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Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________to___________________________
Commission file number 0-13507
RURBAN FINANCIAL CORP.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-1395608
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
401 Clinton Street, Defiance, Ohio 43512
----------------------------------------
(Address of principal executive offices)
(Zip Code)
(419) 783-8950
--------------------------------------------------------
(Registrant's telephone number, including area code)
None
---------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the proceeding 12 months (or for such shorter period the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
Yes [ ] No [X]
The number of common shares of Rurban Financial Corp. outstanding was
4,559,148 on May 1, 2004.
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The interim condensed consolidated financial statements of Rurban Financial
Corp. ("Rurban" or the "Company") and subsidiaries are unaudited; however, the
information contained herein reflects all adjustments which are, in the opinion
of management, necessary for a fair presentation of financial condition and
results of operations for the interim periods presented. All adjustments
reflected in these financial statements are of a normal recurring nature in
accordance with Rule 10-01(b)(8) of Regulation S-X. Results of operations for
the three months ended March 31, 2004 are not necessarily indicative of results
for the complete year.
2
RURBAN FINANCIAL CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MARCH 31, 2004, DECEMBER 31, 2003 AND MARCH 31, 2003
ASSETS
(UNAUDITED) (UNAUDITED)
--------------------------------------------------
MARCH 31, DECEMBER 31, MARCH 31,
2004 2003 2003
--------------------------------------------------
Cash and due from banks $ 10,819,543 $ 14,176,952 $ 21,589,334
Federal funds sold 14,700,000 10,000,000 59,350,000
-------------- -------------- --------------
Cash and cash equivalents 25,519,543 24,176,952 80,939,334
Interest-bearing deposits 250,000 260,000 310,000
Available-for-sale securities 97,885,459 107,698,595 99,097,514
Loans held for sale 231,758 218,753 79,787,224
Loans, net of unearned income 269,316,021 284,104,311 365,929,891
Allowance for loan losses (8,244,713) (10,181,135) (13,491,372)
Premises and equipment 10,795,189 11,145,499 13,732,992
Federal Reserve and Federal Home Loan Bank stock 2,767,200 2,744,900 3,697,100
Foreclosed assets held for sale, net 957,711 1,390,552 2,009,790
Interest receivable 1,797,944 2,000,732 2,649,869
Deferred income taxes 2,189,970 2,304,264 5,397,313
Goodwill 2,144,304 2,144,304 2,249,246
Core deposits and other intangibles 618,018 644,987 737,620
Other 15,522,538 6,659,158 3,317,729
-------------- -------------- --------------
Total assets $ 421,750,942 $ 435,311,872 $ 646,364,250
============== ============== ==============
See notes to condensed consolidated financial statements (unaudited)
3
LIABILITIES AND STOCKHOLDERS' EQUITY
(UNAUDITED) (UNAUDITED)
--------------------------------------------------
MARCH 31, DECEMBER 31, MARCH 31,
2004 2003 2003
--------------------------------------------------
LIABILITIES
Deposits
Demand $ 33,468,275 $ 46,084,861 $ 35,141,128
Savings, NOW and money market 103,624,318 96,721,318 110,134,983
Time 170,634,579 174,668,570 225,658,046
-------------- -------------- --------------
Total deposits 307,727,172 317,474,749 370,934,157
Deposits held for sale -- -- 166,064,199
Note payable 5,311,364 10,327,599 5,499,999
Federal Home Loan Bank advances 39,000,000 39,000,000 46,000,000
Trust preferred securities 10,310,000 10,000,000 10,000,000
Interest payable 840,073 2,347,303 2,903,799
Retail repurchase agreements 4,738,985 3,923,754 --
Other liabilities 4,549,717 3,855,711 3,310,588
-------------- -------------- --------------
Total liabilities 372,477,311 386,929,116 604,712,742
-------------- -------------- --------------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Common stock, $2.50 stated value; authorized 10,000,000 shares; issued
4,575,702; outstanding March 31, 2004 - 4,567,296, December 31, 2003
- 4,565,879 and March 31, 2003 - 4,565,721
shares 11,439,255 11,439,255 11,439,255
Additional paid-in capital 11,007,086 11,009,268 11,009,733
Retained earnings 26,821,466 26,209,444 19,203,843
Unearned employee stock ownership plan (ESOP) shares (124,175) (163,493) (281,447)
Accumulated other comprehensive income 422,947 201,082 595,138
Treasury stock, at cost
Common; March 31, 2004 - 8,406, December 31, 2003 - 9,823
and March 31, 2003 - 9,981 shares (292,948) (312,800) (315,014)
-------------- -------------- --------------
Total stockholders' equity 49,273,631 48,382,756 41,651,508
-------------- -------------- --------------
Total liabilities and stockholders' equity $ 421,750,942 $ 435,311,872 $ 646,364,250
============== ============== ==============
See notes to condensed consolidated financial statements (unaudited)
Note: The balance sheet at December 31, 2003 has been derived from the
audited consolidated financial statements at that date.
