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1
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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
Commission File Number 0-13507
RURBAN FINANCIAL CORP.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Ohio 34-1395608
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
401 Clinton Street, Defiance, Ohio 43512
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (419) 783-8950
--------------------
Securities registered pursuant to Section 12(b) of the Act: None
----------------
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, Without Par Value (2,069,909 outstanding at March 12, 1998)
--------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Based upon the average bid and asked prices of the Common Shares of the
Registrant on March 12, 1998, the aggregate market value of the Common Shares of
the Registrant held by non-affiliates on that date was $68,027,642.
Documents Incorporated by Reference:
Portions of the Registrant's definitive Proxy Statement for its Annual Meeting
of Shareholders to be held on April 27, 1998 are incorporated by reference into
Part III of this Annual Report on Form 10-K.
Exhibit Index on Page 79
Page 1 of 115 Pages.
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PART I
------
Item 1. Business.
- ------------------
General
-------
Rurban Financial Corp., an Ohio corporation (the "Corporation"), is a
bank holding company under the Bank Holding Company Act of 1956, as amended, and
is subject to regulation by the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board"). The executive offices of the Corporation are
located at 401 Clinton Street, Defiance, Ohio 43512.
Through its subsidiaries, The State Bank and Trust Company, Defiance,
Ohio ("State Bank"), The Peoples Banking Company, Findlay, Ohio ("Peoples
Bank"), The First National Bank of Ottawa ("First National Bank") and The
Citizens Savings Bank Company, Pemberville, Ohio ("Citizens Savings Bank"), the
Corporation is engaged in the business of commercial banking. The Corporation's
subsidiary, Rurbanc Data Services, Inc. ("RDSI"), is engaged in the related
business of providing data processing services, principally to banks. The
Corporation's subsidiary, Rurban Life Insurance Company ("Rurban Life"), is
engaged in the related business of accepting life and disability reinsurance
ceded in part by USLIFE Credit Life Insurance Company ("USLIFE") from the credit
life and disability insurance purchased by customers of the Corporation's
banking subsidiaries from USLIFE in connection with revolving credit loans
secured by mortgages and with certain installment loans made to such customers.
State Bank has two wholly-owned subsidiaries: Reliance Financial
Services, N.A. ("RFS") and Rurban Mortgage Company ("RMC"). RFS is
nationally-chartered trust and financial services company . RMC is an Ohio
corporation with its main office located in Clearwater, Florida which engages in
the retail and wholesale mortgage industry.
General Description of Holding Company Group
--------------------------------------------
State Bank
- ----------
State Bank is an Ohio state-chartered bank. State Bank presently
operates seven branch offices in Defiance County, Ohio (six in the city of
Defiance and one in Ney), one branch office in adjacent Paulding County, Ohio
and three branch offices in Fulton County, Ohio (one in each of Delta, Lyons and
Wauseon). At December 31, 1997, State Bank had 97.5 full-time equivalent
employees.
State Bank offers a full range of commercial banking services,
including checking and NOW accounts; passbook savings and money market accounts;
automatic teller machines; commercial, consumer, agricultural and residential
mortgage loans (including "Home Value Equity" line of credit loans); personal
and corporate trust services; commercial leasing; bank credit card services;
safe deposit box rentals; and other personalized banking services. In addition,
State Bank serves as a correspondent (federal funds investing and check clearing
purposes) for three affiliated financial institutions in the region (Peoples
Bank, First National Bank and Citizens Savings Bank).
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3
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 a Robert Thomas
Securities office.
RFS' offices are located in State Bank's main offices in Defiance,
Ohio. At December 31, 1997, RFS had 29 full-time equivalent employees.
RMC
---
RMC is an Ohio corporation with its main office located in Clearwater,
Florida. RMC is a wholly-owned subsidiary of State Bank. RMC engages in the
retail and wholesale mortgage business. The principal activities engaged in by
RMC are originating, underwriting and servicing first and second residential
mortgage loans and then selling such loans in the secondary market.
RMC presently operates 2 offices (other than its main office) which are
located in Port Richey, Florida and Port Charlotte, Florida. At December 31,
1997, RMC had 41.5 full-time equivalent employees.
Peoples Bank
- ------------
Peoples Bank is an Ohio state-chartered bank. The main office of
Peoples Bank is located in Findlay, Ohio. Peoples Bank provides checking and NOW
accounts; passbook savings and money market accounts; time certificates of
deposit; commercial and consumer loans and real estate mortgage loans; trust
services; and safe deposit box rental facilities. Peoples Bank operates two
full-service branches in Findlay and one in McComb, Ohio. At December 31, 1997,
Peoples Bank had 27 full-time equivalent employees.
First National Bank
- -------------------
First National Bank is a national banking association. The executive
offices of First National Bank are located at 405 East Main Street, Ottawa,
Ohio. At its present location, First National Bank operates four drive-in teller
lanes and an automatic teller machine with a traditional banking lobby on the
first floor. First National Bank presently operates no branch offices. At
December 31, 1997, First National Bank had 16.5 full-time equivalent employees.
First National Bank offers a full range of commercial banking services,
including checking and NOW accounts; passbook savings and money market accounts;
automatic teller machines; commercial, consumer, agricultural and residential
mortgage loans; personal and corporate trust services; commercial leasing; bank
credit card services; safe deposit box rentals; and other personalized banking
services.
3
4
Citizens Savings Bank
- ---------------------
Citizens Savings Bank is an Ohio state-chartered bank. The main office
of Citizens Savings Bank is located in Pemberville, Ohio. Citizens Savings Bank
provides checking and NOW accounts; passbook savings and money market accounts;
time certificates of deposit; commercial, consumer, agricultural and residential
loans; personal and corporate trust services; commercial leasing; bank credit
card services; safe deposit box rentals; and other personalized banking
services. Citizens Savings Bank also operates a full-service branch in
Gibsonburg, Ohio. At December 31, 1997, Citizens Savings Bank had 29 full-time
equivalent employees.
RDSI
- ----
Substantially all of RDSI's business is comprised of providing data
processing services to 37 financial institutions primarily in the northwest area
of Ohio (including State Bank, Peoples Bank, First National Bank and Citizens
Savings Bank), including information processing for financial institution
customer services, loan and deposit account information and data analysis. At
December 31, 1997, RDSI had 32 full-time equivalent employees.
Rurban Life
- -----------
Rurban Life commenced its business of transacting insurance as an
Arizona life and disability reinsurer in January, 1988. Rurban Life may accept
life and disability reinsurance ceded to Rurban Life by an insurance company
authorized to write life and disability insurance, provided that the amount
accepted does not exceed certain limitations imposed under Arizona law. Rurban
Life is not currently authorized to write life and disability insurance on a
direct basis. Rurban Life accepts reinsurance ceded in part by USLIFE from the
credit life and disability insurance purchased by customers of State Bank,
Peoples Bank, First National Bank and Citizens Savings Bank from USLIFE in
connection with revolving credit loans secured by mortgages and with certain
installment loans made to such customers by State Bank, Peoples Bank, First
National Bank and Citizens Savings Bank. The operations of Rurban Life do not
materially impact the consolidated results of operations of the Corporation. As
of December 31, 1997, Rurban Life has not accepted any other reinsurance. Rurban
Life does not currently intend to accept any other reinsurance in the immediate
future. At December 31, 1997, Rurban Life had no employees.
Competition
-----------
State Bank, Peoples Bank, First National Bank and Citizens Savings Bank
experience significant competition in attracting depositors and borrowers.
Competition in lending activities comes principally from other commercial banks
in the lending areas of State Bank, Peoples Bank, First National Bank and
Citizens Savings Bank, and, to a lesser extent, from savings associations,
insurance companies, governmental agencies, credit unions, securities brokerage
firms and pension funds. The primary factors in competing for loans are interest
rates charged and overall banking services.
Competition for deposits comes from other commercial banks, savings
associations, money market funds and credit unions as well as from insurance
companies and securities brokerage firms.
4
5
The primary factors in competing for deposits are interest rates paid on
deposits, account liquidity and convenience of office location.
RDSI also operates in a highly competitive field. RDSI competes
primarily on the basis of the value and quality of its data processing services,
and service and convenience to its customers.
Rurban Life operates in the highly competitive industry of credit life
and disability insurance. A large number of stock and mutual insurance companies
also operating in this industry have been in existence for longer periods of
time and have substantially greater financial resources than does Rurban Life.
The principal methods of competition in the credit life and disability insurance
industry are the availability of coverages, premium rates and quality of
service. The Corporation believes that Rurban Life has a competitive advantage
due to the fact that the business of Rurban Life is limited to the accepting of
life and disability reinsurance ceded in part by USLIFE from the credit life and
disability insurance purchased by loan customers of State Bank, Peoples Bank,
First National Bank and Citizens Savings Bank.
RFS operates in the highly competitive trust services field and its
competition is primarily other Ohio bank trust departments.
RMC operates in the highly competitive mortgage banking environment. In
Florida, RMC competes primarily with large national and regional mortgage
brokers who originate well over 50% of new loans. RMC also underwrites loans
originated by the Corporation's four affiliate banks and other community banks
in Ohio.
Supervision and Regulation
--------------------------
The following is a summary of certain statutes and regulations
affecting the Corporation and its subsidiaries. The summary is qualified in its
entirety by reference to such statutes and regulations.
The Corporation is a bank holding company under the Bank Holding
Company Act of 1956, as amended, which restricts the activities of the
Corporation and the acquisition by the Corporation of voting shares or assets of
any bank, savings association or other company. The Corporation is also subject
to the reporting requirements of, and examination and regulation by, the Federal
Reserve Board. Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act on transactions with affiliates,
including any loans or extensions of credit to the bank holding company or any
of its subsidiaries, investments in the stock or other securities thereof and
the taking of such stock or securities as collateral for loans or extensions of
credit to any borrower; the issuance of guarantees, acceptances or letters of
credit on behalf of the bank holding company and its subsidiaries; purchases or
sales of securities or other assets; and the payment of money or furnishing of
services to the bank holding company and other subsidiaries. Bank holding
companies are prohibited from acquiring direct or indirect control of more than
5% of any class of voting stock or substantially all of the assets of any bank
holding company without the prior approval of the Federal Reserve Board. A bank
holding company and its subsidiaries are prohibited from engaging in certain
tying arrangements in connection with extensions of credit and/or the provision
of other property or services to a customer by the bank holding company or its
subsidiaries.
5
6
As a national bank, First National Bank is supervised and regulated by
the OCC. Reliance, as a nationally-chartered bank, is also regulated by the OCC.
As Ohio state-chartered banks, State Bank, Peoples Bank and Citizens Savings
Bank are supervised and regulated by the Ohio Division of Financial Institutions
and the Federal Deposit Insurance Corporation ("FDIC"). The deposits of State
Bank, Peoples Bank, First National Bank and Citizens Savings Bank are insured by
the FDIC and those entities are subject to the applicable provisions of the
Federal Deposit Insurance Act. A subsidiary of a bank holding company can be
liable to reimburse the FDIC, if the FDIC incurs or anticipates a loss because
of a default of another FDIC-insured subsidiary of the bank holding company or
in connection with FDIC assistance provided to such subsidiary in danger of
default. In addition, the holding company of any insured financial institution
that submits a capital plan under the federal banking agencies' regulations on
prompt corrective action guarantees a portion of the institution's capital
shortfall, as discussed below.
Various requirements and restrictions under the laws of the United
States and the State of Ohio affect the operations of State Bank, Peoples Bank,
First National Bank and Citizens Savings Bank including requirements to maintain
reserves against deposits, restrictions on the nature and amount of loans which
may be made and the interest that may be charged thereon, restrictions relating
to investments and other activities, limitations on credit exposure to
correspondent banks, limitations on activities based on capital and surplus,
limitations on payment of dividends, and limitations on branching. Pursuant to
recent federal legislation, First National Bank may branch across state lines,
if permitted by the law of the other state. In addition, effective June 1997,
such interstate branching by First National Bank will be authorized, unless the
law of the other state specifically prohibits the interstate branching authority
granted by federal law.
The Federal Reserve Board has adopted risk-based capital guidelines for
bank holding companies and for state member banks, such as State Bank and
Citizens Savings Bank. The risk-based capital guidelines include both a
definition of capital and a framework for calculating risk weighted assets by
assigning assets and off-balance-sheet items to broad risk categories. The
minimum ratio of total capital to risk weighted assets (including certain
off-balance-sheet items, such as standby letters of credit) is 8%. At least 4.0
percentage points is to be comprised of common stockholders' equity (including
retained earnings but excluding treasury stock), noncumulative perpetual
preferred stock, a limited amount of cumulative perpetual preferred stock, and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and certain other intangible assets ("Tier 1 capital"). The remainder
("Tier 2 capital") may consist, among other things, of mandatory convertible
debt securities, a limited amount of subordinated debt, other preferred stock
and a limited amount of allowance for loan and lease losses. The Federal Reserve
Board also imposes a minimum leverage ratio (Tier 1 capital to total assets) of
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
100-200 basis points higher for other bank holding companies and state member
banks based on their particular circumstances and risk profiles and those
experiencing or anticipating significant growth. National bank subsidiaries,
such as First National Bank, are subject to similar capital requirements adopted
by the Comptroller of the Currency, and state non-member bank subsidiaries, such
as Peoples Bank, are subject to similar capital requirements adopted by the
FDIC.
6
7
The Corporation and its subsidiaries currently satisfy all capital
requirements. Failure to meet applicable capital guidelines could subject a
banking institution to a variety of enforcement remedies available to federal
and state regulatory authorities, including the termination of deposit insurance
by the FDIC.
The federal banking regulators have established regulations governing
prompt corrective action to resolve capital deficient banks. Under these
regulations, institutions which become undercapitalized become subject to
mandatory regulatory scrutiny and limitations, which increase as capital
continues to decrease. Such institutions are also required to file capital plans
with their primary federal regulator, and their holding companies must guarantee
the capital shortfall up to 5% of the assets of the capital deficient
institution at the time it becomes undercapitalized.
The ability of a bank holding company to obtain funds for the payment
of dividends and for other cash requirements is largely dependent on the amount
of dividends which may be declared by its subsidiary banks and other
subsidiaries. However, the Federal Reserve Board expects the Corporation to
serve as a source of strength to its subsidiary banks, which may require it to
retain capital for further investment in the subsidiaries, rather than for
dividends for shareholders of the Corporation. State Bank, Peoples Bank, First
National Bank and Citizens Savings Bank may not pay dividends to the Corporation
if, after paying such dividends, they would fail to meet the required minimum
levels under the risk-based capital guidelines and the minimum leverage ratio
requirements. State Bank, Peoples Bank, First National Bank and Citizens Savings
Bank must have the approval of their respective regulatory authorities if a
dividend in any year would cause the total dividends for that year to exceed the
sum of the current year's net profits and the retained net profits for the
preceding two years, less required transfers to surplus. Payment of dividends by
the bank subsidiaries may be restricted at any time at the discretion of the
regulatory authorities, if they deem such dividends to constitute an unsafe
and/or unsound banking practice. These provisions could have the effect of
limiting the Corporation's ability to pay dividends on its outstanding common
shares.
Rurban Life is chartered by the State of Arizona and is subject to
regulation, supervision, and examination by the Arizona Department of Insurance.
The powers of regulation and supervision of the Arizona Department of Insurance
relate generally to such matters as minimum capitalization, the grant and
revocation of certificates of authority to transact business, the nature of and
limitations on investments, the maintenance of reserves, the form and content of
required financial statements, reporting requirements and other matters
pertaining to life and disability insurance companies.
Deposit Insurance Assessments and Recent Legislation
----------------------------------------------------
The FDIC is authorized to establish separate annual assessment rates
for deposit insurance for members of the Bank Insurance Fund ("BIF") and the
Savings Association Insurance Fund ("SAIF"). State Bank, Peoples Bank, First
National Bank and Citizens Savings Bank are members of BIF. The FDIC may
increase assessment rates for either fund if necessary to restore the fund's
ratio of reserves to insured deposits to its target level within a reasonable
time and may decrease such rates if such target level has been met. The FDIC has
established a risk-based assessment system for both BIF and SAIF members. Under
this system, assessments vary based on the risk the institution poses to its
deposit insurance fund. The risk level is determined based on the institution's
capital level and the FDIC's level of supervisory concern about the institution.
7
8
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.
Statistical Financial Information Regarding the Corporation
-----------------------------------------------------------
The following schedules and tables analyze certain elements of the
consolidated balance sheets and statements of income of the Corporation and its
subsidiaries, as required under Exchange Act Industry Guide 3 promulgated by the
Securities and Exchange Commission, and should be read in conjunction with the
narrative analysis presented in Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation and the Consolidated Financial
Statements of the Corporation and its subsidiaries included at pages 48 through
78 of this Annual Report on Form 10-K.
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9
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
A. The following are the average balance sheets for the years ending
December 31:
1997 1996 1995
ASSETS ---- ---- ----
Interest-earning assets
Securities available for sale (1)
Taxable $ 63,329,510 $ 65,724,102 $ 64,643,230
Non-taxable 5,827,365 8,931,157 25,869
Securities held to maturity
Taxable - - 1,485,961
Non-taxable - - 9,416,228
Federal funds sold 13,009,024 6,950,036 10,145,738
Loans, net of unearned income
and deferred loan fees (2) 342,480,740 305,611,881 282,864,867
------------ ------------ ------------
Total interest-earning assets 424,646,639 387,217,176 368,581,893
Allowance for loan losses (5,245,851) (4,593,293) (4,606,629)
------------ ------------ ------------
419,400,788 382,623,883 363,975,264
Noninterest-earning assets
Cash and due from banks 14,980,442 17,435,810 17,670,513
Premises and equipment, net 8,732,846 8,540,524 8,857,350
Accrued interest receivable and
other assets 8,897,276 8,142,608 8,056,940
------------ ------------ ------------
$452,011,352 $416,742,825 $398,560,067
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Deposits
Savings and interest-bearing
demand deposits $ 90,874,940 $ 83,395,385 $ 83,243,571
Time deposits 265,046,479 243,798,539 231,640,466
Federal funds purchased and
securities sold under agreements
to repurchase 2,294,882 2,559,025 684,484
Advances from Federal Home
Loan Bank (FHLB) 3,907,485 - -
------------ ------------ ------------
Total interest-bearing liabilities 362,123,786 329,752,949 315,568,521
Noninterest-bearing liabilities
Demand deposits 44,405,121 42,733,313 41,427,007
Accrued interest payable and
other liabilities 3,331,816 3,507,865 3,687,999
------------ ------------ ------------
409,860,723 375,994,127 360,683,527
Net ESOP obligation 8,178,356 8,615,308 8,083,792
Shareholders' equity (3) 33,972,273 32,133,390 29,792,748
------------ ------------ ------------
$452,011,352 $416,742,825 $398,560,067
============ ============ ============
- -------------------------------------------------------------------------------------------------------------------
(1) Securities available for sale are carried at fair value. The average
balance includes quarterly average balances of the market value
adjustments and daily average balances for the amortized cost of
securities.
(2) Loan balances include principal balances of nonaccrual loans and loans
held for sale.
(3) Shown net of average net unrealized appreciation (depreciation) on
securities available for sale, net of tax.
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10
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (CONTINUED)
B. The following tables set forth, for the years indicated, the condensed
average balances of interest-earning assets and interest-bearing
liabilities, the interest earned or paid on such amounts, and the
average interest rates earned or paid thereon.
