Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
--------------
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
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RURBAN FINANCIAL CORP.
- -----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-1395608
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
401 Clinton Street, Defiance, Ohio 43512
----------------------------------------
(Address of principal executive offices)
(Zip Code)
(419) 783-8950
----------------------------------------------------
(Registrant's telephone number, including area code)
None
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by sections 13 or 15(d) of the Securities Exchange Act of 1934
during the proceeding 12 months (or for such shorter period the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of common shares of Rurban Financial Corp. outstanding was
4,565,721 on May 1, 2002.
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------
The interim condensed consolidated financial statements of Rurban Financial
Corp. and Subsidiaries are unaudited; however, the information contained herein
reflects all adjustments which are, in the opinion of management, necessary for
a fair presentation of financial condition and results of operations for the
interim periods presented. All adjustments reflected in these financial
statements are of a normal recurring nature in accordance with Rule 10-01 (b)
(8) of Regulation S-X. Results of operations for the three months ended March
31, 2002 are not necessarily indicative of results for the complete year.
2
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, December 31, March 31,
2002 2001 2001
------------ ------------ ------------
(Unaudited) (Note) (Unaudited)
ASSETS
Cash and due from banks $ 30,822,141 $ 25,342,043 $ 17,628,648
Interest-earning deposits in other
financial institutions 645,053 260,000 110,000
Securities available for sale 119,288,154 104,375,551 91,150,408
Loans held for sale, net of valuation
allowance of $0 85,635 439,991 1,951,794
Loans, net of allowance for losses of $12,638,515
at March 31, 2002, $9,238,936 at December 31,
2001 and $7,661,778 at March 31, 2001 628,487,031 591,051,994 571,315,451
Accrued interest receivable 5,488,357 4,939,741 5,967,447
Premises and equipment, net 12,167,814 11,816,557 12,290,959
Other assets 13,721,610 8,276,811 7,472,631
------------ ------------ ------------
Total assets $810,705,795 $746,502,688 $707,887,338
============ ============ ============
3
(Continued)
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, December 31, March 31,
2002 2001 2001
(Unaudited) (Note) (Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $ 53,804,958 $ 52,830,193 $ 41,713,708
Interest-bearing 614,220,003 558,029,616 543,400,228
------------- ------------- -------------
Total deposits 668,024,961 610,859,809 585,113,936
Federal funds purchased -- 14,850,000 2,000,000
Advances from Federal Home Loan Bank (FHLB) 52,350,000 54,275,069 51,493,382
Trust preferred securities 10,000,000 10,000,000 10,000,000
Other borrowed funds 7,000,000 -- --
Accrued interest payable 3,380,770 3,630,623 4,965,611
Accounts payable - FDIC 18,378,054 -- --
Other liabilities 1,425,887 2,057,855 2,256,821
------------- ------------- -------------
Total liabilities 760,559,672 695,673,356 655,829,750
Shareholders' equity
Common stock, stated value $2.50 per share;
shares authorized: 10,000,000;
shares issued: 4,575,702;
shares outstanding: 4,564,513 at March 31, 2002
and December 31, 2001 and 4,347,238 at March 31, 2001 11,439,255 11,439,255 11,439,255
Additional paid-in capital 11,013,284 11,013,284 11,113,340
Retained earnings 28,112,189 28,499,026 32,522,826
Accumulated other comprehensive income (loss),
net of tax of $192,792 at March 31, 2002, $371,863
at December 31, 2001 and $584,177 at March 31, 2001 374,242 721,851 1,133,992
Unearned ESOP shares (460,909) (512,146) (682,124)
Treasury stock; shares at cost March 31, 2002
and December 31, 2001 - 11,189 and
March 31, 2001 - 228,464 (331,938) (331,938) (3,469,701)
------------- ------------- -------------
Total shareholders' equity 50,146,123 50,829,332 52,057,588
------------- ------------- -------------
Total liabilities and shareholders' equity $ 810,705,795 $ 746,502,688 $ 707,887,338
============= ============= =============
See notes to condensed consolidated financial statements (unaudited)
Note: The balance sheet at December 31, 2001 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
March 31,
---------------------------------
2002 2001
Interest income
Interest and fees on loans $ 11,284,125 $ 13,328,068
Interest and dividends on securities:
Taxable 1,351,698 1,341,548
Tax-exempt 103,476 156,576
Other 13,404 14,294
------------ ------------
Total interest income 12,752,703 14,840,486
Interest expense
Deposits 5,454,468 6,959,511
Borrowings 1,103,164 1,229,958
------------ ------------
Total interest expense 6,557,632 8,189,469
------------ ------------
Net interest income 6,195,071 6,651,017
Provision for loan losses 2,132,000 525,000
------------ ------------
Net interest income after provision for loan losses 4,063,071 6,126,017
Noninterest income
Service charges on deposit accounts 608,263 465,145
Loan servicing fees 105,614 167,666