4
RURBAN FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED
MARCH 31, MARCH 31,
2004 2003
----------------------------
INTEREST INCOME
Loans $ 4,259,958 $ 8,790,024
Securities
Taxable 782,522 811,477
Tax-exempt 41,322 39,925
Other 30,075 101,023
------------ ------------
Total interest income 5,113,877 9,742,449
------------ ------------
INTEREST EXPENSE
Deposits 1,279,031 3,839,800
Notes payable 166,853 93,764
Federal Home Loan Bank advances 407,563 653,502
Trust preferred securities 276,250 265,000
------------ ------------
Total interest expense 2,129,697 4,852,066
------------ ------------
NET INTEREST INCOME 2,984,180 4,890,383
PROVISION FOR LOAN LOSSES 150,000 1,194,000
------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,834,180 3,696,383
------------ ------------
NONINTEREST INCOME
Data service fees 2,691,238 2,223,184
Trust fees 843,529 671,502
Customer service fees 513,845 636,256
Net gains on loan sales 10,128 151,412
Net realized gains on sales of available-for-sale
securities 61,074 26,533
Loan servicing fees 96,765 117,453
(Loss) on sale of assets (18,415) --
Gain on sale of branches -- 8,035,912
Other 136,850 133,153
------------ ------------
Total noninterest income 4,335,014 11,995,405
------------ ------------
See notes to condensed consolidated financial statements (unaudited)
5
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
MARCH 31, MARCH 31,
2004 2003
---------------------------
NONINTEREST EXPENSE
Salaries and employee benefits $ 3,255,168 $ 3,814,914
Net occupancy expense 251,426 396,354
Equipment expense 1,039,093 1,059,154
Data processing fees 140,434 89,687
Professional fees 468,519 774,662
Marketing expense 104,209 100,854
Printing and office supplies 145,776 165,137
Telephone and communications 145,826 197,511
Postage and delivery expense 90,589 191,074
State, local and other taxes 203,099 158,399
Other 445,060 721,739
------------ ------------
Total noninterest expense 6,289,199 7,669,485
------------ ------------
INCOME BEFORE INCOME TAX 879,995 8,022,303
PROVISION FOR INCOME TAXES 267,973 2,722,672
------------ ------------
NET INCOME $ 612,022 $ 5,299,631
============ ============
BASIC EARNINGS PER SHARE $ 0.13 $ 1.17
============ ============
DILUTED EARNINGS PER SHARE $ 0.13 $ 1.17
============ ============
See notes to condensed consolidated financial statements (unaudited)
6
RURBAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY (UNAUDITED)
Three Months Three Months
Ended Ended
March 31, 2004 March 31, 2003
Total Total
Stockholders' Stockholders'
Equity Equity
-------------------------------
Balance at beginning of period $ 48,382,756 $ 36,382,332
Net Income 612,022 5,299,631
Other comprehensive income (loss):
Net change in unrealized gains (losses)
on securities available for sale, net 221,865 (69,773)
------------ ------------
Total comprehensive income 833,887 5,229,858
Stock options exercised 17,670 -
Paydown of ESOP loan 39,318 39,318
------------ ------------
Balance at end of period $ 49,273,631 $ 41,651,508
============ ============
See notes to condensed consolidated financial statements (unaudited)
7
RURBAN FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED
MARCH 31, MARCH 31,
2004 2003
------------------------------
OPERATING ACTIVITIES
Net income $ 612,022 $ 5,299,631
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization 564,862 608,682
Provision for loan losses 150,000 1,194,000
ESOP shares earned 39,318 39,318
Amortization of premiums and discounts on securities 259,897 166,683
Amortization of intangible assets 26,969 107,554
Deferred income taxes - 98,499
Proceeds from sale of loans held for sale 1,074,695 13,479,405
Originations of loans held for sale (1,064,567) (13,327,993)
Gain on sale of branch - (8,009,437)
Gain from sale of loans (10,128) (151,412)
Loss on sales of foreclosed assets 18,415 -
(Gain) loss on sales of fixed assets 15,955 (28,948)
Net realized gains on available-for-sale securities (61,074) (26,533)
Changes in
Interest receivable 202,788 1,316,852
Other assets (863,380) 6,344,040
Interest payable and other liabilities (503,223) 168,900
------------- -------------
Net cash provided by operating activities 462,549 7,279,241
------------- -------------
INVESTING ACTIVITIES
Net change in interest-bearing deposits 10,000 (50,000)
Purchases of available-for-sale securities (15,838,469) (34,522,183)
Proceeds from maturities of available-for-sale securities 12,141,146 41,989,452
Proceeds from the sales of available-for-sale securities 13,647,795 8,334,056
Net change in loans 12,609,750 42,721,729
Purchase of bank owned life insurance (8,000,000) --
Purchase of premises and equipment (441,020) (486,572)
Proceeds from sales of premises and equipment 210,513 -
Purchase of Federal Home Loan Federal Reserve Bank stock (405,600) -
Proceeds from sale of Federal Home Loan Federal Reserve
Bank stock 383,300 (31,200)
Proceeds from the sale of foreclosed assets 493,538 (49,514)
Payment of assumption of liability from sale of branch -- (4,707,772)
------------- -------------
Net cash provided by investing activities 14,810,953 53,197,996
------------- -------------
8
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
MARCH 31, MARCH 31,
2004 2003
------------------------------
FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, money market,
NOW and savings accounts $ (5,713,586) 37,025,646
Net decrease in certificates of deposit (4,033,991) (65,231,885)
Net increase in securities sold under agreements to
repurchase 815,231 --
Repayment of Federal Home Loan Bank advances -- (1,850,000)
Repayments of note payable (5,016,235) (500,001)
Proceeds from stock options exercised 17,670 --
------------- -------------
Net cash used in financing activities (13,930,911) (30,556,240)
------------- -------------
INCREASE IN CASH AND CASH EQUIVALENTS 1,342,591 29,920,997
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 24,176,952 51,018,337
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 25,519,543 $ 80,939,334
============= =============
SUPPLEMENTAL CASH FLOWS INFORMATION
Interest paid $ 3,636,927 $ 4,707,792
Income taxes paid (net of refunds) -- (4,252,322)
See notes to condensed consolidated financial statements (unaudited)
9
(Continued)
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The financial
statements reflect all adjustments that are, in the opinion of management,
necessary to fairly present the financial position, results of operations and
cash flows of the Company and its subsidiaries. Those adjustments consist only
of normal recurring adjustments.
In December 2003, FASB issued a revision to FIN 46 to clarify certain provisions
which affected the accounting for trust preferred securities. As a result of the
provisions in FIN 46, Rurban Statutory Trust 1 ("RST") was deconsolidated as of
March 31, 2004, with the Company accounting for its investment in RST as assets,
its subordinated debentures as debt, and the interest paid thereon as interest
expense. The Company had always classified the trust preferred securities as
debt, but eliminated its common stock investment.
The condensed consolidated balance sheet of the Company as of December 31, 2003
has been derived from the audited consolidated balance sheet of the Company as
of that date.