------------------------------1997----------------------
Average Average
Balance Interest Rate
------- -------- ----
INTEREST-EARNING ASSETS
Securities(1)
Taxable $ 63,329,510 $ 3,900,143 6.16%
Non-taxable 5,827,365 473,148(2) 8.12 (2)
Federal funds sold 13,009,024 753,081 5.79
Loans, net of unearned income and
deferred loan fees 342,480,740(3) 32,155,039(4) 9.39
------------ -----------
Total interest-earning assets $424,646,639 37,281,411(2) 8.78%(2)
============
INTEREST-BEARING LIABILITIES
Deposits
Savings and interest-bearing
demand deposits $ 90,874,940 1,971,334 2.17%
Time deposits 265,046,479 14,334,398 5.41
Federal funds purchased and
securities sold under agree-
ments to repurchase 2,294,882 161,505 7.04
Advances from FHLB 3,907,485 221,918 5.68
------------ -----------
Total interest-bearing liabilities $362,123,786 16,689,155 4.61
============ -----------
Net interest income $20,592,256(2)
===========
Net interest income as a percent
of average interest-earning assets 4.85%(2)
====
- -------------------------------------------------------------------------------------------------------------------
(1) Securities balances represent daily average balances for the amortized
cost of securities. The average rate is calculated based on the
amortized cost of securities.
(2) Computed on tax equivalent basis for non-taxable securities (34%
statutory tax rate in 1997).
(3) Loan balances include principal balances of nonaccrual
loans and loans held for sale.
(4) Includes fees on loans of $1,430,211 in 1997.
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11
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Continued)
---------------------------1996------------------
Average Average
Balance Interest Rate
------- -------- ----
INTEREST-EARNING ASSETS
Securities(1)
Taxable $ 65,675,003 $ 4,066,184 6.19%
Non-taxable 8,771,930 619,411(2) 7.06 (2)
Federal funds sold 6,950,036 355,950 5.12
Loans, net of unearned income and
deferred loan fees 305,611,881(3) 28,680,021(4) 9.38
------------ -----------
Total interest-earning assets $387,008,850 33,721,566(2) 8.71%(2)
============
INTEREST-BEARING LIABILITIES
Deposits
Savings and interest-bearing
demand deposits $ 83,395,385 2,109,831 2.53%
Time deposits 243,798,539 12,401,905 5.09
Federal funds purchased and
securities sold under agreements
to repurchase 2,559,025 144,773 5.66
------------ -----------
Total interest-bearing liabilities $329,752,949 14,656,509 4.44%
============ -----------
Net interest income $ 19,065,057(2)
============
Net interest income as a percent
of average interest-earning assets 4.93%(2)
====
- -------------------------------------------------------------------------------------------------------------------
(1) Securities balances represent daily average balances for the amortized
cost of securities. The average rate is calculated based on the
amortized cost of securities.
(2) Computed on tax equivalent basis for non-taxable securities (34%
statutory tax rate in 1996).
(3) Loan balances include principal balances of nonaccrual loans and loans
held for sale.
(4) Includes fees on loans of $1,237,771 in 1996.
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12
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (CONTINUED)
------------------------1995-------------------
Average Average
Balance Interest Rate
------- -------- ----
INTEREST-EARNING ASSETS
Securities(1)
Taxable $ 66,675,224 $ 3,756,764 5.63%
Non-taxable 9,442,097 645,724(2) 6.84 (2)
Federal funds sold 10,145,738 707,596 6.97
Loans, net of unearned income and
deferred loan fees 282,864,867 (3) 26,539,689(4) 9.38
------------ -----------
Total interest-earning assets $369,127,926 31,649,773(2) 8.57%(2)
============
INTEREST-BEARING LIABILITIES
Deposits
Savings and interest-bearing
demand deposits $ 83,243,571 2,088,899 2.51%
Time deposits 231,640,466 12,109,099 5.23
Federal funds purchased and
securities sold under agree-
ments to repurchase 684,484 40,050 5.85
------------ -----------
Total interest-bearing liabilities $315,568,521 14,238,048 4.51%
============ -----------
Net interest income $17,411,725(2)
===========
Net interest income as a percent
of average interest-earning assets 4.72%(2)
====
- -------------------------------------------------------------------------------------------------------------------
(1) Securities balances represent daily average balances for the amortized
cost of securities. The average rate is calculated based on the
amortized cost of securities.
(2) Computed on tax equivalent basis for non-taxable securities (34%
statutory tax rate in 1995).
(3) Loan balances include principal balances of nonaccrual loans and loans
held for sale.
(4) Includes fees on loans of $967,504 in 1995.
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13
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Continued)
C. The following tables set forth the effect of volume and rate changes on
interest income and expense for the periods indicated. For purposes of
these tables, changes in interest due to volume and rate were determined as
follows:
Volume Variance - change in volume multiplied by the previous year's rate.
Rate Variance - change in rate multiplied by the previous year's volume.
Rate/Volume Variance - change in volume multiplied by the change in
rate. This variance was allocated to volume variance and rate variance
in proportion to the relationship of the absolute dollar amount of the
change in each.
Interest on non-taxable securities has been adjusted to a fully tax
equivalent basis using a statutory tax rate of 34% in 1997, 1996 and 1995.
Total Variance Attributable To
Variance ------------------------
1997/1996 Volume Rate
--------- ------ ----
INTEREST INCOME
Securities
Taxable $ (166,041) $ (144,547) $ (21,494)
Non-taxable (146,263) (229,465) 83,202
Federal funds sold 397,131 345,492 51,639
Loans, net of unearned income
and deferred loan fees 3,475,018 3,440,015 35,003
---------- ---------- ---------
3,559,845 3,411,495 148,350
INTEREST EXPENSE
Deposits
Savings and interest-bearing
demand deposits (138,497) 178,809 (317,306)
Time deposits 1,932,493 1,120,456 812,037
Federal funds purchased and
securities sold under agreements
to repurchase 16,732 (16,027) 32,759
Advances from FHLB 221,918 221,918 -
---------- ---------- ---------
2,032,646 1,505,156 527,490
---------- ---------- ---------
NET INTEREST INCOME $1,527,199 $1,906,339 $(379,140)
========== ========== =========
13
14
'
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Continued)
Total Variance Attributable To
Variance ------------------------
1996/1995 Volume Rate
--------- ------ ----
INTEREST INCOME
Securities
Taxable $ 309,420 $ (57,091) $ 366,511
Non-taxable (26,313) (46,854) 20,541
Federal funds sold (351,646) (190,759) (160,887)
Loans, net of unearned income
and deferred loan fees 2,140,332 2,154,575 (14,243)
---------- ---------- ---------
2,071,793 1,859,871 211,922
INTEREST EXPENSE
Deposits
Savings and interest-bearing
demand deposits 20,932 3,815 17,117
Time deposits 292,806 624,266 (331,460)
Federal funds purchased and
securities sold under agreements
to repurchase 104,723 106,093 (1,370)
---------- ---------- ---------
418,461 734,174 (315,713)
---------- ---------- ---------
NET INTEREST INCOME $1,653,332 $1,125,697 $ 527,635
========== ========== =========
14
15
II. INVESTMENT PORTFOLIO
A. The book value of securities available for sale as of December 31
are summarized as follows:
1997 1996 1995
---- ---- ----
U.S. Treasury and U.S. Government
agency securities $43,398,433 $54,235,593 $74,251,501
Obligations of states and
political subdivisions 5,395,065 6,389,434 9,543,395
Mortgage-backed securities 21,159,472 4,837,112 5,345,748
Marketable equity securities 1,730,150 1,173,750 1,189,222
----------- ----------- -----------
$71,683,120 $66,635,889 $90,329,866
=========== =========== ===========
B. The maturity distribution and weighted average yield of securities
available for sale at December 31, 1997 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 U.S. Government
agency securities $ - $43,170,683 $ 227,750 $ -
Obligations of states and political
subdivisions (1) 293,389 2,802,897 2,192,900 105,879
Mortgage-backed securities (2) 33,816 4,285,568 10,710,064 6,130,024
Marketable equity securities - - - 1,730,150
-------- ----------- ----------- ----------
$327,205 $50,259,148 $13,130,714 $7,966,053
======== =========== =========== ==========
Weighted average yield 5.95% 6.04% 6.80% 6.23%
==== ==== ==== ====
(1) Yields are not presented on a tax-equivalent basis.
(2) Maturity based upon estimated weighted-average life.
The weighted average interest rates are based on coupon rates for
securities purchased at par value and on effective interest rates
considering amortization or accretion if the securities were purchased at
a premium or discount.
C. Excluding those holdings of the investment portfolio in U.S. Treasury
securities and other agencies of the U.S. Government, there were no
securities of any one issuer which exceeded 10% of the shareholders'
equity of the Corporation at December 31, 1997.
15
16
III. LOAN PORTFOLIO
A. Types of Loans - Total loans on the balance sheet are
comprised of the following classifications at December 31 for
the years indicated:
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Commercial,
financial and
agricultural(1) $217,324,268 $185,838,900 $ 63,444,036 $ 62,866,040 $ 51,078,815
Real estate
mortgage(1) 75,212,817 72,356,881 152,555,540 152,136,086 122,313,826
Consumer
loans to
individuals 67,198,876 60,512,850 61,600,664 65,676,876 54,420,469
------------ ------------ ------------ ------------ ------------
$359,735,961 $318,708,631 $277,600,240 $280,679,002 $227,813,110
============ ============ ============ ============ ============
Real estate
mortgage
loans held
for resale $ 4,404,327 $ 1,875,636 $ 2,949,293 $ 4,689,611 $ 4,669,580
============ ============ ============ ============ ============
(1) Beginning in 1996, commercial real estate loans are classified as
commercial, financial and agricultural. Prior to 1996, commercial
real estate loans are classified as real estate mortgage.
Concentrations of Credit Risk: The Corporation grants commercial, real estate
and installment loans to customers mainly in northwest Ohio. Commercial loans
include loans collateralized by business assets and agricultural loans
collateralized by crops and farm equipment. As of December 31, 1997, commercial,
financial and agricultural loans make up approximately 60% of the loan portfolio
and the loans are expected to be repaid from cash flow from operations of
businesses. As of December 31, 1997, residential first mortgage loans make up
approximately 21% of the loan portfolio and are collateralized by first
mortgages on residential real estate. As of December 31, 1997, consumer loans to
individuals make up approximately 19% of the loan portfolio and are primarily
collateralized by consumer assets.
B. Maturities and Sensitivities of Loans to Changes in Interest
Rates - The following table shows the amounts of commercial,
financial and agricultural loans outstanding as of December 31,
1997 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, financial and agricultural loans due after one
year. (Variable-rate loans are those loans with floating or
adjustable interest rates.)
Commercial,
Financial and
Maturing Agricultural
-------- ------------
Within one year $ 97,867,000
After one year but within five years 114,137,000
After five years 5,320,000
------------
$217,324,000
16
17
III. LOAN PORTFOLIO (Continued)
Commercial, Financial and Agricultural
--------------------------------------
Interest Sensitivity
----------------------
Fixed Variable
Rate Rate Total
---- ---- -----
Due after one year but
within five years $33,473,000 $80,664,000 $114,137,000
Due after five years 5,320,000 - 5,320,000
----------- ----------- ------------
$38,793,000 $80,664,000 $119,457,000
=========== =========== ============
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.
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
(a) Loans accounted for on a
nonaccrual basis $2,303(1) $1,055(1) $2,403(1) $3,538 $3,621
(b) Accruing loans which are
contractually past due 90 days
or more as to interest
or principal payments 462 293 711 1,198 200
(c) Loans not included in (a)
or (b) which are
"Troubled Debt Restruc-
turings" as defined by
Statement of Financial
Accounting Standards
No. 15 - - - - -
(d) Other loans defined as
"impaired" - 2,490 - - -
------ ------ ------ ------ ------
$2,765 $3,838 $3,114 $4,736 $3,821
====== ====== ====== ====== ======
(1) Includes loans defined as "impaired" under SFAS No. 114.
17
18
III. LOAN PORTFOLIO (Continued)
Management believes the allowance for loan losses at December 31, 1997 is
adequate to absorb any losses on nonperforming loans, as the allowance balance
is maintained by management at a level considered adequate to cover losses that
are currently anticipated based on past loss experience, general economic
conditions, information about specific borrower situations including their
financial position and collateral values, and other factors and estimates which
are subject to change over time.
1997
----
(In thousands)
Gross interest income that would have been recorded in 1997 on
nonaccrual loans outstanding at December 31, 1997 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 $250
Interest income actually recorded on nonaccrual loans and
included in net income for the period (46)
----
Interest income not recognized during the period $204
====
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, 1997, in addition to the $2,765,000 of
loans reported under Item III, C.1., there are
approximately $3,855,000 in other outstanding loans where
known information about possible credit problems of the
borrowers causes management to have serious doubts as to
the ability of such borrowers to comply with the present
loan repayment terms and which may result in disclosure of
such loans pursuant to Item III. C.1 at some future date.
Consideration was given to loans classified for regulatory
purposes as loss, doubtful, substandard, or special
mention that have not been disclosed in Section 1 above.
To the extent that such loans are not included in the
$3,855,000 potential problem loans described above,
management believes that such loans will not materially
impact future operating results, liquidity, or capital
resources.
18
19
III. LOAN PORTFOLIO (Continued)
3. Foreign Outstandings
None
4. Loan Concentrations
At December 31, 1997, loans outstanding related to
agricultural operations or collateralized by agricultural
real estate aggregated approximately $48,794,000. At
December 31, 1997, there were no agriculture loans which
were accounted for on a nonaccrual basis; and there are no
accruing agriculture loans which are contractually past
due ninety days or more as to interest or principal
payments.
D. Other Interest-Bearing Assets
-----------------------------
There are no other interest-bearing assets as of December 31,
1997 which would be required to be disclosed under Item III. C.1
or 2 if such assets were loans.
19
20
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:
1997 1996 1995
---- ---- ----
LOANS
Loans outstanding at end of period (1) $ 363,851,637 $ 320,321,476 $ 280,314,137
============= ============= =============
Average loans outstanding during period (1) $ 342,480,740 $ 305,611,881 $ 282,864,867
============= ============= =============
ALLOWANCE FOR LOAN LOSSES
Balance at beginning of period $ 5,066,600 $ 4,270,000 $ 4,770,000
Allowance of acquired Bank -- -- --
Loans charged-off
Commercial, financial and agricultural loans (2) (438,317) (308,143) (1,267,028)
Real estate mortgage (2) (30,863) (14,470) (509,108)
Consumer loans to individuals (856,426) (555,164) (874,690)
------------- ------------- -------------
(1,325,606) (877,777) (2,650,826)
Recoveries of loans previously charged-off
Commercial, financial and agricultural loans (2) 308,283 380,951 497,437
Real estate mortgage (2) 6,877 8,288 23,432
Consumer loans to individuals 235,482 324,129 178,059
------------- ------------- -------------
550,642 713,368 698,928
------------- ------------- -------------
Net loans charged-off (774,964) (164,409) (1,951,898)
Provision for loan losses 947,965 961,009 1,451,898
------------- ------------- -------------
Balance at end of period $ 5,239,601 $ 5,066,600 $ 4,270,000
============= ============= =============
Ratio of net charge-offs during the period to
average loans outstanding during the period .23% .05% .69%
============= ============= =============
1994 1993
---- ----
LOANS $ 285,106,409 $ 232,317,346
Loans outstanding at end of period (1) ============= =============
$ 249,993,210 $ 225,013,808
Average loans outstanding during period (1) ============= =============
ALLOWANCE FOR LOAN LOSSES $ 3,390,000 $ 3,086,443
Balance at beginning of period 1,100,000 --
Allowance of acquired Bank
Loans charged-off (275,543) (139,250)
Commercial, financial and agricultural loans (2) (66,531) (118,054)
Real estate mortgage (2) (408,879) (676,436)
Consumer loans to individuals ------------- -------------
(750,953) (933,740)
Recoveries of loans previously charged-off 85,052 89,832
Commercial, financial and agricultural loans (2) 56,809 114,156
Real estate mortgage (2) 187,602 237,823
Consumer loans to individuals ------------- -------------
329,463 441,811
------------- -------------
(421,490) (491,929)
Net loans charged-off
701,490 795,486
Provision for loan losses ------------- -------------
$ 4,770,000 $ 3,390,000
Balance at end of period ============= =============
Ratio of net charge-offs during the period to .17% .22%
average loans outstanding during the period ============= =============
(1) Net of unearned income and deferred loan fees, including
loans held for sale
(2) Beginning in 1996, commercial real estate loans are
classified as commercial, financial and agricultural.
Prior to 1996, commercial real estate loans are
classified as real estate mortgage.
The allowance for loan losses balance and the provision for loan
losses are judgmentally determined by management based upon
periodic reviews of the loan portfolio. In addition, management
considered the level of charge-offs on loans as well as the
fluctuations of charge-offs and recoveries on loans including
the factors which caused these changes. Estimating the risk of
loss and the amount of loss is necessarily subjective.
Accordingly, the allowance is maintained by management at a
level considered adequate to cover losses that are currently
anticipated based on past loss experience, general economic
conditions, information about specific borrower situations
including their financial position and collateral values and
other factors and estimates which are subject to change over
time. The increase in loans charged-off in 1995 as compared to
the other periods presented is due largely to the charge-off of
certain credits which were previously reported on a nonaccrual
basis.
20
21
IV. SUMMARY OF LOAN LOSS EXPERIENCE (Continued)
B. The following schedule is a breakdown of the allowance for loan losses
allocated by type of loan and related ratios.
-----------Allocation of the Allowance for Loan Losses-------
Percentage Percentage
of Loans of Loans
In Each In Each
Category to Category To
Allowance Total Allowance Total
Amount Loans Amount Loans
------ ----- ------ -----
December 31, 1997 December 31, 1996
----------------- -----------------
Commercial, financial
and agricultural $3,678,000 60.4% $3,445,000 58.3%
Residential first mortgage 203,000 20.9 203,000 22.7
Consumer loans
to individuals 742,000 18.7 811,000 19.0
Unallocated 616,601 N/A 607,600 N/A
---------- ------- ---------- -----
$5,239,601 100.0% $5,066,600 100.0%
========== ======= ========== =====
December 31, 1995 December 31, 1994
----------------- -----------------
Commercial, financial
and agricultural $1,665,000 22.9% $1,764,900 22.4%
Real estate mortgage 512,000 54.9 572,400 54.2
Consumer loans
to individuals 1,452,000 22.2 1,621,800 23.4
Unallocated 641,000 N/A 810,900 N/A
---------- ------- ---------- -----
$4,270,000 100.0% $4,770,000 100.0%
========== ======= ========== =====
December 31, 1993
-----------------
Commercial, financial
and agricultural $1,220,400 22.4%
Real estate mortgage 372,900 53.7
Consumer loans
to individuals 1,084,800 23.9
Unallocated 711,900 N/A
---------- -----
$3,390,000 100.0%
========== =====
While management's periodic analysis of the adequacy of the
allowance for loan losses may allocate portions of the allowance
for specific problem loan situations, the entire allowance is
available for any loan charge-offs that occur.
21
22
V. DEPOSITS
The average amount of deposits and average rates paid are summarized as
follows for the years ended December 31:
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
Savings and interest-bearing demand deposits $ 90,874,940 2.17% $ 83,395,385 2.53% $ 83,243,571 2.51%
Time deposits 265,046,479 5.41 243,798,539 5.09 231,640,466 5.23
Demand deposits (noninterest-bearing) 44,405,121 ---- 42,733,313 ---- 41,427,007 ----
------------ ------------ ------------
$400,326,540 $369,927,237 $356,311,044
============ ============ ============
Maturities of time certificates of deposit and other time deposits of
$100,000 or more outstanding at December 31, 1997 are summarized as follows:
Amount
-----------
Three months or less $16,139,000
Over three months and through six months 17,506,000
Over six months and through twelve months 10,834,000
Over twelve months 12,799,000
-----------
$57,278,000
===========
22
23
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:
1997 1996 1995
---- ---- ----
Average total assets $452,011,352 $416,742,825 $398,560,067
============ ============ ============
Average shareholders'
equity and net ESOP
obligation (1) $ 42,150,629 $ 40,748,698 $ 37,876,540
============ ============ ============
Average shareholders' equity (1) $ 33,972,273 $ 32,133,390 $ 29,792,748
============ ============ ============
Net income $ 5,515,797 $ 4,849,214 $ 4,094,813
============ ============ ============
Cash dividends declared $ 1,648,730 $ 1,308,975 $ 1,310,627
============ ============ ============
Return on average total assets 1.22% 1.16% 1.03%
==== ==== ====
Return on average share-
holders' equity and net ESOP
obligation 13.09% 11.90% 10.81%
===== ===== =====
Return on average share-
holders' equity 16.24% 15.09% 13.74%
===== ===== =====
Dividend payout percentage (2) 29.89% 26.99% 32.01%
===== ===== =====
Average shareholders'
equity and net ESOP obligation
to average total assets 9.33% 9.78% 9.50%
==== ==== ====
Average shareholders'
equity to average total assets 7.52% 7.71% 7.48%
==== ==== ====
(1) Net of average unrealized appreciation or depreciation on securities
available for sale.