Trust fees 712,882 725,801
Data service fees 1,738,864 1,486,774
Net gain (loss) on securities (80,706) --
Net gain on sales of loans 129,688 180,034
Other income 183,781 212,537
------------ ------------
Total noninterest income 3,398,386 3,237,957
Noninterest expense
Salaries and employee benefits 3,867,691 3,961,182
Net occupancy expense of premises 306,931 306,774
Equipment rentals, depreciation and maintenance 882,531 915,348
Other expenses 2,133,189 1,837,708
------------ ------------
Total noninterest expense 7,190,342 7,021,012
------------ ------------
Income before income tax expense 271,115 2,342,962
Income tax expense 64,566 748,711
------------ ------------
Net income $ 206,549 $ 1,594,251
============ ============
Basic and diluted earnings per share (Note B) $ 0.05 $ 0.35
============ ============
Dividends declared per share $ 0.130 $ 0.114
============ ============
See notes to condensed consolidated financial statements (unaudited)
5
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY (UNAUDITED)
Three Months Three Months
Ended Ended
March 31, 2002 March 31, 2001
Total Total
Shareholders' Shareholders'
Equity Equity
---------------------------------
Balance at beginning of period $ 50,829,332 $ 50,140,186
Net Income 206,549 1,594,251
Other comprehensive income (loss):
Net change in unrealized gains (losses)
on securities available for sale, net (347,609) 805,502
------------ ------------
Total comprehensive income (loss) (141,060) 2,399,753
Cash dividends declared (593,386) (521,669)
Paydown of ESOP loan 51,237 39,318
------------ ------------
Balance at end of period $ 50,146,123 $ 52,057,588
============ ============
See notes to condensed consolidtion financial statements (unaudited)
6
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended
March 31,
---------------------------------
2002 2001
Cash Flows From Operating Activities:
Cash received from customers - fees and commissions $ 3,349,404 $ 3,057,923
Cash paid to suppliers and employees (8,568,257) (8,648,176)
Loans originated for sale (1,979,466) (7,775,672)
Proceeds from sales of loans held for sale 2,463,510 7,170,628
Interest received 12,204,087 14,589,087
Interest paid (6,807,485) (7,837,031)
Income taxes paid -- (1,900,000)
------------ ------------
Net cash from operating activities 661,793 (1,343,241)
Cash Flows From Investing Activities:
Net change in interest-earning deposits in other
financial institutions (385,053) --
Proceeds from principal repayments, maturities and
calls of securities available for sale 14,183,825 9,011,215
Proceeds from sales of securities available for sale 1,923,320 --
Purchase of securities available for sale (12,563,458) (10,036,208)
Net change in loans (9,108,899) (2,510,709)
Recoveries on loan charge-offs 348,361 91,513
Premises and equipment expenditures, net (882,531) (1,894,945)
Cash received for net liabilities assumed in Oakwood acquisition 58,240,077 --
------------ ------------
Net cash from investing activities 51,755,642 (5,339,134)
Cash Flows From Financing Activities:
Net change in deposits (35,975,495) 18,793,175
Net change in federal funds purchased (14,850,000) (11,200,000)
Proceeds from FHLB advances -- 13,500,000
Repayments of FHLB advances (1,925,069) (14,170,532)
Net change in other borrowed funds 7,000,000 --
Cash dividends paid (1,186,773) (1,043,337)
------------ ------------
Net cash from financing activities (46,937,337) 5,879,306
------------ ------------
Net change in cash and cash equivalents 5,480,098 (803,069)
Cash and cash equivalents at beginning of period 25,342,043 18,431,717
------------ ------------
Cash and cash equivalents at end of period $ 30,822,141 $ 17,628,648
============ ============
7
(Continued)
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended
March 31,
-------------------------------
2002 2001
Reconciliation Of Net Income To Net
Cash From Operating Activities
Net Income $ 206,549 $ 1,594,251
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation 529,647 506,735
Amortization of intangible assets 45,992 45,000
Amortization of deferred debt issue costs 3,932 3,932
Provision for loan losses 2,132,000 525,000
Net (gain) loss on securities 80,706 --
Loans originated for sale (1,979,466) (7,775,672)
Proceeds from sales of loans held for sale 2,463,510 7,170,628
Net gain on sale of loans (129,688) (180,034)
Net gain on sale of fixed assets 1,627 --
Paydown of ESOP loan 51,237 39,318
Change in accrued interest receivable (47,142) (251,399)
Change in other assets (2,221,440) (1,462,936)
Change in accrued interest payable (437,090) 352,438
Change in other liabilities (38,581) (1,910,502)
----------- -----------
Net cash from operating activities $ 661,793 $(1,343,241)
=========== ===========
See notes to condensed consolidated financial statements (unaudited)
8
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 on Form 10-k for the year
ended December 31, 2001.
NOTE B--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
March 31,
---------
2002 2001
---- ----
Basic earnings per share 4,538,155 4,511,980
Diluted earnings per share 4,557,370 4,515,371
Earnings per share and dividends per share have been restated for the 5% stock
dividend paid during the third quarter of 2001.