For further information, refer to the consolidated financial statements and
footnotes included in the Company's Annual Report on Form 10-k for the year
ended December 31, 2003.
NOTE B--EARNINGS PER SHARE
Earnings per share have been computed based on the weighted average number of
shares outstanding during the periods presented. For the three months ended
March 31, 2004 and 2003, stock options totaling 29,227 and 223,376 shares of
common stock were not considered in computing EPS as they were anti-dilutive.
The number of shares used in the computation of basic and diluted earnings per
share was:
Three Months Ended
March 31,
-------------------
2004 2003
---- ----
Basic earnings per share 4,554,959 4,545,162
Diluted earnings per share 4,582,586 4,545,162
10
(Continued)
NOTE C - LOANS, RISK ELEMENTS AND ALLOWANCE FOR LOAN LOSSES
Total loans on the balance sheet are comprised of the following classifications
at:
March 31, December 31, March 31,
2004 2003 2003
---- ---- ----
Commercial $ 78,264,048 $ 89,470,661 $ 85,155,609
Commercial real estate 59,711,735 62,339,628 110,102,184
Agricultural 38,445,599 36,721,822 55,358,427
Residential real estate 47,227,550 46,717,917 53,879,447
Consumer 36,009,987 37,309,999 43,263,920
Lease financing 9,900,170 11,774,730 18,444,060
-------------- -------------- --------------
Total loans 269,559,089 284,334,757 366,203,647
Less
Net deferred loan fees, premiums and discounts (243,068) (230,446) (273,756)
Allowance for loan losses (8,244,713) (10,181,135) (13,491,372)
-------------- -------------- --------------
Net loans $ 261,071,308 $ 273,923,176 $ 273,923,176
============== ============== ==============
The following is a summary of the activity in the allowance for loan losses
account for the three months ended March 31, 2004 and 2003 and the year ended
December 31, 2003.
March 31, December 31, March 31,
2004 2003 2003
---- ---- ----
Balance, beginning of year $ 10,181,135 $ 17,693,841 $ 17,693,841
Provision charged to expense 150,000 1,202,000 962,000
Recoveries 561,284 3,139,534 487,727
Loans charged off (2,647,706) (11,854,240) (5,652,196)
-------------- -------------- --------------
Balance, end of year $ 8,244,713 $ 10,181,135 $ 13,491,372
============== ============== ==============
11
(Continued)
The following schedule summarizes nonaccrual, past due and impaired loans at:
March 31, December 31, March 31,
2004 2003 2003
---- ---- ----
Loans accounted for on a nonaccrual basis $ 17,853,000 $ 18,352,000 $ 16,548,000
Accruing loans which are contractually
past due 90 days or more as to interest or
principal payments - - 4,404,000
------------ ------------ ------------
Total non-performing loans $ 17,853,000 $ 18,352,000 $ 20,952,000
============ ============ ============
Individual loans determined to be impaired were as follows:
March 31, December 31, March 31,
2004 2003 2003
---- ---- ----
Loans with no allowance for loan losses allocated $ 156,000 $ 153,000 $ 1,050,000
Loans with allowance for loan losses allocated 15,108,000 19,685,000 17,175,000
------------ ------------ ------------
Total impaired loans $ 15,264,000 $ 19,838,000 $ 18,225,000
============ ============ ============
Amount of allowance allocated $ 3,209,000 $ 5,651,000 $ 4,895,000
============ ============ ============
12
(Continued)
NOTE D - TRUST PREFERRED SECURITIES
On September 7, 2000, 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 March 31,
2004, the outstanding principal balance of the Capital Securities was
$10,310,000 and as of December 31, 2003 and March 31, 2003, the outstanding
principal balance was $10,000,000. In December 2003, FASB issued a revision to
FIN 46 to clarify certain provisions which affected the accounting for trust
preferred securities. As a result of the provisions in FIN 46, RST was
deconsolidated as of March 31, 2004, with the Company accounting for its
investment in RST as assets, its subordinated debentures as debt, and the
interest paid thereon as interest expense. The Company had always classified the
trust preferred securities as debt, but eliminated its common stock investment.
The junior subordinated debentures are subject to mandatory redemption, in whole
or in part, upon repayment of the Capital Securities at maturity or their
earlier redemption at the liquidation amount. Subject to the Company having
received prior approval of the Federal Reserve, if then required, the Capital
Securities are redeemable prior to the maturity date of September 7, 2030, at
the option of the Company; on or after September 7, 2010 at a premium, or on or
after September 7, 2020 at par; or upon occurrence of specific events defined
within the trust indenture. The Company has the option to defer distributions on
the Capital Securities from time to time for a period not to exceed 10
consecutive semi-annual periods.
On January 28, 2004, the Trustee was notified that the Company elected to defer
the semi-annual distributions which would have been due on March 7, 2004, until
September 7, 2004.
NOTE E - NOTE PAYABLE
RFC Banking Company ("RFCBC") has a note payable to The Union Banking Company
secured by the common stock of Rurbanc Data Services, Inc. ("RDSI") and
substantially all assets of RFCBC, principal payments of $300,000 quarterly
together with interest at prime plus 1% (5.0% at March 31, 2004), maturing June
6, 2006. The principal note balance was $4,600,000 as of March 31, 2004.
RFCBC had a note payable to First Federal Bank of the Midwest secured by certain
identified loans held by RFCBC, 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%. This note was paid off March 5, 2004.
RDSI has two notes payable to First Federal Bank of the Midwest. The first note
is secured by equipment, monthly payments of $13,416, interest at 7.65%,
maturing June 9, 2009. The principal note balance was $354,626 as of March 31,
2004. The second note is secured by equipment, monthly
13
(Continued)
payments of $10,902, interest at 7.65%, maturing June 10, 2007. The principal
note balance was $356,738 as of March 31, 2004.
NOTE F - REGULATORY MATTERS
The Company and the subsidiary banks are subject to various regulatory capital
requirements administered by the federal and state banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators. If undertaken, these actions
could have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and the subsidiary banks must meet specific capital
guidelines that involve quantitative measures of assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the subsidiary banks to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). As of March 31, 2004, the Company and
the subsidiary banks exceeded all "well-capitalized" requirements to which they
are subject.
