- ---------
Outstanding, end of year 183,584 13.07 241,289 13.02 326,732 12.96
========= ========= =========
Options exercisable, end of
year 168,901 13.17 186,113 13.29 184,581 13.31
========= ========= =========
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
------------------------
Dividend yields 3.41% 3.77%
Volatility factors of expected market price of common stock 15.00% 10.84%
Risk-free interest rates 1.50% 4.78%
Expected life of options 10 years 8 years
Weighted-average fair value of options granted during the year $ 0.92 $ 1.69
(Continued)
F-29.
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
The following table summarizes information about stock options under
the plan outstanding at December 31, 2003:
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 45,744 7.04 years $ 11.04 35,995 $ 11.06
$12.87 to $14.00 108,061 4.28 years $ 12.91 103,428 $ 12.88
$15.20 to $16.78 29,778 5.05 years $ 16.75 29,478 $ 16.77
NOTE 21: EARNINGS PER SHARE
Earnings per share (EPS) are computed as follows:
YEAR ENDED DECEMBER 31, 2003
WEIGHTED-
AVERAGE PER SHARE
INCOME SHARES AMOUNT
---------------------------------------
Basic earnings per share
Net loss available to common
stockholders $12,305,232 4,545,320 $ 2.71
===========
Effect of dilutive securities
Stock options -- 6,829
----------- -----------
Diluted earnings per share
Income available to common stockholders
and assumed conversions $12,305,232 4,552,149 $ 2.70
=========== =========== ===========
Options to purchase 29,778 shares of common stock at $15.20 to $16.78
per share were outstanding at December 31, 2003, 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.
(Continued)
F-30.
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
YEAR ENDED DECEMBER 31, 2002
WEIGHTED-
AVERAGE PER SHARE
INCOME SHARES 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 PER SHARE
INCOME SHARES 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
========== ========== ==========
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.
(Continued)
F-31.
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTE 22: 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.
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.
(Continued)
F-32.
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTE 23: 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.
DECEMBER 31, 2003 DECEMBER 31, 2002
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------------------------------------------------------
Financial assets
Cash and cash equivalents $ 24,176,952 $ 24,177,000 $ 51,018,337 $ 51,018,000
Interest-bearing deposits 260,000 260,000 260,000 260,000
Available-for-sale securities 107,698,595 107,699,000 115,108,762 115,109,000
Loans including loans held for
sale, net 274,141,929 276,010,000 533,317,094 540,143,000
Stock in FRB and FHLB 2,744,900 2,745,000 3,665,900 3,666,000
Cash surrender value of life
insurance 1,815,070 1,815,000 1,017,573 1,018,000
Interest receivable 2,000,732 2,001,000 3,966,721 3,967,000
Financial liabilities
Deposits including deposits held
for sale $317,474,749 $318,351,000 $636,035,341 $641,643,000
Securities sold under agreements
to repurchase 3,923,754 3,924,000 -- --
Note payable 10,327,599 10,328,000 6,000,000 6,000,000
FHLB advances 39,000,000 43,077,000 47,850,000 52,474,000
Trust preferred securities 10,000,000 11,285,000 10,000,000 11,444,000
Interest payable 2,347,303 2,347,000 2,971,448 2,971,448
For purposes of the above disclosures of estimated fair value, the
following assumptions were used as of December 31, 2003 and 2002. 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, 2003 and 2002
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, 2003 and 2002, applied for the time
period until maturity. The fair value of commitments is estimated using
the fees currently charged to enter into similar
(Continued)
F-33.
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
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, 2003 and 2002 and are not
considered significant to this presentation.
NOTE 24: 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
13% and 11% of the portfolio as of December 31, 2003 and 2002,
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.
2003 2002
----------- -----------
Loan commitments and unused lines of credit $53,431,000 $97,937,000
Standby letters of credit -- 1,349,000
Commercial letters of credit 436,000 11,000
----------- -----------
$53,867,000 $99,297,000
=========== ===========
The Bank had federal funds sold to LaSalle Bank, N.A. in the amount of
$10,000,000 at December 31, 2003 and $9,000,000 at December 31, 2002.
