Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________to___________________________
Commission file number 0-13507
RURBAN FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Ohio 34-1395608
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
401 Clinton Street, Defiance, Ohio 43512
(Address of principal executive offices)
(Zip Code)
(419) 783-8950
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by sections 13 or 15(d) of the Securities Exchange Act of 1934
during the proceeding 12 months (or for such shorter period the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
The number of common shares of Rurban Financial Corp. outstanding was
4,563,982 on November 1, 2001.
1
PART I - FINANCIAL INFORMATION
Item 1. Financial statements
The interim condensed consolidated financial statements of Rurban Financial
Corp. and Subsidiaries are unaudited; however, the information contained herein
reflects all adjustments which are, in the opinion of management, necessary for
a fair presentation of financial condition and results of operations for the
interim periods presented. All adjustments reflected in these financial
statements are of a normal recurring nature in accordance with Rule 10-01 (b)
(8) of Regulation S-X. Results of operations for the nine months ended September
30, 2001 are not necessarily indicative of results for the complete year.
2
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, December 31, September 30,
2001 2000 2000
------------ ------------ ------------
(Unaudited) (Note) (Unaudited)
ASSETS
Cash and due from banks $ 18,346,030 $ 18,431,717 $ 18,307,274
Federal funds sold 14,650,000 -- --
------------ ------------ ------------
Total cash and cash equivalents 32,996,030 18,431,717 18,307,274
Interest-earning deposits in other
financial institutions 260,000 110,000 110,000
Securities available for sale 95,190,979 88,904,958 88,501,019
Loans held for sale, net of valuation
allowance $0 197,100 1,166,716 2,215,711
Loans, net of allowance for losses of $7,945,113
at September 30, 2001, $7,214,970 at December
31, 2000 and $6,890,492 at September 30, 2000 572,765,096 569,421,255 554,860,349
Accrued interest receivable 5,411,504 5,716,048 5,901,706
Premises and equipment, net 12,043,320 10,902,749 10,326,748
Other assets 7,053,022 6,164,259 8,287,081
------------ ------------ ------------
Total assets $725,917,051 $700,817,702 $688,509,888
============ ============ ============
3
(Continued)
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, December 31, September 30,
2001 2000 2000
------------- ------------- -------------
(Unaudited) (Note) (Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $ 46,271,575 $ 47,989,547 $ 42,434,782
Interest-bearing 557,281,397 518,331,214 508,582,254
------------- ------------- -------------
Total deposits 603,552,972 566,320,761 551,017,036
Federal funds purchased -- 13,200,000 25,600,000
Advances from Federal Home Loan Bank (FHLB) 51,348,977 52,163,914 46,233,355
Junior subordinated debentures 9,702,473 9,690,677 9,695,834
Accrued interest payable 4,283,933 4,613,173 4,073,468
Other liabilities 3,185,881 4,688,991 3,770,044
------------- ------------- -------------
Total liabilities 672,074,236 650,677,516 640,389,737
Shareholders' equity
Common stock, stated value $2.50 per share;
shares authorized: 10,000,000;
shares issued: 4,575,702;
shares outstanding: 4,563,982 at September 30, 2001
4,347,238 at December 31, 2000 and 4,347,238
at September 30, 2000 11,439,255 11,439,255 11,439,255
Additional paid-in capital 11,017,464 11,113,340 11,113,340
Retained earnings 30,863,704 31,450,244 30,768,753
Accumulated other comprehensive income (loss), net
of tax of $732,008 at September 30, 2001, $169,222
at December 31, 2000 and $(500,076) at
September 30, 2000 1,420,959 328,490 (970,736)
Unearned ESOP shares: 35,553 at September 30,
2001, 36,802 at December 31, 2000 and 47,727 at
September 30, 2000 (561,867) (721,442) (760,760)
Treasury stock; shares at cost September 30, 2001 -
11,720, December 31, 2000 - 228,464 and
September 30, 2000 - 228,464 (336,700) (3,469,701) (3,469,701)
------------- ------------- -------------
Total shareholders' equity 53,842,815 50,140,186 48,120,151
------------- ------------- -------------
Total liabilities and shareholders' equity $ 725,917,051 $ 700,817,702 $ 688,509,888
============= ============= =============
See notes to condensed consolidated financial statements (unaudited)
Note: The balance sheet at December 31, 2000 has been derived from
the audited consolidated financial statements at that date.