As of December 31, 2003, the most recent notification to the regulators
categorized The State Bank and Trust Company ("State Bank") as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, State 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 State Bank's category.
14
(Continued)
The Company and significant subsidiary banks' actual capital amounts (in
millions) and ratios are also presented in the following table.
TO BE WELL CAPITALIZED UNDER
FOR CAPITAL ADEQUACY PROMPT CORRECTIVE ACTION
ACTUAL PURPOSES PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------------------------------------------------------------------
As of March 31, 2004
Total Capital
(to Risk-Weighted Assets)
Consolidated $ 59.7 20.3% $ 23.5 8.0% $ -- N/A
State Bank 38.0 14.1 21.5 8.0 26.9 10.0
Tier I Capital
(to Risk-Weighted Assets)
Consolidated 56.0 19.0 11.8 4.0 -- N/A
State Bank 34.6 12.8 10.8 4.0 16.2 6.0
Tier I Capital
(to Average Assets)
Consolidated 56.0 13.2 17.0 4.0 -- N/A
State Bank 34.6 8.8 15.8 4.0 19.7 5.0
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
15
(Continued)
NOTE G - CONTINGENT LIABILITIES
There are various contingent liabilities that are not reflected in the
consolidated financial statements, including claims and legal actions arising in
the ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these matters is
not expected to have a material effect on the Corporation's consolidated
financial condition or results of operations.
NOTE H - NEW ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB (Financial Accounting Standards Board) revised SFAS
No. 132, "Employers Disclosures about Pensions and Other Postretirement
Benefits", which is an amendment of FASB Statements No. 87, 88 and 106. There
was no material impact of the adoption on the financial statements.
NOTE I - BRANCH SALES
On March 28, 2003, the Citizens Savings Bank ("Citizens"), 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.
The Company does not maintain a separate statement of operations for each
division.
NOTE J - STOCK OPTIONS
The Company accounts for its stock option plan under the recognition and
measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and related Interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
grant date. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value provisions of FASB
Statement No. 123, "Accounting for Stock-Based Compensation", to stock-based
employee compensation.
Three Months Ended March 31,
2004 2003
----------- ------------
Net income, as reported $ 612,022 $ 5,299,631
Less: Total stock-based employee compensation
cost determined under the fair value based
method, net of income taxes (49,183) (19,823)
----------- ------------
Pro forma net income $ 562,839 $ 5,279,808
=========== ============
Earnings per share:
Basic - as reported $ 0.13 $ 1.17
Basic - pro forma $ 0.12 $ 1.16
Diluted - as reported $ 0.13 $ 1.17
Diluted - proforma $ 0.12 $ 1.16
16
(Continued)
NOTE K - COMMITMENTS AND CREDIT RISK
As of March 31, 2004, loan commitments and unused lines of credit totaled
$50,142,000, standby letters of credit totaled $367,000 and no commercial
letters of credit were outstanding.
NOTE L - SEGMENT INFORMATION
The reportable segments are determined by the products and services offered,
primarily distinguished between banking and data processing operations. Other
segments include the accounts of the holding company, Rurban Financial Corp.,
which provides management and operational services to its subsidiaries; Reliance
Financial Services, N.A., which provides trust and financial services to
customers nationwide; and Rurban Life, which provides insurance products to
customers of the Company's subsidiary banks. Information reported internally for
performance assessment follows.
17
(Continued)
As of and for the three months ended March 31, 2004
Data Total Intersegment Consolidated
Banking Processing Other Segments Elimination Totals
-------------------------------------------------------------------------------------------
Income statement information:
Net interest income (expense) $ 3,321,403 $ (54,555) $ (282,668) $ 2,984,180 $ - $ 2,984,180
Noninterest income - external
customers 777,970 2,691,238 865,806 4,335,014 - 4,335,014
Noninterest income - other segments - 348,901 481,252 830,153 (830,153) -
------------- ------------ ----------- ------------- ------------- -------------
Total revenue 4,099,373 2,985,584 1,064,390 8,149,347 (830,153) 7,319,194
Noninterest expense 3,808,094 2,135,333 1,175,925 7,119,352 (830,153) 6,289,199
Significant non-cash items:
Depreciation and amortization 125,572 417,208 22,082 564,862 - 564,862
Provision for loan losses 150,000 - - 150,000 - 150,000
Income tax expense (benefit) 88,760 289,085 (109,872) 267,973 - 267,973
Segment profit (loss) $ 262,128 $ 561,166 $ (211,272) $ 612,022 $ - $ 612,022
Balance sheet information:
Total assets $ 418,398,038 $ 9,389,703 $ 4,212,483 $ 432,000,224 $ (10,249,282) $ 421,750,942
Goodwill and intangibles 2,762,322 - - 2,762,322 - 2,762,322
Premises and equipment
expenditures, Three months
ended March 31, 2004 46,100 353,740 41,180 441,020 - 441,020
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Rurban Financial Corp. ("Rurban" or "the Company") was incorporated on February
23, 1983, under the laws of the State of Ohio. Rurban is a bank holding company
registered with the Federal Reserve Board under the Bank Holding Company Act of
1956, as amended. Rurban's subsidiaries, The State Bank and Trust Company
("State Bank") and RFC Banking Company ("RFCBC") are engaged in the industry
segment of commercial banking. RFCBC was created June 30, 2001 through the
merger of The Peoples Banking Company, The First National Bank of Ottawa and The
Citizens Savings Bank Company. As of June 6, 2003, RFCBC completed the sale of
all its active banking locations, retaining only selected loans. RFCBC has
ceased doing a banking business and operates as a loan subsidiary of Rurban in
servicing and working out the retained loans. Rurban's subsidiary, Rurbanc Data
Services, Inc. ("RDSI"), provides computerized data processing services to
community banks and businesses including Rurban's subsidiary banks. Rurban's
subsidiary, Rurban Life Insurance Company ("Rurban Life") has a certificate of
authority from the State of Arizona to transact insurance as a domestic life and
disability insurer. Rurban Statutory Trust I ("RST") was established 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. Reliance Financial Services,
N.A. ("Reliance"), a wholly owned subsidiary of State Bank, provides trust and
financial services to customers nationwide.