From time to time certain due from bank accounts are in excess of
federally insured limits.
(Continued)
F-34.
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 25: 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
2003 2002
----------- -----------
ASSETS
Cash and cash equivalents $ 699,797 $ 155,892
Investment in common stock of banking subsidiaries 54,555,584 47,961,076
Investment in nonbanking subsidiaries 4,880,073 4,514,071
Other assets 440,783 661,661
----------- -----------
Total assets $60,576,237 $53,292,700
=========== ===========
LIABILITIES
Trust preferred securities $10,000,000 $10,000,000
Notes payable -- 6,000,000
Borrowings from nonbanking subsidiaries 310,000 310,000
Other liabilities 1,883,481 600,368
----------- -----------
Total liabilities 12,193,481 16,910,368
STOCKHOLDERS' EQUITY 48,382,756 36,382,332
----------- -----------
Total liabilities and stockholders' equity $60,576,237 $53,292,700
=========== ===========
(Continued)
F-35.
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF INCOME
2003 2002 2001
------------ ------------ ------------
INCOME
Interest income $ 2,014 $ 114,566 $ 187,179
Dividends from subsidiaries
Banking subsidiaries 5,169,456 -- 3,090,000
Nonbanking subsidiaries 1,150,000 1,825,000 300,000
------------ ------------ ------------
Total 6,319,456 1,825,000 3,390,000
Other income 2,496,981 5,356,332 3,775,452
------------ ------------ ------------
Total income 8,818,451 7,295,898 7,352,631
------------ ------------ ------------
EXPENSES
Interest expense 1,263,741 1,292,416 1,150,382
Other expenses 3,176,605 7,381,220 5,753,396
------------ ------------ ------------
Total expenses 4,440,346 8,673,636 6,903,778
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAX AND
EQUITY IN UNDISTRIBUTED INCOME OF
SUBSIDIARIES 4,378,105 (1,377,738) 448,853
INCOME TAX EXPENSE (BENEFIT) (660,060) (1,088,931) 999,990
------------ ------------ ------------
INCOME (LOSS) BEFORE EQUITY IN
UNDISTRIBUTED INCOME OF SUBSIDIARIES 5,038,165 (288,807) 1,448,843
EQUITY IN UNDISTRIBUTED (EXCESS
DISTRIBUTED) INCOME OF SUBSIDIARIES
Banking subsidiaries 6,901,065 (12,827,147) (227)
Nonbanking subsidiaries 366,002 (291,930) 804,342
------------ ------------ ------------
Total 7,267,067 (13,119,077) 804,115
------------ ------------ ------------
NET INCOME (LOSS) $ 12,305,232 $(13,407,884) $ 2,252,958
============ ============ ============
(Continued)
F-36.
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CASH FLOWS
2003 2002 2001
------------ ------------ ------------
OPERATING ACTIVITIES
Net income $ 12,305,232 $(13,407,884) $ 2,252,958
Items not requiring (providing) cash
Equity in (undistributed) excess
distributed net income of
subsidiaries (7,267,067) 13,119,077 (804,115)
Other assets 220,878 613,504 299,526
Other liabilities 1,283,113 (3,310,134) 1,292,688
------------ ------------ ------------
Net cash provided by (used in)
operating activities 6,542,156 (2,985,437) 3,041,057
------------ ------------ ------------
INVESTING ACTIVITIES
Investment in banking subsidiaries -- (7,500,000) (8,150,000)
Repayment of note payable (6,000,000) -- --
Proceeds from note payable -- 6,000,000 --
Proceeds from loans to banking
subsidiaries -- -- (600,000)
Repayment of loans to banking
subsidiaries -- 600,000 7,600,000
------------ ------------ ------------
Net cash provided by (used in)
investing activities (6,000,000) (900,000) (1,150,000)
------------ ------------ ------------
FINANCING ACTIVITIES
Cash dividends paid -- (1,186,930) (2,086,370)
Proceeds from exercise of stock options 1,749 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)
------------ ------------ ------------
Net cash provided by (used in)
financing activities 1,749 (1,173,557) (2,094,447)
------------ ------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 543,905 (5,058,994) (203,390)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR 155,892 5,214,886 5,418,276
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 699,797 $ 155,892 $ 5,214,886
============ ============ ============
(Continued)
F-37.
