UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ____________
COMMISSION FILE NUMBER 0-13507
RURBAN FINANCIAL CORP.
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(Exact name of Registrant as specified in its charter)
OHIO 34-1395608
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
401 CLINTON STREET, DEFIANCE, OHIO 43512
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (419) 783-8950
-------------------------
Securities registered pursuant to Section 12(b) of the Act:
NONE
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Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS
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Common Stock, Without Par Value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the common shares of the Registrant held by
non-affiliates computed by reference to the price at which the common shares
were last sold as of the last business day of the Registrant's most recently
completed second fiscal quarter was $52,220,796.
The number of common shares of the Registrant outstanding at March 21, 2005 was
4,568,488.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its Annual Meeting
of Shareholders to be held on April 21, 2005 are incorporated by reference into
Part III of this Annual Report on Form 10-K.
1.
RURBAN FINANCIAL CORP.
2004 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 7A. Qualitative and Quantitative Disclosures about Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
2.
PART I
Item 1. Business.
General
Rurban Financial Corp., an Ohio corporation (the "Company"), is a bank
holding company under the Bank Holding Company Act of 1956, as amended, and is
subject to regulation by the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board"). The executive offices of the Company are located
at 401 Clinton Street, Defiance, Ohio 43512.
Through its direct and indirect subsidiaries, The State Bank and Trust
Company ("State Bank"), RFCBC, Inc. ("RFCBC"), Rurbanc Data Services, Inc.
("RDSI"), Reliance Financial Services, N.A. ("RFS"), Rurban Mortgage Company
("RMC"), and Rurban Statutory Trust 1 ("RST"), the Company is engaged in a
variety of activities, including commercial banking, data processing, and trust
and financial services, as explained in more detail below.
General Description of Holding Company Group
State Bank
State Bank is an Ohio state-chartered bank. State Bank presently operates
six branch offices in Defiance County, Ohio (five in the city of Defiance and
one in Ney), two branch offices in adjacent Paulding County, Ohio (one each in
Paulding and Oakwood) and three branch offices in Fulton County, Ohio (one each
in Delta, Lyons and Wauseon). At December 31, 2004, State Bank had 129.65
full-time equivalent employees.
State Bank offers a full range of commercial banking services, including
checking accounts, passbook savings, money market accounts and time certificates
of deposit; automatic teller machines; commercial, consumer, agricultural and
residential mortgage loans (including "Home Value Equity" line of credit loans);
personal and corporate trust services; commercial leasing; bank credit card
services; safe deposit box rentals; Internet and telephone banking and other
personalized banking services.
RFS
RFS is a nationally-chartered trust and financial services company and a
wholly-owned subsidiary of State Bank. RFS offers various trust and financial
services, including asset management services for individuals and corporate
employee benefit plans, as well as brokerage services through Raymond James
Financial, Inc.
RFS has one office located in State Bank's main office in Defiance, Ohio.
At December 31, 2004, RFS had 17 full-time equivalent employees.
RMC
RMC is an Ohio corporation and wholly-owned subsidiary of State Bank. RMC
is a mortgage company; however, it ceased originating mortgage loans in the
second quarter of 2000 and it is inactive.
At December 31, 2004, RMC had no employees.
RFCBC
RFCBC is an Ohio corporation and wholly owned subsidiary of the Company
that was incorporated in August 2004. RFCBC operates as a loan subsidiary in
servicing and working out problem loans. At December 31, 2004, RFCBC had 3
full-time equivalent employees.
3.
RDSI
RDSI has been in operation since 1964 and became an Ohio state-chartered
company in June 1976. RDSI has six operating locations: three in Defiance, Ohio,
one each in Grove City (Columbus), Ohio, Fremont, Ohio and Holland, Michigan. At
December 31, 2004, RDSI had 65 full-time equivalent employees.
RDSI delivers software systems to the banking industry which provide a
broad range of data processing services in an outsourced environment utilizing
Information Technology Inc. (ITI) software.
RST
RST is a trust and wholly owned subsidiary of the Company that was
organized in August 2000. In September 2000, RST closed a pooled private
offering of 10,000 Capital Securities with a liquidation amount of $1,000 per
security. The proceeds of the offering were loaned to the Company in exchange
for junior subordinated debentures with terms similar to the Capital Securities.