NOTE C - LOANS, RISK ELEMENTS AND ALLOWANCE FOR LOAN LOSSES
Total loans on the balance sheet are comprised of the following classifications
at:
March 31, December 31,
2002 2001
---- ----
Commercial and agriculture $ 404,613,200 $ 388,673,339
Real estate mortgage 125,472,855 106,353,207
Consumer loans to individuals 82,429,309 76,512,215
Lease financing 28,610,182 28,752,169
Allowance for loan losses (12,638,515) (9,238,936)
------------- -------------
$ 628,487,031 $ 591,051,994
============= =============
Real estate mortgage loans held for sale $ 85,635 $ 439,991
============= =============
9
(Continued)
The following is a summary of the activity in the allowance for loan losses
account for the three months ended March 31, 2002 and 2001 and the year ended
December 31, 2001.
March 31, December 31, March 31,
2002 2001 2001
---- ---- ----
Beginning balance, January 1 $ 9,238,936 $ 7,214,970 $ 7,214,970
Additions from acquisitions 1,427,000 -- --
Provision for loan losses 2,132,000 8,733,000 525,000
Recoveries of previous charge-offs 348,361 463,923 91,513
Losses charged to the allowance (507,782) (7,172,957) (169,705)
--------------- --------------- --------------
Ending balance $ 12,638,515 $ 9,238,936 $ 7,661,778
=============== =============== ==============
The following schedule summarizes nonaccrual, past due and impaired loans at:
March 31, December 31,
2002 2001
---- ----
Loans accounted for on a nonaccrual basis $13,795,000(1) $12,557,000(1)
Accruing loans which are contractually
past due 90 days or more as to interest or
principal payments 2,789,000 2,131,000
----------- -----------
Total non-performing loans $16,584,000 $14,688,000
=========== ===========
Other loans defined as impaired $ 1,439,000 $ --
=========== ===========
(1) Includes loans defined as impaired.
Individual loans determined to be impaired were as follows:
March 31, December 31,
2002 2001
---- ----
Loans with no allowance for loan losses allocated $ 3,625,000 $ 1,937,000
Loans with allowance for loan losses allocated 9,990,000 9,134,000
----------- -----------
Total impaired loans $13,615,000 $11,071,000
=========== ===========
Amount of allowance allocated $ 5,907,000 $ 3,647,000
=========== ===========
10
(Continued)
NOTE D - ACQUISITIONS
On February 2, 2002 ("acquisition date"), the Corporation acquired certain
assets and assumed certain liabilities of the Oakwood Deposit Bank Company of
Oakwood, Ohio from the FDIC following the Ohio Superintendent of Financial
Institutions placing the Oakwood Deposit Bank Company in receivership and
appointing the FDIC as receiver for a net premium of approximately $2.0 million.
The acquisition was accounted for as a purchase, and, accordingly, the purchase
price has been allocated to the assets purchased and the liabilities assumed
based upon the estimated fair values at the date of acquisition. The excess of
the purchase price over the fair values of the net tangible assets acquired has
been recorded as unidentified intangible assets and core deposit intangible
assets totaling $2,344,930 and $708,435 and are being amortized on an
accelerated basis over 15 years and 10 years. Amortization expense for the
quarter ended March 31, 2002 totaled $70,496. Accumulated amortization as of
March 31, 2002 totaled $48,852 for unidentified intangible assets and $21,644
for core deposit intangible assets. All acquired intangible assets were in the
Banking segment. The purchase accounting adjustments are being amortized under
various methods and over the lives of the corresponding assets and liabilities.
Estimated amortization expense follows for the years ended December 31:
2002 $398,553
2003 378,694
2004 339,866
2005 305,209
2006 273,379
Following are the approximate fair values of assets acquired and liabilities
assumed as of the acquisition date.
Cash and cash equivalents $ 5,236,676
Federal funds sold 2,085,000
Securities available for sale 19,063,676
Loans, net 30,806,499
Unidentified intangible assets 2,344,930
Core deposit intangible assets 708,435
Accrued interest receivable 501,474
Other assets 33,897
Deposits (93,140,647)
Accrued interest payable (187,237)
At March 31, 2002, the Corporation had an amount payable to the FDIC of
approximately $18,400,000 which represents final settlement for assets acquired
and which is reported as Accounts Payable - FDIC in the March 31, 2002 condensed
consolidated balance sheet.
11
(Continued)
NOTE E - TRUST PREFERRED SECURITIES
On September 7, 2000, Rurban Statutory Trust 1 ("RST"), a wholly owned
subsidiary of the Corporation closed a pooled private offering of 10,000 Trust
Preferred Securities with a liquidation amount of $1,000 per security. The
proceeds of the offering were loaned to the Corporation in exchange for junior
subordinated debentures with terms similar to the Trust Preferred Securities.