The following discussion is intended to provide a review of the consolidated
financial condition and results of operations of Rurban. This discussion should
be read in conjunction with the consolidated financial statements and related
footnotes in Rurban's 2003 Form 10-K filed with the Securities and Exchange
Commission.
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.
19
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.
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 effect the estimates include, among
others, customer attrition, changes in revenue growth trends, specific industry
conditions and changes in competition.
IMPACT OF ACCOUNTING CHANGES
In December 2003, the FASB (Financial Accounting Standards Board) revised SFAS
No. 132, "Employers Disclosures about Pensions and Other Postretirement
Benefits", which is an amendment of FASB Statements No. 87, 88 and 106. There
was no material impact of the adoption on the financial statements.
QUARTERLY EARNINGS SUMMARY
Net income for the quarter was $612,000, or $0.13 per diluted share, versus $5.3
million, or $1.17 per diluted share, for the first quarter 2003. The decrease in
net income is the result of the Citizens branch sale on March 28, 2003 for a
pre-tax gain of $8.0 million.
Net interest income declined $1.9 million to $3.0 million for the three months
ended March 31, 2004 compared to $4.9 million for the first quarter 2003. The
decline in net interest income is largely attributed to the branch sales in 2003
lowering the level of average earning assets as the Company focused on
strengthening its capital position.
20
The provision for loan losses of $150,000 for the first quarter of 2004
decreased $1.0 million (87%) compared to the first three months of 2003.
Noninterest income decreased $7.7 million to $4.3 million in the first quarter
of 2004 compared to $12.0 million for the first three months of 2003. The
decrease in noninterest income was mainly the result of the aforementioned
branch sale for a pre-tax gain of $8.0 million.
Noninterest expense decreased $1.4 million to $6.3 million for the first quarter
of 2004 compared to $7.7 million for the first three months of 2003. This
decrease is the result of staff reductions from the branch sale and a $306,000
decrease in professional fees as the Company experienced large expenses in 2003
for the branch divestitures and loan workouts.
CHANGES IN FINANCIAL CONDITION
At March 31, 2004, total assets were $421.8 million, a decrease of $13.6 million
from December 31, 2003. The decrease was primarily attributable to decreases in
loans of $14.8 million and available for sale securities of $9.8 million
partially offset by an increase in other assets of $8.9 million as a result of
an $8.0 million bank owned life insurance policy purchase in the first quarter
of 2004.
At March 31, 2004, the decrease in total liabilities of $14.5 million from the
fourth quarter of 2003 was mainly attributable to decreases in deposits of $9.7
million.
LINKED QUARTER COMPARISON
The Company reported a net profit for the first quarter of 2004 of $612,000, or
$0.13 per diluted share, versus a net profit of $326,000, or $0.07 per diluted
share, for the fourth quarter of 2003. The first quarter profit was mainly due
to increasing the core earnings level as shown by improvements in net interest
income, fee income and credit quality. The fourth quarter profit was driven
largely by a reduction in the loan loss provision of $60,000 bringing the
allowance for loan losses to $10.2 million or 3.58% at December 31, 2003.
Net interest income increased $97,000 or 3% to $3.0 million for the three months
ended March 31, 2004 compared to $2.9 million for the fourth quarter of 2003.
This increase was largely driven by improving loan quality and continued
reductions in the cost of interest-bearing liabilities.
21
A comparison of financial results for the quarter ended March 31, 2004 to the
previous quarter ended December 31, 2003 is as follows:
Linked
Three Months Ended Quarter
03/31/04 12/31/03 % Change
-------- -------- --------
(dollars in millions, except per share data)
Total Assets $ 422 $ 435 -3%
Loans Held for Sale 0.2 0.2 --
Loans (Net) 261 274 -5%
Allowance for Loan Losses 8.2 10.2 -20%
Total Deposits 308 317 -3%
Total Revenue 7.3 6.6 +12%
Net interest Income 3.0 2.9 +3%
Loan Loss Provision 0.2 (0.1) --
Noninterest Income 4.3 3.7 +18%
Noninterest Expense 6.3 6.1 +2%
Net Income 0.6 0.3 --
Basic Earnings Per Share $ 0.13 $ 0.07 --
Diluted Earnings Per Share $ 0.13 $ 0.07 --
On a linked quarter basis, total loans declined $15 million and total assets
declined $14 million. The decline in loans was primarily due to negotiated
settlements reached with several borrowers resulting in a reduction of nearly
$11 million in classified loans and another $2.6 million as a result of being
charged-off. The Company continues to promote the exiting of out of market
loans.
TOTAL REVENUE
Three Months Ended
03/31/04 12/31/03 $Change %Change
-------- -------- ------- -------
(dollars in thousands)
TOTAL REVENUE $ 7,319 $ 6,555 $ 764 +12%
Total revenue (net interest income plus noninterest income) was $7.3 million for
the first quarter of 2004 compared to $6.6 million for the fourth quarter of
2003, up $764,000 or 12%.
NET INTEREST INCOME
Three Months Ended
03/31/04 12/31/03 $Change %Change
-------- -------- ------- -------
(dollars in thousands)
NET INTEREST INCOME $ 2,984 $ 2,887 $ 97 +3%
Net interest income for the first quarter of 2004 was $3.0 million compared to
$2.9 million for the fourth quarter of 2003. The net interest margin for the
first quarter of 2004 was 3.09% compared to 2.78% for the previous quarter.
22
LOAN LOSS PROVISION
The provision for loan losses of $150,000 for the first quarter of 2004
represented an increase of $210,000 compared to the fourth quarter of 2003. The
reasons for the increase in the first quarter are discussed in the "Allowance
for Loan Losses" section.
