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 June 30, 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
-------
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 August 13, 2002.
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 with the exception of the write-down of the Corporation's
investment in Worldcom bonds and the provision for loan losses recorded in the
second quarter. Results of operations for the six months ended June 30, 2002 are
not necessarily indicative of results for the complete year.
2
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, December 31, June 30,
2002 2001 2001
------------ ------------ ------------
(Unaudited) (Note) (Unaudited)
ASSETS
Cash and due from banks $ 21,902,810 $ 25,342,043 $ 22,018,502
Federal funds sold 5,950,000 - -
------------ ------------ ------------
Cash and cash equivalents 27,852,810 25,342,043 22,018,502
Interest-earning deposits in other
financial institutions 270,000 260,000 260,000
Securities available for sale 98,214,037 104,375,551 91,801,206
Loans held for sale, net of valuation
allowance of $0 1,780,835 439,991 3,854,299
Loans, net of allowance for losses of $19,016,725
at June 30, 2002, $9,238,936 at December 31,
2001 and $7,655,853 at June 30, 2001 624,295,651 591,051,994 576,278,758
Accrued interest receivable 4,891,489 4,939,741 5,126,726
Premises and equipment, net 13,489,540 11,816,557 12,207,918
Other assets 17,486,362 8,276,811 7,007,225
------------ ------------ ------------
Total assets $788,280,724 $746,502,688 $718,554,634
============ ============ ============
3
(Continued)
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, December 31, June 30,
2002 2001 2001
------------- ------------- -------------
(Unaudited) (Note) (Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $ 52,876,568 $ 52,830,193 $ 45,531,575
Interest-bearing 593,453,869 558,029,616 553,260,624
------------- ------------- -------------
Total deposits 646,330,437 610,859,809 598,792,199
Federal funds purchased - 14,850,000 -
Advances from Federal Home Loan Bank (FHLB) 57,350,000 54,275,069 51,421,742
Trust preferred securities 10,000,000 10,000,000 10,000,000
Other borrowed funds 7,000,000 - -
Accrued interest payable 2,997,021 3,630,623 4,175,779
Accounts payable - FDIC 19,706,024 - -
Other liabilities 2,090,060 2,057,855 1,596,858
------------- ------------- -------------
Total liabilities 745,473,542 695,673,356 665,986,578
Shareholders' equity
Common stock, stated value $2.50 per share;
shares authorized: 10,000,000;
shares issued: 4,575,702;
shares outstanding: 4,565,721 at June 30, 2002,
4,564,513 at December 31, 2001 and 4,347,238
at June 30, 2001 11,439,255 11,439,255 11,439,255
Additional paid-in capital 11,009,733 11,013,284 11,113,340
Retained earnings 19,888,360 28,499,026 33,122,275
Accumulated other comprehensive income,
net of tax of $615,695 at June 30, 2002, $371,863
at December 31, 2001 and $502,024 at June 30, 2001 1,195,173 721,851 974,517
Unearned ESOP shares (410,325) (512,146) (611,630)
Treasury stock, shares at cost: June 30, 2002 - 9,981,
December 31, 2001 - 11,189 and June 30, 2001 - 228,464 (315,014) (331,938) (3,469,701)
------------- ------------- -------------
Total shareholders' equity 42,807,182 50,829,332 52,568,056
------------- ------------- -------------
Total liabilities and shareholders' equity $ 788,280,724 $ 746,502,688 $ 718,554,634
============= ============= =============
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
June 30,
--------------------------------
2002 2001
Interest income
Interest and fees on loans $ 11,303,047 $ 12,975,085
Interest and dividends on securities
Taxable 1,256,627 1,325,764
Tax-exempt 59,375 136,770
Other 25,181 69,842
------------ ------------
Total interest income 12,644,230 14,507,461
Interest expense
Deposits 5,124,762 6,901,139
Borrowings 1,200,495 1,054,639
------------ ------------
Total interest expense 6,325,257 7,955,778
------------ ------------
Net interest income 6,318,973 6,551,683
Provision for loan losses 11,852,000 1,458,000
------------ ------------
Net interest income (loss) after provision for loan losses (5,533,027) 5,093,683
Noninterest income
Service charges on deposit accounts 672,747 668,148
Loan servicing fees 94,571 158,380
Trust fees 656,884 651,628
Data service fees 1,829,902 1,520,591
Net gain (loss) on securities (1,737,232) 40,503
Net gain on sales of loans 54,118 184,619
Other income 143,945 192,750
------------ ------------
Total noninterest income 1,714,935 3,416,619
Noninterest expense
Salaries and employee benefits 3,894,342 3,870,576
Net occupancy expense of premises 334,893 297,503
Equipment rentals, depreciation and maintenance 966,455 848,205
Other expenses 2,570,179 1,850,239
------------ ------------
Total noninterest expense 7,765,869 6,866,523
------------ ------------
Income (loss) before income tax expense (benefit) (11,583,961) 1,643,779
Income tax expense (benefit) (3,953,676) 522,662
------------ ------------
Net income (loss) $ (7,630,285) $ 1,121,117
============ ============
Basic and diluted earnings (loss) per common share $ (1.68) $ 0.25
============ ============
Dividends declared per common share $ 0.13 $ 0.114
============ ============
See notes to condensed consolidated financial statements (unaudited)
5
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Six Months Ended
June 30,