The sole assets of RST are the junior subordinated debentures of the Corporation
and payments thereunder. The junior subordinated debentures and the back-up
obligations, in the aggregate, constitute a full and unconditional guarantee by
the Corporation of the obligations of RST under the Trust Preferred Securities.
Distributions on the Trust Preferred Securities are payable semi-annually at the
annual rate of 10.6% and are included in interest expense in the consolidated
financial statements. These securities are considered Tier 1 capital (with
certain limitations applicable) under current regulatory guidelines. As of March
31, 2002, December 31, 2001 and March 31, 2001, the outstanding principal
balance of the Trust Preferred Securities was $10,000,000. Certain costs
associated with the issuance of the Trust Preferred Securities have been
capitalized and are included in other assets in the condensed consolidated
balance sheets. Such costs are reported as an adjustment to interest expense
over the term of the Trust Preferred Securities.
The junior subordinated debentures are subject to mandatory redemption, in whole
or in part, upon repayment of the Trust Preferred Securities at maturity or
their earlier redemption at the liquidation amount. Subject to the Corporation
having received prior approval of the Federal Reserve, if then required, the
Trust Preferred Securities are redeemable prior to the maturity date of
September 7, 2030, at the option of the Corporation; on or after September 7,
2020 at par; or on or after September 7, 2010 at a premium, or upon occurrence
of specific events defined within the trust indenture. The Corporation has the
option to defer distributions on the Trust Preferred Securities from time to
time for a period not to exceed 10 consecutive semi-annual periods.
NOTE F - OTHER BORROWED FUNDS
The Corporation had a line of credit from The Northern Trust Company for up to
$15,000,000 at March 31, 2002. The line of credit is unsecured and requires
monthly interest payments with full principal payment at maturity on April 28,
2002. The interest rate is variable based on the current federal funds rate and
adjusts daily. The line of credit had an outstanding balance of $7,000,000 and
$-0- at March 31, 2002 and 2001. The line of credit agreement contains various
covenants with which the Corporation must comply. The Corporation was in
violation of several covenants at March 31, 2002. As of April 19, 2002, the
maximum amount of the line of credit was reduced to $7,000,000, the then
outstanding balance. The line of credit is currently past its stated maturity.
Northern Trust has indicated that they will not extend the line of credit for an
additional year. However, management is in the process of attempting to
negotiate a 90 day extension of the maturity of this line of credit and
addressing the covenant violations. The lender has indicated that the pledging
of the outstanding stock of each of the Corporation's subsidiaries will be a
requirement of such extension.
12
(Continued)
NOTE G - 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 the classification
in certain cases. Failure to meet various capital requirements can initiate
regulatory action that could have a direct material effect on the condensed
consolidated financial statements.
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 less than well 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 March 31, 2002, 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 Resolutions
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Total capital (to risk weighted assets)
Consolidated $ 64.7 10.0% $ 51.8 8.0% $ 64.7 10.0%
State Bank 39.9 10.2 31.2 8.0 39.2 10.0
RFCBC 26.1 10.3 20.3 8.0 25.3 10.0
Tier 1 capital (to risk weighted assets)
Consolidated 56.5 8.7 25.9 4.0 38.8 6.0
State Bank 34.3 8.7 15.7 4.0 23.5 6.0
RFCBC 22.9 9.1 10.1 4.0 15.2 6.0
Tier 1 capital (to average assets)
Consolidated 56.5 7.3 40.0 4.0 38.7 5.0
State Bank 34.3 6.8 20.3 4.0 25.4 5.0
RFCBC 22.9 7.5 12.2 4.0 15.3 5.0
The Corporation, State Bank and RFCBC were categorized as well capitalized at
March 31, 2002.
13
(Continued)
NOTE H - 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 I - NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2002, the Corporation adopted a new accounting standard which
addresses accounting for goodwill and intangible assets arising from business
combinations. Identifiable intangible assets must be separated from goodwill.
Identifiable intangible assets with finite useful lives will be amortized under
the new standard, whereas goodwill, both amounts previously recorded and future
amounts purchased, will cease being amortized. Annual impairment testing will be
required for goodwill with impairment being recorded if the carrying amount of
goodwill exceeds its implied fair value. Adoption of this standard on January 1,
2002 did not have a material effect on the Corporation's consolidated financial
position or results of operations.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations" which will be adopted by the
Company on January 1, 2003. The new accounting standard addresses accounting for
obligations associated with the retirement of tangible, long-lived assets and
requires a liability to be recognized for the fair value of any such
obligations. Adoption of this standard on January 1, 2003 is not expected to
have a material effect on the Corporation's consolidation financial position or
results of operations.
On January 1, 2002, the Corporation adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This new accounting standard
establishes more restrictive requirements for the classification of assets as
"held for sale" and also expands the types of dispositions that are to be
accounted for as discontinued operations. Adoption of this standard on January
1, 2002 did not have a material effect on the Corporation's consolidated
financial position or results of operations.
NOTE J - 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.