(2) Dividends declared divided by net income.
II. SHORT-TERM BORROWINGS
The Corporation did not have any category of short-term borrowings for
which the average balance outstanding during the reported periods was
30 percent or more of shareholders' equity at the end of the reported
periods.
23
24
Effect of Environmental Regulation
----------------------------------
Compliance with federal, state and local provisions regulating the
discharge of materials into the environment, or otherwise relating to the
protection of the environment, has not had a material effect upon the capital
expenditures, earnings or competitive position of the Corporation and its
subsidiaries. The Corporation believes that the nature of the operations of its
subsidiaries has little, if any, environmental impact. The Corporation,
therefore, anticipates no material capital expenditures for environmental
control facilities for its current fiscal year or for the foreseeable future.
The Corporation's subsidiaries may be required to make capital expenditures for
environmental control facilities related to properties which they may acquire
through foreclosure proceedings in the future; however, the amount of such
capital expenditures, if any, is not currently determinable.
Item 2. Properties.
- ---------------------
The following is a listing and brief description of the properties
owned or leased by State Bank and used in its business:
1. Its main office is a two-story brick
building located at 401 Clinton Street, Defiance,
Ohio, which was built in 1971. Including a basement
addition built in 1991, it contains 33,400 square
feet of floor space. Approximately 2,186 square feet
on the second floor and 2,910 on the lower level
presently are leased to RDSI, 6,408 square feet on
the second floor are leased to RFS and 3,565 sqaure
feet on the lower level are leased to the
Corporation.
2. A branch office located in downtown
Defiance, Ohio containing 3,200 square feet of floor
space was built in 1961. Most of the space is in the
basement which is used for storage. It contains a
three-bay drive-thru, two inside teller locations, an
ATM and a night deposit unit.
3. A full service branch office located on
Main Street in Ney, Ohio containing 1,536 square feet
of floor space was opened in 1968.
4. A full service branch office located at
1796 North Clinton Street, Defiance, Ohio containing
2,120 square feet of floor space was opened in 1968.
It is a free standing structure located in front of a
shopping center.
5. A full service branch office located at
1856 East Second Street, Defiance, Ohio containing
2,160 square feet of floor space was opened in 1972.
It is a free standing structure located in front of a
shopping center.
6. A full service branch office located at
2010 South Jefferson, Defiance, Ohio containing 2,160
square feet of floor space was opened in 1979. It is
located in a primarily residential area.
24
25
7. A full service branch office located at
220 North Main Street, Paulding, Ohio containing
6,200 square feet of floor space was opened in 1980.
8. A full service branch office located at
312 Main Street, Delta, Ohio containing 3,470 square
feet of floor space was acquired from Society Bank &
Trust ("Society") in 1992.
9. A full service branch office located at
133 E. Morenci Street, Lyons, Ohio containing 2,578
square feet of floor space was acquired from Society
in 1992.
10. A full service branch office located at
515 Parkview, Wauseon, Ohio containing 3,850 square
feet of floor space was acquired from Society in
1992.
11. A full service branch located in the
Chief Market Square supermarket at 705 Deatrick
Street, Defiance, Ohio and containing 425 square feet
was opened in 1993. State Bank leases the space in
which this branch is located pursuant to a 15-year
lease.
The following is a listing and brief description of the properties
owned by Peoples Bank and used in its business:
1. The full service main office located at
301 South Main Street, Findlay, Ohio was opened in
1990. It contains approximately 30,000 square feet of
floor space, of which 12,000 is used by an unrelated
law firm.
2. A full service branch office located at
124 East Main Street, McComb, Ohio was opened in
1990. It contains approximately 3,600 square feet of
floor space.
3. A full service branch office located at
1330 North Main Street, Findlay, Ohio, was opened in
1979. It contains approximately 1,500 square feet of
floor space.
The only real property owned by First National Bank is the location of
the Bank at 405 East Main Street, Ottawa, Ohio. First National Bank's facility
is a two-story brick and steel building containing approximately 7,100 square
feet of space. The first floor is a traditional banking lobby which was
remodeled in 1991. The second floor contains bookkeeping, office and storage
space.
The following is a listing and brief description of the properties
owned by Citizens Savings Bank and used in its business:
1. The full service main office is located
at 132 East Front Street, Pemberville, Ohio and
contains 6,389 square feet. It was built near the
turn of the century and was completely remodeled and
added on to in 1992.
25
26
2. A full service branch office located at
230 West Madison Street, Gibsonburg, Ohio occupies
2,520 square feet and was built in 1988.
The following is a listing and brief description of the properties
leased by RMC and used in its business:
1. A 6,400 square foot office space located
at Estancia Boulevard, Suite 201, Clearwater,
Florida. This office was first leased on January 22,
1997.
2. A 650 square foot office space located at
6521 Ridge Rd. Port Richey, Florida and used as a
satellite mortgage loan production office.
3. A 650 square foot office space located at
3443G Tamiami Trail Port Charlotte, Florida.
Item 3. Legal Proceedings.
- ----------------------------
There are no pending legal proceedings to which the Corporation or
any of its subsidiaries is a party or to which any of their property is
subject, except routine legal proceedings to which the Corporation or any of
its subsidiaries is a party incidental to its banking business. None of such
proceedings are considered by the Corporation to be material.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------------------------------------------------------------
Not applicable.
Executive Officers of the Registrant.
- -------------------------------------
The following table lists the names and ages of the executive officers
of the Corporation as of the date of this Annual Report on Form 10-K, the
positions presently held by each such executive officer and the business
experience of each such executive officer during the past five years. Unless
otherwise indicated, each person has held his principal occupation(s) for more
than five years. All executive officers serve at the pleasure of the Board of
Directors of the Corporation.
Name Age Position(s) Held with the
---- --- Corporation and its Subsidiaries
and Principal Occupation(s)
---------------------------
Steven D. VanDemark 45 Chairman of the Board of Directors of the Corporation;
Chairman of the Board of Directors of State Bank; Director of
RDSI; Director of RMC; General Manager of Defiance Publishing
Company, Defiance, Ohio, a newspaper publisher.
26
27
Name Age Position(s) Held with the
---- --- Corporation and its Subsidiaries
and Principal Occupation(s)
---------------------------
Thomas C. Williams 49 President and Chief Executive Officer of the Corporation since
June 1995; Director of the Corporation, State Bank, Peoples
Bank, Rurban Life, RFS, RMC and RDSI. President and Chief
Executive Officer of State Bank, June 1995 to August 1996;
President of FirstMerit Bank, FSB, Clearwater, Florida, from
1994 to June 1995; Senior Vice President and Managing Officer
of the Northern Region of The First National Bank of Ohio,
Cleveland, Ohio, from 1990 to 1994.
Robert W. Constien 45 Executive Vice President of the Corporation since March 12,
1997; Vice President of the Corporation from 1994 to March,
1997; Chief Executive Officer and a Director of RFS since
March 1997; Director of State Bank; Executive Vice President
of State Bank from 1994 to 1997, Senior Vice President of
State Bank from 1991 to 1993 and Vice President of State Bank
from 1987 to 1991.
Richard C. Warrener 53 Executive Vice President of the Corporation since December
1997; Chief Financial Officer of the Corporation since
December 31, 1996; Senior Vice President of the Corporation
from December 31, 1996 to December 1997; Senior Vice President
and Chief Financial Officer of FirstMerit Bank, N.A. from
March 1994 to December 1996; Senior Vice President and Chief
Financial Officer of Life Savings Bank from January 1991 to
March 1994; Division Vice President and Chief Financial
Officer of Florida Federal Savings Bank from 1988 to November
1990.
Mark E. Rowland 46 Senior Vice President and Senior Lender of the Corporation
since December 1997; Executive Vice President of State Bank
since June 1997; Senior Vice President of State Bank since
January 1997; Executive Vice President of Bancapital
Corporation, a financial services company involved primarily
in mortgage lending, from January 1991 to June 1996.
27
28
Name Age Position(s) Held with the
---- --- Corporation and its Subsidiaries
and Principal Occupation(s)
---------------------------
Mark A. Soukup 41 President and Chief Executive Officer of State Bank since
(1) August 1996; Senior Vice President-Retail Banking of State
Bank from November 1995 to August 1996;
Branch Administrator
FirstMerit First National
Bank of Ohio from 1992 to
September 1995.
Kenneth A. Joyce 50 Chairman and Chief Executive Officer of RDSI since October
(1) 1997; Chairman and Chief Executive Officer of RMC since
November 1997; Executive Vice President of State Bank from
June 1997 to November 1997; President of
FirstMerit Bank, FSB,
Clearwater Florida from
July 1995 to December 1996.
(1) For purposes of this Form 10-K, even though Mr. Soukup and Mr. Joyce are
not employed as officers of the Corporation and their salaries are not paid
by the Corporation, they are included in the list of Executive Officers of
the Corporation because they perform policy making functions for the
Corporation.
PART II
-------
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
- ------------------------------------------------------------------------------
The common shares of the Corporation are traded on a limited basis in
the over-the-counter market. The table below sets forth the high and low bid
quotations for, and the cash dividends declared with respect to, the common
shares of the Corporation, for the indicated periods. The bid quotations were
obtained from one of the securities dealers who makes a market in the
Corporation's common shares (the Corporation is aware of three securities
dealers who make a market in its common shares). The bid quotations reflect the
prices at which purchases and sales of the Corporation's common shares could be
made during each period and not inter-dealer prices. The bid quotations reflect
retail mark-ups, but not commissions or retail mark-downs. The bid quotations
represent actual transactions in the Corporation's common shares. The per share
amounts have been restated for the 5% stock dividend declared in December 1996.
Per Share Per Share
Bid Prices Dividends
1996 High Low Declared
- ---- ---- --- --------
First Quarter $32.38 $29.88 $ .1429
Second Quarter 33.81 30.95 $ .1429
Third Quarter 33.81 31.90 $ .1429
Fourth Quarter 33.10 28.00 $ .1429
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Per Share Per Share
Bid Prices Dividends
1997 High Low Declared
- ---- ---- --- --------
First Quarter $33.00 $26.00 $ .18
Second Quarter 32.00 30.00 $ .18
Third Quarter 31.50 28.00 $ .18
Fourth Quarter 31.38 27.50 $ .20
There can be no assurance as to the amount of dividends which will be
declared with respect to the common shares of the Corporation in the future,
since such dividends are subject to the discretion of the Corporation's Board of
Directors, cash needs, general business conditions, dividends from the
subsidiaries and applicable governmental regulations and policies. See Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operation - Capital Resources and Note 1 of Notes to Consolidated Financial
Statements.
The approximate number of holders of outstanding common shares of the
Corporation, based upon the number of record holders as of December 31, 1997, is
1,130.
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Item 6. Selected Financial Data.
- ---------------------------------
SUMMARY OF SELECTED FINANCIAL DATA
(Dollars in thousands except per share data)
Year Ended December 31, 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
EARNINGS
Total interest income $ 37,120 $ 33,511 $ 31,430 $ 23,474 $ 21,478
Total interest expense 16,689 14,657 14,238 9,612 8,909
Net interest income 20,431 18,854 17,192 13,862 12,569
Provision for loan losses 948 961 1,452 701 795
Total noninterest income 7,756 6,194 5,753 5,312 5,434
Total noninterest expense 19,253 16,876 15,271 12,664 11,510
Income tax expense 2,470 2,362 2,127 1,899 1,823
Net income 5,516 4,849 4,095 3,910 3,875
- -------------------------------------------------------------------------------------------------
PER SHARE DATA (1)
Basic and diluted net income(2) $ 2.49 $ 2.14 $ 1.79 $ 1.80 $ 1.82
Cash dividends declared 0.74 0.57 0.57 0.57 0.57
- -------------------------------------------------------------------------------------------------
AVERAGE BALANCES
Average shareholders'
equity and net ESOP
obligation $ 42,151 $ 40,749 $ 37,877 $ 30,614 $ 29,966
Average shareholders'
equity 33,972 32,133 29,793 24,589 25,412
Average total assets 452,011 416,743 398,560 335,118 314,230
- -------------------------------------------------------------------------------------------------
RATIOS
Return on average total assets 1.22% 1.16% 1.03% 1.17% 1.23
Average shareholders' equity
and net ESOP obligation to
average total assets 9.33 9.78 9.50 9.14 9.54
Average shareholders' equity
to average total assets 7.52 7.71 7.48 7.34 8.09
Return on average shareholders'
equity and net ESOP obligation 13.09 11.90 10.81 12.77 12.93
Return on average
shareholders' equity 16.24 15.09 13.74 15.90 15.25
Cash dividend payout ratio
(cash dividends divided by
net income) 29.89 26.99 32.01 32.33 31.54
- -------------------------------------------------------------------------------------------------
(1) Per share data restated for 5% stock dividend declared in 1996 and 1994
two-for-one stock split.
(2) Restated to reflect adoption of SFAS No. 128 on December 31, 1997.
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SUMMARY OF SELECTED FINANCIAL DATA (Continued)
(Dollars in thousands except per share data)
Year Ended December 31, 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
PERIOD END TOTALS
Total assets $471,371 $433,273 $411,226 $393,547 $317,845
Total loans and leases 359,736 318,709 277,600 280,679 227,813
Total deposits 415,181 387,766 367,797 354,646 283,603
Advances from FHLB 7,530 -- -- -- --
Shareholders' equity and
net ESOP obligation 39,094 41,489 40,078 35,675 31,293
Shareholders' equity 30,268 33,591 30,745 28,840 26,076
Shareholders' equity and
net ESOP obligation per
share(1) 18.89 18.13 17.47 15.55 14.69
Shareholders' equity per
share(1) 17.36 17.14 15.52 14.36 13.12
- -------------------------------------------------------------------------------------------
(1) Per share data restated for 5% stock dividend declared in 1996 and 1994
two-for-one stock split.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operation.
-------------
EARNINGS SUMMARY
CONSOLIDATED NET INCOME for Rurban Financial Corp. (the "Corporation") for 1997
was $5.5 million, up from $4.8 million in 1996 and $4.1 million in 1995. Net
income per share was $2.49 in 1997, an increase of 16% from $2.14 in 1996. The
1996 net income per share results represented a 20% increase from $1.79 in 1995.
Cash dividends declared per share were $.74 in 1997 compared to $.57 in 1996 and
1995, a 30% increase in 1997. Per share data has been adjusted to reflect the 5%
stock dividend declared in December, 1996.
RESULTS OF OPERATIONS
1997 COMPARED WITH 1996
- -----------------------
NET INTEREST INCOME for 1997 was $20.4 million an increase of $1.6 million
(8.4%) over 1996. The increase was primarily due to additional net interest
income resulting from an 12.1% increase in the average balance of total loans
and loans held for sale. While the average yield on loans was flat at 9.39%
compared to 9.38% for 1996, the mix of loans as a percentage of average earning
assets increased from 79.0% in 1996 to 80.7% in 1997, thereby improving the
average yield on earning assets from 8.71% to 8.78%. The improvement in earning
asset yield was more than offset by the increase in the average rate on interest
bearing liabilities from 4.44% in 1996 to 4.61% in 1997; resulting in a decline
in the net interest margin from 4.93% in 1996 to 4.85% in 1997.
AT DECEMBER 31, 1997, total loans and loans held for sale, net of deferred loan
fees amounted to $363.9 million, an increase of 13.6% over net loans of $320.3
million at December 31, 1996. This increase was primarily due to the
Corporation's loan origination efforts.
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COMMERCIAL, FINANCIAL AND AGRICULTURAL LOANS increased $35.1 million from $185.8
million at December 31, 1996 to $217.3 million at December 31, 1997. This
increase occurred as the result of the hiring of additional commercial lending
staff and the Corporation's goal to increase commercial loan relationships.
AT DECEMBER 31, 1997, approximately $4.4 million of real estate mortgage loans
were held for sale in the secondary market. During 1997, approximately $30.8
million of real estate mortgage loans were originated for sale and approximately
$28.8 million were sold in the secondary market. This represents an increase of
$7.6 million (36%) in loans sold in 1997 as compared to 1996. Real estate
mortgage loans originated for sale increased $10.4 million in 1997, as compared
to 1996, primarily due to the loan origination efforts of the Rurban Mortgage
Division of State Bank and Rurban Mortgage Company. Net gains on loan sales for
1997 totaled $552,000, an increase of $762,000 as compared to net losses on loan
sales of $210,000 in 1996. During 1997, most loans were sold on a servicing
released basis. Loans originated for sale are primarily fixed rate mortgage
loans. Management anticipate further growth in the volume of loans originated
for sale in 1998 as Rurban Mortgage Company's volume grows from its start-up
level in 1997. Such growth is anticipated to be boosted by relatively low
interest rate levels, which during the first quarter of 1998 were resulting in a
wave of mortgage loan refinancing.
SECURITIES AVAILABLE FOR SALE TOTALED $71.7 million at December 31, 1997 which
represented an increase of $5.0 million (7.6%) from total securities of $66.6
million at December 31, 1996. As of December 31, 1997, all securities of the
Corporation were designated available for sale. Available for sale securities
represent those securities which the Corporation may decide to sell if needed
for liquidity, asset/liability management or other reasons. Such securities are
reported at fair value with net unrealized appreciation (depreciation) included
as a separate component of shareholders' equity, net of tax. This resulted in a
net increase in shareholders' equity of $219,000 at December 31, 1997.
TOTAL DEPOSITS AT December 31, 1997 amounted to $415.2 million, an increase of
$27.4 million (7.1%) over total deposits of $387.8 million at December 31, 1996.
The increase in deposits is believed to have occurred as a result of increased
deposit services and flexibility of products offered. Management believes that
customers continue to place a value on federal insurance on deposit accounts and
that, to the extent the Corporation continues to pay competitive rates on
deposits and continues to provide flexibility of deposit products, the
Corporation will be able to maintain and increase its deposit levels.
OTHER BORROWINGS at December 31, 1997 were 12.5 million and $0 at December 31,
1997 and 1996. These borrowings consisted of $7.5 million of FHLB Advances and
$4.9 million of federal funds purchased as the Corporation began to access
alternative sources for funding its loan growth.
THE PROVISION FOR LOAN LOSSES charged to operations was based on the amount of
net losses incurred and management's estimation of future losses based on an
evaluation of loan portfolio risk and economic factors. The provision for loan
losses was $948,000 in 1997 compared to $961,000 in 1996.
THE ALLOWANCE FOR LOAN LOSSES at December 31, 1997 was $5.2 million or 1.44% of
total loans and loans held for sale, net of deferred loan fees, compared to $5.1
million or 1.58% at December 31, 1996.
LOANS ARE CONSIDERED IMPAIRED if full principal or interest payments are not
anticipated in accordance with the contractual loan terms. Impaired loans are
carried at the present value of expected future cash flows discounted at the
loan's effective interest rate or at the fair value of the collateral if the
loan is collateral dependent. Under this guidance, the carrying value of
impaired loans is periodically adjusted to reflect cash payments, revised
estimates of future cash flows and increases in the present value of expected
cash flows due to the passage of time. A portion of the allowance for loan
losses is allocated to impaired loans.