--------------------------------
2002 2001
Interest income
Interest and fees on loans $ 22,587,172 $ 26,303,153
Interest and dividends on securities
Taxable 2,657,512 2,667,312
Tax-exempt 113,663 293,346
Other 38,586 84,136
------------ ------------
Total interest income 25,396,933 29,347,947
Interest expense
Deposits 10,579,230 13,860,650
Borrowings 2,303,659 2,284,597
------------ ------------
Total interest expense 12,882,889 16,145,247
------------ ------------
Net interest income 12,514,044 13,202,700
Provision for loan losses 13,984,000 1,983,000
------------ ------------
Net interest income (loss) after provision for loan losses (1,469,956) 11,219,700
Noninterest income
Service charges on deposit accounts 1,281,010 1,133,293
Loan servicing fees 200,185 326,046
Trust fees 1,369,766 1,377,429
Data service fees 3,568,766 3,007,365
Net gain (loss) on securities (1,817,938) 40,503
Net gain on sales of loans 183,806 364,653
Other income 327,726 405,287
------------ ------------
Total noninterest income 5,113,321 6,654,576
Noninterest expense
Salaries and employee benefits 7,762,032 7,831,758
Net occupancy expense of premises 641,824 604,277
Equipment rentals, depreciation and maintenance 1,848,986 1,763,553
Other expenses 4,703,369 3,687,947
------------ ------------
Total noninterest expense 14,956,211 13,887,535
------------ ------------
Income (loss) before income tax expense (benefit) (11,312,846) 3,986,741
Income tax expense (benefit) (3,889,110) 1,271,373
------------ ------------
Net income (loss) $ (7,423,736) $ 2,715,368
============ ============
Basic and diluted earnings (loss) per common share $ (1.64) $ 0.60
============ ============
Dividends declared per common share $ 0.26 $ 0.23
============ ============
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 Six Months Six Months
Ended Ended Ended Ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
Total Total Total Total
Shareholders' Shareholders' Shareholders' Shareholders'
Equity Equity Equity Equity
------------ ------------ ------------ ------------
Balance at beginning of period $ 50,146,123 $ 52,057,588 $ 50,829,332 $ 50,140,186
Net Income (loss) (7,630,285) 1,121,117 (7,423,736) 2,715,368
Other comprehensive income (loss):
Net change in unrealized gains (losses)
on securities available for sale, net 820,931 (159,475) 473,322 646,027
------------ ------------ ------------ ------------
Total comprehensive income (loss) (6,809,354) 961,642 (6,950,414) 3,361,395
Cash dividends declared (593,544) (521,668) (1,186,930) (1,043,337)
Proceeds from sale of 1,208 shares of
treasury stock 13,373 - 13,373 -
Paydown of ESOP loan 50,584 70,494 101,821 109,812
------------ ------------ ------------ ------------
Balance at end of period $ 42,807,182 $ 52,568,056 $ 42,807,182 $ 52,568,056
============ ============ ============ ============
See notes to condensed consolidated financial statements (unaudited)
7
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
June 30,
---------------------------------
2002 2001
Cash Flows From Operating Activities:
Cash received from customers - fees and commissions $ 6,747,453 $ 6,233,117
Cash paid to suppliers and employees (15,150,512) (13,659,218)
Loans originated for sale (6,109,603) (14,676,171)
Proceeds from sales of loans held for sale 4,952,565 12,353,241
Interest received 25,445,185 29,937,269
Interest paid (13,516,491) (16,582,641)
Income taxes paid - (3,797,000)
------------ ------------
Net cash from operating activities 2,368,597 (191,403)
Cash Flows From Investing Activities:
Net change in interest-earning deposits in other
financial institutions (10,000) (150,000)
Proceeds from principal repayments, maturities and
calls of securities available for sale 25,719,522 17,264,934
Proceeds from sales of securities available for sale 32,935,249 6,658,567
Purchase of securities available for sale (35,322,699) (25,800,417)
Net change in loans (16,916,182) (9,030,847)
Recoveries on loan charge-offs 495,024 190,344
Premises and equipment expenditures, net (2,500,866) (2,318,653)
Cash received for net liabilities assumed in Oakwood acquisition 58,594,150 -
------------ ------------
Net cash from investing activities 62,994,198 (13,186,072)
Cash Flows From Financing Activities:
Net change in deposits (56,310,015) 32,471,438
Net change in federal funds purchased (14,850,000) (13,200,000)
Proceeds from FHLB advances 5,000,000 13,500,000
Repayments of FHLB advances (1,925,069) (14,242,172)
Net change in other borrowed funds 7,000,000 -
Cash dividends paid (1,780,317) (1,565,006)
Proceeds from sale of 1,208 shares of treasury stock 13,373 -
------------ ------------
Net cash from financing activities (62,852,028) 16,964,260
------------ ------------
Net increase in cash and cash equivalents 2,510,767 3,586,785
Cash and cash equivalents at beginning of period 25,342,043 18,431,717
------------ ------------
Cash and cash equivalents at end of period $ 27,852,810 $ 22,018,502
============ ============
8
(Continued)
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
June 30,
--------------------------------
2002 2001
Reconciliation Of Net Income (Loss) To Net
Cash From Operating Activities
Net Income (Loss) $ (7,423,736) $ 2,715,368
Adjustments to reconcile net income (loss) to net cash from
operating activities:
Depreciation 1,031,781 1,029,787
Amortization of intangible assets 102,806 71,965
Provision for loan losses 13,984,000 1,983,000