14
(Continued)
NOTE J -- SEGMENT INFORMATION (Continued)
As of and for the three months ended March 31, 2002
Data Total Intersegment Consolidated
Banking Processing Other Segments Elimination Totals
------------------------------------------------------------------------------------------
Income statement information:
- ----------------------------
Net interest income (expense) $ 6,380,509 $ (22,367) $ (163,071) $ 6,195,071 $ - $ 6,195,071
Noninterest income - external
customers 897,300 1,738,864 762,222 3,398,386 - 3,398,386
Noninterest income - other segments - 412,292 991,057 1,403,349 (1,403,349) -
----------- ---------- ---------- ----------- ----------- ----------
Total revenue 7,277,809 2,128,789 1,590,208 10,996,806 (1,403,349) 9,593,457
Noninterest expense 4,682,143 1,514,664 2,396,884 8,593,691 (1,403,349) 7,190,342
Significant non-cash items:
Depreciation and
amortization 295,975 237,466 46,130 579,571 -- 579,571
Provision for loan losses (2,132,000) - - (2,132,000) -- (2,132,000)
Income tax expense (benefit) 130,224 208,794 (274,452) 64,566 -- 64,566
Segment profit (loss) 333,443 405,330 (532,224) 206,549 -- 206,549
Balance sheet information:
- -----------------------------
Total assets 869,265,038 6,099,825 8,654,810 884,019,673 (73,313,878) 810,705,795
Goodwill and intangibles 3,186,712 -- -- 3,186,712 -- 3,186,712
Premises and equipment
expenditures, net 259,847 643,142 (20,458) 882,531 -- 882,531
15
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.
QUARTERLY RESULTS
Net income for the quarter was $0.21 million, or $0.05 per diluted share, versus
net income of $1.6 million, or $0.35 per diluted share, for first quarter 2001.
Net interest income declined $455,946 (7%) to $6,195,071 for the three months
ended March 31, 2002 compared to $6,651,017 for the first quarter of 2001. The
4.75% reduction in the prime lending rate during 2001 and its impact on the
company's asset sensitive balance sheet was the primary reason for the decline.
The company's balance sheet is positioned to benefit from a rising rate
environment.
Noninterest income increased $160,000 to $3.4 million in the first quarter of
2002. The growth in noninterest income was primarily due to a $252,000 increase
in data processing fees from the Company's bank data processing subsidiary,
Rurbanc Data Services, Inc. ("RDSI"), a $143,000 increase in deposit service
fees due largely to a new product introduction during the second quarter of
2001, offset by a $131,000 decrease in gains and losses on sale of loans and
securities.
16
Three Months Ended
March 31,
---------
2002 2001 $Change %Change
---------------------------------------------
(dollars in millions except per share data)
Total Assets $811 $708 $103 15%
Total Loans (Net) 628 571 57 10%
Total Deposits 668 585 83 14%
Total Revenue $9.6 $9.9 -$0.3 -3%
Net Interest Income 6.2 6.7 -0.5 -7%
Noninterest Income 3.4 3.2 0.2 +5%
Loan Loss Provision 2.1 .525 1.575 300%
Noninterest Expense 7.2 7.0 0.2 +2%
Net Income 0.2 1.6 -1.4 -88%
Basic Earnings per Share 0.05 0.35 -.30 -86%
Diluted Earnings per Share 0.05 0.35 -.30 -86%
TOTAL REVENUE
Three Months Ended
March 31,
---------
2002 2001 $Change %Change
---------------------------------------------
(dollars in thousands)
Total Revenue $9,593 $9,889 -$296 -3%
Total revenue (net interest income plus noninterest income) was $9.6 million for
the first quarter of 2002 compared to $9.9 million for the first quarter of
2001, down $0.3 million, or 3%.
NET INTEREST INCOME
Three Months Ended
March 31,
---------
2002 2001 $Change %Change
--------------------------------------------------
(dollars in thousands)
Net Interest Income $6,195 $6,651 -$456 -7%
Net interest income for the first quarter was $6.2 million compared to $6.7
million for the first quarter of 2001. The net interest margin for the first
quarter of 2002 was 3.30% compared to 3.93% for the first quarter of 2001. The
63 basis point decline in the net interest margin was largely due to a 198 basis
point decrease in the yield on earning assets from 8.76% to 6.78% which was
partially offset by a 165 basis point decrease in the company's cost of funds.
17
The Rurban banks have long maintained a discipline of avoiding long term
mismatches of the maturities of earning assets and interest-bearing liabilities.
During 2001 and the first quarter 2002, that discipline was not rewarded as the
prime rate declined by 4.75% from 9.5% to 4.75% in 2001. This unprecedented
steep decline in the prime rate compressed the net interest margin as the
decline in interest income on loans exceeded the pace of the decline in funding
costs.