SMALLER-BALANCE homogeneous loans are evaluated for impairment in total. Such
loans include residential first mortgage loans secured by one-to-four family
residences, residential construction loans, and automobile, home equity and
second mortgage loans. Commercial loans and mortgage loans secured by other
properties are evaluated individually for impairment. When analysis of borrower
operating results and financial condition indicates that underlying cash flows
of the borrower's business are not adequate to meet its debt service
requirements, the loan is evaluated for impairment. Often this is associated
with a delay or shortfall in payments
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of 30 days or more. Commercial loans are rated on a scale of 1 to 8, with 1-3
being satisfactory, 4 watch, 5 special mention, 6 substandard, 7 doubtful, and 8
as loss which are then charged off. Loans graded a 6 or worse are considered for
impairment. Loans are generally moved to nonaccrual status when 90 days or more
past due. Such loans are often considered impaired. Impaired loans, or portions
thereof, are charged off when deemed uncollectible. This typically occurs when
the loan is 120 days or more past due. At December 31, 1997, the Corporation
classified four loan relationships as impaired, totaling $1.8 million.
Management allocated $725,000 of the allowance for loan losses to impaired loans
at December 31, 1997.
MANAGEMENT ALLOCATED approximately 70% of the allowance for loan losses to
commercial, financial and agricultural loans; 14% to consumer loans; and 4% to
residential first mortgage loans at December 31, 1997, leaving a balance of 12%
unallocated. Nonperforming loans decreased to $2.8 million at December 31, 1997
from $3.8 million at December 31, 1996. The decrease in nonperforming loans
relates primarily to the reduction of impaired loans during 1997. The allowance
is maintained by management at a level considered adequate to cover losses that
are currently anticipated based on past loss experience, general economic
conditions, information about specific borrower situations including their
financial position and collateral values, and other factors and estimates which
are subject to change over time. Management believes the allowance for loan
losses balance at December 31, 1997 is adequate to absorb losses on these and
other loans.
TOTAL NONINTEREST INCOME increased $1,562,000 (25.2%) to $7.8 million in 1997
from $6.2 million in 1996. Net gain on sales of loans increased $762,000 to
$552,000 in 1997 as compared to a net loss of $210,000 in 1996. During the first
quarter of 1997, an adjustment of approximately $238,000 was made to reflect the
adoption of SFAS No. 122 as of January 1, 1996. Approximately $200,000 of that
amount related to the recording of originated mortgage servicing rights on loans
sold in 1996. Trust fees income declined $32,000 (1.4%) to $2,327,000 in 1997
from $2,359,000 in 1996. This $32,000 decline actually represented a $228,000
(10.8%) increase after considering the $260,000 increase in 1996 as the result
of converting from cash to accrual basis of accounting for trust fees in 1996.
Data processing fees increased $563,000 (25.5%) to $2,766,000 in 1997 compared
to $2,203,000 in 1996. An adjustment in 1997 to convert from cash to accrual
basis of accounting for data processing fees accounted for $238,000 (42.3%) of
this increase.
TOTAL NONINTEREST EXPENSE increased $2.4 million (14.1%) to $19.3 million in
1997, from $16.9 million in 1996, primarily due to the following factors.
Salaries and employee benefits increased $1.9 million (22.4%) to $10.2 million
in 1997 compared to $8.3 million in 1996. This increase was due primarily to
three factors; 1) annual merit increases, 2) staffing increases, and 3)the
extension of performance related bonuses and incentive compensation throughout
the organization, and 4)individual employee equity and market salary adjustments
to maintain competitive salaries and retain qualified employees. Equipment
rentals, depreciation and maintenance declined $150,000 primarily due to a
reduction in the dollar amount for classifying equipment purchases as fixed
assets rather than recording them as direct expense in accordance with the
Corporation's new fixed asset capitalization policy. The minimum amount to be
capitalized was reduced from $5,000 to $1,000. Other expenses increased $649,000
(11.9%) primarily due to inflation and additional expenses attributed to loan
and deposit growth.
INCOME TAX EXPENSE for the year ended December 31, 1997 was $2.5 million, an
increase of $108,000 (4.6%) from 1996. This increase was primarily attributable
to an increase in income before income tax expense.
THE FINANCIAL ACCOUNTING STANDARDS BOARD (FASB) issued SFAS No. 125 which
applied for the first time in 1997. SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, provides
authoritative guidance as to the accounting and financial reporting for
transfers and servicing of financial assets and extinguishment of liabilities.
Example transactions covered by SFAS No. 125 include asset securitizations,
repurchase agreements, wash sales, loan participations, transfers of loans with
recourse and servicing of loans. The Standard is based on a consistent
application of a financial components approach that focuses on control. The
Statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. The
Statement also requires measuring instruments that have a substantial prepayment
risk at fair value, much like debt instruments classified as available for sale
or trading. SFAS No. 125 also supersedes SFAS No. 122, Accounting for Mortgage
Servicing Rights, but it only marginally modifies the accounting and disclosure
requirements of SFAS No. 122. SFAS No. 125, as amended by SFAS No.
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127, was effective on a prospective basis for some transactions in 1997 and will
be effective for others in 1998. The effect on the consolidated financial
statements was not material.
A NEW ACCOUNTING STANDARD, SFAS No. 130, Reporting Comprehensive Income, has
been issued which will require future reporting of comprehensive income
beginning March 31, 1998. Comprehensive income is net income plus changes in
unrealized appreciation (depreciation) on securities available for sale, net of
tax.
A NEW ACCOUNTING STANDARD, SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, will require future reporting of additional
information related to material business segments beginning December 31, 1998.
RESULTS OF OPERATIONS
1996 COMPARED WITH 1995
- -----------------------
NET INTEREST INCOME for 1996 was $18.9 million an increase of $1.7 million
(9.7%) over 1995. The increase was primarily due to additional net interest
income resulting from an 8.0% increase in the average balance of total loans and
loans held for sale, net of unearned income and deferred loan fees. While the
average yield on loans remained at 9.38%, the mix of loans as a percentage of
average earning assets increased from 76.6% in 1995 to 79.0% in 1996, thereby
improving the average yield on earning assets from 8.57% to 8.71%. The
improvement in earning asset yield coupled with a decline in the average rate on
interest bearing liabilities from 4.51% in 1995 to 4.44% in 1996; resulted in an
improvement in the net interest margin from 4.72% to 4.93%.
AT DECEMBER 31, 1996, total loans and loans held for sale, net of deferred loan
fees amounted to $320.3 million, an increase of 14.3% over net loans of $280.3
million at December 31, 1995. This increase was primarily due to a decline in
interest rates and an improved focus on loan origination during 1996.
AT DECEMBER 31, 1996, approximately $1.9 million of real estate mortgage loans
were held for sale in the secondary market. During 1996, approximately $20.4
million of real estate mortgage loans were originated for sale and approximately
$21.2 million were sold in the secondary market. This represents an increase of
$9.0 (74%) in loans sold in 1996 as compared to 1995. Mortgage loans originated
for sale increased $10.0 million in 1996, as compared to 1995, primarily due to
declines in interest rates during the first half of 1996. Net losses on loan
sales for 1996 totaled $210,000, a decrease of $294,000 as compared to net gains
on loan sales of $84,000 in 1995. The Corporation retained the servicing of
these loans as a fee generating service. Loans originated for sale were
primarily fixed rate mortgage loans.
SECURITIES AVAILABLE FOR SALE TOTALED $66.6 million at December 31, 1996 which
represented a decrease of $23.7 million (26.2%) from total securities of $90.3
million at December 31, 1995. The decrease in securities from sales and
maturities was primarily due to the need to fund loan demand which out paced
deposit growth.
TOTAL DEPOSITS at December 31, 1996 amounted to $387.8 million, an increase of
$20.0 million (5.4%) over total deposits of $367.8 million at December 31, 1995.
The increase in deposits is believed to have occurred as a result of increased
deposit services and flexibility of products offered.
THE PROVISION FOR LOAN LOSSES charged to operations was based on the amount of
net losses incurred and management's estimation of future losses based on an
evaluation of loan portfolio risk and economic factors. The provision for loan
losses was $961,000 in 1996 compared to $1,452,000 in 1995. The decreased
provision and increase in the allowance in 1996 as compared to 1995 were due
largely to the charge-off of certain large credits in 1995.
THE ALLOWANCE FOR LOAN LOSSES at December 31, 1996 was $5.1 million or 1.59% of
total loans and loans held for sale, net of deferred loan fees, compared to $4.3
million or 1.52% at December 31, 1995.
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MANAGEMENT ALLOCATED approximately 68% of the allowance for loan losses to
commercial, financial and agricultural loans; 16% to consumer loans; and 4% to
residential first mortgage loans at December 31, 1996, leaving a balance of 12%
unallocated. Nonperforming loans increased to $3.8 million at December 31, 1996
from $3.1 million at December 31, 1995. The increase in nonperforming loans
relates primarily to the identification of additional loans as impaired during
1996.
TOTAL NONINTEREST INCOME increased $440,000 (7.7%) to $6.2 million in 1996 from
$5.8 million in 1995. Trust fees income increased $413,000 (21.2%) to $2,359,000
in 1996 from $1,946,000 in 1995; $260,000 of this increase resulted from a
change from cash to accrual basis of accounting for trust fees in 1996. Data
processing fees increased $164,000 (8.1%) to $2,203,000 in 1996 compared to
$2,039,000 in 1995. These increases were partially offset by net loss on sales
of loans of $210,000 in 1996 which was an unfavorable change of $294,000 from
the $84,000 of net gains on sales of loans in 1995.
TOTAL NONINTEREST EXPENSE increased $1.6 million (10.5%) to $16.9 million in
1996, from $15.3 million in 1995, primarily due to the following factors.
Salaries and employee benefits increased $1.2 million (16.7%) to $8.3 million in
1996 compared to $7.1 million in 1995. This increase was due primarily to three
factors; 1) annual merit increases, 2) staffing increases, and 3)the extension
of performance related bonuses and incentive compensation throughout the
organization. Net occupancy expense of premises increased by $107,000 due to the
repair of the exterior of the main office. Equipment costs increased $242,000
due primarily to the purchase of personal computers and other small equipment to
upgrade the quality of the tools available to our people. Other expenses
increased $64,000 (1.2%) primarily due to increases in professional fees of
$142,000 and in other operating expenses of $573,000 which were offset by
decreases in amortization of intangibles of $349,000 and FDIC deposit insurance
premiums of $359,000. The increase in other operating expenses was primarily a
result of increases in education and travel expenses of $191,000, and an
increase of $84,000 in temporary labor.
INCOME TAX EXPENSE for the year ended December 31, 1996 was $2.4 million, an
increase of $235,000 (11.0%) from 1995. This increase was primarily attributable
to an increase in income before income tax expense.
LIQUIDITY
LIQUIDITY RELATES PRIMARILY to the Corporation's ability to fund loan demand,
meet deposit customers' withdrawal requirements and provide for operating
expenses. Assets used to satisfy these needs consist of cash and due from banks,
federal funds sold, securities available-for sale and loans held for sale. These
assets are commonly referred to as liquid assets. Liquid assets were $98 million
at December 31, 1997 compared to $103 million at December 31, 1996 and $122
million at December 31, 1995. Liquidity levels declined $5 million from 1996 to
1997 and $19 million from 1995 to 1996 primarily due to the increase in loans.
Management recognizes that securities may need to be sold in the future to help
fund loan demand and, accordingly, as of December 31, 1997, the entire
securities portfolio of $71.7 million was classified as available for sale.
THE CORPORATION'S RESIDENTIAL FIRST MORTGAGE PORTFOLIO of $75.2 million which
can and has been readily used to collateralize borrowings is an additional
source of liquidity. Management believes its current liquidity level is
sufficient to meet anticipated future growth.
THE CASH FLOW statements for the periods presented provide an indication of the
Corporation's sources and uses of cash as well as an indication of the ability
of the Corporation to maintain an adequate level of liquidity. A discussion of
the cash flow statements for 1997, 1996 and 1995 follows.
FOR ALL PERIODS presented, the Corporation experienced a net increase in cash
from operating activities. Net cash from operating activities was $4.1 million,
$8.6 million and $8.0 million for the years ended December 31, 1997, 1996 and
1995, respectively. The decrease in net cash from operating activities of $4.5
million for 1997 as compared to 1996 was primarily due to increases in loans
held for sale of $2.5 million and increases in cash paid to supplies and
employees of $2.5 million. The increase in net cash from operating activities of
$566,000 for 1996 as compared to 1995 was primarily due to interest received on
interest-earning assets which outpaced an increase in interest paid on
interest-bearing liabilities.
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NET CASH FLOW FROM INVESTING ACTIVITIES was $(47.8 million), $(20.0 million) and
$(16.7 million) for the years ended December 31, 1997, 1996 and 1995,
respectively. The changes in net cash from investing activities include loan
growth, as well as normal maturities and reinvestments of securities and
premises and equipment expenditures. In 1997, 1996 and 1995, the Corporation
received $28.6, $19.4 million and $2.3 million, respectively, from sales of
securities available for sale, while proceeds from repayments and maturities of
securities were $8.8 million, $46.4 million and $22.2 million in 1997, 1996 and
1995, respectively.
NET CASH FLOW FROM FINANCING ACTIVITIES was $32.0, $17.0 and $11.8 million for
the years ended December 31, 1997, 1996 and 1995, respectively. The net cash
increase was primarily attributable to growth in total deposits of $27.4, $20.0
and $13.2 million in 1997, 1996 and 1995, respectively. Other significant
changes in 1997 included $12.5 million in borrowings partially offset by $6.7
paid to repurchase common stock.
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 Corporation 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 Corporation are for other than trading purposes.
All of the Corporation's transactions are denominated in U.S. dollars with no
specific foreign exchange exposure. In addition, the Corporation has limited
exposure to commodity prices related to agricultural loans. The impact of
changes in foreign exchange rate and commodity prices on interest rates are
assumed to be significant. The Corporation's financial instruments have varying
levels of sensitivity to changes in market interest rates resulting in market
risk. Interest rate risk is the Corporation'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
Corporation's earnings and capital base. Accordingly, effective risk management
that maintains interest rate risks at prudent levels is essential to the
Corporation'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 Corporation 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 Corporation 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 Corporation, 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.
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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 possible, 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 decreasing rate
environment.
SEVERAL WAYS an institution can manage interest rate risk include: 1) selling
existing assets or repaying certain liabilities; 2) matching repricing periods
for new assets and liabilities, for example, by shortening terms of new loans or
investments; 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 are often used for this purpose. Because these
instruments are sensitive to interest rate changes, they require management's
expertise to be effective. The Corporation 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 Corporation's financial instruments used for purposes other than
trading that are sensitive to changes in interest rates. 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 Corporation's historical experience of the impact of
interest rate fluctuations on the prepayment of residential and home equity
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 Corporation's
historical experience, management's judgement and statistical analysis, as
applicable, concerning their most likely withdrawal behaviors. Weighted average
variable rates are based upon rates existing at the reporting date.
37
38
Principal/Notional Amount Maturing In:
(Dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002 Thereafter Total
- ---------------------------------------------------------------------------------------------------------------------------------
RATE-SENSITIVE ASSETS
Fixed interest rate loans $ 26,160 $ 9,372 $16,252 $23,495 $18,947 $ 22,305 $116,531
Average interest rate 9.75% 9.72% 9.12% 9.02% 9.00% 9.88% 9.42%
Variable interest rate loans $210,233 $15,499 $ 8,475 $ 6,296 $ 6,650 $ 456 $247,609
Average interest rate 9.15% 9.15% 9.04% 7.72% 8.64% 8.71% 9.10%
Fixed interest rate securities $ 336 $37,116 $ 5,919 $ 4,284 $ 3,372 $ 20,656 $ 71,683
Average interest rate 5.90% 5.88% 6.24% 6.12% 6.26% 6.54% 6.13%
Other interest-bearing assets $ 7,200 -- -- -- -- -- $ 7,200
Average interest rate 5.80% -- -- -- -- -- 5.80%
RATE SENSITIVE LIABILITIES:
Non interest-bearing checking $ 839 $ 1,679 $ 2,515 $ 3,355 $ 4,195 $ 33,566 $ 46,149
Average interest rate -- -- -- -- -- -- --
Savings and interest-bearing $ 1,652 $ 3,303 $ 4,946 $ 6,598 $ 8,250 $ 65,278 $ 90,027
checking
Average interest rate 2.17% 2.17% 2.17% 2.17% 2.17% 2.17% 2.17%
Time deposits and money markets $215,036 $52,266 $ 8,921 $ 1,263 $ 764 $ 755 $279,005
Average interest rate 5.50% 5.75% 5.75% 5.92% 6.16% 5.10% 5.56%
Fixed interest rate borrowings $ 6,570 $ 255 $ 271 $ 288 $ 75 -- $ 7,459
Average interest rate 6.38% 6.25% 6.25% 6.25% 6.25% -- 6.36%
Variable interest rate borrowings -- -- -- -- -- $ 5,000 $ 5,000
Average interest rate -- -- -- -- -- 5.75% 5.75%
AT DECEMBER 31, 1997, the Corporation has a modestly positive Asset/Liability
Gap of 108% during the one year frame. The one year Gap ratio above 100%
indicates that a change in interest rates will affect more interest-earning
assets that interest-bearing liabilities over the course of the year. Therefore,
in the absence of countermanding strategies or circumstances, net interest
income could be expected to rise in a period of rising rates and decline in
periods of declining rates.
THE CORPORATION MANAGES its interest rate risk by the employment of strategies
to assure that desired levels of both interest- earning assets and
interest-bearing liabilities mature or reprice 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 five years.
CAPITAL RESOURCES
TOTAL SHAREHOLDERS' EQUITY plus common stock subject to repurchase obligation in
ESOP, net of unearned ESOP shares was $39,094,000 as of December 31, 1997, a
decrease of $2,395,000 from $41,489,000 as of December 31, 1996. The decrease
was primarily due to the repurchase of 217,942 common shares at a cost of
$6,677,000 under a stock repurchase program initiated during the fourth quarter
of 1997, cash dividends of $1,649,000 offset by 1997 net income of $5,516,000.
TOTAL REGULATORY (RISK-BASED) CAPITAL was $42.2 million (which includes $8.8
million of common stock subject to repurchase obligation in ESOP, net of $1.3
million of unearned ESOP shares) as of December 31, 1997, a decrease of $2.3
million from total regulatory (risk-based) capital of $44.5 million as of
December 31, 1996.
38
39
AS OF DECEMBER 31, 1997, the Corporation's and State Bank's total capital to
risk weighted assets exceeded the minimum requirements for capital adequacy
purposes of 8.0% (by 3.6% or $13.1 million for the Corporation and by 2.3% or
$5.5 million for State Bank). Tier 1 capital to risk weighted assets exceeded
the minimum of 4.0% (by 6.3% or $23.1 million for the Corporation and by 5.1%r
$12.0 million for State Bank), and Tier 1 capital to average assets exceeded the
minimum of 4.0% (by 4.0% or $18.8 million for the Corporation and by 3.2% or
$9.5 million for State Bank). Under prompt corrective actions regulations, the
Corporation's and State Bank's total capital to risk weighted assets exceeded
the minimum requirement to be well capitalized of 10.0% (by 1.6% or $5.8 million
for the Corporation and by .3% or $.8 million for State Bank). Tier 1 capital to
risk weighted assets exceeded the minimum of 6.0% (by 4.3% or $15.9 million for
the Corporation and by 3.1% or $7.3 million for State Bank), and Tier 1 capital
to average assets exceeded the minimum of 5.0% (by 3.0% or $14.1 million for the
Corporation and by 2.2% or $6.6 million for State Bank).
THE COMPONENTS OF total risk-based capital are Tier 1 capital and Tier 2
capital. Tier 1 capital is total shareholders' equity less intangible assets.