Net (gain) loss on securities 1,817,938 (40,503)
Loans originated for sale (6,109,603) (14,676,171)
Proceeds from sales of loans held for sale 4,952,565 12,353,241
Net gain on sale of loans (183,806) (364,653)
Net gain on sale of fixed assets 2,318 (16,303)
Paydown of ESOP loan 101,821 109,812
Change in accrued interest receivable 749,509 589,322
Change in other assets (6,461,749) (938,410)
Change in accrued interest payable (820,839) (437,394)
Change in other liabilities 625,592 (2,570,464)
------------ ------------
Net cash from operating activities $ 2,368,597 $ (191,403)
============ ============
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 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 Six Months Ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Basic earnings per share 4,539,853 4,526,397 4,539,078 4,526,397
Diluted earnings per share 4,539,853 4,529,728 4,539,078 4,531,467
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:
June 30, December 31,
2002 2001
---- ----
Commercial and agriculture $ 413,745,865 $ 388,673,339
Real estate mortgage 122,308,079 106,353,207
Consumer loans to individuals 79,814,670 76,512,215
Lease financing 27,443,762 28,752,169
Allowance for loan losses (19,016,725) (9,238,936)
---------------- ----------------
$ 624,295,651 $ 591,051,994
================ ================
Loans held for sale $ 1,780,835 $ 439,991
================ ================
10
(Continued)
The following is a summary of the activity in the allowance for loan losses
account for the six months ended June 30, 2002 and 2001 and the year ended
December 31, 2001.
June 30, December 31, June 30,
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 13,984,000 8,733,000 1,983,000
Recoveries of previous charge-offs 495,024 463,923 190,344
Losses charged to the allowance (6,128,235) (7,172,957) (1,732,461)
----------- ----------- -----------
Ending balance $19,016,725 $ 9,238,936 $ 7,655,853
=========== =========== ============
The following schedule summarizes nonaccrual, past due and impaired loans at:
June 30, December 31,
2002 2001
---- ----
Loans accounted for on a nonaccrual basis $20,453,000(1) $12,557,000(1)
Accruing loans which are contractually
past due 90 days or more as to interest or
principal payments 1,005,000 2,131,000
----------- -----------
Total non-performing loans $21,458,000(1) $14,688,000(1)
=========== ===========
(1) Includes loans defined as impaired.
Individual loans determined to be impaired were as follows:
June 30, December 31,
2002 2001
---- ----
Loans with no allowance for loan losses allocated $ 3,808,000 $ 1,937,000
Loans with allowance for loan losses allocated 13,867,000 9,134,000
----------- -----------
Total impaired loans $17,675,000 $11,071,000
=========== ===========
Amount of allowance allocated to loans
individually determined to be impaired $ 7,060,000 $ 3,647,000
=========== ===========
11
(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, respectively.
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 June 30, 2002, the Corporation's subsidiary, State Bank, had an amount
payable to the FDIC of approximately $19,706,000 which represents final
settlement for assets acquired and which is reported as Accounts Payable - FDIC
in the June 30, 2002 condensed consolidated balance sheet. A payment of
$18,746,869 was made to the FDIC on July 30, 2002. The remaining balance is
subject to further settlement discussions.
12
(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 June
30, 2002 and 2001 and December 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, on or after September 7, 2010 at a premium, or upon the 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.
Under the terms of the Written Agreement (see note H and Management's Discussion
and Analysis) between the Corporation and its regulators, regulatory approval is
required to pay semi-annual dividends. The Corporation has applied for approval
to pay the September 7, 2002 dividend.
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, which was unsecured and required monthly interest
payments with full principal payment at maturity on April 28, 2002. The interest
rate is variable and adjusts daily. In the first quarter, $7,000,000 was drawn
on this line to provide the capital needed to maintain State Bank's "well
capitalized" regulatory classification after the assumption of certain assets
and liabilities of the Oakwood Deposit Bank (see note D). The line of credit had
an outstanding balance of $7,000,000 at June 30, 2002 and $0 at December 31,
2001 and June 30, 2001. The line of credit agreement contains various covenants
with which the Corporation must comply. The Corporation is currently in
violation of several covenants. As of April 19, 2002, the maximum amount of the
line of credit was reduced to $7,000,000, the then outstanding balance, and
secured by the common stock of the Corporation's first tier subsidiaries. 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 negotiated a 90 day extension of the maturity of this line
of credit, which matured on July 31, 2002. Management is negotiating an
additional 60 day extension of the
13
(Continued)
maturity of this line of credit. The lender has indicated that the pledging of
the outstanding stock of each of the Corporation's first tier subsidiaries will
continue to be a requirement of such an extension.