4
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended
September 30,
--------------------------------
2001 2000
Interest income
Interest and fees on loans $12,457,019 $ 13,158,559
Interest and dividends on securities:
Taxable 1,304,284 1,208,936
Tax-exempt 60,548 147,115
Other 125,942 70,422
----------- ------------
Total interest income 13,947,793 14,585,032
Interest expense
Deposits 6,608,968 6,625,221
Borrowings 1,026,446 1,276,628
----------- ------------
Total interest expense 7,635,414 7,901,849
----------- ------------
Net interest income 6,312,379 6,683,183
Provision for loan losses 1,125,000 450,000
----------- ------------
Net interest income after provision
for loan losses 5,187,379 6,233,183
Noninterest income
Service charges on deposit accounts 752,022 458,353
Loan servicing fees 127,683 172,541
Trust fees 642,232 649,701
Data service fees 1,503,738 1,238,911
Net gain (loss) on securities 155,144 (2,520)
Net gain on sales of loans 304,339 22,722
Net gain on sales of fixed assets 52,793 351
Other income 171,868 184,188
----------- ------------
Total noninterest income 3,709,819 2,724,247
Noninterest expense
Salaries and employee benefits 3,877,193 3,580,325
Net occupancy expense of premises 312,409 298,066
Equipment rentals, depreciation and maintenance 842,730 827,263
Other expenses 1,911,950 1,688,234
----------- ------------
Total noninterest expense 6,944,282 6,393,888
----------- ------------
Income before income tax expense 1,952,916 2,563,542
Income tax expense 644,034 849,685
----------- ------------
Net income $ 1,308,882 $ 1,713,857
=========== ============
Basic and diluted earnings per share (Note C) $ 0.29 $ 0.38
=========== ============
Dividends declared per share $ 0.114 $ 0.105
=========== ============
See notes to condensed consolidated financial statements (unaudited)
5
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Nine Months Ended
September 30,
--------------------------------
2001 2000
Interest income
Interest and fees on loans $38,760,172 $ 36,721,236
Interest and dividends on securities:
Taxable 3,971,596 3,555,090
Tax-exempt 353,894 436,396
Other 210,078 188,174
----------- ------------
Total interest income 43,295,740 40,900,896
Interest expense
Deposits 20,469,618 17,918,879
Borrowings 3,311,043 3,396,578
----------- ------------
Total interest expense 23,780,661 21,315,457
----------- ------------
Net interest income 19,515,079 19,585,439
Provision for loan losses 3,108,000 1,350,000
----------- ------------
Net interest income after provision
for loan losses 16,407,079 18,235,439
Noninterest income
Service charges on deposit accounts 1,885,315 1,271,291
Loan servicing fees 453,729 499,360
Trust fees 2,019,661 2,070,005
Data service fees 4,511,103 3,836,134
Net gain (loss) on securities 195,647 (80,540)
Net gain on sales of loans 668,992 317,675
Net gain on sales of fixed assets 69,096 1,641
Other income 560,852 534,373
----------- ------------
Total noninterest income 10,364,395 8,449,939
Noninterest expense
Salaries and employee benefits 11,708,951 10,794,635
Net occupancy expense of premises 916,686 857,626
Equipment rentals, depreciation and maintenance 2,606,283 2,470,978
Other expenses 5,599,897 5,278,002
----------- ------------
Total noninterest expense 20,831,817 19,401,241
----------- ------------
Income before income tax expense 5,939,657 7,284,137
Income tax expense 1,915,407 2,401,117
----------- ------------
Net income $ 4,024,250 $ 4,883,020
=========== ============
Basic and diluted earnings per share (Note C) $ 0.89 $ 1.08
=========== ============
Dividends declared per share $ 0.343 $ 0.305
=========== ============
See notes to condensed consolidated financial statements (unaudited)
6
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, 2001 September 30, 2000 September 30, 2001 September 30, 2000
Total Total Total Total
Shareholders' Shareholders' Shareholders' Shareholders'
Equity Equity Equity Equity
---------------- ----------------- ----------------- ----------------
Balance at beginning of period $ 52,568,056 $ 46,137,455 50,140,186 $ 43,900,471
Net Income 1,308,882 1,713,857 4,024,250 4,883,020
Other comprehensive income (loss):
Net change in unrealized gains (losses)
on securities available for sale, net 446,442 682,239 1,092,469 562,811
------------ ------------ ----------- ------------
Total comprehensive income 1,755,324 2,396,096 5,116,719 5,445,831
Cash dividends declared (521,669) (455,479) (1,565,006) (1,366,437)
Cash paid in lieu of fractional shares
for 5% stock dividend
(Share issued from treasury 216,744 in 2001