NONINTEREST INCOME
Three Months Ended
03/31/04 12/31/03 $Change %Change
-------- -------- ------- -------
(dollars in thousands)
Total Noninterest Income $ 4,335 $ 3,669 $666 +18%
- Data Service Fees 2,691 2,294 +397 +17%
- Trust Fees 844 775 +69 +9%
- Deposit Service Fees 514 529 -15 -3%
- Gains on Sale of Loans 10 25 -15 -59%
- Gains on Sale of Securities 61 - +61 -
- Gain (Loss) on Assets (18) (142) +124 +87%
- Other 234 188 +46 +24%
Noninterest income increased by $666,000 to $4.3 million in the first quarter of
2004 compared to $3.7 million in the fourth quarter of 2003. The first quarter
increase was the continued improvement in data service fees of $397,000 or 17%
coupled with another strong quarterly increase in trust fees of $69,000 or 9%.
Other items impacting the quarterly results was the purchase of Bank Owned Life
Insurance in late January of 2004 resulting in $28,000 per month and gain on the
sale of securities resulting in $61,000.
RURBANC DATA SERVICES, INC. ("RDSI")
THREE MONTHS ENDED
------------------
03/31/04 12/31/03 $Change %Change
-------- -------- ------- -------
(dollars in thousands)
Data Processing Fees $ 2,691 $ 2,294 $ 397 +17%
RDSI's continued growth in network services, Internet banking and other
technical services accounts for the majority of its revenue growth.
NONINTEREST EXPENSE
Three Months Ended
03/31/04 12/31/03 $Change %Change
-------- -------- ------- -------
(dollars in thousands)
Total Noninterest Expense $ 6,289 $ 6,144 $ 145 +2%
- Salaries & Employee Benefits 3,255 3,034 +221 +7%
- Equipment Expense 1,039 1,024 +15 +1%
- Professional Fees 469 678 (209) -31%
- All Other 1,526 1,408 +118 +8%
23
Noninterest expense for the first quarter of 2004 was $6.3 million compared to
$6.1 million for the fourth quarter of 2003, an increase of $145,000 or 2%. The
quarterly increase is due to the rising costs of employee benefit plans, the
accrual of certain incentive based compensation plans and outside data
processing fees related to post year-end customer processing associated with tax
related information reporting requirements plus conversion fees associated with
adding new technology products. The increase is somewhat offset by a $209,000
reduction in professional fees as a result of lower legal costs associated with
reduced loan resolution issues during the first quarter of 2004.
LOANS
As Of
% of % of Inc
03/31/04 Total 12/31/03 Total (Dec)
-------- ----- -------- ----- -----
(dollars in millions)
Commercial $ 78 29% $ 89 31% $ (11)
Commercial real estate 60 22% 62 22% (2)
Agricultural 39 15% 37 13% 2
Residential 47 17% 47 16% -
Consumer 36 13% 37 13% (1)
Leasing loans 10 4% 12 5% (2)
-------- -------- -----
Total $ 270 $ 284 $ (14)
Loans held for sale .2 .2 -
-------- -------- -----
Total $ 270 $ 285 $ (15)
Loans decreased $15 million from December 31, 2003 to $270 million at March 31,
2004. The decline in loans was primarily due to negotiated settlements reached
with several borrowers resulting in a reduction of nearly $11 million in
classified loans and another $2.6 million as a result of being charged-off. The
Company continues to promote the exiting of out of market loans.
ASSET QUALITY
As Of And For The Quarter Ended
(dollars in millions)
03/31/04 12/31/03 Change
-------- -------- ------
Non-performing loans $ 17.9 $ 18.4 $ -0.5
Non-performing assets 19.0 19.9 -0.9
Non-performing assets/ loan plus OREO 7.02% 6.96% +0.06%
Non-performing assets/ total assets 4.50% 4.57% -0.07%
Net chargeoffs 2.1 1.0 --
Net chargeoffs (annualized)/ total loans 3.1% 1.4% --
Loan loss provision 0.2 (0.1) --
Allowance for loan loss - $ 8.2 10.2 -2.0
Allowance for loan loss - % 3.06% 3.58% -0.52%
Allowance/non-performing loans 46% 55% --
Allowance/non-performing assets 43% 51% --
Non-performing assets at March 31, 2004 decreased to $19.0 million or 4.50% of
total assets, versus $19.9 million, or 4.57% at December 31, 2003, a decrease of
$0.9 million. Net chargeoffs for the first quarter of 2004 were $2.1 million
compared to $1.0 million in the fourth quarter of 2003.
24
ALLOWANCE FOR LOAN LOSSES
The Company grades its loans using an eight grade system. Loans with concerns
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 pay off of debt
- Grade 7 - Doubtful: Inherent weaknesses which are well-defined and a
high probability of loss (impaired) (These loans are typically
reserved down to collateralized values)
- 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.
----------03/31/04--------- ----------12/31/03---------
ALLOCATION ALLOCATION
LOAN --------------- LOAN ----------------
BALANCE $ % BALANCE $ %
------- ---- ----- ------- ----- -----
Allocations for individual $ 15.1 $3.2 34.23% $ 19.7 $ 5.7 28.93%
commercial loans graded
Doubtful (impaired)
Allocations for individual
commercial loans graded
Substandard 27.8 3.0 11.44 33.4 2.5 7.49
Allocation based on Special
Mention loan balance 18.4 0.5 -- 21.0 0.6 2.86
"General" allowance based on
chargeoff history of nine
categories of loans 208.5 1.5 1.09 210.5 1.4 0.67
------- ---- ----- ------- ----- -----
TOTAL $ 269.8 $8.2 3.06% $ 284.6 $10.2 3.58%
The amount of loans classified as doubtful decreased $4.6 million to $15.1
million for the quarter ended March 31, 2004 and substandard loans decreased
$5.6 million to $27.8 million. Allowance allocations on doubtful loans decreased
$2.5 million while allowance allocations on substandard loans increased $0.5
million from December 31, 2003. The allowance for loan losses at March 31, 2004
was $8.2 million or 3.06% of loans compared to $10.2 million or 3.58% at
December 31, 2003.