Management is currently negotiating to refinance this line of credit with $10
million in the form of a line of credit or a second trust preferred securities
offering. The availability of such securities or lines of credit can have an
impact on the Corporation's ability to pay dividends and on the levels and
regulatory classifications of capital at the Corporation's subsidiary banks.
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. RFCBC has applied
for permission to issue broker certificates of deposit to replace maturing
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 June 30, 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 Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Total capital (to risk weighted assets)
Consolidated $ 56.4 9.1% $ 49.8 8.0% $ 62.2 10.0%
State Bank 38.2 10.3 29.6 8.0 37.1 10.0
RFCBC 20.6 8.2 20.1 8.0 25.1 10.0
Tier 1 capital (to risk weighted assets)
Consolidated 48.4 7.8 24.9 4.0 37.3 6.0
State Bank 32.9 8.9 14.8 4.0 22.2 6.0
RFCBC 17.4 7.0 10.0 4.0 15.1 6.0
Tier 1 capital (to average assets)
Consolidated 48.4 5.8 33.2 4.0 41.4 5.0
State Bank 32.9 6.8 19.2 4.0 24.1 5.0
RFCBC 17.4 5.5 12.8 4.0 16.0 5.0
14
(Continued)
State Bank was categorized as well capitalized while the Corporation and RFCBC
were categorized as adequately capitalized at June 30, 2002.
NOTE H - COMMITMENTS, CONTINGENCIES AND UNCERTAINTIES
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 position or results of operations.
On July 5, 2002, the Corporation and State Bank signed a written agreement with
the Federal Reserve Bank of Cleveland and the Ohio Division of Financial
Institutions. This agreement requires the Corporation and State Bank take
certain actions to correct certain identified deficiencies in policies,
procedures and internal control, and requires regulatory approval to perform
certain customary banking activities, including paying dividends on common stock
and Trust Preferred Securities, incurring debt and redemption of outstanding
stock. The Corporation currently does not plan to pay a cash dividend on common
stock in the third and fourth quarters of 2002.
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
Corporation 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.
15
(Continued)
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.
16
(Continued)
NOTE J -- SEGMENT INFORMATION (Continued)
As of and for the six months ended June 30, 2002
Data Total Intersegment Consolidated
Banking Processing Other Segments Elimination Totals
------------------------------------------------------------------------------------------
Income statement information:
- ----------------------------------
Net interest income (expense) $ 12,991,835 $ (49,481) $ (428,310) $ 12,514,044 $ - $ 12,514,044
Noninterest income - external
customers 92,312 3,568,766 1,452,243 5,113,321 - 5,113,321
Noninterest income - other segments - 848,052 2,126,604 2,974,656 (2,974,656) -
------------ ---------- ----------- ------------ ----------- ------------
Total revenue 13,084,147 4,367,337 3,150,537 20,602,021 (2,974,656) 17,627,365
Noninterest expense 9,703,573 3,286,651 4,940,643 17,930,867 (2,974,656) 14,956,211
Significant non-cash items:
Depreciation and
amortization 518,737 520,792 95,058 1,134,587 -- 1,134,587
Provision for loan losses 13,984,000 - - 13,984,000 -- 13,984,000
Income tax expense (benefit) (3,647,907) 367,433 (608,636) (3,889,110) -- (3,889,110)
Segment profit (loss) (6,955,519) 713,253 (1,181,470) (7,423,736) -- (7,423,736)
Balance sheet information:
- ----------------------------------
Total assets 780,307,942 7,753,230 4,805,640 792,866,812 (4,586,088) 788,280,724
Goodwill and intangibles 3,129,898 -- -- 3,129,898 -- 3,129,898
Premises and equipment
expenditures, net 704,105 1,833,480 (36,719) 2,500,866 -- 2,500,866
17
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. This discussion should
be read in conjunction with the consolidated financial statements and related
footnotes in Rurban's 2001 Form 10-K previously filed with the Securities and
Exchange Commission.
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
- -----------------
The Corporation reported a net loss for the quarter of $7.6 million, or $1.68
per diluted share, versus net income of $207,000, or $0.05 per diluted share,
for first quarter 2002. The net loss for the six months was $7.4 million, or
$1.64 per diluted share. The loss was driven largely by a loan loss provision of
$11.9 million recorded in the second quarter bringing the total loan loss
provision for 2002 to $14.0 million and the allowance for loan losses to $19.0
million or 2.96% of gross loans at June 30, 2002.
Net interest income increased $124,000 or 2% to $6.3 million for the three
months ended June 30, 2002 compared to $6.2 for the first quarter of 2002. This
increase was due to a decline in the cost of funds as maturing certificates of
deposit continued to be renewed at lower market rates. Most of the decline in
cost of funds was offset by the loss of interest income on non-accrual loans of
$507,000 in the second quarter, which exceeded the first quarter amount by
$194,000.