and 206,502 in 2000) (8,659) (6,968) (8,659) (6,968)
Paydown of ESOP loan 49,763 49,047 159,575 147,254
------------ ------------ ----------- ------------
Balance at end of period $ 53,842,815 $ 48,120,151 53,842,815 $ 48,120,151
============ ============ =========== ============
See notes to condensed consolidated financial statements (unaudited)
7
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
September 30,
----------------------------------
2001 2000
Cash Flows From Operations
Cash received from customers - fees and commissions $ 9,430,662 $ 8,211,163
Cash paid to suppliers and employees (19,501,295) (18,887,784)
Loans originated for sale (16,681,108) (8,226,696)
Proceeds from sales of loans held for sale 18,319,716 13,478,245
Interest received 43,600,284 39,146,511
Interest paid (24,109,901) (19,755,787)
Income taxes paid (4,000,000) (1,446,000)
------------ ------------
Net cash from operating activities 7,058,358 12,519,652
Cash Flows From Investing Activities:
Proceeds from principal repayments, maturities and
calls of securities available for sale 29,327,629 6,753,629
Proceeds from sales of securities available for sale 14,252,069 9,063,569
Purchase of securities available for sale (48,014,817) (20,427,106)
Net change in interest-earning deposits in other
financial institutions (150,000) --
Net change in loans (6,790,406) (61,404,644)
Recoveries on loan charge-offs 338,565 331,961
Premises and equipment expenditures, net (2,579,024) (591,475)
------------ ------------
Net cash from investing activities (13,615,984) (66,274,066)
Cash Flows From Financing Activities:
Net change in deposits 37,232,211 31,720,952
Net change in federal funds purchased (13,200,000) 14,700,000
Proceeds from FHLB advances 13,500,000 13,500,000
Repayments of FHLB advances (14,314,937) (7,301,948)
Net change in other borrowed funds -- (7,000,000)
Net proceeds from issuance of junior subordinated
debentures -- 9,695,834
Cash paid in lieu of fractional share for stock dividend (8,659) (6,968)
Cash dividends paid (2,086,676) (1,828,884)
------------ ------------
Net cash from financing activities 21,121,939 53,478,986
------------ ------------
Net change in cash and cash equivalents 14,564,313 (275,428)
Cash and cash equivalents at beginning of period 18,431,717 18,582,702
------------ ------------
Cash and cash equivalents at end of period $ 32,996,030 $ 18,307,274
============ ============
8
(Continued)
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
September 30,
---------------------------------
2001 2000
Reconciliation Of Net Income To Net
Cash From Operating Activities
Net Income $ 4,024,250 $ 4,883,020
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation 1,507,549 1,406,695
Amortization of intangible assets 96,313 165,000
Amortization of deferred debt issue costs 11,796 --
Provision for loan losses 3,108,000 1,350,000
Net (gain) loss on securities (195,647) 80,540
Loans originated for sale (16,681,108) (8,226,696)
Proceeds from sales of loans held for sale 18,319,716 13,478,245
Net gain on sale of loans (668,992) (317,675)
Net gain on sale of fixed assets (69,096) (1,641)
Paydown of ESOP loan 159,575 147,254
Change in accrued interest receivable 304,544 (1,754,385)
Change in other assets (1,547,862) (344,998)
Change in accrued interest payable (329,240) 1,559,670
Change in other liabilities (981,440) 94,623
------------ ------------
Net cash from operating activities $ 7,058,358 $ 12,519,652
============ ============
See notes to condensed consolidated financial statements (unaudited)
9
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes included in the Corporation's annual report for the year ended
December 31, 2000.
NOTE B -- STOCK DIVIDENDS
During the third quarter of 2001, the Board of Directors declared and paid a 5%
stock dividend from treasury stock. Dividends issued in stock are reported by
transferring the market value of the stock issued from retained earnings to
common stock or treasury stock and additional paid in capital.
NOTE C -- EARNINGS PER SHARE
Earnings per share have been computed based on the weighted average number of
shares outstanding during the periods presented. The number of shares used in
the computation of basic and diluted earnings per share was:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Basic earnings per share 4,528,223 4,513,595 4,527,805 4,512,338
Diluted earnings per share 4,545,500 4,513,595 4,538,473 4,512,338
Earnings per share and dividends per share have been restated for the 5% stock
dividends paid during the third quarters of 2001 and 2000.