The sole assets of RST are the junior subordinated debentures and the back-up
obligations, in the aggregate, constitute a full and unconditional guarantee by
the Company of the obligations of RST under the Capital Securities.
See Note 26 of the Financials, pages F-39 and F-40, for the Company's segment
information.
Subsequent Events
On March 15, 2005, State Bank, a wholly owned subsidiary of Rurban
Financial Corp., entered into a Branch Purchase and Assumption Agreement (the
"Purchase Agreement") with Liberty Savings Bank, FSB ("Liberty Savings"), a
subsidiary of Liberty Capital, Inc. The Purchase Agreement provides for the sale
to State Bank of two of Liberty Savings' bank branches and one non-banking
facility located in Lima, Ohio. The transaction includes the acquisition of
approximately $61.9 million in deposits and $5.4 million in loans.
Competition
State Bank experiences significant competition in attracting depositors
and borrowers. Competition in lending activities comes principally from other
commercial banks in the lending areas of State Bank, and, to a lesser extent,
from savings associations, insurance companies, governmental agencies, credit
unions, securities brokerage firms and pension funds. The primary factors in
competing for loans are interest rates charged and overall banking services.
State Bank's competition for deposits comes from other commercial banks,
savings associations, money market funds and credit unions as well as from
insurance companies and securities brokerage firms. The primary factors in
competing for deposits are interest rates paid on deposits, account liquidity
and convenience of office location.
RDSI also operates in a highly competitive field. RDSI competes primarily
on the basis of the value and quality of its data processing services and
service and convenience to its customers.
RFS operates in the highly competitive trust services field and its
competition is primarily other Ohio bank trust departments.
SUPERVISION AND REGULATION
The following is a summary of certain statutes and regulations affecting
the Company and its subsidiaries. The summary is qualified in its entirety by
reference to such statutes and regulations.
Regulation of Bank Holding Companies and Their Subsidiaries in General
4.
The Company is a bank holding company under the Bank Holding Company Act
of 1956, as amended, which restricts the activities of the Company and the
acquisition by the Company of voting shares or assets of any bank, savings
association or other company. The Company is also subject to the reporting
requirements of, and examination and regulation by, the Federal Reserve Board.
Bank holding companies are prohibited from acquiring direct or indirect control
of more than 5% of any class of voting stock or substantially all of the assets
of any bank holding company without the prior approval of the Federal Reserve
Board. A bank holding company and its subsidiaries are prohibited from engaging
in certain tying arrangements in connection with extensions of credit and/or the
provision of other property or services to a customer by the bank holding
company or its subsidiaries.
RFS, as a nationally-chartered trust company, is regulated by the Office
of the Comptroller of the Currency (the "OCC"). As an Ohio state-chartered bank,
State Bank is supervised and regulated by the Ohio Division of Financial
Institutions. State Bank is a member of the Federal Reserve System so its
primary federal regulator is the Federal Reserve Board. The deposits of State
Bank are insured by the FDIC and are subject to the applicable provisions of the
Federal Deposit Insurance Act. A subsidiary of a bank holding company can be
liable to reimburse the FDIC, if the FDIC incurs or anticipates a loss because
of a default of another FDIC-insured subsidiary of the bank holding company or
in connection with FDIC assistance provided to such subsidiary in danger of
default. In addition, the holding company of any insured financial institution
that submits a capital plan under the federal banking agencies' regulations on
prompt corrective action guarantees a portion of the insured financial
institution's capital shortfall, as discussed below.
Various requirements and restrictions under the laws of the United States
and the State of Ohio affect the operations of State Bank, including
requirements to maintain reserves against deposits, restrictions on the nature
and amount of loans which may be made and the interest that may be charged
thereon, restrictions relating to investments and other activities, limitations
on credit exposure to correspondent banks, limitations on activities based on
capital and surplus, limitations on payment of dividends, and limitations on
branching.
The Federal Home Loan Banks ("FHLBs") provide credit to their members in
the form of advances. As a member of the FHLB of Cincinnati, State Bank must
maintain an investment in the capital stock of the FHLB of Cincinnati in an
amount equal to the greater of 1% of the aggregate outstanding principal amount
of State Bank's residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each year, or 5% of its advances from the FHLB
of Cincinnati. State Bank was in compliance with this requirement at December
31, 2004.