The quarter and year-to-date results were also negatively impacted by a $1.7
million write-down in the market value of the Corporation's investment in
WorldCom bonds, which resulted in a $1.1 million after tax loss. Those bonds are
carried on the books at their June 30, 2002 market value of $325,000. The
Corporation currently holds no other corporate bond investments.
18
LINKED QUARTER COMPARISON
- -------------------------
A comparison of financial results for the quarter ended June 30, 2002 to the
previous quarter ended March 31, 2002 is as follows:
Three Months Ended Linked Quarter Annualized
06/30/02 03/31/02 % Change % Change
-------- -------- -------- --------
(dollars in millions, except per share data)
Total Assets $788 $811 -3% -11%
Total Loans (Gross) 643 641 less than 1% 1%
Allowance for Loan Losses 19.0 12.6 51% 203%
Total Deposits 646 668 -3% -13%
Total Revenue 8.0 9.6 -16% 67%
Net interest Income 6.3 6.2 2% 6%
Noninterest Income 1.7 3.4 -50% -200%
Loan Loss Provision 11.9 2.1 466% 1,867%
Noninterest Expense 7.8 7.2 +8% +33%
Net Income -7.6 0.2 -- --
Basic Earnings Per Share -$1.68 $0.05 -- --
Diluted Earnings Per Share -$1.68 $0.05 -- --
On a linked quarter basis, loans increased $2.0 million while deposits declined
$21.7 million as $21.7 million of broker certificates from the Oakwood
acquisition were withdrawn. Total assets declined $22.4 million, largely due to
a $21.1 million decline in securities available for sale.
TOTAL REVENUE
- -------------
Three Months Ended
06/30/02 03/31/02 $Change %Change
----------------------------------------------
(dollars in thousands)
Total Revenue $8,034 $9,593 -$1,559 -16%
Total revenue (net interest income plus noninterest income) was $8.0 million for
the second quarter of 2002 compared to $9.6 million for the first quarter of
2002, down $1.6 million or 16%, due to the $1.7 million writedown on the
WorldCom bonds.
NET INTEREST INCOME
- -------------------
Three Months Ended
06/30/02 03/31/02 $Change %Change
---------------------------------------------
(dollars in thousands)
Net Interest Income $6,319 $6,195 $124 2%
Net interest income for the second quarter was $6.3 million compared to $6.2
million for the first quarter of 2002. The net interest margin for the second
quarter of 2002 was 3.34% compared to 3.30% for the previous quarter. The 4
basis point linked quarter increase in the net interest margin was largely due
to a 17 basis point decline in the Corporation's cost of funds, primarily as a
result of the continued repricing of maturing
19
certificates of deposit at the current lower market rates; which more than
offset a 10 basis point decline in the yield on earning assets to 6.68% from
6.78%. The decline in the yield on earning assets was largely due to the loss of
interest income on $12.6 million of loans placed on nonaccrual during the second
quarter.
NONINTEREST INCOME
- ------------------
Three Months Ended
06/30/02 03/31/02 $Change %Change
---------------------------------------------
(dollars in thousands)
Total Noninterest Income $1,715 $3,398 -$1,683 -50%
- Data Processing Fees 1,830 1,739 +91 +5%
- Deposit Service Fees 673 608 +64 11%
- Gains on Sale of Loans 54 130 -76 -58%
- Gain (Loss) on Securities -1,737 -81 -1,656 -2,044%
Noninterest income for the second quarter of 2002 decreased to $1.7 million from
$3.4 million in the second quarter of 2002, due to the $1.7 million WorldCom
writedown.
LOAN LOSS PROVISION
- -------------------
The provision for loan losses of $11.9 for the second quarter of 2002 increased
$9.7 million compared to the first quarter of 2002. The reasons for this
increase are discussed in the "Asset Quality" section.
NONINTEREST EXPENSE
- -------------------
Three Months Ended
06/30/02 03/31/02 $Change %Change
--------------------------------------------
(dollars in thousands)
Total Noninterest Expense $7,766 $7,190 $576 +8%
- Salaries & Employee Benefits 3,894 3,868 26 +1%
- Equipment Expense 966 883 83 +9%
- Professional Fees 812 642 170 +26%
- All Other 2,094 1,797 297 +17%
Noninterest expense for the second quarter of 2002 was $7.8 million compared to
$7.2 million for the linked quarter.
Salaries and Employee Benefits increased only $26,000 or 1%. Equipment Expense
increased $83,000 or 9% due to RDSI's acquisition of BancServ and the purchase
of a second mainframe computer at RDSI. Professional Fees increased $170,000 or
26% due to consulting, legal and audit fees for risk assessment and loan workout
services. All Other expenses increased $297,000 or 17% due to an increase in
supplies, postage and other expenses.