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTE 26: 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.
DATA TOTAL INTERSEGMENT CONSOLIDATED
2003 BANKING PROCESSING OTHER SEGMENTS ELIMINATION TOTALS
------------------------------------------------------------------------------------------
INCOME STATEMENT
INFORMATION:
Net interest income
(expense) $ 15,293,092 $ (286,906) $ (1,204,633) $ 13,801,553 $ -- $ 13,801,553
Other
revenue-external
customers 23,047,951 8,971,632 2,667,773 34,687,356 -- 34,687,356
Other revenue-other
segments -- 1,580,426 3,249,904 4,830,330 (4,830,330) --
----------- ------------ ------------ ------------ ------------ ------------
Net interest income
and other revenue 38,341,043 10,265,152 4,713,044 53,319,239 (4,830,330) 48,488,909
Noninterest expense 20,308,343 7,986,031 5,214,291 33,508,665 (4,830,330) 28,678,335
Significant noncash
items:
Depreciation and
amortization 585,735 1,592,380 132,007 2,310,122 -- 2,310,122
Provision for loan
losses 1,202,000 -- -- 1,202,000 -- 1,202,000
Income tax expense 5,968,819 774,902 (440,379) 6,303,342 -- 6,303,342
Segment profit 11,655,187 1,504,220 (854,175) 12,305,232 -- 12,305,232
BALANCE SHEET
INFORMATION:
Total assets 435,203,288 8,434,735 3,577,550 447,215,573 (11,903,701) 435,311,872
Goodwill and
intangibles 2,789,291 -- -- 2,789,291 -- 2,789,291
Premises and
equipment
expenditures 529,051 2,252,992 69,865 2,851,908 -- 2,851,908
(Continued)
F-38.
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
DATA TOTAL INTERSEGMENT CONSOLIDATED
2002 BANKING PROCESSING OTHER SEGMENTS ELIMINATION TOTALS
-------------------------------------------------------------------------------------------------
INCOME STATEMENT
INFORMATION:
Net interest income
(expense) $ 25,035,177 $ (150,430) $ (1,107,084) $ 23,777,663 $ -- $ 23,777,663
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 28,397,412 9,455,540 6,933,563 44,786,515 (7,229,584) 37,556,931
Noninterest expense 20,583,831 7,163,698 9,960,774 37,708,303 (7,229,584) 30,478,719
Significant noncash
items:
Depreciation and
amortization 1,009,168 1,211,934 194,504 2,415,606 -- 2,415,606
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 2,705,525 3,964,064 240,849 6,910,438 -- 6,910,438
DATA TOTAL INTERSEGMENT CONSOLIDATED
2001 BANKING PROCESSING OTHER SEGMENTS ELIMINATION 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
(Continued)
F-39.
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTE 27: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following tables summarize selected quarterly results of operations
for 2003 and 2002.
DECEMBER 31, 2003 MARCH JUNE SEPTEMBER DECEMBER
----- ---- --------- --------
Interest income $ 9,742,449 $ 7,224,646 $ 5,483,277 $ 5,323,478
Interest expense 4,852,066 3,904,814 2,778,633 2,436,785
Net interest income 4,890,383 3,319,832 2,704,644 2,886,693
Provision for loan losses 962,000 300,000 -- (60,000)
Noninterest income 11,763,405 15,671,394 3,583,966 3,668,591
Noninterest expense 7,669,485 8,853,374 6,011,061 6,144,415
Income tax expense 2,722,672 3,358,451 77,754 144,464
Net income 5,299,631 6,479,401 199,795 326,405
Earnings per share
Basic 1.17 1.42 .04 .07
Diluted 1.17 1.42 .04 .07
Dividends per share -- -- -- --
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 (3,956,676) 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 -- --
Noninterest income increased during the first and second quarters of
2003 as a result of the branch sales.