NONINTEREST INCOME
Three Months Ended
March 31,
---------
2002 2001 $Change %Change
---------------------------------------------
(dollars in thousands)
Total Noninterest Income $3,398 $3,238 $160 +5%
- Data Processing Fees 1,739 1,487 252 +17%
- Deposit Service Fees 608 465 143 +31%
- Loan servicing Fees 106 168 -62 -37%
- Gains on Sale of Loans 130 180 -50 -28%
- Loss on Sale of Securities -81 0 -81 -
Noninterest income for the first quarter of 2002 increased to $3.4 million from
$3.2 million a year ago, a 5% increase.
For the first quarter of 2002 and 2001, noninterest income represented 35% and
33% respectively, of total revenue.
LOAN LOSS PROVISION
The provision for loan losses of $2,132,000 for the first quarter of 2002
increased $1,607,000 (306%) compared to the first three months of 2001 due to an
increased level of past due, nonperforming and impaired loans. Additionally, a
review by management of the repayment capacity and collateral levels for one
borrower relationship led to increased allowance allocations of approximately
$1,500,000.
The allowance for loan loss increased $3.4 million from December 31, 2001 to
$12.6 million at March 31, 2002. That increase was the result of a $1.4 million
allowance for loan losses established for loans of the former Oakwood Deposit
Bank acquired from the FDIC and the $1,973,000 excess of loan loss provision
($2,132,000) over 1st quarter net chargeoffs ($159,000).
18
NONINTEREST EXPENSE
Three Months Ended
March 31,
---------
2002 2001 $Change %Change
------------------------------------------
(dollars in thousands)
Total Noninterest Expense $7,190 $7,021 $169 +2%
- Salaries & Employee Benefits 3,868 3,961 -93 -2%
- All Other 3,322 3,060 262 +9%
Noninterest expense for the first quarter of 2002 was $7.2 million, up 2% from
$7.0 million a year ago.
The noninterest expense increase was $169,000 (2%). Salaries and Employee
Benefits declined 2% while noninterest expense other than salaries and benefits
increased $262,000 (9%).
LINKED QUARTER COMPARISON
A comparison of financial results for the quarter ended March 31, 2002 to the
previous quarter ended December 31, 2001 follows: (Dollars in millions, except
per share data)
Linked Quarter
Three Months Ended -------------- Annualized
03/31/02 12/31/01 $Change %Change %Change
-------- -------- ------- ------- -------
Total Assets $811 $746 $65 +9% +35%
Total Loans (Net) 628 591 37 +6% +25%
Total Deposits 668 611 57 +9% +38%
Total Revenue $9.6 $10.0 -$0.4 -4% -
Net Interest Income 6.2 6.2 -- -- -
Noninterest Income 3.4 3.8 -0.4 -11% -
Loan Loss Provision 2.1 5.6 -3.5 -63% -
Noninterest Expense 7.2 7.2 -- -- -
Net Income 0.21 -1.8 2.0 +111% -
Basic Earnings Per Share 0.05 -0.39 0.44 +113% -
Diluted Earnings Per Share 0.05 -0.39 0.44 +113% -
On a linked quarter basis, loans grew $37 million or 6% and deposits $57 million
or 9%, primarily as a result of the acquisition of Oakwood. Total revenue was
down 4% as net interest income was flat while noninterest income declined 11%.
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TOTAL REVENUE
Three Months Ended
03/31/02 12/31/01 $Change %Change
--------------------------------------------
(dollars in thousands)
Total Revenue $9,593 $10,023 -$430 -4%
Total revenue (net interest income plus noninterest income) was $9.6 million for
the first quarter of 2002 compared to $10.0 million for the fourth quarter of
2001, down $430,000, or 4%.
NET INTEREST INCOME
Three Months Ended
03/31/02 12/31/01 $Change %Change
------------------------------------------
(dollars in thousands)
Net Interest Income $6,195 $6,226 -$31 --
Net interest income for the first quarter was $6.2 million compared to $6.2
million for the fourth quarter of 2001. Net interest income from the Oakwood
acquisition was $330,000. However, that increase was offset by a decline in net
interest margin. The net interest margin for the first quarter of 2002 was 3.30%
compared to 3.57% for the previous quarter. The 27 basis point linked quarter
decline in the net interest margin was largely due to a 81 basis point decline
in the yield on earning assets from 7.59% to 6.78% which was not fully offset by
a 52 basis point decline in the Company's cost of funds. This margin contraction
amounted to approximately $400,000 and was primarily the result of the loss of
interest income on loans placed on non-accrual or charged-off at December 31.
NONINTEREST INCOME
Three Months Ended
03/31/02 12/31/01 $Change %Change
-------------------------------------------
(dollars in thousands)
Total Noninterest Income $3,398 $3,797 -$399 -11%
- Data Processing Fees 1,739 1,615 124 +8%
- Deposit Service Fees 608 707 -99 -14%
- Gains on Sale of Loans 130 220 -90 -41%
- Gain (Loss) on Sale of Securities -81 294 -375 -
Noninterest income for the first quarter of 2002 decreased to $3.4 million from
$3.8 million in the fourth quarter of 2001, an 11% decrease.