20
LOANS
- -----
As Of
Inc
% of % of ---
06/30/02 Total 03/31/02 Total (Dec)
-------- ----- -------- ----- -----
(dollars in millions)
Commercial $414 64% $405 63% $9
Residential 123 19% 125 20% (2)
Consumer 107 17% 111 17% (3)
----- ----- -----
Total Loans 644 641 3
Loans increased $2 million to $644 million at June 30, 2002.
Commercial loan growth for the quarter was 2%, while residential and consumer
loans declined 3%. At June 30, 2002, commercial, residential and consumer loans
represented 64%, 19% and 17% respectively, of total loans, compared to 63%, 20%
and 17% at March 31, 2002.
ASSET QUALITY
- -------------
As Of And For The Quarter Ended
-------------------------------
(dollars in millions)
06/30/02 03/31/02 Change
-------- -------- ------
Non-performing loans $21.5 $16.6 $-4.8
Non-performing assets 22.0 16.9 -5.1
Nonperforming assets/ loan plus OREO 3.42% 2.63% -.77%
Nonperforming assets/ total assets 2.79% 2.08% -.71%
Net chargeoffs 5.5 .159
Net chargeoffs (annualized)/ total loans 3.40% .10%
Loan loss provision 11.8 2.1
Allowance for loan loss - $ 19.0 12.6 +6.4
Allowance for loan loss - % 2.96% 1.97% +.96%
Allowance/nonperforming loans 89% 76% +13%
Allowance/nonperforming assets 86% 75% +11%
Asset quality statistics reflect a significant increase in nonperforming assets
and chargeoffs during the second quarter, as well as the related loan loss
provision and the allowance for loan losses, which was $19.0 million or 2.96% of
gross loans at June 30, 2002.
Non-performing assets at June 30, 2002 were $22.0 million or 2.79% of total
assets, versus $16.9 million, or 2.08% at March 31, 2002. $8.8 million of assets
were added to nonperforming assets, while $3.7 million were charged off during
the second quarter.
Net chargeoffs for the second quarter of 2002 were $5.5 million compared to
$159,000 in the first quarter.
The allowance for loan losses at June 30, 2002 was $19.0 million or 2.96% of
loans compared to $12.6 million or 1.97% at March 31, 2002. Allowance
allocations on substandard and doubtful loans increased $5.6 million and $1.2
million, respectively from March 31, 2002. Management's estimate of the
allowance for loan losses includes judgments related to the following factors:
21
- - Physical inspections of collateral securing loans performed during the
quarter, new appraisals of collateral securing loans received during the
quarter, and other information regarding borrower collateral levels;
- - Borrower financial information received during the quarter; and
- - Consideration of exposures to industries potentially most affected by
current risks in the economic and political environment.
The results of the Corporation's extensive, ongoing loan review and workout
process suggest that the volume of potential problem loans, nonperforming loans
and charge-offs were attributable to a combination of entering higher risk lines
of business, ineffective oversight and a few lenders neglecting basic lending
fundamentals required by the Corporation's lending policies and procedures. A
significant portion of the loan portfolio's risk exposure is in direct loans to
leasing companies and in the residual values of indirect loans to third parties
originated through these leasing companies. The corporation has begun the
process of exiting the majority of the leasing line of business. Changes in
lending staff and management during the second quarter include the departure of
several lending officers and senior executives with lending oversight
responsibilities.
CAPITAL RESOURCES
- -----------------
At June 30, 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 Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Total capital (to risk weighted assets)
Consolidated $ 56.4 9.1% $ 49.8 8.0% $ 62.2 10.0%
State Bank 38.2 10.3 29.6 8.0 37.1 10.0
RFCBC 20.6 8.2 20.1 8.0 25.1 10.0
State Bank was categorized as well capitalized while the Corporation and RFCBC
were categorized as adequately capitalized at June 30, 2002.
The Corporation's plans to return its and RFCBC's ratios of total capital to
risk weighted assets to the well capitalized level may include the sale of the
loans and deposits of State Bank's Cleveland branch and the sale of
participation interests in performing loans from RFCBC to State Bank.
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 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 second quarter
RDSI purchased the principal assets of BancServ Inc. BancServ provided data
processing, item processing and imaging to two independent banks located in
North Central Ohio. In July 2002, RDSI acquired the principal assets of
Northwest Financial Services Inc. Northwest is a limited liability corporation
which had provided item processing and imaging services for seven RDSI client
banks.
22
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
------------------
June 30 March 31
2002 2002 % Increase
----------------------------------------
(Dollars in Thousands)
Data Processing Fees $1,830 $1,739 5%
CHANGES IN EXECUTIVE MANAGEMENT
- -------------------------------
Subsequent to March 31, 2002, Rurban accepted the resignation of its President
and CEO, Thomas C. Williams and 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 Corporation 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.
On August 13, 2002, the Corporation's Board of Directors and its chairman,
Steven VanDemark, announced the selection of the Corporation's new President and
CEO, Kenneth A. Joyce. Mr. Burrows will continue to work closely with Mr. Joyce
to ensure a smooth transition.
Prior to his appointment as President and CEO of the Corporation, Mr. Joyce
served Rurban as the Chairman and CEO of RDSI, its growing and successful bank
data processing subsidiary.