Upon the origination or renewal of a loan or advance, each FHLB is
required by law to obtain and maintain a security interest in collateral in one
or more of the following categories: fully-disbursed, whole first mortgage loans
on improved residential property not more than 90 days delinquent or securities
representing a whole interest in such loans; securities issued, insured or
guaranteed by the United States Government or an agency thereof; deposits in any
FHLB; or other real estate related collateral acceptable to the applicable FHLB,
if such collateral has a readily ascertainable value and the FHLB can perfect
its security interest in the collateral.
Each FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances from the FHLB. The standards take into account a member's performance
under the Community Reinvestment Act and its record of lending to first-time
home buyers. All long-term advances by each FHLB must be made only to provide
funds for residential housing finance.
Written Agreement
On July 5, 2002, the Company and State Bank entered into a Written
Agreement ("Agreement") with the Federal Reserve Bank of Cleveland and the Ohio
Division of Financial Institutions. The Agreement was the result of an
examination of State Bank as of December 31, 2001, which was
5.
conducted in March and April 2002. A copy of the Agreement was attached as
Exhibit 99(b) to the Form 8-K filed by the Company on July 11, 2002 and is
incorporated by reference as Exhibit 99(b) to this Form 10-K.
On February 18, 2005, the Company received notice from the Federal Reserve
Bank and the Ohio Department of Financial Institutions that approval was given
effective as of February 17, 2005 for release of the Written Agreement.
Dividends
The ability of the Company to obtain funds for the payment of dividends
and for other cash requirements is largely dependent on the amount of dividends
that may be declared by its subsidiaries. State Bank may not pay dividends to
the Company if, after paying such dividends, it would fail to meet the required
minimum levels under the risk-based capital guidelines and the minimum leverage
ratio requirements. State Bank must have the approval of the Federal Reserve
Board and the Ohio Division of Financial Institutions if a dividend in any year
would cause the total dividends for that year to exceed the sum of the current
year's net profits and the retained net profits for the preceding two years,
less required transfers to surplus. Payment of dividends by State Bank may be
restricted at any time at the discretion of the regulatory authorities, if they
deem such dividends to constitute an unsafe and/or unsound banking practice.
These provisions could have the effect of limiting the Company's ability to pay
dividends on its outstanding common shares. Moreover, the Federal Reserve Board
expects the Company to serve as a source of strength to its subsidiary bank,
which may require it to retain capital for further investment in the subsidiary,
rather than for dividends to shareholders of the Company.
Transactions with Affiliates, Directors, Executive Officers and Shareholders
Sections 23A and 23B of the Federal Reserve Act and Regulation W restrict
transactions by banks and their subsidiaries with their affiliates. An affiliate
of a bank is any company or entity that controls, is controlled by or is under
common control with the bank.
Generally, Regulation W:
- limits the extent to which a bank or its subsidiaries may engage in
"covered transactions" with any one affiliate to an amount equal to
10% of that bank's capital stock and surplus (i.e., tangible
capital);
- limits the extent to which a bank or its subsidiaries may engage in
"covered transactions" with all affiliates to 20% of that bank's
capital stock and surplus; and
- requires that all covered transactions be on terms substantially the
same, or at least as favorable to the bank or subsidiary, as those
provided to non-affiliates.
The term "covered transaction" includes the making of loans, purchase of assets,
issuance of a guarantee and similar types of transactions.
A bank's authority to extend credit to executive officers, directors and
greater than 10% shareholders, as well as entities such persons control, is
subject to Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O
promulgated thereunder by the Federal Reserve Board. Among other things, these
loans must be made on terms substantially the same as those offered to
unaffiliated individuals or be made under a benefit or compensation program and
on terms widely available to employees and must not involve a greater than
normal risk of repayment. In addition, the amount of loans a bank may make to
these persons is based, in part, on the bank's capital position, and specified
approval procedures must be followed in making loans which exceed specified
amounts.
6.