CAPITAL RESOURCES
At March 31, 2004, actual capital levels (in millions) and minimum required
levels were:
Minimum Required
Minimum Required To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
-------------- ----------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- -------- ----- ------ -----
Total capital (to risk weighted assets)
Consolidated $ 59.7 20.3% $ 23.5 8.0% $ - N/A
State Bank 38.0 14.1 21.5 8.0 26.9 10.0
The Company and State Bank were categorized as well capitalized at March 31,
2004.
25
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.
As of March 31, 2004, 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.
GOALS FOR 2004 AND 2005
The Company's near term goals include:
- Focus on the quality of the loan underwriting process
- Continued efforts to reduce the level of problem loans
- Continued focus on Customer Relationship Management (CRM)
- Continued efforts to improve operational efficiencies
- Continue improvement efforts necessary to achieve the release
from the Agreement
- Restoring earnings to a level sufficient to resume the payment
of a dividend
LIQUIDITY
Liquidity relates primarily to the Company's ability to fund loan demand, meet
deposit customers' withdrawal requirements and provide for operating expenses.
Assets used to satisfy these needs consist of cash and due from banks, 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 $123.9 million at March 31,
2004 compared to $132.4 million at December 31, 2003.
The Company's residential first mortgage portfolio of $47.2 million at March 31,
2004 and $46.7 million at December 31, 2003, which can and has been used to
collateralize borrowings, is an additional source of liquidity. Management
believes its current liquidity level is sufficient to meet its liquidity needs.
At March 31, 2004, all eligible mortgage loans were pledged under a Federal Home
Loan Bank ("FHLB") blanket lien.
The cash flow statements for the periods presented provide an indication of the
Company's sources and uses of cash as well as an indication of the ability of
the Company to maintain an adequate level of liquidity. A discussion of the cash
flow statements at March 31, 2004 and 2003 follows.
26
The Company experienced negative cash flows from operating activities at March
31, 2004 but positive cash flows as of March 31, 2003. Net cash from operating
activities was $(7.5) million and $7.3 million, respectively, at March 31, 2004
and 2003.
Net cash flow from investing activities was $22.8 million and $53.2 million at
March 31, 2004 and 2003 respectively. The changes in net cash from investing
activities at March 31, 2004 include a increase in securities of $10.0 million,
a decrease in loans of $(12.6) million and changes in interest-bearing deposits,
purchases of premises and equipment and other investing activities. The changes
in net cash from investing activities at March 31, 2003 include a decrease in
securities of $(15.8) million, a decrease in loans of $(42.7) million, a
decrease from the sale of Citizens Banking Company branches of $(4.7) million as
well as changes in interest-bearing deposits, purchases of premises and
equipment and other investing activities.
Net cash flow from financing activities was $(13.9) million and $(30.6) million
at March 31, 2004 and 2003, respectively. The net cash decrease was primarily
due to a reduction in total deposits of $(9.7) million at March 31, 2004
compared to $(28.2) at March 31, 2003. Other changes included a note payable
decrease of $(5.0) million at March 31, 2004 compared to a $(1.9) decrease in
FHLB advances, a decrease of $(0.5) million for a note payable at March 31,
2003.
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 Agreement between Rurban, State Bank, the Federal
Reserve Bank of Cleveland and the Ohio Division of Financial Institutions
requires Rurban and State Bank to obtain written approval of the Federal Reserve
Bank of Cleveland and the Ohio Division of Financial Institutions prior to
directly or indirectly incurring any debt.
Approximately $38.6 million residential first mortgage loans of the Company's
$47.2 million portfolio qualify to collateralize FHLB borrowings and have been
pledged to meet FHLB collateralization requirements as of March 31, 2004. In
addition to residential first mortgage loans, $25.0 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 March 31, 2004.
As of March 31, 2004, the Company had unused federal funds lines totaling
approximately $13.0 million from two correspondent banks. At December 31, 2003,
the Company had no unused federal funds lines. Federal funds borrowed were $0 at
March 31, 2004 and December 31, 2003.
Approximately $8.7 million of performing commercial loans are pledged to the
Federal Reserve Discount Window to establish additional borrowing capacity of
$6.1 million. Such loans are pledged for contingency funding purposes and to
date this borrowing capacity has not been used.
27
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 $39,0000,000 $ 10,000,000 $0 $5,000,000 $24,000,000
Other Debt Obligations 15,621,364 1,446,172 3,865,192 0 10,310,000
Capital Lease Obligations 0 0 0 0 0
Operating Lease Obligations 771,900 99,600 199,200 199,200 273,900
Purchase Obligations 0 0 0 0 0
Other Long-Term Liabilities
Reflected on the Registrant's
Balance Sheet under GAAP 170,634,579 115,101,774 49,111,251 6,232,442 189,112
------------ ------------ ----------- ----------- -----------
Total $226,027,843 $126,647,546 $53,175,643 $11,431,642 $34,773,012
============ ============ =========== =========== ===========
The Company's contractual obligations as of March 31, 2004 were evident in
long-term debt obligations, other debt obligations, operating lease obligations
and other long-term liabilities. The long-term debt obligations are comprised of
FHLB advances of $39,000,000. The other debt obligations are comprised of Trust
Preferred Securities of $10,310,000 and Notes Payable of $5,311,364. The
operating lease obligation is a lease on the RDSI building of $99,600 a year.
The other long-term liabilities are comprised of time deposits of $170,634,579.
ASSET LIABILITY MANAGEMENT
Asset liability management involves developing and monitoring strategies to
maintain sufficient liquidity, maximize net interest income and minimize the
impact that significant fluctuations in market interest rates would have on
earnings. The business of the Company and the composition of its balance sheet
consists of investments in interest-earning assets (primarily loans,
mortgage-backed securities, and securities available for sale) which are
primarily funded by interest-bearing liabilities (deposits and borrowings). With
the exception of loans which are originated and held for sale, all of the
financial instruments of the Company are for other than trading purposes. All of
the Company's transactions are denominated in U.S. dollars with no specific
foreign exchange exposure. In addition, the Company has limited exposure to
commodity prices related to agricultural loans. The impact of changes in foreign
exchange rates and commodity prices on interest rates are assumed to be
insignificant. The Company's financial instruments have varying levels of
sensitivity to changes in market interest rates resulting in market risk.