Prior to joining Rurban in 1997, Mr. Joyce served as President of a banking
subsidiary of an Ohio based regional bank. Mr. Joyce also served as Section
Chief of Operations for Resolution Trust Corporation (RTC) from 1991 to 1994.
Mr. Joyce was responsible for all operational issues within RTC conservatorships
in the southeast United States. Mr. Joyce's banking experience also includes
serving as senior loan production manager for a national mortgage company and in
branch administration with several regional financial institutions. He earned
his Bachelor of Arts degree in Finance from Wayne State University and his MBA
from the University of Michigan. He is a U.S. Army veteran. Mr. Joyce's
appointment is subject to formal regulatory approval.
GOALS FOR THE REMAINDER OF 2002 AND FOR 2003
- --------------------------------------------
The Corporation's near term goals include:
- Early identification of emerging loan portfolio risks.
- Asset quality protection.
- Reduction of nonperforming loans.
- Noninterest expense control.
- Continued growth in noninterest income.
- Continued focus on customer relationship management.
- Completion of the centralization of operations functions.
23
WRITTEN AGREEMENT
- -----------------
On July 9, 2002, Rurban and State Bank announced they entered into a Written
Agreement with the Federal Reserve Bank of Cleveland and the Ohio Division of
Financial Institutions on July 5, 2002. The Agreement is the result of an
examination of State Bank as of December 31, 2001, which was conducted in March
and April 2002.
The provisions of the Written Agreement require Rurban and State Bank to take
specific actions to address issues identified in the examination and to maintain
the safe and sound nature of Rurban and State Bank. The provisions include:
- - retention of an independent consultant to conduct a management review and
to prepare a written report of findings and recommendations to Rurban's
Board of Directors and submission of a written management plan and business
plan to the regulators;
- - development and submission of a written plan to strengthen Board of
Director oversight and supervision of State Bank;
- - enhancement of State Bank's loan policies and procedures to address
identified deficiencies;
- - enhancement of asset quality procedures, the allowance for loan losses
procedures, the loan review function, interest income accrual procedures
and steps Rurban will take to correct all documentation and credit
information deficiencies noted;
- - development and submission of written procedures to strengthen and maintain
various internal controls and a contingency funding plan;
- - prior written regulatory approval must be obtained for Rurban or State Bank
to pay dividends, incur debt either directly or indirectly or redeem
outstanding stock; and
- - limit the activities of Rurban Mortgage Company to those that are approved
and divest of any inconsistent assets.
Rurban has appointed a committee of outside directors to monitor and coordinate
Rurban's compliance with each provision of the agreement and provide quarterly
written progress reports to its regulators.
LIQUIDITY
- ---------
Liquidity relates primarily to the Corporation's ability to fund loan demand,
meet deposit customers' withdrawal requirements and provide for operating
expenses. The Corporation has various sources of liquidity available to satisfy
these needs, including 1) liquid assets, which consist of cash, federal funds
sold, interest-earning deposits in other financial institutions, securities
available-for-sale and loans held for sale, 2) cash flows received from
principal and interest payments on loans and securities, and 3) various
available off-balance-sheet borrowing arrangements.
Management is actively monitoring the expected liquidity needs of the
Corporation as well as the available sources of liquidity. The following
discussion provides a summary of the available sources of liquidity to the
Corporation.
LIQUID ASSETS: Total liquid assets at June 30, 2002 were $128.1 million compared
to $130.4 million as December 31, 2001. Cash and due from banks totaled $27.9
million at June 30, 2002 compared to $25.3 million at December 31, 2001 and is
available to meet the Corporation's liquidity needs. However, approximately $4.1
million of cash and due from banks is required to be maintained to meet various
compensating balance and other reserve and clearing requirements. Management
recognizes securities may need to be sold in the future, and has classified the
entire securities portfolio, totaling $98.2 million at June
24
30, 2002, as available for sale. However, approximately $80.4 million of
securities are pledged as collateral for certain of the Corporation's
liabilities, including public funds deposits and FHLB borrowings, leaving $17.8
million as available to sell or pledge for additional borrowings. Management is
actively working to sell the loans held for sale at June 30, 2002, which totaled
$1.8 million.
CASH FLOWS: 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 from ongoing operations.
The Corporation experienced a net increase in cash from operating activities for
the six months ended June 30, 2002 of $2.4 million and a net decrease in cash
from operating activities of $191,000 for the six months ended June 30, 2001.
The net cash flows from operating activities primarily include net income /
(loss) for the periods and adjustments for various non-cash expenses such as the
provision for loan losses, the impairment loss on Worldcom bonds and other
depreciation and amortization.
Net cash flow from investing activities was $63.0 million and $(13.2) million
for the six months ended June 30, 2002 and 2001. The net cash flows from
investing activities primarily include loan growth, normal maturities and
reinvestment of securities, premises and equipment expenditures and a one time
net cash receipt resulting from the Oakwood acquisition.