During the second and fourth quarters 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-40.
RURBAN FINANCIAL CORP.
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 2003
INDEX TO EXHIBITS
Exhibit No. Description Location.
- ----------- ----------- ---------
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 Articles of Rurban Incorporated herein by reference to Registrant's Annual
Financial Corp. 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 Articles of Rurban Incorporated herein by reference to Registrant's Annual
Financial Corp. 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 Financial Corp. 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 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 Financial Corp. 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(a)].
10(b) First Amendment to Employees' Stock Ownership Plan of Rurban Incorporated herein by reference to Registrant's Annual
Financial Corp., dated June 14, 1993 and made to be effective Report on Form 10-K for the fiscal year ended December
as of January 1, 1993 31, 1993 (File No. 0-13507) [Exhibit 10(b)].
96.
Exhibit No. Description Location.
- ----------- ----------- ---------
10(c) Second Amendment to Employees' Stock Ownership Plan of Rurban Incorporated herein by reference to Registrant's Annual
Financial Corp., dated March 14, 1994 and made to be Report on Form 10-K for the fiscal year ended December
effective as of January 1, 1993 31, 1993 (File No. 0-13507) [Exhibit 10(c)].
10(d) Third Amendment to Employees' Stock Ownership Plan of Rurban Incorporated herein by reference to Registrant's Annual
Financial Corp., dated March 13, 1995 Report on Form 10-K for the fiscal year ended December
31, 1994 (File No. 0-13507) [Exhibit 10(d)].
10(e) Fourth Amendment to Employees' Stock Ownership Plan of Incorporated herein by reference to Registrant's Annual
Rurban Financial Corp., dated June 10, 1995 and made to be Report on Form 10-K for the fiscal year ended December
effective as of January 1, 1995 31, 1995 (File No. 0-13507) [Exhibit 10(e)].
10(f) The Rurban Financial Corp. Savings Plan and Trust Incorporated herein by reference to Registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1990 (File No. 0-13507) [Exhibit 10(g)].
10(g) First Amendment to The Rurban Financial Corp. Savings Plan Incorporated herein by reference to Registrant's Annual
and Trust, dated December 10, 1990 and effective January 1, Report on Form 10-K for the fiscal year ended December
1990 31, 1990 (File No. 0-13507) [Exhibit 10(g)].
10(h) Second Amendment to The Rurban Financial Corp. Savings Plan Incorporated herein by reference to Registrant's Annual
and Trust, dated March 11, 1991, effective February 1, 1991 Report on Form 10-K for the fiscal year ended December
31, 1992 (File No. 0-13507) [Exhibit 10(d)].
10(i) Third Amendment to The Rurban Financial Corp. Savings Plan Incorporated herein by reference to Registrant's Annual
and Trust, dated June 11, 1991 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. Savings Plan Incorporated herein by reference to Registrant's Annual
and Trust, dated July 14, 1992, effective May 1, 1992 Report on Form 10-K for the fiscal year ended December
31, 1992 (File No. 0-13507) [Exhibit 10(f)].
97.
Exhibit No. Description Location.
- ----------- ----------- ---------
10(k) Fifth Amendment to The Rurban Financial Corp. Savings Plan Incorporated herein by reference to Registrant's Annual
and Trust, dated March 14, 1994 Report on Form 10-K for the fiscal year ended December
31, 1993 (File No. 0-13507) [Exhibit 10(i)].
10(l) Sixth Amendment to The Rurban Financial Corp. Savings Plan Incorporated herein by reference to Registrant's Annual
and Trust dated May 1, 1995 Report on Form 10-K for the fiscal year ended December
31, 1995 (File No. 0-13507) [Exhibit 10(l)].
10(m) Summary of Incentive Compensation Plan of State Bank 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(j)].