NOTE D -- ACCOUNTING STANDARDS IMPLEMENTED IN 2001
On January 1, 2001, the Corporation adopted SFAS No. 133 which requires
derivatives to be recorded at fair value. Unless designated as hedges, changes
in the fair values will be recorded in the income statement. Fair value changes
involving hedges will generally be recorded by offsetting gains and losses on
the hedge and on the hedged items, even if the fair value of the hedged item is
not otherwise recorded. Adoption of this standard on January 1, 2001 did not
have a material effect on the Corporation's financial condition or results of
operations.
NOTE E - RECLASSIFICATIONS
Certain amounts appearing in the December 31, 2000 financial statements have
been reclassified to conform to the current presentation.
10
(Continued)
NOTE F - RISK ELEMENTS AND ALLOWANCE FOR LOAN LOSSES
ALLOWANCE FOR LOAN LOSSES
The following is a summary of the activity in the allowance for loan losses
account for the nine months ended September 30, 2001 and 2000 and the year ended
December 31, 2000.
September 30, December 31, September 30,
2001 2000 2000
----------- ----------- -----------
Beginning balance, January 1 $ 7,214,970 $ 6,193,712 $ 6,193,712
Provision for loan losses 3,108,000 2,100,000 1,350,000
Recoveries of previous charge-offs 338,565 490,752 331,961
Losses charged to the allowance (2,716,422) (1,569,494) (985,181)
----------- ----------- -----------
Ending balance $ 7,945,113 $ 7,214,970 $ 6,890,492
=========== =========== ===========
At September 30, 2001, December 31, 2000 and September 30, 2000 loans past due
more than 90 days and still accruing interest approximated $2,248,000,
$1,927,000 and $2,054,000.
Impaired loans were as follows.
September 30, December 31, September 30,
2001 2000 2000
----------- ---------- ----------
Loans with no allowance for loan losses allocated $ 5,114,000 $4,189,000 $3,441,000
Loans with allowance for loan losses allocated 6,211,000 3,923,000 1,673,000
----------- ---------- ----------
Total impaired loans $11,325,000 $8,112,000 $5,114,000
=========== ========== ==========
Amount of allowance allocated $ 1,723,000 $2,410,000 $1,049,000
=========== ========== ==========
During the third quarter, net chargeoffs were $879,000 versus $292,000 in the
third quarter of 2000. As a reflection of those chargeoffs and the impact of the
prevailing economic slowdown on individual loans, a loan loss provision of
$1,125,000 was recorded during the third quarter of 2001 as compared to $450,000
in the same period for 2000. For the nine months, net chargeoffs were $2,378,000
versus $653,000 for the first nine months of 2000. The provision for loan losses
was $3,108,000 for the nine months ended September 30, 2001 as compared to
$1,350,000 for the same period for 2000.
11
(Continued)
NOTE -G CONTINGENT LIABILITIES
There are various contingent liabilities that are not reflected in the
consolidated financial statements, including claims and legal actions arising in
the ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these matters is
not expected to have a material effect on the Corporation's consolidated
financial condition or results of operations.
NOTE H - SEGMENT INFORMATION
The reportable segments are determined by the products and services offered,
primarily distinguished between banking and data processing operations. Other
segments include the accounts of the holding company, Rurban Financial Corp.,
which provides management and operational services to its subsidiaries; Reliance
Financial Services, N.A., which provides trust and financial services to
customers nationwide; Rurban Life, which provides insurance products to
customers of the Corporation's subsidiary banks; and Rurban Statutory Trust 1,
which manages the Corporation's junior subordinated debentures. Information
reported internally for performance assessment follows.