Net cash flows from financing activities was $(62.9) million and $17.0 million
for the six months ended June 30, 2002 and 2001. The net cash flows from
financing activities are primarily attributable to growth in total deposits and
net borrowings from the Federal Home Loan Bank.
OFF-BALANCE-SHEET BORROWING ARRANGEMENTS: Significant additional
off-balance-sheet liquidity is available in the form of FHLB advances, unused
federal funds lines from correspondent banks, and the national certificate of
deposit market. While such additional off-balance-sheet liquidity is available,
the Written Agreement between Rurban, State Bank, the Federal Reserve Bank of
Cleveland and the Ohio Division of Financial Institutions requires Rurban and
State Bank to obtain written approval of the Federal Reserve Bank of Cleveland
and the Ohio Division of Financial Institutions prior to directly or indirectly
incurring any debt.
Approximately $84.0 million residential first mortgage loans of the
Corporation's $122.3 million portfolio qualify to collateralize FHLB borrowings
and have been pledged to meet FHLB collateralization requirements as of June 30,
2002. Based on the current collateralization requirements of the FHLB,
approximately $6.0 million of additional borrowing capacity exists at June 30,
2002.
At December 31, 2001, the Corporation had unused federal funds lines totaling
approximately $32.2 million from five correspondent banks. As of June 30, 2002,
the Corporation had unused federal funds lines totaling approximately $27.5
million from three correspondent banks. Federal funds borrowed were $0 and $14.9
million at June 30, 2002 and December 31, 2001, respectively.
Because RFCBC was not classified as well capitalized at June 30, 2002, it will
require approval from its respective regulatory agencies prior to accepting any
new brokered certificates of deposit. RFCBC has applied for permission to issue
broker certificates of deposits to replace maturing brokered deposits. At June
30, 2002, RFCBC has approximately $54.2 million in certificates of deposit which
have been accepted from brokers. Approximately $26.4 million of these
certificates of deposit mature within the next year.
Management continues to attempt to expand existing sources of liquidity and to
explore and develop new sources of liquidity for the Corporation. Such sources
include those previously discussed and collateralized borrowings from the
Federal Reserve Discount Window. The Corporation's subsidiary banks are in the
process of pledging up to $60 million of performing commercial loans as
collateral with the Fed to establish additional borrowing capacity of
approximately $30 million.
25
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 June 30, 2002 to December 31, 2001.
Principal/notational amount maturing in:
(Dollars in thousands)
First Years
Year 2 to 5 Thereafter Total
---- ------ ---------- -----
Comparison of 6/30/02 to 12/31/01
Total rate sensitive assets:
At June 30, 2002 $ 317,923 $ 298,995 $ 132,968 $ 749,886
At December 31, 2001 304,536 297,113 103,614 705,263
------------ ------------ ------------ ------------
Increase (decrease) $ 13,387 $ 1,882 $ 29,354 $ 44,623
============ ============ ============ ============
Total rate sensitive liabilities:
At June 30, 2002 $ 362,605 $ 228,472 $ 129,603 $ 720,680
At December 31, 2001 371,811 199,079 119,095 689,985
------------ ------------ ------------ ------------
Increase (decrease) $ (9,206) $ 29,393 $ 10,508 $ 30,695
============ ============ ============ ============
Total rate sensitive assets increased approximately $44.6 million for the six
months ended June 30, 2002 due primarily to the acquisition of the failed
Oakwood Deposit Bank in February from the FDIC. At quarter end, loans acquired
from Oakwood totaled approximately $27 million. Most of these loans are fixed
rate ($20.6 million) and are the primary cause of the $29.4 million increase in
the "Thereafter" category. An increase in prime based loans accounts for the
$13.4 million increase in the "First Year" category.
Total rate sensitive liabilities increased approximately $31.0 million for the
six months ended June 30, 2002 due primarily to $29.0 million in deposits from
Oakwood and a $7.0 million borrowing on the Corporation's line of credit to
provide the funds for a capital infusion from the Corporation into State Bank to
capitalize the Oakwood acquisition.
During the past six months, maturing broker certificates of deposit and fed
funds purchased have been replaced with intermediate term (2-4 years) fixed rate
broker certificates of deposit, which accounts for the $29.4 million dollar
increase in the "Years 2 to 5" category and the $9.2 million decrease in the
"First Year" category. Transaction accounts (DDA, NOW and Savings) account for
the $10.5 million increase in the "Thereafter" category.
26
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 on May 30, 2002, the
Corporation's shareholders voted on the election of directors.
Item 5. Other Information
- -------------------------
Not applicable
Item 6. Reports on Form 8-K
- ---------------------------
A Form 8-K was filed on July 3, 2002 to report that an estimated after tax
loss of $1.1 million will be recorded during the quarter ended June 30, 2002
related to the decline in the market value of the Corporation's Worldcom
investment.
A Form 8-K was filed on July 11, 2002 to report the issuance of a press
release announcing that the Corporation and its wholly owned subsidiary, the
State Bank and Trust and Company, entered into a written agreement with the
Federal Reserve Bank of Cleveland and the Ohio Division of Financial
Institutions on July 5, 2002.
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: August 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
27