Tier 2 capital is Tier 1 capital plus a portion of the allowance for loan
losses. The allowance for loan losses is includable in Tier 2 capital up to a
maximum of 1.25% of risk weighted assets. The net unrealized
appreciation(depreciation) on securities available for sale, net of tax, under
SFAS No. 115 is not considered in meeting regulatory capital requirements. The
following table provides the minimum regulatory capital requirements and the
Corporation's capital ratios at December 31, 1997:
CAPITAL RATIOS
Minimum
Regulatory
Capital Corporation's
Requirements Capital
12/31/96 Ratio
-------- -----
Ratio of Total Capital to Risk Weighted Assets 8.0% 11.6%
Ratio of Tier 1 Capital to Risk Weighted Assets 4.0% 10.3%
Ratio of Tier 1 Capital to Average Assets 4.0% 8.0%
THE CORPORATION'S SUBSIDIARIES exceed the applicable minimum regulatory capital
requirements at December 31, 1997.
RESTRICTIONS EXIST REGARDING the ability of the subsidiary banks to transfer
funds to the Corporation in the form of cash dividends, loans or advances. (See
Note 1 to consolidated financial statements.) These restrictions have had no
major impact on the Corporation's dividend policy or operations and it is not
anticipated that they will have a major impact in the future.
IMPACT OF THE YEAR 2000
THE CORPORATION HAS CONDUCTED A comprehensive review of its computer systems to
identify applications that could be affected by the "Year 2000" issue, and has
developed an implementation plan to address the issue. The Corporation's data
processing is performed primarily in-house by RDSI; however software and
hardware utilized is under maintenance agreements with third party vendors.
Consequently the Corporation has contacted each vendor to request time tables
for Year 2000 compliance and expected costs, if any, to be passed along to the
Corporation. To date, the Corporation has been informed that its primary service
providers anticipate that all reprogramming efforts will be complete by June 30,
1998, allowing the Corporation time for testing of the Corporation's primary
computer systems before the Year 2000 arrives. Certain vendors have not
responded, however, and the Corporation will pursue other options if it appears
that these vendors will be unable to comply. Management does not expect the
costs of addressing the impact of the Year 2000 to have a significant impact on
the Corporation's consolidated financial position or results of operations;
however, there can be no assurance that the vendors'
39
40
systems will be 2000 compliant, consequently the Corporation could incur
material incremental costs to convert to other vendors. The Corporation has
identified certain of its hardware and software equipment that will not be Year
2000 compliant and intends to purchase new equipment and software prior to
December 31, 1998.
PLANNED PURCHASES OF PREMISES AND EQUIPMENT
MANAGEMENT PLANS TO PURCHASE additional premises and equipment to meet the
current and future needs of the Corporation's customers. These purchases,
including land, buildings and improvements and furniture and equipment (which
includes computer software and license agreements), are currently expected to
total at least $4 million over the next two years.
AS OF DECEMBER 31, 1997, management is not aware of any current recommendations
by banking regulatory authorities which, if they were to be implemented, would
have, or are reasonably likely to have, a material adverse effect on the
Corporation's liquidity, capital resources or operations.
IMPACT OF INFLATION AND CHANGING PRICES
THE MAJORITY OF ASSETS AND LIABILITIES of the Corporation are monetary in nature
and therefore the Corporation differs greatly from most commercial and
industrial companies that have significant investments in fixed assets or
inventories. However, inflation does have an important impact on the growth of
total assets in the banking industry and the resulting need to increase equity
capital at higher than normal rates in order to maintain an appropriate equity
to assets ratio. Inflation significantly affects noninterest expense, which
tends to rise during periods of general inflation.
MANAGEMENT BELIEVES the most significant impact on financial results is the
Corporation's ability to react to changes in interest rates. Management seeks to
maintain an essentially balanced position between interest sensitive assets and
liabilities and actively manages the amount of securities available for sale in
order to protect against the effects of wide interest rate fluctuations on net
income and shareholders' equity.
FORWARD-LOOKING STATEMENTS
WHEN USED IN THIS FILING and in future filing by the Corporation with the
Securities and Exchange Commission, in the Corporation'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 Corporation's market area, changes in policies by regulatory
agencies, fluctuations in interest rates, demand for loans in the Corporation'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 CORPORATION 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 Corporation's financial performance and could cause
the Corporation's actual results for future periods to differ materially form
those anticipated or projected.
THE CORPORATION 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.
40
41
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
- --------------------------------------------------------------------
The disclosures required by this item appear on pages 36 through 38 of
this Annual Report on Form 10-K under the caption "Asset Liability Management".
Item 8. Financial Statements and Supplementary Data.
- ----------------------------------------------------
The Consolidated Balance Sheets of the Corporation and its subsidiaries
as of December 31, 1997 and December 31, 1996, 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, 1997, the related Notes to
Consolidated Financial Statements and the Report of Independent Auditors, appear
on pages 48 through 78 of this Annual Report on Form 10-K. The Corporation is
not required to furnish the supplementary financial information specified by
Item 302 of Regulation S-K.
Item 9. Changes in and Disagreements With Accountants on Accounting and
- -----------------------------------------------------------------------
Financial Disclosure.
---------------------
None.
PART III
--------
Item 10. Directors and Executive Officers of the Registrant.
- -------------------------------------------------------------
In accordance with General Instruction G(3), the information called for
in this Item 10 is incorporated herein by reference to the Corporation's
definitive Proxy Statement, filed with the Securities and Exchange Commission
pursuant to Regulation 14A of the General Rules and Regulations under the
Securities Exchange Act of 1934, relating to the Corporation's Annual Meeting of
Shareholders to be held on April 27, 1998, under the captions "ELECTION OF
DIRECTORS" and "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
In addition, certain information concerning the executive officers of the
Corporation called for in this Item 10 is set forth in the portion of Part I of
this Annual Report on Form 10-K entitled "Executive Officers of the Registrant"
in accordance with General Instruction G(3).
Item 11. Executive Compensation.
- ---------------------------------
In accordance with General Instruction G(3), the information called for
in this Item 11 is incorporated herein by reference to the Corporation's
definitive Proxy Statement, filed with the Securities and Exchange Commission
pursuant to Regulation 14A of the General Rules and Regulations under the
Securities Exchange Act of 1934, relating to the Corporation's Annual Meeting of
Shareholders to be held on April 27, 1998, under the captions "COMPENSATION OF
EXECUTIVE OFFICERS AND DIRECTORS" and "COMPENSATION COMMITTEE INTERLOCKS AND
INSIDER PARTICIPATION." Neither the "REPORT ON EXECUTIVE COMPENSATION" nor the
"PERFORMANCE GRAPH" included in the Corporation's definitive Proxy Statement
relating to the Corporation's Annual Meeting of Shareholders to be held on April
27, 1998, shall be deemed to be incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- -------------------------------------------------------------------------
In accordance with General Instruction G(3), the information called for
in this Item 12 is incorporated herein by reference to the Corporation's
definitive Proxy Statement, filed with the Securities and Exchange Commission
pursuant to Regulation 14A of the General Rules and
41
42
Regulations under the Securities Exchange Act of 1934, relating to the
Corporation's Annual Meeting of Shareholders to be held on April 27, 1998, under
the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
Item 13. Certain Relationships and Related Transactions.
- ---------------------------------------------------------
In accordance with General Instruction G(3), the information called for
in this Item 13 is incorporated herein by reference to the Corporation's
definitive Proxy Statement, filed with the Securities and Exchange Commission
pursuant to Regulation 14A of the General Rules and Regulations under the
Securities Exchange Act of 1934, relating to the Corporation's Annual Meeting of
Shareholders to be held on April 27, 1998, under the caption "TRANSACTIONS
INVOLVING MANAGEMENT."
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
- --------------------------------------------------------------------------
(a) (1) Financial Statements.
For a list of all financial statements included in this Annual
Report on Form 10-K, see "Index to Financial Statements" at
page 48.
(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 79. 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.
42
43
Executive Compensation Plans and Arrangements
---------------------------------------------
Exhibit No. Description Location
- ----------- ----------- --------
10(a) Employees' Stock Ownership Plan of Rurban Incorporated herein by reference to the
Financial Corp. Corporation's Annual Report on Form 10-K
for the fiscal year ended December 31,
1993 (File No. 0-13507) [Exhibit 10(a)].
10(b) First Amendment to Employees' Stock Ownership Incorporated herein by reference to the
Plan of Rurban Financial Corp., dated June 14, Corporation's Annual Report on Form 10-K
1993 and made to be effective as of January 1, for the fiscal year ended December 31,
1993 1993 (File No. 0-13507) [Exhibit 10(b)].
10(c) Second Amendment to Employees' Stock Ownership Incorporated herein by reference to the
Plan of Rurban Financial Corp., dated March 14, Corporation's Annual Report on Form 10-K
1994 and made to be effective as of January 1, for the fiscal year ended December 31,
1993 1993 (File No. 0-13507) [Exhibit 10(c)].
10(d) Third Amendment to Employees' Stock Ownership Incorporated herein by reference to the
Plan of Rurban Financial Corp., dated March 13, Corporation's Annual Report on Form 10-K
1995 for the fiscal year ended December 31,
1994 (File No. 0-13507) [Exhibit 10(d)].
10(e) Fourth Amendment to Employees' Stock Ownership Incorporated herein by reference to the
Plan of Rurban Financial Corp., dated June 10, Corporation's Annual Report on Form 10-K
1995 and made to be effective as of January 1, for the fiscal year ended December 31,
1995 1995 (File No. 0-13507) [Exhibit 10(e)].
10(f) The Rurban Financial Corp. Savings Plan and Incorporated herein by reference to the
Trust Corporation's Annual Report on Form 10-K
for the fiscal year ended December 31,
1990 (File No. 0-13507) [Exhibit 10(g)].
10(g) First Amendment to The Rurban Financial Corp. Incorporated herein by reference to the
Savings Plan and Trust, dated December 10, 1990 Corporation's Annual Report on Form 10-K
and effective January 1, 1990 for the fiscal year ended December
31, 1990 (File No. 0-13507)
[Exhibit 10(g)].
43
44
Exhibit No. Description Location
- ----------- ----------- --------
10(h) Second Amendment to The Rurban Financial Corp. Incorporated herein by reference to the
Savings Plan and Trust, dated March 11, 1991, Corporation's Annual Report on Form 10-K
effective February 1, 1991 for the fiscal year ended December 31,
1992 (File No. 0-13507) [Exhibit 10(d)].
10(i) Third Amendment to The Rurban Financial Corp. Incorporated herein by reference to the
Savings Plan and Trust, dated June 11, 1991 Corporation's Annual Report on Form 10-K
for the fiscal year ended December 31,
1992 (File No. 0-13507) [Exhibit 10(e)].
10(j) Fourth Amendment to The Rurban Financial Corp. Incorporated herein by reference to the
Savings Plan and Trust, dated July 14, 1992, Corporation's Annual Report on Form 10-K
effective May 1, 1992 for the fiscal year ended December 31,
1992 (File No. 0-13507) [Exhibit 10(f)].
10(k) Fifth Amendment to The Rurban Financial Corp. Incorporated herein by reference to the
Savings Plan and Trust, dated March 14, 1994 Corporation's Annual Report on Form 10-K
for the fiscal year ended December 31,
1993 (File No. 0-13507) [Exhibit 10(i)].
10(l) Sixth Amendment to The Rurban Financial Corp. Incorporated herein by reference to the
Savings Plan and Trust dated May 1, 1995 Corporation's Annual Report on Form 10-K
for the fiscal year ended December 31,
1995 (File No. 0-13507) [Exhibit 10(l)].
10(m) Summary of Incentive Compensation Plan of State Incorporated herein by reference to the
Bank Corporation's Annual Report on Form 10-K
for the fiscal year ended December 31,
1993 (File No. 0-13507) [Exhibit 10(j)].
10(n) Summary of Bonus Program adopted by the Trust Incorporated herein by reference to the
Department of State Bank for the benefit of Corporation's Annual Report on Form 10-K
Robert W. Constien in his capacity as Manager for the fiscal year ended December 31,
of the Trust Department 1991 (File No. 0-13507) [Exhibit 10(e)].
10(o) Summary of Bonus Program for the Trust Incorporated herein by reference to the
Department of State Bank Corporation's Annual Report on Form 10-K
for the fiscal year ended December 31,
1992 (File No. 0-13507) [Exhibit 10(i)].
44
45
Exhibit No. Description Location
- ----------- ----------- --------
10(p) Summary of Sales Bonus Program of State Bank Incorporated herein by reference to the
Corporation's Annual Report on Form 10-K
for the fiscal year ended
December 31, 1994 (File No. 0-13507)
[Exhibit 10(n)].
10(q) Summary of Rurban Financial Corp. Bonus Plan Incorporated herein by reference to the
Corporation's Annual Report on Form 10-K
for the fiscal year ended December 31,
1993 (File No. 0-13507) [Exhibit 10(q)].
10(r) Executive Salary Continuation Agreement, dated Incorporated herein by reference to the
December 15, 1994, between Rurban Financial Corporation's Annual Report on Form 10-K
Corp. and Richard C. Burrows for the fiscal year ended December 31,
1994 (File No. 0-13507) [Exhibit 10(p)].
10(s) Executive Salary Continuation Agreement, dated Incorporated herein by reference to the
October 11, 1995, between Rurban Financial Corporation's Annual Report on Form 10-K
Corp. and Thomas C. Williams; and Amended for the fiscal year ended
Schedule A to Exhibit 10(s) identifying other December 31, 1995 (File No. 0-13507)
identical Executive Salary Continuation [Exhibit 10(s)]; Amended Schedule A to
Agreements between executive officers of Rurban 10(s) is included at Page 92 of this
Financial Corp. and Rurban Financial Corp. Annual Report on Form 10-K.
10(t)
Description of Split-Dollar Insurance Policies Incorporated herein by reference to the
Maintained for Certain Executive Officers of Corporation's Annual Report on Form 10-K
Rurban Financial Corp. for the fiscal year ended December 31,
1995 (File No. 0-13507) [Exhibit 10(t)].
10(u)
Rurban Financial Corp. Stock Option Plan Incorporated herein by reference to the
Corporation's Annual Report on Form 10-K
for the fiscal year ended
December 31, 1996 (File No. 0-13507)
[Exhibit 10(u)].
10(v)
Rurban Financial Corp. Plan to Allow Directors Incorporated herein by reference to the
to Elect to Defer Compensation Corporation's Annual Report on Form 10-K
for the fiscal year ended
December 31, 1996 (File No. 0-13507)
[Exhibit 10(v)].
10(w) Form of Non-Qualified Stock Option Agreement Pages 93 through 97 of this Annual
Report on Form 10-K.
45
46
Exhibit No. Description Location
- ----------- ----------- --------
10(x) Form of Incentive Stock Option Agreement Pages 98 through 102 of this Annual
Report on Form 10-K.
(b) Reports on Form 8-K.
There were no Current Reports on Form 8-K filed during the fiscal
quarter ended December 31, 1997.
(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 79.
(d) Financial Statement Schedules.
None.
46
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RURBAN FINANCIAL CORP.
/s/ RICHARD C. WARRENER
-----------------------
Date: March 31, 1998 By: Richard C. Warrener, Executive Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Name Date Capacity
---- ---- --------
*Thomas C. Williams * President, Chief Executive Officer, Principal
- ------------------- Executive Officer and Director
*Richard C. Burrows * Director
- -------------------
*John R. Compo * Director
- --------------
*John Fahl * Director
- ----------
*Robert A. Fawcett, Jr. * Director
- -----------------------
*Richard Z. Graham * Director
- ------------------
*Eric C. Hench * Director
- --------------
*W. Scott Muir * Director
- -------------
*Steven D. VanDemark * Director
- --------------------
*J. Michael Walz, D.D.S * Director
- -----------------------
*By: Richard C. Warrener * Executive Vice President and Chief Financial
- ------------------------- Officer
(Attorney-in-Fact)
Date: March 31, 1998
47
48
RURBAN FINANCIAL CORP.
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 1997
INDEX TO FINANCIAL STATEMENTS
Pages in
this Annual
Report on
Description Form 10-K
- ----------- ---------
Report of Independent Auditors................................................................... 49
Consolidated Balance Sheets at December 31, 1997
and 1996....................................................................................... 50-51
Consolidated Statements of Income for the years
ended December 31, 1997, 1996 and 1995......................................................... 52
Consolidated Statements of Changes in Shareholders'
Equity for the three years ended December 31,
1997........................................................................................... 53
Consolidated Statements of Cash Flows for the
years ended December 31, 1997, 1996 and
1995........................................................................................... 54-55
Notes to Consolidated Financial Statements....................................................... 56-78
48
49
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Rurban Financial Corp.
Defiance, Ohio
We have audited the accompanying consolidated balance sheets of Rurban Financial
Corp. and Subsidiaries as of December 31, 1997 and 1996 and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for the years ended December 31, 1997, 1996 and 1995. These consolidated
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Rurban Financial
Corp. and Subsidiaries as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years ended December 31, 1997, 1996 and
1995 in conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
South Bend, Indiana
January 30, 1998
49
50
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
- --------------------------------------------------------------------------------
1997 1996
---- ----
ASSETS
Cash and due from banks $ 15,552,385 $ 18,718,263
Federal funds sold 6,670,000 15,309,000
------------ ------------
Total cash and cash equivalents 22,222,385 34,027,263
Interest-bearing deposits in other financial institutions 529,777 180,000
Securities available for sale 71,683,120 66,635,889
Loans held for sale, net of valuation allowance
(1997 - $-0-, 1996 - $31,119) 4,404,327 1,875,636
Loans
Commercial, financial and agricultural 217,324,268 185,838,900
Residential first mortgage 75,212,817 72,356,881
Consumer 67,198,876 60,512,850
------------ ------------
Total loans 359,735,961 318,708,631
Deferred loan fees, net (288,651) (262,791)
Allowance for loan losses (5,239,601) (5,066,600)
------------ ------------
Net loans 354,207,709 313,379,240
Accrued interest receivable 3,533,532 3,298,902
Premises and equipment, net 8,583,961 8,827,838
Other assets 6,206,279 5,048,005
------------ ------------
Total assets $471,371,090 $433,272,773
============ ============
- --------------------------------------------------------------------------------
50
(Continued)
51
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
- --------------------------------------------------------------------------------
1997 1996
---- ----
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $ 46,149,132 $ 42,323,683
Interest-bearing 369,032,154 345,442,390
------------ ------------
Total deposits 415,181,286 387,766,073
Federal funds purchased 4,929,000 -
Advances from Federal Home Loan Bank (FHLB) 7,529,867 -
Accrued interest payable 1,577,140 1,421,131
Other liabilities 3,059,869 2,596,921
------------ ------------
Total liabilities 432,277,162 391,784,125
Common stock subject to repurchase obligation
in ESOP (shares outstanding: 1997 - 326,612,
1996 - 328,582) 10,124,972 9,387,588
Unearned ESOP shares (unearned shares: 1997 - 43,111,
1996 - 46,879) (1,299,000) (1,490,000)
Common stock: stated value $2.50 per share;
shares authorized: 10,000,000; shares issued: 2,287,851;
shares outstanding: 1997 - 1,743,297, 1996 - 1,959,269 4,903,098 4,898,173
Additional paid-in capital 7,930,646 8,672,955
Retained earnings 23,891,983 20,024,916
Net unrealized appreciation (depreciation) on
securities available for sale, net of tax of $106,988 in
1997 and $(2,567) in 1996 218,840 (4,984)
Treasury stock: 1997 - 217,942 shares, at cost (6,676,611) -
------------ ------------
Total liabilities and shareholders' equity $471,371,090 $433,272,773
============ ============
- --------------------------------------------------------------------------------
51
The accompanying notes are an integral part of these
consolidated financial statements.