LOAN LOSS PROVISION
The provision for loan losses of $2,132,000 for the first quarter of 2002
decreased $3.5 million (63%) compared to the fourth quarter of 2001.
20
NONINTEREST EXPENSE
Three Months Ended
03/31/02 12/31/01 $Change %Change
--------------------------------------------
(dollars in thousands)
Total Noninterest Expense $7,190 $7,186 $4 --
- Salaries & Employee Benefits 3,868 3,739 129 +3%
- All Other 3,322 3,447 -125 -4%
Noninterest expense for the first quarter of 2002 was $7.2 million, flat
compared to the linked quarter.
Salaries and Employee Benefits increased $129,000 or 3% while noninterest
expense other than salaries and benefits declined $125,000 or 4%.
LOANS
Period Ended
% of % of Inc % of Inc %
03/31/02 Total 12/31/01 Total (Dec) 03/31/01 Total (Dec) Inc/(Dec)
-----------------------------------------------------------------------------------------------
(dollars in millions)
-----------------------------------------------------------------------------------------------
Commercial $404 63% $388 65% $15 $369 64% $35 9%
Residential 126 20% 107 18% 19 105 18% 21 20%
Consumer 111 17% 105 17% 6 105 18% 6 6%
----- ----- ----- ----- -----
Total Loans 641 600 40 579 62 11%
Loan growth of $40 million in the first quarter was primarily due to the $20
million of loans from the Oakwood acquisition.
Commercial loan growth for the year was 9%. Residential growth was 20% and
consumer loans 6% when compared to a year ago. At March 31, 2002, commercial,
residential and consumer loans represented 63%, 20% and 17% respectively, of
total loans, compared to 64%, 18% and 18%, respectively, at March 31, 2001.
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ASSET QUALITY
Period Ended
------------
03/31/02 12/31/01 Change 03/31/01 Change
----------------------------------------------------------------------
(dollars in millions)
----------------------------------------------------------------------
Non-performing loans $16.6 $14.7 $1.9 $4.8 $11.8
Non-performing assets 16.9 15.0 1.9 5.4 11.5
Nonperforming assets/ loan plus OREO 2.63% 2.49% .14% .86% 1.77%
Nonperforming assets/ total assets 2.08% 2.00% .08% .71% 1.37%
Net chargeoffs .159 6.7 - .078 .081
Net chargeoffs/ total loans (annualized) .10% 1.12% - .05% .05
Loan loss provision 2.1 8.7 - .525 1.6
Allowance for loan loss - $ 12.6 9.2 +3.4 7.7 +4.9
Allowance for loan loss - % 1.97% 1.54% .43% 1.31% .66%
Allowance/nonperforming loans 76% 63% 13% 158% -82%
Allowance/nonperforming assets 75% 62% 13% 152% -77%
Non-performing assets at March 31, 2002 were $16.9 million or 2.1% of total
assets, versus $15.0 million, or 2.0% at December 31, 2001 and $5.4 million or
0.71% at March 31, 2001.
Net chargeoffs for the first quarter of 2002 were $159,000 compared to $6.7
million for the year ended December 31, 2001 and $78,000 in the 1st quarter of
2001.
The allowance for loan losses at March 31, 2002 was $12.6 million or 1.97% of
loans compared to $9.2 million or 1.54% at December 31, 2001 and $7.7 million or
1.31% at March 31, 2001.
The ratio of the allowance for loan losses to nonperforming loans was 76% at
March 31, 2002 compared to 63% at December 31, 2001 and 158% at March 31, 2001.
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 $151 million at March 31, 2002, compared
to $130 million at December 31, 2001. Management recognizes securities may need
to be sold in the future to help fund loan demand and, accordingly, as of March
31, 2002, the entire securities portfolio of $119 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, and the national certificate of deposit market. Also, refer
to Note F relative to renegotiating the extension of the Corporation's line of
credit.
22
CAPITAL RESOURCES
Stockholders' equity at March 31, 2002 decreased to $50.1 million or 6.40% of
average total assets. The Company and each of its banking subsidiaries meet all
"well-capitalized" regulatory capital benchmarks at March 31, 2002.
RURBANC DATA SERVICES, INC. ("RDSI")
RDSI provides data processing services for 53 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 applications
utilized by RDSI are driven by world-class software used by over 3,600 banks
nationwide. Customer service encompasses on-time delivery every morning and a
discipline of responding to and resolving customer questions and issues within
one hour in excess of 90% of the time. Finally, RDSI can provide turnkey
solutions for its clients through its partnerships with vendors experienced in a
full array of banking products.
RDSI's growth comes from both new and existing clients. In the past five years,
the number of bank clients has more than doubled. Equally important is the
growth of client banks, both in their number of customer accounts and in the
breadth of services provided. Network services, internet banking and other
technical services are a rapidly growing part of RDSI's revenue.
Three Months Ended
March 31,
---------
2002 2001 $Increase %Increase
---------------------------------------------------
(dollars in thousands)
Data Processing Fees $1,739 $1,487 $252 17%
2002 GOALS
- - Asset quality protection.