Regulatory Capital
The Federal Reserve Board has adopted risk-based capital guidelines for
bank holding companies and for state member banks, such as State Bank. The
risk-based capital guidelines include both a definition of capital and a
framework for calculating risk weighted assets by assigning assets and
off-balance-sheet items to broad risk categories. The minimum ratio of total
capital to risk weighted assets (including certain off-balance-sheet items, such
as standby letters of credit) is 8%. Of that 8%, 4% is to be comprised of common
stockholders' equity (including retained earnings but excluding treasury stock),
noncumulative perpetual preferred stock, a limited amount of cumulative
perpetual preferred stock, and minority interests in equity accounts of
consolidated subsidiaries, less goodwill and certain other intangible assets
("Tier 1 capital"). The remainder ("Tier 2 capital") may consist, among other
things, of certain amounts of mandatory convertible debt securities,
subordinated debt, preferred stock not qualifying as Tier 1 capital, an
allowance for loan and lease losses and net unrealized, after applicable taxes,
on available-for-sale equity securities with readily determinable fair values,
all subject to limitations established by the guidelines. The Federal Reserve
Board also imposes a minimum leverage ratio (Tier 1 capital to total assets) of
3% for bank holding companies and state member banks that meet certain specified
conditions, including no operational, financial or supervisory deficiencies, and
including having the highest regulatory rating. The minimum leverage ratio is
1%-2% higher for other bank holding companies and state member banks based on
their particular circumstances and risk profiles and those experiencing or
anticipating significant growth. Failure to meet applicable capital guidelines
could subject a banking institution to a variety of enforcement remedies
available to federal and state regulatory authorities, including the termination
of deposit insurance by the FDIC.
The federal banking regulators have established regulations governing
prompt corrective action to resolve capital deficient banks. The regulations
establish five capital level categories: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized. Under these regulations, institutions which become
undercapitalized become subject to mandatory regulatory scrutiny and
limitations, which increase as capital decreases. Such institutions are also
required to file capital plans with their primary federal regulator, and their
holding companies must guarantee the capital shortfall up to 5% of the assets of
the capital deficient institution at the time it becomes undercapitalized.
The Company and State Bank at year end 2004 were categorized as well
capitalized.
Deposit Insurance Assessments
The FDIC is authorized to establish separate annual assessment rates for
deposit insurance for members of the Bank Insurance Fund ("BIF") and the Savings
Association Insurance Fund ("SAIF"). State Bank is a member of BIF. The FDIC may
increase assessment rates for either fund if necessary to restore the fund's
ratio of reserves to insured deposits to its target level within a reasonable
time and may decrease such rates if such target level has been met. The FDIC has
established a risk-based assessment system for both BIF and SAIF members. Under
this system, assessments vary based on the risk the institution poses to its
deposit insurance fund. The risk level is determined based on the institution's
capital level and the FDIC's level of supervisory concern about the institution.
Monetary Policy and Economic Conditions
The commercial banking business is affected not only by general economic
conditions, but also by the policies of various governmental regulatory
authorities, including the Federal Reserve Board. The Federal Reserve Board
regulates money and credit conditions and interest rates in order to influence
general economic conditions primarily through open market operations in U.S.
Government securities, changes in the discount rate on bank borrowings and
changes in reserve requirements against bank deposits. These policies and
regulations significantly affect the overall growth and distribution of bank
7.
loans, investments and deposits, and the interest rates charged on loans as well
as the interest rates paid on deposits and accounts.
Holding Company Activities
In November 1999, the Gramm-Leach-Bliley Act was enacted, permitting bank
holding companies to become financial holding companies and thereby affiliate
with securities firms and insurance companies and engage in other activities
that are financial in nature. A bank holding company may become a financial
holding company if each of its subsidiary banks is well capitalized under the
Federal Deposit Insurance Corporation Act of 1991 prompt corrective action
provisions, is well managed, and has at least a satisfactory rating under the
Community Reinvestment Act by filing a declaration that the bank holding company
wishes to become a financial holding company. No regulatory approval is required
for a financial holding company to acquire a company, other than a bank or
savings association, engaged in activities that are financial in nature or
incidental to activities that are financial in nature, as determined by the
Federal Reserve Board.
The Gramm-Leach-Bliley Act defines "financial in nature" to include: (i)
securities underwriting, dealing and market making; (ii) sponsoring mutual funds
and investment companies; (iii) insurance underwriting and agency; (iv) merchant
banking activities; and (v) activities that the Federal Reserve Board has
determined to be closely related to banking.