52
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
Interest income
Loans, including fees $32,155,039 $28,680,021 $26,539,689
Taxable securities 3,900,143 4,066,184 3,756,764
Non-taxable securities 312,278 408,811 426,178
Other interest income 753,081 355,950 707,596
----------- ----------- -----------
Total interest income 37,120,541 33,510,966 31,430,227
Interest expense
Deposits 16,305,732 14,511,736 14,197,998
Short-term borrowings 161,505 144,773 40,050
Advances from FHLB 221,918 - -
----------- ----------- -----------
Total interest expense 16,689,155 14,656,509 14,238,048
----------- ----------- -----------
Net interest income 20,431,386 18,854,457 17,192,179
Provision for loan losses 947,965 961,009 1,451,898
----------- ----------- -----------
Net interest income after provision
for loan losses 19,483,421 17,893,448 15,740,281
Noninterest income
Service charges on deposit accounts 1,199,153 1,253,127 1,184,787
Trust fees 2,326,629 2,359,312 1,946,013
Data processing fees 2,765,533 2,203,213 2,038,948
Net gain on securities 193,892 33,884 3,113
Net gain (loss) on sales of loans 551,730 (210,000) 83,919
Other income 718,804 554,131 496,419
----------- ----------- -----------
Total noninterest income 7,755,741 6,193,667 5,753,199
Noninterest expense
Salaries and employee benefits 10,189,420 8,327,349 7,135,943
Net occupancy expense of premises 992,486 977,165 869,678
Equipment rentals, depreciation and
maintenance 1,981,699 2,131,295 1,889,540
Other expenses 6,089,291 5,439,951 5,376,402
----------- ----------- -----------
Total noninterest expense 19,252,896 16,875,760 15,271,563
----------- ----------- -----------
Income before income tax expense 7,986,266 7,211,355 6,221,917
Income tax expense 2,470,469 2,362,141 2,127,104
----------- ----------- -----------
Net income $ 5,515,797 $ 4,849,214 $ 4,094,813
=========== =========== ===========
Basic and diluted earnings per common share $ 2.49 $ 2.14 $ 1.79
=========== =========== ===========
- --------------------------------------------------------------------------------
52
The accompanying notes are an integral part of these
consolidated financial statements.
53
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Three years ended December 31, 1997
- --------------------------------------------------------------------------------
Net Unrealized
Appreciation
(Depreciation)
On Securities
Additional Available
Common Paid-In Retained For Sale, Treasury
Stock Capital Earnings Net of Tax Stock
----- ------- -------- ----------- ------
Balances at January 1, 1995 $ 4,782,375 $ 8,232,185 $ 16,995,711 $ (1,170,241) $ -
Net income for the year - - 4,094,813 - -
Cash dividends declared
($0.57 per share) - - (1,310,627) - -
Transfer of 26,039 common shares
and adjustment to common stock
subject to repurchase obligation in
ESOP (65,098) (2,433,372) - - -
Net change in unrealized appreciation
(depreciation) on securities available
for sale, net of tax of $834,400 - - - 1,619,718 -
------------- -------------- ------------- ------------- --------------
Balances at December 31, 1995 4,717,277 5,798,813 19,779,897 449,477 -
Net income for the year - - 4,849,214 - -
Cash dividends declared
($0.57 per share) - - (1,308,975) - -
Declaration of a 5% stock dividend
and issuance of 92,826 common
shares and 15,647 common shares
subject to repurchase obligation
in ESOP 232,066 2,574,993 (3,280,224) - -
Cash dividend distributable for
fractional shares related to 5%
stock dividend - - (14,996) - -
Purchase and retirement of 5,000
common shares (12,500) (158,125) - - -
Transfer of 15,468 common shares
and adjustment to common stock
subject to repurchase obligation
in ESOP (38,670) 457,274 - - -
Net change in unrealized
appreciation (depreciation) on
securities available for sale,
net of tax of $(234,116) - - - (454,461) -
------------- -------------- ------------- ------------- --------------
Balances at December 31, 1996 4,898,173 8,672,955 20,024,916 (4,984) -
Net income for the year - - 5,515,797 - -
Cash dividends declared
($.74 per share) - - (1,648,730) - -
Purchase of 217,942 treasury shares - - - - (6,676,611)
Transfer of 1,970 common shares
and adjustment from common
stock subject to repurchase
obligation in ESOP 4,925 (742,309) - - -
Net change in unrealized
appreciation (depreciation) on
securities available for sale, net
of tax of $109,555 - - - 223,824 -
------------- -------------- ------------- ------------- --------------
Balances at December 31, 1997 $ 4,903,098 $ 7,930,646 $ 23,891,983 $ 218,840 $ (6,676,611)
============= ============== ============= ============= ==============
- --------------------------------------------------------------------------------
53
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
54
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
Cash flows from operating activities
Cash received from customers - fees
and commissions $ 7,010,119 $ 6,369,783 $ 5,666,167
Cash paid to suppliers and employees (18,388,747) (15,877,040) (14,117,567)
Loans originated for sale (30,797,914) (20,385,626) (10,418,133)
Proceeds from sales of loans held for sale 28,820,953 21,249,283 12,242,370
Interest received 36,911,771 33,479,613 30,857,639
Interest paid (16,533,146) (14,270,426) (14,111,248)
Income taxes paid (2,968,950) (1,966,477) (2,086,479)
--------------- --------------- ----------------
Net cash from operating activities 4,054,086 8,599,110 8,032,749
Cash flows from investing activities
Net change in interest-bearing deposits
in other financial institutions (349,777) - 166,324
Net change in loans (42,353,197) (41,986,168) 427,936
Proceeds from sales of securities available
for sale 28,631,037 19,416,875 2,263,104
Principal repayments, maturities, and
calls of:
Securities available for sale 8,785,410 46,431,465 22,190,401
Securities held to maturity - - 3,318,925
Purchase of:
Securities available for sale (41,936,407) (42,809,056) (41,660,219)
Securities held to maturity - - (3,802,079)
Net purchases of premises and equipment (1,149,654) (1,717,922) (274,859)
Recoveries on loan charge-offs 550,903 713,368 698,928
--------------- --------------- ----------------
Net cash from investing activities (47,821,685) (19,951,438) (16,671,539)
Cash flows from financing activities
Cash paid to purchase unearned ESOP
shares - (1,490,000) -
Net change in deposits 27,415,213 19,969,535 13,150,902
Net change in federal funds purchased 4,929,000 - -
Proceeds from advances from FHLB 7,529,867 - -
Cash dividends paid (1,234,748) (1,308,975) (1,310,627)
Cash paid to repurchase common stock (6,676,611) (170,625) -
--------------- --------------- ----------------
Net cash from financing activities 31,962,721 16,999,935 11,840,275
--------------- --------------- ----------------
Net change in cash and cash equivalents (11,804,878) 5,647,607 3,201,485
Cash and cash equivalents at beginning of year 34,027,263 28,379,656 25,178,171
--------------- --------------- ----------------
Cash and cash equivalents at end of year $ 22,222,385 $ 34,027,263 $ 28,379,656
=============== =============== ================
- --------------------------------------------------------------------------------
54
(CONTINUED)
55
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
Reconciliation of net income to
net cash from operating activities
Net income $ 5,515,797 $ 4,849,214 $ 4,094,813
Adjustments to reconcile net income
to net cash from operating activities
Depreciation 1,393,531 1,273,801 1,155,227
Amortization of intangible assets 180,000 285,000 634,000
Provision for loan losses 947,965 961,009 1,451,898
Net gain on securities (193,892) (33,884) (3,113)
Loans originated for sale (30,797,914) (20,385,626) (10,418,133)
Proceeds from sales of loan held for sale 28,820,953 21,249,283 12,242,370
Net (gain) loss on sales of loans (551,730) 210,000 (83,919)
Paydown of ESOP loan 191,000 - -
Change in assets and liabilities
Deferred loan fees, net 25,860 27,395 (26,808)
Accrued interest receivable (234,630) (58,748) (545,780)
Other assets (1,447,829) (430,654) (591,281)
Accrued interest payable 156,009 386,083 126,800
Other liabilities 48,966 266,237 (3,325)
--------------- --------------- ----------------
Net cash from operating
activities $ 4,054,086 $ 8,599,110 $ 8,032,749
=============== =============== ================
Supplemental disclosures of cash flow information
Transfer from securities held to maturity to
securities available for sale $ - $ - $ 10,854,066
- --------------------------------------------------------------------------------
55
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
56
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The accompanying consolidated financial statements
include the accounts of Rurban Financial Corp. and its wholly-owned
subsidiaries. Rurban Financial Corp. is a bank holding company, organized under
Ohio law, that owns all the outstanding stock of The State Bank and Trust
Company ("State Bank"), The Peoples Banking Company ("Peoples Bank"), The First
National Bank of Ottawa ("First National Bank"), The Citizens Savings Bank
Company ("Citizens Savings Bank"), Rurbanc Data Services, Inc. ("RDSI") and
Rurban Life Insurance Company ("Rurban Life") (together referred to as "the
Corporation"). State Bank owns all of the outstanding stock of Reliance
Financial Services, N.A. ("RFS") and Rurban Mortgage Company ("RMC"). RMC was
incorporated on November 5, 1997. On December 31, 1997, the operations of the
Rurban Mortgage Division of State Bank were merged into RMC along with the
acquired operations of S&L Financial Services, Inc. ("S&L"). The S&L acquisition
was accounted for as a purchase; income from S&L was not material for the years
ended December 31, 1997, 1996 and 1995. All significant intercompany balances
and transactions are eliminated in consolidation.
Nature of Business: The Corporation operates primarily in the banking industry
which accounts for more than 90% of its revenues, operating income and assets.
The Corporation's subsidiary banks grant credit and accept deposits from their
customers in the normal course of business primarily in the northwestern Ohio
region. RDSI provides data processing services, primarily to financial
institutions located in northwestern Ohio. Rurban Life accepts reinsurance ceded
in part by USLIFE from the credit life and disability insurance purchased by
customers of the Corporation's subsidiary banks. RFS offers a diversified array
of trust and financial services to customers nationwide. RMC services
residential mortgage customers in West and Central Florida.
Use of Estimates: To prepare consolidated financial statements in conformity
with generally accepted accounting principles, management makes estimates and
assumptions based on available information. These estimates and assumptions
affect the amounts reported in the consolidated financial statements and the
disclosures provided, and future results could differ. The allowance for loan
losses, fair values of financial instruments, the carrying value of loans held
for sale and fair value of stock options are particularly subject to change.
Securities: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value,
with unrealized holding gains and losses reported separately in shareholders'
equity, net of tax. Securities are classified as trading when held for short
term periods in anticipation of market gains, and are carried at fair value.
Securities are written down to fair value when a decline in fair value is not
temporary.
In November 1995, the Financial Accounting Standards Board ("FASB") issued its
Special Report, A Guide to Implementation of SFAS No. 115 on Accounting for
Certain Investments in Debt and Equity Securities ("Guide"). As permitted by the
Guide, on December 31, 1995, the Corporation made a one-time reassessment and
transferred securities from the held to maturity portfolio to the available for
sale portfolio. At the date of transfer, these securities had an amortized cost
of $10,854,066 and the transfer increased the unrealized gain on securities
available for sale by $210,566 and shareholders' equity by $138,974, net of tax
of $71,592.
- --------------------------------------------------------------------------------
56
(CONTINUED)
57
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Realized gains and losses resulting from the sale of securities are computed by
the specific identification method. Interest and dividend income, adjusted by
amortization of purchase premium or discount, is included in earnings. Premiums
and discounts on securities are recognized using the level yield method over the
estimated life of the security.
Loans Held for Sale: Mortgage loans intended for sale in the secondary market
are carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized in a valuation allowance by charges to income.
Interest Income on Loans: Interest on loans is accrued over the term of the
loans based upon the principal outstanding. Management reviews loans delinquent
90 days or more to determine if the interest accrual should be discontinued.
When serious doubt exists as to the collectibility of a loan, the accrual of
interest is discontinued. Under Statement of Financial Accounting Standards
("SFAS") No. 114, Accounting by Creditors for Impairment of a Loan, as amended
by SFAS No. 118, the carrying value of impaired loans is periodically adjusted
to reflect cash payments, revised estimates of future cash flows, and increases
in the present value of expected cash flows due to the passage of time. Cash
payments representing interest income are reported as such and other cash
payments are reported as reductions in carrying value. Increases or decreases in
carrying value due to changes in estimates of future payments or the passage of
time are reported as a component of the provision for loan losses.
Loan Fees and Costs: Loan fees, net of direct origination costs, are deferred.
The net amount deferred is reported in the consolidated balance sheets as part
of loans and is recognized in interest income over the term of the loan using
the level yield method.
Allowance For Loan Losses: An allowance for loan losses is established and
maintained because some loans may not be repaid in full. Increases to the
allowance are recorded by a provision for loan losses charged to expense.
Estimating the risk of loss and the amount of loss on any loan is necessarily
subjective. Accordingly, the allowance is maintained by management at a level
considered adequate to cover losses that are currently anticipated based on past
loss experience, general economic conditions, information about specific
borrower situations including their financial position and collateral values,
and other factors and estimates which are subject to change over time. While
management may periodically allocate portions of the allowance for specific
problem loan situations, the entire allowance is available for any loan
charge-offs that may occur. A loan is charged off by management as a loss when
deemed uncollectible, although collection efforts continue and future recoveries
may occur.
Loans are considered impaired if full principal or interest payments are not
anticipated in accordance with the contractual loan terms. Impaired loans are
carried at the present value of expected future cash flows discounted at the
loan's effective interest rate or at the fair value of the collateral if the
loan is collateral dependent. A portion of the allowance for loan losses is
allocated to impaired loans if the value of such loans is deemed to be less than
the unpaid balance. If these allocations cause the allowance for loan losses to
require increase, such increase is reported as a component of the provision for
loan losses.
- --------------------------------------------------------------------------------
57
(CONTINUED)
58
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Smaller-balance homogeneous loans are evaluated for impairment in total. Such
loans include residential first mortgage loans secured by one-to-four family
residences, residential construction loans, and automobile, home equity and
second mortgage loans. Commercial loans and mortgage loans secured by other
properties are evaluated individually for impairment. When analysis of borrower
operating results and financial condition indicates that underlying cash flows
of the borrower's business are not adequate to meet its debt service
requirements, the loan is evaluated for impairment. Often this is associated
with a delay or shortfall in payments of 30 days or more. Commercial loans are
rated on a scale of 1 to 8, with 1 to 3 being satisfactory, 4 watch, 5 special
mention, 6 substandard, 7 doubtful, and 8 as loss which are then charged off.
Loans graded a 6 or worse are considered for impairment. Loans are generally
moved to nonaccrual status when 90 days or more past due. These loans are often
considered impaired. Impaired loans, or portions thereof, are charged off when
deemed uncollectible. This typically occurs when the loan is 120 days or more
past due. The nature of disclosures for impaired loans is considered generally
comparable to prior nonaccrual and renegotiated loans and non-performing and
past-due asset disclosures.
Premises and Equipment: Land is carried at cost. Buildings and improvements are
depreciated using primarily the straight-line method with useful lives ranging
from 10 to 50 years. Furniture and equipment are depreciated using the
straight-line and declining-balance methods with useful lives ranging
predominantly from 5 to 20 years. These assets are reviewed for impairment under
SFAS No. 121 when events indicate the carrying amount may not be recoverable.
Maintenance and repairs are expensed and major improvements are capitalized.
Servicing Rights: Prior to adopting SFAS No. 122 at the start of 1996, servicing
right assets were recorded only for purchased rights to service mortgage loans.
Subsequent to adopting this standard, servicing rights represent both purchased
rights and the allocated value of servicing rights retained on loans sold.
Servicing rights are expensed in proportion to, and over the period of,
estimated net servicing revenues. Impairment is evaluated based on the fair
value of the rights, using groupings of the underlying loans as to interest
rates and then, secondarily, as to geographic and prepayment characteristics.
Any impairment of a grouping is reported as a valuation allowance. The impact on
the Corporation's consolidated financial position and results of operations for
the years ended December 31, 1997 and 1996 was not material.
Excess servicing receivable is reported when a loan sale results in servicing in
excess of normal amounts, and is expensed over the life of the servicing on the
interest method.
Intangible Assets: Goodwill arising from the acquisition of subsidiary banks and
RMC is amortized over 5 to 25 years using the straight-line method. Core deposit
intangibles are amortized on an accelerated basis over 10 years, the estimated
life of the deposits acquired. Goodwill and identified intangibles are assessed
for impairment based on estimated undiscounted cash flows, and written down if
necessary. As of December 31, 1997, 1996 and 1995, unamortized goodwill totaled
approximately $941,000, $669,000 and $784,000 and unamortized core deposit
intangibles totaled approximately $271,000, $351,000 and $521,000.
- --------------------------------------------------------------------------------
58
(CONTINUED)
59
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Foreclosed Real Estate: Real estate properties acquired through, or in lieu of,
loan foreclosure are initially recorded at fair value at the date of acquisition
establishing a new cost basis. Any reduction to fair value from the carrying
value of the related loan at the time of acquisition is accounted for as a loan
loss and charged against the allowance for loan losses. After acquisition, a
valuation allowance is recorded through a charge to income for the amount of
estimated selling costs. Valuations are periodically performed by management,
and valuation allowances are adjusted through a charge to income for changes in
fair value or estimated selling costs. Other real estate owned amounted to
approximately $-0- and $329,000 at December 31, 1997 and 1996, respectively, and
is included in other assets in the consolidated balance sheets.
Income Taxes: Income tax expense is the sum of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax consequences of temporary
differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
Employee Benefits: The Corporation sponsors an employee stock ownership plan
(ESOP) and 401(k) profit sharing plan for which contributions are made and
expensed annually. The Corporation also provides split-dollar life insurance
plans for certain executive officers of the Corporation. Also, the Corporation
sponsors a supplemental retirement plan for certain executive officers of the
Corporation. Employee benefits are discussed further in Note 8.
Stock Option Plan: The Corporation sponsors a stock option plan for directors,
officers and key employees. Expense for employee compensation under the stock
option plan is based on Accounting Principles Board ("APB") Opinion 25 with
expense reported only if options are granted below market price at grant date.
If applicable, disclosures of net income and earnings per common share are
provided as if the fair value method of SFAS No. 123 were used for stock-based
compensation. For further discussion see Note 8.
Postretirement Health Care Benefits: The Corporation sponsors a postretirement
health care plan that covers both salaried and nonsalaried employees. The
Corporation accrues, during the years that employees render the necessary
service, the expected cost of providing postretirement health care benefits to
employees and their beneficiaries and covered dependents. The Corporation's
postretirement health care plan provides that retired employees may remain on
the Corporation's health care plan with each retiree's out-of-pocket
contribution to the Corporation equal to their premium expense determined
exclusively on the loss experience of the retirees in the plan.
- --------------------------------------------------------------------------------
59
(CONTINUED)
60
v RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Dividends: Dividends issued in stock are reported by transferring the
market value of the stock issued from retained earnings to common stock and
additional paid-in capital. Stock splits are recorded by adjusting par value. On
December 9, 1996, the Board of Directors declared a five percent stock dividend
increasing shares outstanding by 108,473 shares. The stock dividend was payable
to shareholders of record as of December 24, 1996. As of December 31, 1996,
common stock includes $232,066 for the stock dividend distributable to
shareholders which was paid on January 31, 1997.
Earnings and Dividends Per Common Share: Basic and diluted earnings per common
share are computed under a new accounting standard, SFAS No. 128, effective
beginning with the quarter ended December 31, 1997. All prior earnings per
common share amounts have been restated to be comparable. Basic earnings per
common share is based on net income divided by the weighted average number of
common shares considered to be outstanding during the period. Diluted earnings
per common share shows the dilutive effect of any additional potential common
shares issuable under stock options. ESOP shares are considered to be
outstanding, for both basic and diluted earnings per common share, after they
are committed to be released. Earnings and dividends per common share are
restated for all stock splits and dividends.
Dividend Restriction: Certain restrictions exist regarding the ability of the
subsidiaries to transfer funds to Rurban Financial Corp. in the form of cash
dividends, loans or advances. As of December 31, 1997, approximately $4,200,000
of undistributed earnings of the subsidiaries, included in consolidated retained
earnings, was available for distribution to Rurban Financial Corp. as dividends
without prior regulatory approval.
Fair Values of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in Note 14. Fair value estimates involve uncertainties and matters of
significant judgment regarding interest rates, credit risk, prepayments, and
other factors, especially in the absence of broad markets for particular items.
Changes in assumptions or in market conditions could significantly affect such
estimates.