- - Reduction of nonperforming loans.
- - Expansion of the net interest margin in an anticipated rising rate
environment.
- - Continued growth in noninterest income. Continued focus on customer
relationship management.
- - Completion of the centralization of operations functions.
23
CHANGES IN EXECUTIVE MANAGEMENT
Subsequent to March 31, 2002, Rurban accepted the resignations of its President
and CEO, Thomas C. Williams and two senior executives, the President and CEO of
State Bank and Trust Company and the Senior Vice President/Senior Credit Officer
of Rurban.
On May 9, the Rurban board of directors and its chairman, Steven VanDemark
announced that Richard Burrows had accepted the position of Interim President
and CEO of Rurban. Mr. Burrows is a graduate of The University of Michigan Law
School. He has over 40 years banking experience. Mr. Burrows previously served
as the President and Chief Executive Officer of Rurban and The State Bank and
Trust Company from 1985 to 1995. Mr. Burrows prior service with the Company
extended for approximately 20 years, most recently serving on the Boards of
Directors of both Rurban and The State Bank and Trust Company until May 2001.
Mr. Burrows will provide the necessary leadership to guide the Company during
the transition period. The appointment of Mr. Burrows will also allow the Board
of Directors the necessary time to conduct a comprehensive search for Mr.
Williams' replacement. A search committee has been established which has
immediately commenced the search for a CEO.
Robert W. Constien was named President and CEO of The State Bank and Trust
Company. Mr. Constien is a veteran member of senior management serving in the
role of Senior Executive Vice President of Rurban and CEO of Reliance Financial
Services.
John Matey was named Senior Credit Administrator for Rurban Financial Corp. John
has been a member of Rurban's Credit Administration Team for the past four
years. His prior experience includes 13 years in banking and four years working
with the Office of Thrift Supervision.
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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, 2001. The following table compares
rate sensitive assets and liabilities as of March 31, 2002 to December 31, 2001.
Principal/notational amount maturing in:
(Dollars in thousands)
First Years
Year 2 to 5 Thereafter Total
---- ------ ---------- -----
Comparison of 3/31/02 to 12/31/01
Total rate sensitive assets:
At March 31, 2002 $ 317,151 $ 306,293 $ 137,939 $ 761,383
At December 31, 2001 304,536 297,113 103,614 705,263
------------ ------------ ------------ ------------
Increase $ 12,615 $ 9,180 $ 34,325 $ 56,120
============ ============ ============ ============
Total rate sensitive liabilities:
At March 31, 2002 $ 406,897 $ 204,478 $ 126,000 $ 737,375
At December 31, 2001 371,811 199,079 119,095 689,985
------------ ------------ ------------ ------------
Increase $ 35,086 $ 5,399 $ 6,905 $ 47,390
============ ============ ============ ============
Total rate sensitive assets increased approximately $56.1 million for the three
months ended March 31, 2002 due primarily to the acquisition of the failed
Oakwood Deposit Bank in February from the FDIC. At quarter end, securities
acquired from Oakwood totaled approximately $16.0 million. These securities are
being evaluated for consistency with the Corporation's investing strategy and,
as a result, may be sold. First year maturities include $14.8 million in
investments scheduled to be sold. Actual maturity of these investments would be
greater than five years.
Rate sensitive assets greater than five years increased $34.3 million due
primarily to the Oakwood acquisition and an $11 million increase in originated
adjustable rate loans. Oakwood loans maturing greater than five years include
$5.6 million in adjustable rate loans and $15.7 million fixed rate loans.
Total rate sensitive liabilities increased approximately $47.4 million for the
three months ended March 31, 2002 due primarily to $43.6 million in deposits
from Oakwood and reductions in federal funds sold and FHLB advances of $7.9
million and $1.9 million, respectively. The majority of Oakwood certificates of
deposit mature within one year, accounting for $34.6 million of the $35.1
million increase in rate sensitive liabilities within year one.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. REPORTS ON FORM 8-K
A Form 8-K was filed on February 15, 2002 to report the February 2, 2002
assumption of insured deposit accounts of the Oakwood Deposit Bank in
Oakwood, OH from the FDIC.
A Form 8-K was filed on April 2, 2002 to report the revision of the
Company's fourth quarter and year-end earnings releases and its intent to
request an extension of the deadline to file its 2001 Annual Report on Form
10-K with the Securities and Exchange Commission.
A Form 8-K was filed on May 1, 2002 to report the resignation of Thomas C.
Williams as the Corporation's President and Chief Executive Officer and to
report the appointment of Richard C. Burrows as the Corporation's Interim
President and Chief Executive Officer.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
RURBAN FINANCIAL CORP.
Date May 14, 2002 By /S/ Richard C. Burrows
--------------- ------------------------------
Richard C. Burrows
Interim President &
Chief Executive Officer
By /S/ Richard C. Warrener
------------------------------
Richard C. Warrener
Executive Vice President &
Chief Financial Officer
26