As of the date of this Form 10-K, the Company has opted not to become a
financial holding company. The Company intends to continue to analyze the
proposed advantages and disadvantages of becoming a financial holding company on
a periodic basis.
Sarbanes-Oxley Act of 2002 and Related Rules Affecting Corporate Governance
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of
2002 (the "Sarbanes-Oxley Act"). The stated goals of the Sarbanes-Oxley Act are
to increase corporate responsibility, to provide for enhanced penalties for
accounting and auditing improprieties at publicly traded companies and to
protect investors by improving the accuracy and reliability of corporate
disclosures made pursuant to the securities laws. The changes are intended to
allow shareholders to monitor the performance of companies and directors more
easily and efficiently.
The Sarbanes-Oxley Act generally applies to all companies, both U.S. and
non-U.S., that file or are required to file periodic reports with the Securities
and Exchange Commission ("SEC") under the Exchange Act. Further, the
Sarbanes-Oxley Act includes very specific additional disclosure requirements and
new corporate governance rules, requires the SEC, securities exchanges and The
NASDAQ Stock Market to adopt extensive additional disclosure, corporate
governance and other related rules.
The Sarbanes-Oxley Act addresses, among other matters: increased
responsibilities of audit committees; corporate responsibility for financial
reports; a requirement that chief executive and chief financial officers forfeit
certain bonuses and profits if their companies issue an accounting restatement
as a result of misconduct; a prohibition on insider trading during pension fund
black-out periods; disclosure of off-balance sheet transactions; conditions for
the use of pro forma financial information; a prohibition on personal loans to
directors and executive officers (excluding loans by insured depository
institutions that are subject to the insider lending restrictions of the Federal
Reserve Act); expedited filing requirements for stock transaction reports by
officers and directors; the formation of the Public Company Accounting Oversight
Board; auditor independence; and various increased criminal penalties for
violations of securities laws.
As mandated by the Sarbanes-Oxley Act, the SEC has adopted rules and
regulations governing, among other issues, corporate governance, auditing and
accounting and executive compensation, and enhanced the timely disclosure of
corporate information. The SEC has also approved corporate governance rules
promulgated by The Nasdaq Stock Market, Inc. ("Nasdaq"). The Board of Directors
of
8.
the Company has taken a series of actions to comply with the new Nasdaq and SEC
rules and to further strengthen its corporate governance practices. The Company
implemented a Code of Conduct and Ethics in 2003 and a copy of that policy can
be found on the Company's website at www.rurbanfinancial.net under the corporate
governance tab.
Statistical Financial Information Regarding the Company
The following schedules and tables analyze certain elements of the
consolidated balance sheets and statements of income of the Company and its
subsidiaries, as required under Exchange Act Industry Guide 3 promulgated by the
SEC, and should be read in conjunction with the narrative analysis presented in
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations and the Consolidated Financial Statements of the Company and its
subsidiaries included at pages F-1 through F-41 of this Annual Report on Form
10-K.
9.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL
The following are the condensed average balance sheets for the years
ending December 31 and the interest earned or paid on such amounts and the
average interest rate thereon:
2004 2003 2002
----------------------------------------------------------------------------------------
Average Avg Average Avg Average Avg
Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------- --------- ----- -------- -------- ----- -------- -------- ------
(dollars in thousands)
ASSETS:
Securities
Taxable $100,517 $ 3,586 3.57% $ 94,771 $ 2,821 2.98% $ 98,383 $ 4,781 4.86%
Non-taxable (1) 4,426 249 5.63% 4,696 261 5.55% 6,276 333 5.31%
Federal funds sold 4,557 61 1.34% 26,130 386 1.48% 15,146 295 1.95%
Loans, net (2) 271,503 16,217 5.97% 385,153 24,395 6.33% 627,685 43,295 6.90%