12
(Continued)
NOTE H -- SEGMENT INFORMATION (Continued)
As of and for the nine months ended September 30, 2001
Data Total Intersegment Consolidated
Banking Processing Other Segments Elimination Totals
---------------------------------------------------------------------------------------
Income statement information:
- -----------------------------
Net interest income (expense) $ 19,431,285 ($ 103,017) $ 186,811 $ 19,515,079 $ -- $ 19,515,079
Noninterest income - external
customers 3,670,580 4,511,103 2,182,712 10,364,395 -- 10,364,395
Noninterest income - other segments -- 1,168,537 2,660,363 3,828,900 (3,828,900) --
------------ ----------- ------------ ------------ ------------ ------------
Total revenue 23,101,865 5,576,623 5,029,886 33,708,374 (3,828,900) 29,879,474
Noninterest expense 13,162,015 4,508,657 6,990,045 24,660,717 (3,828,900) 20,831,817
Significant non-cash items:
Depreciation and
amortization 710,140 756,405 149,113 1,615,658 -- 1,615,658
Provision for loan losses 3,108,000 -- -- 3,108,000 -- 3,108,000
Income tax expense (benefit) 2,219,497 363,108 (667,198) 1,915,407 -- 1,915,407
Segment profit (loss) 4,612,353 704,858 (1,292,961) 4,024,250 -- 4,024,250
Balance sheet information:
- -----------------------------
Total assets 718,038,816 5,746,683 18,590,730 742,376,229 (16,459,178) 725,917,051
Goodwill and intangibles 203,687 -- -- 203,687 -- 203,687
Premises and equipment
expenditures, net 522,221 1,980,951 75,852 2,579,024 -- 2,579,024
13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Rurban Financial Corp. ("Rurban") was incorporated on February 23, 1983, under
the laws of the State of Ohio. Rurban is a bank holding company registered with
the Federal Reserve Board under the Bank Holding Company Act of 1956, as
amended. Rurban's subsidiaries, The State Bank and Trust Company ("State Bank")
and RFC Banking Company ("RFCBC") are engaged in the industry segment of
commercial banking. RFCBC was created June 30, 2001 through the merger of The
Peoples Banking Company, The First National Bank of Ottawa and The Citizens
Savings Bank Company, which were wholly owned subsidiaries of Rurban prior to
the merger, and now operate as separate divisions under their longstanding
names. Rurban's subsidiary, Rurbanc Data Services, Inc. ("RDSI"), provides
computerized data processing services to community banks and businesses
including Rurban's subsidiary banks. Rurban's subsidiary, Rurban Life Insurance
Company ("Rurban Life") has a certificate of authority from the State of Arizona
to transact insurance as a domestic life and disability insurer. Rurban's
subsidiary, Rurban Statutory Trust I ("RST") was established in September 2000
for the purpose of managing the Corporation's junior subordinated debentures.
Reliance Financial Services, N.A. ("Reliance"), a wholly owned subsidiary of
State Bank, provides trust and financial services to customers nationwide.
The following discussion is intended to provide a review of the consolidated
financial condition and results of operations of Rurban Financial Corp. This
discussion should be read in conjunction with the consolidated financial
statements and related footnotes.
This section may contain statements that are forward-looking as defined by the
Securities and Exchange Commission in its rules, regulations and releases. The
Company intends that such forward-looking statements be subject to the safe
harbors created thereby. All forward-looking statements are based on current
expectations regarding important risk factors including those identified in the
Company's most recent periodic report and other filings with the Securities and
Exchange Commission. Accordingly, actual results may differ materially from
those expressed in the forward-looking statements, and the making of such
statements should not be regarded as a representation by the Company or any
other person that the results expressed therein will be achieved.
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, federal funds
sold, interest-earning deposits in other financial institutions, securities
available-for-sale and loans held for sale. These assets are commonly referred
to as liquid assets. Liquid assets were $129 million at September 30, 2001,
compared to $109 million at December 31, 2000. Management recognizes securities
may need to be sold in the future to help fund loan demand and, accordingly, as
of September 30, 2001, the entire securities portfolio of $95 million was
classified as available for sale. Significant additional off balance sheet
liquidity is available in the form of FHLB advances, unused federal funds lines
from correspondent banks, the national certificate of deposit market and
Rurban's $15 million line of credit, which had no balance outstanding at
September 30, 2001.
14
CAPITAL RESOURCES
Total shareholders' equity net of unearned ESOP shares was $53,842,815 as of
September 30, 2001, an increase of $3,702,629 over the $50,140,186 as of
December 31, 2000 and an increase of $5,722,664 over the $48,120,151 as of
September 30, 2000. The increase for the nine months ended September 30, 2001
was a result of net income of $4,024,250, a net $1,092,469 increase in
unrealized appreciation on securities available for sale, net of tax; a
reduction in unearned ESOP shares of $159,575, offset by dividends declared of
$1,565,006 and $8,659 of cash paid for fractional shares resulting from payment
of a 5% stock dividend.
The Corporation and each of its subsidiary banks exceed the applicable "well
capitalized" regulatory capital requirements at September 30, 2001.
As of September 30, 2001, 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.
Supplemental Information
Changes in Financial Condition and Results of Operations
Net income for the quarter was $1.3 million, or $0.29 per share, versus $1.7
million, or $0.38 per share, for third-quarter 2000. Net income for the first
nine months of 2001 were $4.0 million, or $0.89 per share, compared with the
$4.9 million, or $1.08 per share, reported for the first nine months of 2000.