Concentrations of Credit Risk: The Corporation grants commercial, real estate
and installment loans to customers mainly in northwest Ohio. Commercial loans
include loans collateralized by commercial real estate, business assets and
agricultural loans collateralized by crops and farm equipment. Commercial,
financial and agricultural loans make up approximately 60% of the loan portfolio
and the loans are expected to be repaid from cash flow from operations of
businesses. Residential first mortgage loans make up approximately 21% of the
loan portfolio and are collateralized by first mortgages on residential real
estate. Consumer loans make up approximately 19% of the loan portfolio and are
primarily collateralized by consumer assets.
Financial Instruments With Off-Balance-Sheet Risk: The Corporation, in the
normal course of business, makes commitments to extend credit which are not
reflected in the consolidated financial statements. A summary of these
commitments is disclosed in Note 12.
- --------------------------------------------------------------------------------
60
(CONTINUED)
61
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Statements of Cash Flows: For purposes of reporting cash flows, cash and cash
equivalents is defined to include cash on hand, due from financial institutions
and federal funds sold with original maturities under 90 days. The Corporation
reports net cash flows for customer loan transactions, deposit transactions,
short-term borrowings with original maturities of 90 days or less and
interest-bearing deposits in other financial institutions.
New Accounting Pronouncements: SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities, was issued by
the FASB in 1996. It revised the accounting for transfers of financial assets,
such as loans and securities, and for distinguishing between sales and secured
borrowings. It was effective for some transactions in 1997 and will be effective
for others in 1998. The effect on the consolidated financial statements was not
material.
A new accounting standard, SFAS No. 130, Reporting Comprehensive Income, has
been issued which will require future reporting of comprehensive income.
Comprehensive income is net income plus changes in unrealized appreciation
(depreciation) on securities available for sale, net of tax.
A new accounting standard, SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, will require future reporting of additional
information related to material business segments.
Reclassifications: Some items in the prior consolidated financial statements
have been reclassified to conform with the current presentation.
- --------------------------------------------------------------------------------
61
(CONTINUED)
62
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE 2 - BASIC AND DILUTED EARNINGS PER COMMON SHARE
A reconciliation of the numerators and denominators of the computations of basic
earnings per common share and diluted earnings per common share for the years
ended December 31, 1997, 1996 and 1995 is presented below:
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
Basic Earnings Per Common Share
Net income $5,515,797 $4,849,214 $4,094,813
========== ========== ==========
Weighted average common shares
outstanding 2,259,671 2,284,197 2,293,597
Less: Unallocated ESOP shares (44,995) (23,440) -
---------- ---------- ----------
Weighted average common shares
outstanding for basic earnings
per common share 2,214,676 2,260,757 2,293,597
========== ========== ==========
Basic earnings per common share $ 2.49 $ 2.14 $ 1.79
========== ========== ==========
Diluted Earnings Per Common Share
Net income $5,515,797 $4,849,214 $4,094,813
========== ========== ==========
Weighted average common shares
outstanding for basic earnings
per common share 2,214,676 2,260,757 2,293,597
Add: Dilutive effects of assumed
conversions and exercise of stock options 1,191 - -
---------- ---------- ----------
Weighted average common and dilutive
potential common shares outstanding 2,215,867 2,260,757 2,293,597
========== ========== ==========
Diluted earnings per common share $ 2.49 $ 2.14 $ 1.79
========== ========== ==========
- --------------------------------------------------------------------------------
62
(CONTINUED)
63
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES AVAILABLE FOR SALE
Year end securities available for sale were as follows.
Gross Gross
Amortized Unrealized Unrealized
1997 Cost Gains Losses Fair Value
- ---- ---- ----- ------ ----------
U.S. Treasury and U.S.
Government agency
securities $43,385,761 $ 48,187 $ (35,515) $43,398,433
Obligations of states and
political subdivisions 5,238,970 156,333 (238) 5,395,065
Mortgage-backed securities 21,002,411 199,211 (42,150) 21,159,472
Marketable equity securities 1,730,150 - - 1,730,150
----------- -------- --------- -----------
$71,357,292 $403,731 $ (77,903) $71,683,120
=========== ======== ========= ===========
1996
- ----
U.S. Treasury and U.S.
Government agency
securities $54,407,062 $ 65,917 $(237,386) $54,235,593
Obligations of states and
political subdivisions 6,249,299 152,997 (12,862) 6,389,434
Mortgage-backed securities 4,813,329 29,022 (5,239) 4,837,112
Marketable equity securities 1,173,750 - - 1,173,750
----------- -------- --------- -----------
$66,643,440 $247,936 $(255,487) $66,635,889
=========== ======== ========= ===========
Contractual maturities of debt securities available for sale at December 31,
1997 were as follows. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties. Securities not due at a single maturity
date are shown separately.
Available for Sale
------------------
Amortized
Cost Fair Value
---- ----------
Due in one year or less $ 297,581 $ 293,389
Due after one year through five years 45,887,958 45,973,580
Due after five years through ten years 2,336,138 2,420,650
Due after ten years 103,054 105,879
Mortgage-backed securities 21,002,411 21,159,472
----------- -----------
Total debt securities available for sale $69,627,142 $69,952,970
=========== ===========
- --------------------------------------------------------------------------------
63
(CONTINUED)
64
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES AVAILABLE FOR SALE (Continued)
Proceeds, gross gains and gross losses realized from sales of securities
available for sale for the years ended December 31, 1997, 1996 and 1995 are as
follows:
1997 1996 1995
---- ---- ----
Proceeds from sales of debt securities
available for sale $28,631,037 $19,401,403 $2,263,104
Proceeds from sales of marketable equity
securities available for sale - 15,472 -
----------- ----------- ----------
Total proceeds from sale of
securities available for sale $28,631,037 $19,416,875 $2,263,104
=========== =========== ==========
Gross gains from sales of debt securities
available for sale $ 252,834 $ 48,248 $ 11,975
Gross losses from sales of debt securities
available for sale (58,942) (14,364) (8,672)
Net losses on calls of securities available
for sale - - (190)
----------- ----------- ----------
Net gain (loss) on securities $ 193,892 $ 33,884 $ 3,113
=========== =========== ==========
At December 31, 1997 there were no holdings of securities of any one issuer,
other than the U.S. Government and its agencies and corporations, in an amount
greater than 10% of shareholders' equity.
Securities with an amortized cost of approximately $51,262,000 and $31,941,000
as of December 31, 1997 and 1996, were pledged to secure public and trust
deposits.
- --------------------------------------------------------------------------------
64
(CONTINUED)
65
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
The following is a summary of the activity in the allowance for loan losses
account for the years ended December 31, 1997, 1996 and 1995:
1997 1996 1995
---- ---- ----
Beginning balance $ 5,066,600 $4,270,000 $ 4,770,000
Provision for loan losses 947,965 961,009 1,451,898
Recoveries of previous charge-offs 550,642 713,368 698,928
Losses charged to the allowance (1,325,606) (877,777) (2,650,826)
----------- ---------- -----------
Ending balance $ 5,239,601 $5,066,600 $ 4,270,000
=========== ========== ===========
At December 31, 1997 and 1996, loans past due more than 90 days and still
accruing interest approximated $462,000 and $293,000.
Impaired loans were as follows.
1997 1996 1995
---- ---- ----
Year-end loans with no allowance for
loan losses allocated $ - $ - $ 302,000
Year-end loans with allowance for loan
losses allocated 1,801,000 3,296,000 1,533,000
Amount of allowance allocated 725,000 1,237,000 643,000
Average of impaired loans during the year 1,919,000 3,081,000 2,542,000
Interest income recognized during impairment 36,000 115,000 32,000
Cash-basis interest income recognized 36,000 112,000 32,000
NOTE 5 - PREMISES AND EQUIPMENT, NET
Premises and equipment, net at December 31, are summarized as follows:
1997 1996
---- ----
Land $ 1,073,031 $ 966,579
Buildings and improvements 7,173,717 7,069,653
Furniture and equipment 8,423,337 7,484,199
----------- -----------
Total cost 16,670,085 15,520,431
Accumulated depreciation and amortization (8,086,124) (6,692,593)
----------- -----------
$ 8,583,961 $ 8,827,838
=========== ===========
- --------------------------------------------------------------------------------
65
(CONTINUED)
66
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 6 - INTEREST-BEARING DEPOSITS
Included in interest-bearing deposits are certificates of deposit in
denominations of $100,000 or more of approximately $57,278,000 and $38,305,000
as of December 31, 1997 and 1996, respectively.
At December 31, 1997, the scheduled maturities of certificates of deposit are as
follows for the years ended December 31:
1998 $147,634,714
1999 45,473,746
2000 6,772,005
2001 840,342
2002 622,480
Thereafter 20,906
------------
$201,364,193
============
NOTE 7 - ADVANCES FROM FHLB
At December 31, 1997, advances from the FHLB of Cincinnati with fixed interest
rates ranging from 6.25% to 6.90% mature in the year ending December 31 as
follows:
1998 $1,639,577
1999 254,987
2000 271,389
2001 288,845
2002 75,069
----------
2,529,867
Line of credit (LIBOR +.25 basis
points) 5,000,000
----------
$7,529,867
==========
At December 31, 1997, in addition to FHLB stock, the Corporation pledged
mortgage loans with a minimum carrying value of approximately $11,324,000 to the
FHLB to secure advances outstanding.
The Corporation has a line of credit with the Fifth Third Bank in the amount of
$10,000,000. At December 31, 1997, the Corporation did not have any advances
outstanding on this line of credit.
- --------------------------------------------------------------------------------
66
(CONTINUED)
67
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 8 - EMPLOYEE BENEFITS
Employee Stock Ownership Plan: The Corporation has a noncontributory employee
stock ownership plan (ESOP) covering substantially all employees of the
Corporation and its subsidiaries. Voluntary contributions are made by the
Corporation to the plan. Each eligible employee is vested based upon years of
service, including prior years of service. Contributions to the ESOP were
$451,000, $375,000 and $374,000 and related expense attributable to the plan
included in salaries and employee benefits were approximately $403,000, $476,000
and $374,000 in 1997, 1996 and 1995, respectively.
Distributions to plan participants may be paid in cash or stock upon their
termination of employment. For corporations not listed on NASDAQ, ERISA rules
require employers with an ESOP to agree to repurchase shares from participants
for a certain time period following the distribution of shares to the
participants.
The Corporation's common stock subject to repurchase obligation in ESOP had an
estimated value as follows:
Unearned
ESOP ESOP Shares
---- -----------
Balance at December 31, 1994 $ 6,834,557 $ -
Change in estimated market value of common
stock subject to repurchase obligation in ESOP 2,498,470 -
----------- -----------
Balance at December 31, 1995 9,333,027 -
Purchase of unallocated ESOP shares with loan 1,490,000 (1,490,000)
Change in estimated market value of common
stock subject to repurchase obligation in ESOP (1,435,439) -
----------- -----------
Balance at December 31, 1996 9,387,588 (1,490,000)
Paydown of ESOP loan - 191,000
Change in estimated market value of common
stock subject to repurchase obligation in ESOP 737,384 -
----------- -----------
Balance at December 31, 1997 $10,124,972 $(1,299,000)
=========== ===========
During 1996, the ESOP borrowed $1,490,000 from the Corporation to purchase
46,879 shares of common stock at a weighted average cost of $31.78 per share.
Collateral for the loan is the unearned shares of common stock purchased by the
ESOP with the loan proceeds. The loan will be repaid principally from the
Corporation's discretionary contributions to the ESOP. The interest rate for the
loan is 7.75%. Shares purchased by the ESOP will be held in suspense until
allocated among ESOP participants as the loan is repaid.
- --------------------------------------------------------------------------------
67
(CONTINUED)
68
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 8 - EMPLOYEE BENEFITS (Continued)
The ESOP shares as of December 31 were as follows:
1997 1996
---- ----
Allocated shares 283,501 281,703
Unearned shares 43,111 46,879
---------- ----------
Total ESOP shares 326,612 328,582
========== ==========
Fair value of unearned ESOP shares at December 31 $1,336,441 $1,339,333
========== ==========
The Corporation accounts for its ESOP under AICPA Statement of Position ("SOP")
93-6. Compensation expense is recorded based on the average market price of the
shares committed to be released for allocation to participant accounts. The
difference between the market price and the cost of shares committed to be
released is recorded as an adjustment to common stock. Dividends on allocated
ESOP shares are recorded as a reduction of retained earnings; dividends on
unearned ESOP shares are reflected as a reduction of debt and accrued interest.
Stock Option Plan: On March 12, 1997, the Board of Directors of the Corporation
adopted the Rurban Financial Corp. Stock Option Plan ("Option Plan"). The
purpose of the Option Plan is to advance the interests of the Corporation and
its shareholders by granting directors, officers, and key employees of the
Corporation options to increase their propriety interest in the Corporation.
200,000 shares of the Corporation's authorized unissued common stock were
reserved for issuance under the Option Plan. The option exercise price shall not
be less than the fair market value (as defined in the Option Plan) of the common
stock on the date the option is granted, and the option term cannot exceed 10
years.
On October 22, 1997, 89,500 options with a 10 year term were granted at an
exercise price of $28.38 per share. All 89,500 of the options granted are
outstanding at December 31, 1997. 110,500 options are available for granting at
December 31, 1997. Eligible directors, officers and key employees are able to
exercise options awarded to them at a rate of 20% per year, October 22, 1998,
being the first possible exercise date, accordingly no options were exercisable
at December 31, 1997 or 1996.
The Corporation applied APB Opinion 25, Accounting For Stock Issued to Employees
and related interpretations in accounting for its Option Plan. Accordingly, no
compensation expense has been recognized for the Option Plan. SFAS No. 123,
Accounting For Stock-Based Compensation requires disclosures for stock-based
compensation awarded in fiscal years beginning after December 15, 1994 for
entities that do not adopt its fair value accounting method for stock-based
compensation. The effects of the fair value of options granted and the effects
of the amortization of the fair value over the vesting period on the
Corporation's net income and earnings per common share under the provisions of
SFAS No. 123 were not material for the years ended December 31, 1997, 1996 and
1995. In future years, as additional options are granted, the effect on net
income and earnings per common share may increase.
- --------------------------------------------------------------------------------
68
(CONTINUED)
69
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- -------------------------------------------------------------------------------
NOTE 8 - EMPLOYEE BENEFITS (Continued)
401(k) Profit Sharing Plan: The Corporation has 401(k) profit sharing plans. The
annual expense of the plans is based on 50% matching of voluntary employee
contributions of up to 6% of individual compensation. Employee contributions are
vested immediately and the Corporation's matching contributions are fully vested
after six years. The plans cover substantially all employees of the Corporation.
Contributions to the plans were $145,000, $120,000 and $101,000 and related
expense attributable to the plans, included in salaries and employee benefits,
were approximately $117,000, $140,000 and $101,000 in 1997, 1996 and 1995.
Life Insurance Plans: Life insurance plans are provided for certain executive
officers on a split-dollar basis and the Corporation is the owner of the
split-dollar policies. The officers are entitled to a sum equal to two times
either the employee's annual salary at death, if actively employed, or final
annual salary, if retired, less $50,000. The Corporation is entitled to the
remainder of the death proceeds less any loans on the policy and unpaid interest
or cash withdrawals previously incurred by the Corporation. The employees have
the right to designate a beneficiary(s) to receive their share of the proceeds
payable upon death. The cash surrender value of these life insurance policies
was approximately $604,000 and $602,000 at December 31, 1997 and 1996, and is
included in other assets in the consolidated balance sheets.
Supplemental Retirement Plan: The Corporation established a supplemental
retirement plan for selected officers. The Corporation has purchased insurance
contracts on the lives of certain participants in the supplemental retirement
plan and has named the Corporation as beneficiary. While no direct contract
exists between the supplemental retirement plan and the life insurance
contracts, it is management's current intent that the proceeds from the
insurance contracts will be used to help offset earlier payments made under the
supplemental retirement plan. The Corporation is recording an expense equal to
the projected present value of the payment due at retirement based on the
projected remaining years of service using the projected unit credit method. The
obligations under the plans, net of payments already made, was approximately
$532,000 and $456,000 at December 31, 1997 and 1996 and is included in other
liabilities in the consolidated balance sheets. The expense attributable to the
plans, included in salaries and employee benefits, was approximately $127,000,
$126,000 and $133,000 in 1997, 1996 and 1995. The cash surrender value of the
life insurance was approximately $1,597,000 and $1,491,000 at December 31, 1997
and 1996, and is included in other assets in the consolidated balance sheets.
- -------------------------------------------------------------------------------
69
(Continued)
70
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- -------------------------------------------------------------------------------
NOTE 9 - OTHER EXPENSES
The following is an analysis of other expenses for the years ended December 31,
1997, 1996 and 1995:
1997 1996 1995
---- ---- ----
Amortization of intangible assets $ 180,000 $ 285,000 $ 634,000
Advertising expense 343,771 271,407 259,938
Professional fees 1,193,329 1,012,029 870,487
Insurance expense 141,929 123,893 525,189
Data processing fees 412,736 426,771 436,983
Printing, stationery and supplies 686,701 689,489 604,340
Postage and delivery expense 362,249 337,544 304,362
State, local and other taxes 655,089 610,792 630,829
Other operating expenses 2,113,487 1,683,026 1,110,274
---------- ---------- ----------
$6,089,291 $5,439,951 $5,376,402
========== ========== ==========
NOTE 10 - INCOME TAX EXPENSE
Income tax expense consists of the following for the years ended December 31,
1997, 1996 and 1995:
1997 1996 1995
---- ---- ----
Current expense $ 2,525,248 $ 2,380,683 $ 2,915,522
Deferred benefit (54,779) (18,542) (788,418)
----------- ----------- -----------
$ 2,470,469 $ 2,362,141 $ 2,127,104
=========== =========== ===========
Tax expense on net gain on securities was $65,923, $11,521 and $1,058 in 1997,
1996 and 1995.
The difference between the financial statement income tax expense and amounts
computed by applying the statutory federal income tax rate to income before
income tax expense is as follows for the years ended December 31, 1997, 1996 and
1995:
1997 1996 1995
---- ---- ----
Statutory tax rate 34% 34% 34%
Income taxes computed at the
statutory federal income tax rate $ 2,715,330 $ 2,451,861 $ 2,115,452
Add (subtract) tax effect of
Tax-exempt income (214,877) (200,737) (184,312)
Non-deductible expenses and other (29,984) 111,017 195,964
----------- ----------- -----------
$ 2,470,469 $ 2,362,141 $ 2,127,104
=========== =========== ===========
- -------------------------------------------------------------------------------
70
(Continued)
71
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- -------------------------------------------------------------------------------
NOTE 10 - INCOME TAX EXPENSE (Continued)
The components of the net deferred tax asset recorded in the consolidated
balance sheets as of December 31, 1997 and 1996 are as follows:
1997 1996
---- ----
Deferred tax assets
Provision for loan losses $1,290,453 $1,252,221
Mark to market adjustment 100,513 --
Net deferred loan fees 48,427 48,427
Net unrealized depreciation on
securities available for sale -- 2,567
Accrued compensation and benefits 180,070 154,880
Other 7,337 112,837
---------- ----------
1,626,800 1,570,932
Deferred tax liabilities
Net unrealized appreciation on
securities available for sale (106,988) --
Originated mortgage servicing rights (88,433) --
Depreciation (105,404) (113,232)
Purchase accounting adjustments (163,252) (196,360)
Mark-to-market adjustment -- (43,883)
Other (1,568) (1,526)
---------- ----------
(465,645) (355,001)
Valuation allowance -- --
---------- ----------
$1,161,155 $1,215,931
========== ==========
NOTE 11 - RELATED PARTY TRANSACTIONS
Certain directors, executive officers and principal shareholders of the
Corporation, including associates of such persons, were loan customers during
1997. A summary of the related party loan activity, for loans aggregating
$60,000 or more to any one related party, follows for the year ended December
31, 1997 and 1996:
1997 1996
---- ----
Balance, January 1 $ 7,891,000 $ 3,512,000
New loans 309,000 18,423,000
Repayments (87,000) (14,469,000)
Other changes (6,783,000) 425,000
----------- ------------
Balance, December 31 $ 1,330,000 $ 7,891,000
=========== ============
Other changes include adjustments for loans applicable to one reporting period
that are excludable from the other reporting period.