-------- --------- ----- -------- -------- ----- -------- -------- ------
Total earning assets 381,003 20,113 5.28% 510,750 27,863 5.46% 747,490 48,704 6.52%
Cash and due from banks 12,179 23,580 26,124
Allowance for loan losses (7,123) (13,755) (15,801)
Premises and equipment 12,168 14,089 13,658
Other assets 19,574 14,707 19,620
-------- -------- --------
Total assets $417,801 $549,371 $791,091
======== ======== ========
LIABILITIES:
Deposits
Savings and interest-bearing $ 94,051 $ 350 0.37% $124,828 $ 781 0.63% $185,357 $ 2,578 1.39%
Time deposits 162,865 4,205 2.58% 267,227 9,244 3.46% 409,363 17,723 4.33%
Short-term borrowings 4,613 53 1.15% - - - 17,541 305 1.74%
Advances from FHLB 48,814 1,877 3.85% 40,809 2,276 5.58% 53,595 2,923 5.45%
Trust preferred securities 10,248 1,119 10.92% 10,000 1,075 10.75% 10,000 1,075 10.75%
Other borrowed funds 5,039 347 6.89% 10,314 596 5.78% 5,400 209 3.87%
-------- --------- ----- -------- -------- ----- -------- -------- ------
Total interest-bearing
liabilities 325,630 7,951 2.44% 453,178 13,972 3.08% 681,256 24,813 3.64%
--------- -------- --------
Demand deposits 38,134 43,729 51,888
Other liabilities 4,758 7,865 13,273
-------- -------- --------
Total liabilities 368,522 504,772 746,417
Shareholder's equity 49,279 44,599 44,674
-------- -------- --------
Total liabilities and
shareholders' equity $417,801 $549,371 $791,091
======== ======== ========
Net interest income (tax
equivalent basis) $ 12,162 $ 13,891 $ 23,891
========= ======== ========
Net interest income as a percent
of average interest-earning 3.19% 2.72% 3.20%
assets
- ---------------
(1) Interest is computed on a tax equivalent basis using a 34% statutory tax
rate. The tax equivalent adjustment was $84, $89 and $110 in 2004, 2003
and 2002, respectively.
(2) Nonaccruing loans and loans held for sale are included in the average
balances.
10.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL (Continued)
The following tables set forth the effect of volume and rate changes on
interest income and expense for the periods indicated. For purposes of
these tables, changes in interest due to volume and rate were determined
as follows:
Volume Variance - change in volume multiplied by the previous year's
rate.
Rate Variance - change in rate multiplied by the previous year's
volume.
Rate/Volume Variance - change in volume multiplied by the change in
rate. This variance was allocated to volume variance and rate variance
in proportion to the relationship of the absolute dollar amount of the
change in each.
Interest on non-taxable securities has been adjusted to a fully tax
equivalent basis using a statutory tax rate of 34% in 2004, 2003 and
2002.
Total Variance Attributable To
Variance ------------------------
2004/2003 Volume Rate
--------- ------- -------
(dollars in thousands)
INTEREST INCOME
Securities
Taxable $ 765 $ 179 $ 586
Non-taxable (12) (15) 3
Federal funds sold (325) (290) (35)
Loans, net of unearned income
and deferred loan fees (8,178) (6,855) (1,323)
--------- ------- -------
(7,750) (6,981) (769)
--------- ------- -------
INTEREST EXPENSE
Deposits
Savings and interest-bearing
demand deposits (431) (163) (268)
Time deposits (5,039) (3,055) (1,984)
Short-term borrowings 53 53 0
Advances from FHLB (399) 393 (792)
Trust preferred securities 44 27 17
Other borrowed funds (249) (348) 99
--------- ------- -------
(6,021) (3,093) (2,928)
--------- ------- -------
NET INTEREST INCOME $ (1,729) $(3,888) $ 2,159
========= ======= =======
11.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL (Continued)
Total Variance Attributable To
Variance ------------------------
2003/2002 Volume Rate
--------- --------- ----------
(dollars in thousands)
INTEREST INCOME
Securities
Taxable $ (1,960) $ (170) $ (1,790)
Non-taxable (72) (87) 15
Federal funds sold 91 175 (84)
Loans, net of unearned income
and deferred loan fees (18,900) (15,600) (3,300)
--------- --------- ----------
(20,841) (15,682) (5,159)
--------- --------- ----------
INTEREST EXPENSE
Deposits
Savings and interest-bearing
demand deposits (1,797) (669) (1,128)
Time deposits (8,479) (5,370) (3,109)
Short-term borrowings (305) (305) 0
Advances from FHLB (647) (712) 65
Trust preferred securities 0 6 (6)
Other borrowed funds 387 251 136
--------- --------- ----------
(10,841) (6,799) (4,042)
--------- --------- ----------
NET INTEREST INCOME $ (10,000) $ (8,883) $ (1,117)
========= ========= ==========
12.