Interest rate risk is the Company's primary market risk exposure; to a lesser
extent, liquidity risk also impacts market risk exposure.
Interest rate risk is the exposure of a banking institution's financial
condition to adverse movements in interest rates. Accepting this risk can be an
important source of profitability and stockholder value; however, excessive
levels of interest rate risk could pose a significant threat to the Company's
earnings and capital base. Accordingly, effective risk management that maintains
interest rate risks at prudent levels is essential to the Company's safety and
soundness.
Evaluating a financial institution's exposure to changes in interest rates
includes assessing both the adequacy of the management process used to control
interest rate risk and the organization's quantitative level of exposure. When
assessing the interest rate risk management process, the Company seeks to ensure
that appropriate policies, procedures, management information systems, and
internal controls are
28
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, and serves as 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.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements within this document which are not statements of historical
fact constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements involve
risks and uncertainties and actual results may differ materially from those
predicted by the forward-looking statements. These risks and uncertainties
include, but are not limited to, risks and uncertainties inherent in the
national and regional banking, insurance and mortgage industries, competitive
factors specific to markets in which Rurban and its subsidiaries operate, future
interest rate levels, legislative and regulatory actions, capital market
conditions, general economic conditions, geopolitical events, the loss of key
personnel and other factors.
Forward-looking statements speak only as of the date on which they are made, and
Rurban undertakes no obligation to update any forward-looking statement to
reflect events or circumstances after the date
29
on which the statement is made. All subsequent written and oral forward-looking
statements attributable to Rurban or any person acting on our behalf are
qualified by these cautionary statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The following table provides information about the Company's financial
instruments used for purposes other than trading that are sensitive to changes
in interest rates as of March 31, 2004. It does not present when these items may
actually reprice. For loans receivable, securities, and liabilities with
contractual maturities, the table presents principal cash flows and related
weighted-average interest rates by contractual maturities as well as the
Company's historical experience of the impact of interest rate fluctuations on
the prepayment of loans and mortgage backed securities. For core deposits
(demand deposits, interest-bearing checking, savings, and money market deposits)
that have no contractual maturity, the table presents principal cash flows and,
as applicable related, weighted-average interest rates based upon the Company's
historical experience, management's judgment and statistical analysis, as
applicable, concerning their most likely withdrawal behaviors. The current
historical interest rates for core deposits have been assumed to apply for
future periods in this table as the actual interest rates that will need to be
paid to maintain these deposits are not currently known. Weighted average
variable rates are based upon contractual rates existing at the reporting date.
PRINCIPAL/NOTIONAL AMOUNT MATURING OR ASSUMED TO WITHDRAW IN:
(DOLLARS IN THOUSANDS)
First Years
Year 2 - 5 Thereafter Total
--------- --------- ---------- ----------
Comparison of 2004 to 2003:
Total rate-sensitive assets:
At March 31, 2004 $ 144,729 $ 143,833 $ 96,832 $ 385,394
At December 31, 2003 152,522 160,505 92,230 405,257
--------- --------- ---------- ----------
Increase (decrease) $ (7,793) $ (16,672) $ 4,602 $ (19,863)
Total rate-sensitive liabilities:
At March 31, 2004 $ 157,588 $ 174,439 $ 35,060 $ 367,087
At December 31, 2003 168,024 177,733 34,970 380,727
--------- --------- ---------- ----------
Increase (decrease) $ (10,436) $ (3,294) $ 90 $ (13,640)
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 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.
The Company manages its interest rate risk by the employment of strategies to
assure that desired levels of both interest-earning assets and interest-bearing
liabilities mature or reprice with similar time frames. Such strategies include:
1) loans receivable which are renewed (and repriced) annually, 2) variable rate
loans, 3) certificates of deposit with terms from one month to six years and 4)
securities available for sale which mature at various times primarily from one
through ten years, 5) federal funds borrowings with terms of one day to 90 days,
and 6) Federal Home Loan Bank borrowings with terms of one day to ten years.
30
ITEM 4. 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 principal financial officer) of the Company, the
Company's management has evaluated the effectiveness of the Company's disclosure
controls 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
quarterly period covered by this Quarterly Report on Form 10-Q. Based on that
evaluation, the Company's President and Chief Executive Officer and Executive
Vice President and Chief Financial Officer have concluded that:
- information required to be disclosed by the Company in this
Quarterly Report on Form 10-Q 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
disclosure;
- information required to be disclosed by the Company in this
Quarterly Report on Form 10-Q 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 quarterly period covered by this
Quarterly Report on Form 10-Q to ensure that material
information relating to the Company and its consolidated
subsidiaries is made known to them, particularly during the
period in which this Quarterly Report on Form 10-Q is being
prepared.
Changes in Internal Control Over Financial Reporting
There were no changes 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 March 31, 2004, that have materially
affected or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
31
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and Use of Proceeds and Issuer Purchases of Equity
Securities
a. Not applicable
b. Not applicable
c. Not applicable
d. Not applicable
e. Not applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
31.1 - Rule 13a-14(a)/15d-14(a) Certification (Principal Executive
Officer)
31.2 - Rule 13a-14(a)/15d-14(a) Certification (Principal Financial
Officer)
32.1 - Section 1350 Certification (Principal Executive Officer)
32.2 - Section 1350 Certification (Principal Financial Officer)
b. Reports on Form 8-K
A Form 8-K was filed on March 5, 2004 to report that 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
March 7, 2004. During any interest deferral period, the trust preferred
Indenture prohibits the payment of a common stock dividend.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
RURBAN FINANCIAL CORP.
Date: May 14, 2004 By /S/ Kenneth A. Joyce
--------------------
Kenneth A. Joyce
President & Chief
Executive Officer
By /S/ James E. Adams
--------------------
James E. Adams
Executive Vice President &
Chief Financial Officer
33