Rurban's growth in noninterest income continued with increases of $1.0 million
or 36% for the quarter and $1.9 million or 23% year to date. That growth more
than offset single digit growth in noninterest expense and a slight decline in
net interest income. However, the results for the quarter and nine months
reflected softening economic conditions leading to increased loan chargeoffs and
loan loss provisions of $1.1 million and $3.1 million for the three and nine
months compared to $.5 million and $1.4 million for the same periods of 2000.
The allowance for loan losses as a percent of loans increased from 1.23% at
September 30, 2000 and 1.30% at June 30, 2001 to 1.37% at September 30, 2001.
The increases in noninterest income for the third quarter and the first nine
months of 2001 were primarily due to sales of new banking products, data
processing fee growth from Rurban's bank data processing subsidiary, RDSI, and
increases in gains on sale of loans and securities.
DIVIDENDS
Cash dividends declared in the third quarter of 2001 were $530,327, or $0.114
per common share, which represented a 15% increase from the amount declared for
the third quarter of 2000. The cash dividends declared in the first nine months
of 2001 were $1,573,663 or $0.343 per common share, which was $200,258 or 15%
greater than dividends paid in the same period in 2000.
Shareholders received a 5% stock dividend in both September 2000 and 2001,
increasing their number of shares on which dividends are paid.
15
TOTAL REVENUE
9/30/01 9/30/00 % Change
------- ------- --------
(Dollars in thousands)
Three Months
Net Interest Income $ 6,312 $ 6,683 -6%
Noninterest Income 3,710 2,724 +36%
------- -------
Total Revenue $10,022 $ 9,407 +7%
Nine Months
Net Interest Income $19,515 $19,585 --%
Noninterest Income 10,364 8,450 +23%
------- -------
Total Revenue $29,879 $28,035 +7%
Total revenues (net interest income plus noninterest income) were $10.0 million
for the third quarter of 2001 compared to $9.4 million for the third quarter of
2000, an increase of $0.6 million, or 7%. Total revenues for the first nine
months totaled $29.9 million compared to $28.0 million for the first nine months
of 2000, an increase of $1.9 million, or 7%.
NET INTEREST INCOME
Net interest income for the third quarter was $6.3 million compared to $6.6
million for the second quarter and $6.7 million for the third quarter of 2000.
The net interest margin for the third quarter of 2001 was 3.67% compared to
3.73% for the second quarter and 4.13% for the third quarter of 2000. The 6
basis point linked quarter decline in the net interest margin was largely due to
a 36 basis point decrease in the yield on earning assets from 8.59% to 8.23%
which more than offset a 30 basis point decrease in the Company's total cost of
funds.
The Federal Reserve Bank's Open Market Committee (the "FOMC") has slashed the
federal funds interest rate 400 basis points since the beginning of 2001. Many
banks, including Rurban, have dropped their prime lending rate each time that
the federal funds rate has been reduced. Management believes that there is a
possibility that the FOMC may continue with its rate reductions until the
national economy shows signs of improving; placing continued downward pressures
on rates earned on loans and investments.
The Rurban banks have long maintained a discipline of avoiding long term
mismatches of the maturities of interest-earning assets and interest-bearing
liabilities. The Corporation's balance sheet is slightly asset sensitive, with
approximately one-third of its loans indexed to the prime rate. This
unprecedented steep interest rate decline compressed the net interest margin as
the decline in interest income on loans has exceeded the pace of the decline in
funding costs.
NONINTEREST INCOME
Noninterest income for the third quarter of 2001 increased to $3.7 million from
$2.7 million a year ago, a 36% increase. On a linked quarter basis, noninterest
income increased 9%.
Noninterest income for the first nine months of 2001 increased $1.9 million to
$10.4 million from $8.5 million in the first nine months of 2000, a 23%
increase.
16
The increase in noninterest income for the third quarter and the first nine
months of 2001 was primarily due to growth in data processing fees from the
Company's bank data processing subsidiary, Rurbanc Data Services, Inc. ("RDSI")
and increased deposit service fees due to a new product introduction during the
second quarter of 2001 and increases in gains on sale of loans and securities.
Deposit service fees were $752,000 in the third quarter, a $294,000 or 64%
increase over 2000; while such fees for the nine months were $1,885,000, a
$614,000 or 48% increase. Data processing fees grew to $1,504,000 and $4,511,000
for the three and nine months, increases of $265,000 or 21% and $675,000 or 18%
over 2000.