- -------------------------------------------------------------------------------
71
(Continued)
72
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- -------------------------------------------------------------------------------
NOTE 12 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES
The Corporation is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet financing needs of its customers. These
financial instruments include commitments to make loans, unused lines of credit
and standby letters of credit. The Corporation's exposure to credit loss in the
event of nonperformance by the other party to the financial instruments for
commitments to make loans, unused lines of credit and standby letters of credit
is represented by the contractual amount of those instruments. The Corporation
follows the same credit policy to make such commitments as it uses for
on-balance-sheet items.
The Corporation has the following commitments for terms of up to two years
outstanding at December 31:
1997 1996
---- ----
Loan commitments and unused lines of credit $76,633,000 $67,561,000
Standby letters of credit 1,481,000 2,431,000
----------- -----------
$78,114,000 $69,992,000
=========== ===========
Since many commitments to make loans expire without being used, the amount does
not necessarily represent future cash commitments. In addition, commitments to
extend credit are arrangements to lend to customers as long as there is no
violation of any condition established in the contract. No losses are
anticipated as a result of these transactions. Collateral obtained upon exercise
of the commitment is determined using management's credit evaluation of the
borrower and may include real estate, business assets, consumer assets, deposits
and other items.
There are various contingent liabilities that are not reflected in the
consolidated financial statements, including claims and legal actions arising in
the ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these matters is
not expected to have a material effect on the Corporation's consolidated
financial condition or results of operations.
Under employment agreements with certain executive officers, certain events
leading to separation from the Corporation could result in cash payments
totaling approximately $917,000 for which only $208,000 has been accrued as a
liability at December 31, 1997.
- -------------------------------------------------------------------------------
72
(Continued)
73
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- -------------------------------------------------------------------------------
NOTE 12 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES (Continued)
The Corporation was required to have approximately $4,027,000 and $4,802,000 of
cash on hand or on deposit with the Federal Reserve Bank to meet regulatory
reserve and clearing requirements at December 31, 1997 and 1996.
These balances do not earn interest.
NOTE 13 - PARENT COMPANY FINANCIAL STATEMENTS
Presented below are condensed financial statements for the parent company,
Rurban Financial Corp.:
CONDENSED BALANCE SHEETS
December 31, 1997 and 1996
1997 1996
---- ----
ASSETS
Cash and cash equivalents $ 991,206 $ 468,782
Securities available for sale -- 506,614
Investment in and advances to subsidiaries
Banking subsidiaries 34,448,145 37,575,479
Non-banking subsidiaries 3,567,264 2,648,882
----------- -----------
Total investment in subsidiaries 38,015,409 40,224,361
Other assets 886,162 827,280
----------- -----------
Total assets $39,892,777 $42,027,037
=========== ===========
LIABILITIES
Cash dividends payable $ 413,982 $ --
Other liabilities 384,867 538,389
----------- -----------
Total liabilities 798,849 538,389
COMMON STOCK SUBJECT TO REPURCHASE
OBLIGATION IN ESOP 10,124,972 9,387,588
UNEARNED ESOP SHARES (1,299,000) (1,490,000)
SHAREHOLDERS' EQUITY 30,267,956 33,591,060
----------- -----------
Total liabilities and shareholders' equity $39,892,777 $42,027,037
=========== ===========
- -------------------------------------------------------------------------------
73
(Continued)
74
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- -------------------------------------------------------------------------------
NOTE 13 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF INCOME
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Income
Interest on securities-non-taxable $ 21,477 $ 21,070 $ 5,347
Dividends from subsidiaries
Banking subsidiaries 9,705,299 2,325,000 3,015,000
Non-banking subsidiaries -- 50,000 75,000
----------- ---------- ----------
Total 9,705,299 2,375,000 3,090,000
Noninterest income 225,133 17,869 11,509
----------- ---------- ----------
Total income 9,951,909 2,413,939 3,106,856
Noninterest expense 2,738,038 1,423,660 896,999
----------- ---------- ----------
Income before income tax benefit and equity
in undistributed net income of subsidiaries 7,213,871 990,279 2,209,857
Income tax benefit 925,702 448,950 302,011
----------- ---------- ----------
Income before equity in undistributed
net income of subsidiaries 8,139,573 1,439,229 2,511,868
Equity in undistributed (excess distributed)
net income of subsidiaries
Banking subsidiaries (3,542,158) 2,999,521 1,358,754
Non-banking subsidiaries 918,382 410,464 224,191
----------- ---------- ----------
Total (2,623,776) 3,409,985 1,582,945
----------- ---------- ----------
Net income $ 5,515,797 $4,849,214 $4,094,813
=========== ========== ==========
- -------------------------------------------------------------------------------
74
(Continued)
75
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- -------------------------------------------------------------------------------
NOTE 13 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Cash flows from operating activities
Dividends received from subsidiaries
Banking subsidiaries $ 9,705,299 $ 2,325,000 $ 3,015,000
Non-banking subsidiaries -- 50,000 75,000
----------- ----------- -----------
Total 9,705,299 2,375,000 3,090,000
Cash paid to suppliers and employees (2,877,327) (1,445,917) (681,050)
Income tax refunds 933,985 375,026 253,486
----------- ----------- -----------
Net cash from operating activities 7,761,957 1,304,109 2,662,436
Cash flows from investing activities
Proceeds from sales of securities
available for sale 516,371 -- --
Principal repayments and calls of
securities available for sale 155,455 -- --
Purchase of securities available for sale -- (200,517) (306,097)
Cash paid for life insurance premiums -- -- (716,613)
----------- ----------- -----------
Net cash from investing activities 671,826 (200,517) (1,022,710)
Cash flows from financing activities
Cash dividends paid (1,234,748) (1,308,975) (1,310,627)
Cash paid to repurchase common stock (6,676,611) (170,625) --
----------- ----------- -----------
Net cash from financing activities (7,911,359) (1,479,600) (1,310,627)
----------- ----------- -----------
Net change in cash and cash equivalents 522,424 (376,008) 329,099
Cash and cash equivalents at beginning
of year 468,782 844,790 515,691
----------- ----------- -----------
Cash and cash equivalents at end of year $ 991,206 $ 468,782 $ 844,790
=========== =========== ===========
- -------------------------------------------------------------------------------
75
(Continued)
76
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- -------------------------------------------------------------------------------
NOTE 13 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Reconciliation of net income to net cash
from operating activities
Net income $5,515,797 $ 4,849,214 $ 4,094,813
Adjustments to reconcile net income to
net cash from operating activities
Net gain on securities (165,212) -- --
Equity in (undistributed) excess
distributed net income of subsidiaries
Banking subsidiaries 3,542,158 (2,999,521) (1,358,754)
Non-banking subsidiaries (918,382) (410,464) (224,191)
Change in other assets (58,882) 6,772 (66,596)
Change in other liabilities (153,522) (141,892) 217,164
---------- ----------- -----------
Net cash from operating activities $7,761,957 $ 1,304,109 $ 2,662,436
========== =========== ===========
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table shows the estimated fair values and the related carrying
values of the Corporation's financial instruments at December 31, 1997 and 1996.
Items which are not financial instruments are not included.
1 9 9 7 1 9 9 6
---------------------------------- -----------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
Financial assets
Cash and cash equivalents $ 22,222,385 $ 22,222,000 $ 34,027,263 $ 34,027,000
Interest-bearing deposits in
other financial institutions 529,777 530,000 180,000 180,000
Securities available for sale 71,683,120 71,683,000 66,635,889 66,636,000
Loans, net of allowance for loan
losses (including loans held for sale) 358,612,036 358,833,000 315,254,876
312,643,000
Accrued interest receivable 3,533,532 3,534,000 3,298,902 3,299,000
Cash surrender value of
life insurance 2,201,000 2,201,000 2,093,000 2,093,000
Financial liabilities
Demand and savings deposits (213,817,093) (213,817,000) (203,709,830) (203,710,000)
Time deposits (201,364,193) (202,358,000) (184,056,243) (183,925,000)
Accrued interest payable (1,577,140) (1,577,000) (2,596,921) (2,597,000)
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76
(Continued)
77
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- -------------------------------------------------------------------------------
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
For purposes of the above disclosures of estimated fair values, the following
assumptions were used as of December 31, 1997 and 1996. The estimated fair value
for cash and cash equivalents, accrued interest receivable, cash surrender value
of life insurance and accrued interest payable are considered to approximate
cost. The estimated fair value for interest-bearing deposits in other financial
institutions and securities available for sale is based on quoted market values
for the individual deposits or securities or for equivalent deposits or
securities. The estimated fair value for loans is based on estimates of the
difference in interest rates the Corporation would charge the borrowers for
similar such loans with similar maturities made at December 31, 1997 and 1996,
applied for an estimated time period until the loan is assumed to reprice or be
paid. The estimated fair value for demand and savings deposits is based on their
carrying value. The estimated fair value for time deposits is based on estimates
of the rate the Corporation would pay on such deposits at December 31, 1997 and
1996, applied for the time period until maturity. The estimated fair value for
other financial instruments and off-balance-sheet loan commitments approximate
cost at December 31, 1997 and 1996 and are not considered significant to this
presentation.
While these estimates of fair value are based on management's judgment of the
most appropriate factors, there is no assurance that were the Corporation to
have disposed of such items at December 31, 1997 and 1996, the estimated fair
values would necessarily have been achieved at that date, since market values
may differ depending on various circumstances. The estimated fair values at
December 31, 1997 and 1996 should not necessarily be considered to apply at
subsequent dates.
In addition, other assets and liabilities of the Corporation that are not
defined as financial instruments are not included in the above disclosures, such
as premises and equipment. Also, non-financial instruments typically not
recognized in the financial statements nevertheless may have value but are not
included in the above disclosures. These include, among other items, the
estimated earnings power of core deposit accounts, the earnings potential of
trust assets, the trained work force, customer goodwill and similar items.
NOTE 15 - REGULATORY MATTERS
The Corporation and its subsidiary banks are subject to regulatory capital
requirements administered by federal banking agencies. Capital adequacy
guidelines and prompt corrective action regulations involve quantitative
measures of assets, liabilities, and certain off-balance-sheet items calculated
under regulatory accounting practices. Capital amounts and classifications are
also subject to qualitative judgments by regulators about components, risk
weightings, and other factors, and the regulators can lower classifications in
certain cases. Failure to meet various capital requirements can initiate
regulatory action that could have a direct material effect on the consolidated
financial statements.
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77
(Continued)
78
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- -------------------------------------------------------------------------------
NOTE 15 - REGULATORY MATTERS (Continued)
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If only adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required. The minimum
requirements are:
Capital to Risk-
Weighted Assets
---------------------- Tier 1 Capital
Total Tier 1 To Average Assets
----- ------ -----------------
Well capitalized 10% 6% 5%
Adequately capitalized 8% 4% 4%
Undercapitalized 6% 3% 3%
At year end, consolidated actual capital levels (in millions) and minimum
required levels were:
Minimum Required
Minimum Required To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
---------------- ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
1997
Total capital (to risk weighted assets)
Consolidated $42.2 11.6% $29.1 8.0% $36.4 10.0%
State Bank 24.2 10.3 18.7 8.0 23.4 10.0
Tier 1 capital (to risk weighted assets)
Consolidated 37.7 10.3 14.6 4.0 21.8 6.0
State Bank 21.3 9.1 9.3 4.0 14.0 6.0
Tier 1 capital (to averaged assets)
Consolidated 37.7 8.0 18.9 4.0 23.6 5.0
State Bank 21.3 7.2 11.8 4.0 14.7 5.0
1996
Total capital (to risk weighted assets)
Consolidated $44.5 13.9% $25.7 8.0% $32.1 10.0%
State Bank 25.9 12.9 16.0 8.0 20.0 10.0
Tier 1 capital (to risk weighted assets)
Consolidated 40.5 12.6 12.8 4.0 19.3 6.0
State Bank 23.4 11.7 8.0 4.0 12.0 6.0
Tier 1 capital (to averaged assets)
Consolidated 40.5 9.4 17.2 4.0 21.5 5.0
State Bank 23.4 9.0 10.4 4.0 13.0 5.0
The Corporation and State Bank at year-end 1997 and 1996 were categorized as
well capitalized. All other subsidiary banks are not considered significant for
this presentation.
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78
(Continued)
79
RURBAN FINANCIAL CORP.
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 1997
INDEX TO EXHIBITS
Exhibit No. Description Page No.
- ----------- ----------- --------
3(a) Amended Articles of Registrant, as amended Incorporated herein by reference to
Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31,
1989 (File No. 0-13507) [Exhibit
3(a)(i)].
3(b) Certificate of Amendment to the Amended Incorporated herein by reference to
Articles of Rurban Financial Corp. Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31,
1993 (File No. 0-13507) [Exhibit 3(b)].
3(c) Certificate of Amendment to the Amended Pages 84 through 85 of this Annual
Articles of Rurban Financial Corp. Report on Form 10-K.
3(d) Amended and Restated Articles of Pages 86 through 91 of this Annual
Rurban Financial Corp. Report on Form 10-K.
3(e) Regulations of Registrant, as amended Incorporated herein by reference to
Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31,
1986 (File No. 0-13507) [Exhibit 3(b)].
10(a) Employees' Stock Ownership Plan of Rurban Incorporated herein by reference to
Financial Corp. Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31,
1993 (File No. 0-13507) [Exhibit 10(a)].
10(b First Amendment to Employees' Stock Ownership Incorporated herein by reference to
Plan of Rurban Financial Corp., dated Registrant's Annual Report on Form 10-K
June 14, 1993 and made to be effective as of for the fiscal year ended
January 1, 1993 December 31, 1993 (File No. 0-13507)
[Exhibit 10(b)].
79
80
Exhibit No. Description Page No.
- ----------- ----------- --------
10(c) Second Amendment to Employees' Stock Incorporated herein by reference to
Ownership Plan of Rurban Financial Corp., Registrant's Annual Report on Form 10-K
dated March 14, 1994 and made to be effective for the fiscal year ended
as of January 1, 1993 December 31, 1993 (File No. 0-13507)
[Exhibit 10(c)].
10(d) Third Amendment to Employees' Stock Ownership Incorporated herein by reference to
Plan of Rurban Financial Corp., dated Registrant's Annual Report on Form 10-K
March 13, 1995 for the fiscal year ended
December 31, 1994 (File No. 0-13507)
[Exhibit 10(d)].
10(e) Fourth Amendment to Employees' Stock Ownership Incorporated herein by reference to
Plan of Rurban Financial Corp., dated June 10, Registrant's Annual Report on Form 10-K
1995 and made to be effective as of January 1, for the fiscal year ended December 31,
1995 1995 (File No. 0-13507) [Exhibit 10(e)].
10(f) The Rurban Financial Corp. Savings Plan and Incorporated herein by reference to
Trust Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31,
1990 (File No. 0-13507) [Exhibit 10(g)].
10(g) First Amendment to The Rurban Financial Corp. Incorporated herein by reference to
Savings Plan and Trust, dated December 10, Registrant's Annual Report on Form 10-K
1990 and effective January 1, 1990 for the fiscal year ended December
31, 1990 (File No. 0-13507)
[Exhibit 10(g)].
10(h) Second Amendment to The Rurban Financial Corp. Incorporated herein by reference to
Savings Plan and Trust, dated March 11, 1991, Registrant's Annual Report on Form 10-K
effective February 1, 1991 for the fiscal year ended December 31,
1992 (File No. 0-13507) [Exhibit 10(d)].
10(i) Third Amendment to The Rurban Financial Corp. Incorporated herein by reference to
Savings Plan and Trust, dated June 11, 1991 Registrant'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
Savings Plan and Trust, dated July 14, 1992, Registrant's Annual Report on Form 10-K
effective May 1, 1992 for the fiscal year ended December 31,
1992 (File No. 0-13507) [Exhibit 10(f)].
80
81
Exhibit No. Description Page No.
- ----------- ----------- --------
10(k) Fifth Amendment to The Rurban Financial Corp. Incorporated herein by reference to
Savings Plan and Trust, dated March 14, 1994 Registrant'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
Savings Plan and Trust dated May 1, 1995 Registrant'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 Incorporated herein by reference to
State Bank Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31,
1993 (File No. 0-13507) [Exhibit 10(j)].
10(n) Summary of Bonus Program adopted by the Trust Incorporated herein by reference to
Department of State Bank for the benefit of Registrant's Annual Report on Form 10-K
Robert W. Constien in his capacity as Manager for the fiscal year ended December 31,
of the Trust Department 1991 (File No. 0-13507) [Exhibit 10(e)].
10(o) Summary of Bonus Program for the Trust Incorporated herein by reference to
Department of State Bank Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31,
1992 (File No. 0-13507 [Exhibit 10(i)].
10(p) Summary of Sales Bonus Program of State Bank Incorporated herein by reference to
Registrant's Annual Report on Form 10-K
for the fiscal year ended
December 31, 1994 (File No. 0-13507)
[Exhibit 10(n)].
10(q) Summary of Rurban Financial Corp. Bonus Plan Incorporated herein by reference to
Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31,
1993 (File No. 0-13507) [Exhibit 10(q)].
81
82
Exhibit No. Description Page No.
- ----------- ----------- --------
10(r) Executive Salary Continuation Agreement, dated Incorporated herein by reference to
December 15, 1994, between Rurban Financial Registrant's Annual Report on Form 10-K
Corp. and Richard C. Burrows for the fiscal year ended December 31,
1994 (File No. 0-13507) [Exhibit 10(p)].
10(s) Executive Salary Continuation Agreement, dated Incorporated herein by reference to
October 11, 1995, between Rurban Financial Registrant's Annual Report on Form 10-K
Corp. and Thomas C. Williams; and Amended for the fiscal year ended December 31,
Schedule A to Exhibit 10(s) identifying other 1995 (File No. 0-13507) [Exhibit 10(s)].
identical Executive Salary Continuation Amended Schedule A to 10(s) is included
Agreements between executive officers of at Page 92 of this Annual Report on Form
Rurban Financial Corp. and Rurban Financial 10-K.
Corp.
10(t) Description of Split-Dollar Insurance Policies Incorporated herein by reference to
Maintained for Certain Executive Officers of Registrant's Annual Report on Form 10-K
Rurban Financial Corp. for the fiscal year ended December 31,
1995 (File No. 0-13507) [Exhibit 10(t)].
10(u) Rurban Financial Corp. Stock Option Plan Incorporated herein by reference to the
Corporation's Annual Report on Form 10-K
for the fiscal year ended
December 31, 1996 (File No. 0-13507)
[Exhibit 10(u)].
10(v) Rurban Financial Corp. Plan to Allow Directors Incorporated herein by reference to the
to Elect to Defer Compensation Corporation's Annual Report on Form 10-K
for the fiscal year ended
December 31, 1996 (File No. 0-13507)
[Exhibit 10(u)].
10(w) Form of Non-Qualified Stock Option Agreement Pages 93 through 97 of this Annual
Report on Form 10-K.
10(x) Form of Incentive Stock Option Agreement Pages 98 through 102 of this Annual
Report on Form 10-K.
82
83
Exhibit No. Description Page No.
- ----------- ----------- --------
11 Statement re Computation of Per Pages 60 and 62 [included in Note 1 and Note
Share Earnings 2 of the Notes to the Consolidated Financial
Statements of Registrant in the financial
statements portion of this Annual Report
on Form 10-K].
21 Subsidiaries of Registrant Incorporated herein by reference to
Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31,
1994 (File No. 0-13507) [Exhibit 21].
23 Consent of Independent Auditor Page 103 of this Annual Report on Form
10-K
24 Powers of Attorney Pages 104 through 114 of this Annual
Report on Form 10-K.
27 Financial Data Schedule Page 115 of this Annual Report on Form 10-K.
83