10(n) Summary of Bonus Program adopted by the Trust Department of Incorporated herein by reference to Registrant's Annual
State Bank for the benefit of Robert W. Constien in his Report on Form 10-K for the fiscal year ended December
capacity as Manager of the Trust Department 31, 1991 (File No. 0-13507) [Exhibit 10(e)].
10(o) Summary of Bonus Program for the Trust Department of State Incorporated herein by reference to Registrant's Annual
Bank 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, dated December 15, Incorporated herein by reference to Registrant's Annual
1994, between Rurban Financial Corp. and Richard C. Burrows Report on Form 10-K for the fiscal year ended December
31, 1994 (File No. 0-13507) [Exhibit 10(p)].
98.
Exhibit No. Description Location.
- ----------- ----------- ---------
10(s) Executive Salary Continuation Agreement, dated December 3, Incorporated herein by reference to the Company's
2001, between Rurban Financial Corp. and Kenneth A. Joyce; Annual Report on Form 10-K for the fiscal year ended
and Amended Schedule A to Exhibit 10(s) identifying other December 31, 2002 (File No. 0-13507) [Exhibit 10(s)].
identical Executive Salary Continuation Agreements between
executive officers of Rurban Financial Corp. and Rurban
Financial Corp.
10(t) Split-Dollar Dollar Insurance Agreement, dated April 3, Incorporated herein by reference to the Company's
1992, between Robert Constein and Rurban Financial Corp. Annual Report on Form 10-K for the fiscal year ended
December 31, 2002 (File No. 0-13507) [Exhibit 10(t)].
10(u) Rurban Financial Corp. Stock Option Plan Incorporated herein by reference to the Company'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 to Elect to Incorporated herein by reference to the Company's
Defer Compensation 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 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 of Rurban Incorporated herein by reference to Registrant's Annual
Financial Corp. Report on Form 10-K for the fiscal year ended December
31, 1999 (File No. 0-13507) [Exhibit 10(y)].
99.
Exhibit No. Description Location.
- ----------- ----------- ---------
10(z) Rurban Financial Corp. Employee Stock Purchase Plan Incorporated herein by reference to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 2002 (File No. 0-13507) [Exhibit 10(z)].
10(aa) Change in Control Agreement, dated March 14, 2001, between Included in this Annual Report on Form 10-K as Exhibit
Rurban Financial Corp. and Kenneth A. Joyce; and Schedule A to 10(aa).
Exhibit 10(aa) identifying other substantially identical
agreements between Rurban Financial Corp. and certain
executive officers of Rurban Financial Corp.
10(bb) Supplemental Severance Agreement, dated June 25, 2002, between Included in this Annual Report on Form 10-K as Exhibit
Rurban Financial Corp. and Robert W. Constien; and Schedule A 10(bb).
to Exhibit 10(bb) identifying other substantially identical
agreements between Rurban Financial Corp. and certain
executive officers of Rurban Financial Corp.
11 Statement re: Computation of Per Share Earnings Included in Note 1 of the Notes to 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.
23.1 Consent of BKD, LLP Included in this Annual Report on Form 10-K as Exhibit
23.1
23.2 Consent of Crowe, Chizek and Company LLC Included in this Annual Report on Form 10-K as Exhibit
23.2
31.1 Rule 13a-14(a)/15d-14(a) Certification - Principal Included in this Annual Report on Form 10-K as Exhibit
Executive Officer 31.1.
31.2 Rule 13a-14(a)/15d-14(a) Certification - Principal Included in this Annual Report on Form 10-K as Exhibit
Financial Officer 31.2.
32.1 Section 1350 Certification - Principal Executive Officer and Included in this Annual Report on Form 10-K as Exhibit
Principal Financial Officer 32.1.
99(a) Report of Independent Auditors for 2001 Included in this Annual Report on Form 10-K as Exhibit
99(a).
100.
Exhibit No. Description Location.
- ----------- ----------- ---------
99(b) Report of Written Agreement Incorporated herein by reference to the Company's Form
8-K filed July 11, 2002 (File No. 0-13507) [Exhibit
99(b)].
101.