For the first nine months ended September 30, 2001 and September 30, 2000,
noninterest income represented 35% and 30% respectively, of total revenues.
NONINTEREST EXPENSES
Noninterest expenses for the third quarter of 2001 were $6.9 million, up 9% from
$6.4 million a year ago. On a linked quarter basis, noninterest expenses
increased 1%.
Noninterest expenses for the first nine months of 2001 were $20.8 million, up 7%
from $19.4 million in the first nine months of 2000.
The increases in noninterest expenses for the third quarter and the first nine
months of 2001 were largely the result of inflation, annual merit salary
increases and depreciation of technology investments. Despite an expansion of
products and services offered, the number of full-time equivalent employees was
278, the same as at September 30, 2000.
LINKED QUARTER COMPARISON
A comparison of financial results for the quarter ended September 30, 2001 to
the previous quarter ended June 30, 2001 is as follows: (Dollars in millions,
except per share data)
Three Linked Quarter
Months Ended Annualized
9/30/01 6/30/01 % Increase
------- ------- ----------
Total Assets $ 726 $ 718 +4%
Total Loans (Net) 573 576 -5%
Total Deposits 604 599 +3%
Total Revenues 10.0 10.0 +1%
Noninterest Income 3.7 3.4 +9%
Noninterest Expense 6.9 6.9 +1%
Net Income 1.3 1.1 +17%
Earnings Per Share $ 0.29 $ 0.25 +16%
LOANS
Loans declined in the third quarter as loan demand softened and payoffs
increased.
17
Commercial loan growth for the quarter was flat, while residential loans
declined 3% and consumer loans grew 2%. At September 30, 2001, commercial loans,
residential loans and consumer loans represented 65%, 17% and 18% respectively,
of total loans, compared to 62%, 19% and 19%, respectively, at September 30,
2000.
Management believes that growth in all of the loan categories will continue to
be a challenge in the fourth quarter of 2001 and throughout 2002. Borrower
concerns about the local economy may continue to affect demand for both business
and personal loans.
ASSET QUALITY
Asset quality ratios leveled in the third quarter with non-performing assets at
September 30, 2001 totaling $9.4 million or 1.3% of total assets, versus $9.2
million, or 1.3% of total assets at June 30, 2001.
Net chargeoffs (annualized) as a percentage of loans for the third quarter of
2001 were .60% compared to .20% a year ago. Annualized net chargeoffs as a
percentage of net loans for the first nine months of 2001 were .55% compared to
.16% for the same period a year ago.
NET CHARGEOFFS
9/30/01 9/30/00 Change
------- ------- ------
(Dollars in thousands)
Three Months
Commercial $ 793 $ 5 $ 788
Real estate mortgage 10 0 10
Consumer 76 287 (211)
------ ---- -------
Net chargeoffs $ 879 $292 $ 587
====== ==== =======
Nine Months
Commercial $2,128 $183 $ 1,945
Real estate mortgage 10 22 (12)
Consumer 240 448 (208)
------ ---- -------
Net chargeoffs $2,378 $653 $ 1,725
====== ==== =======
The increase in net chargeoffs for the nine months was primarily the result of
chargeoffs on a few large loan relationships whose remaining balances are
classified as impaired.
The allowance for loan losses at September 30, 2001 was 1.37% of total loans
compared to 1.30% at June 30, 2001 and 1.23% at September 30, 2000.
18
RURBANC DATA SERVICES, INC. ("RDSI")
RDSI provides data processing services for 54 community banks in Ohio, Michigan
and Indiana. RDSI differentiates itself from its competition through the quality
of its products and the excellence of its customer service. The application
software utilized by RDSI is a world class software product used by over 3,600
banks nationwide. Customer service encompasses on-time delivery every morning
and a discipline of responding to and resolving customer questions and issues
within one hour in excess of 90% of the time. Finally, RDSI provides turnkey
solutions for its clients through its partnerships with business experienced in
a full array of banking products.
RDSI's growth comes from both new and existing clients. In the past five years,
the number of bank clients has more than doubled.
Three Months Ended Nine Months Ended
September 30, September 30,
------------- ------------
2001 2000 %Increase 2001 2000 %Increase
----------------------------------------------------------------
(Dollars in thousands)
----------------------------------------------------------------
Data Processing Fees $1,504 $1,239 21% $4,511 $3,836 18%
Growth in data processing fees was 21% for the third quarter and 18% for the
nine months of 2001 over the same periods in 2001.
PRESIDENT'S REMARKS
Results for the quarter and for the nine months reflect a proactive response to
the continued softening of the economy. Management has continued to increase the
loan loss provision and reserves, and devote additional resources to asset
quality assurance processes, and to loan generation efforts.
While none of us could predict the events of September 11 and their
aftereffects; Rurban's long-term outlook remains relatively unchanged.
Management is concentrating on improving the net interest margin through
continued exercise of improved pricing disciplines and an increasing focus on
customer relationship management. We expect interest rates to stabilize in the
coming quarters and the economy to strengthen in 2002. We remain extremely
positive on the fundamentals of our business. We are well positioned to generate
improved earnings given the pace of our growth in noninterest income and our
loan generation capability; once interest rates stabilize and we see the signs
of economic recovery.
EFFECT OF NEW ACCOUNTING PRINCIPLES - FAS 141 & 142
In June 2001, the Financial Accounting Standards Board "FASB" issued Statement
of Financial Accounting Standards "SFAS" No. 141, "Business Combinations." SFAS
No. 141 requires all business combinations within its scope to be accounted for
using the purchase method, rather than the pooling-of-interests method. The
provisions of this Statement apply to all business combinations initiated after
June 30, 2001. The adoption of this statement will only have an impact on our
financial statements if we enter into a business combination.
19
Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which addresses the accounting for such assets arising from prior and
future business combinations. Upon the adoption of this statement, goodwill
arising from business combinations will no longer be amortized, but rather will
be assessed regularly for impairment, with any such impairment recognized as a
reduction to earnings in the period identified. Other identified intangible
assets, such as core deposit intangible assets, will continue to be amortized
over their estimated useful lives. We are required to adopt this statement on
January 1, 2002. The adoption of this statement is not expected to have a
material impact on our financial statements.
20
Item 3: Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the Corporation's quantitative and
qualitative market risks since December 31, 2000. The following table compares
rate sensitive assets and liabilities as of September 30, 2001 to December 31,
2000.
Principal/notational amount maturing in:
(Dollars in thousands)
First Years
Year 2 to 5 Thereafter Total
-------- -------- ---------- --------
Comparison of 9/30/01 to 12/31/00
Total rate sensitive assets:
At September 30, 2001 $299,770 $261,851 $ 129,387 $691,008
At December 31, 2000 273,463 254,653 138,702 666,818
-------- -------- --------- --------
Increase (decrease) $ 26,307 $ 7,198 $ (9,315) $ 24,190
======== ======== ========= ========
Total rate sensitive liabilities:
At September 30, 2001 $346,992 $206,473 $ 111,139 $664,604
At December 31, 2000 345,614 187,830 107,931 641,375
-------- -------- --------- --------
Increase $ 1,378 $ 18,643 $ 3,208 $ 23,229
======== ======== ========= ========
Total rate sensitive assets increased approximately $24.2 million for the nine
months ended September 30, 2001 due primarily to a $14.7 million increase in
federal funds sold and $6.3 million increase in securities available for sale.
The primary reason for the increase in federal funds sold is a $7 million
decline in the residential first mortgage portfolio as borrowers refinance their
higher rate loans. The $14.7 million increase in federal funds sold and a $11.0
million increase in projected mortgage-backed securities paydowns resulted in
the $26.3 million increase in the "First Year" category.
Total rate sensitive liabilities increased approximately $23.2 million during
the nine months ended September 30, 2001. Certificates of deposit balances
increased $36.2 million while demand deposits and federal funds purchased
declined by $1.7 and $13.2 million, respectively
The $13.2 million reduction in federal funds purchased, replaced with
intermediate term (2 - 3 years) fixed rate deposits, resulted in the $18.6
million increase in the "Years 2 -5" category.
21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of shareholders held in April, 2001, shareholders voted
on the re-election of certain directors.
Item 5. Other Information
Not applicable
Item 6. Reports on Form 8-K
A Form 8-K was filed on September 30, 2001 to report the August 15, 2001
declaration of a 5% share dividend payable on September 28, 2001 to
shareholders of record as of September 14, 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
RURBAN FINANCIAL CORP.
Date November 14, 2001 By /S/ Thomas C.Williams
------------------ -----------------------------
Thomas C. Williams
President &
Chief Executive Officer
By /S/ Richard C. Warrener
----------------------------
Richard C. Warrener
Executive Vice President &
Chief Financial Officer
22