II. INVESTMENT PORTFOLIO
A. The book value of securities available for sale as of December 31 in
each of the following years are summarized as follows:
2004 2003 2002
--------- -------- --------
(dollars in thousands)
U.S. Treasury and government agencies $ 64,483 $ 43,868 $ 54,771
State and political subdivisions 4,692 4,203 4,309
Mortgage-backed securities 40,704 59,238 54,875
Other securities 50 50 50
Marketable equity securities 9 35 96
--------- -------- --------
Total $ 109,937 $107,394 $114,101
========= ======== ========
B. The maturity distribution and weighted average yield of securities
available for sale at December 31, 2004 are as follows:
-----------------------Maturing------------------------
After One Year After Five Years
Within But Within But Within After
One Year Five Years Ten Years Ten Years
-------- ---------- ---------- ---------
U.S. Treasury and Government agencies $ 14,633 $ 4,976 $ 42,874 $ 2,000
Obligations of states and political
subdivisions 407 1,780 1,837 668
Mortgage-backed securities 10,050 21,373 6,758 2,523
Other securities - 50 - -
Marketable equity securities 8 - - -
-------- ---------- ---------- ---------
$ 25,098 $ 28,179 $ 51,469 $ 5,191
======== ========== ========== =========
Weighted average yield (1) 3.76% 3.56% 4.79% 4.88%
(1) Yields are not presented on a tax-equivalent basis.
The weighted average interest rates are based on coupon rates for securities
purchased at par value and on effective interest rates considering amortization
or accretion if the securities were purchased at a premium or discount.
C. Excluding those holdings of the investment portfolio in U.S. Treasury
securities and other agencies of the U.S. Government, there were no
other securities of any one issuer which exceeded 10% of shareholders'
equity of the Company at December 31, 2004.
13.
III. LOAN PORTFOLIO
A. Types of Loans - Total loans on the balance sheet are comprised of
the following classifications at December 31 for the years
indicated:
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
(dollars in thousands)
Commercial and
agricultural $163,845 $188,532 $321,726 $388,673 $362,928
Real estate
mortgage 63,828 46,718 84,432 106,689 107,718
Consumer
loans to
individuals 31,949 37,310 60,139 76,513 81,063
Leases 5,128 11,775 21,509 28,752 25,279
-------- -------- -------- -------- --------
Total loans $264,750 $284,335 $487,806 $600,627 $576,988
======== ======== ======== ======== ========
Real estate
mortgage
loans held
for resale $ 113 $ 219 $ 63,536 $ 440 $ 1,167
======== ======== ======== ======== ========
Concentrations of Credit Risk: The Company grants commercial, real estate and
installment loans to customers mainly in northwest Ohio. Commercial loans
include loans collateralized by commercial real estate, business assets and, in
the case of agricultural loans, crops and farm equipment. As of December 31,
2004, commercial and agricultural loans made up approximately 61.9% of the loan
portfolio and the loans are expected to be repaid from cash flow from operations
of businesses. As of December 31, 2004, residential first mortgage loans made up
approximately 24.1% of the loan portfolio and are collateralized by first
mortgages on residential real estate. As of December 31, 2004, consumer loans to
individuals made up approximately 14.0% of the loan portfolio and are primarily
collateralized by consumer assets.
B. Maturities and Sensitivities of Loans to Changes in Interest Rates -
The following table shows the amounts of commercial and agricultural
loans outstanding as of December 31, 2004 which, based on remaining
scheduled repayments of principal, are due in the periods indicated.
Also, the amounts have been classified according to sensitivity to
changes in interest rates for commercial and agricultural loans due
after one year. (Variable-rate loans are those loans with floating or
adjustable interest rates.)
Commercial and
Maturing Agricultural
-------- --------------
Within one year $ 47,784
After one year but within five years 56,139
After five years 59,922
--------------
Total commercial and agricultural loans $ 163,845
==============
14.
III. LOAN PORTFOLIO (Continued)
Commercial and Agricultural
Interest Sensitivity
---------------------------
Fixed Variable
Rate Rate Total
------------ ------------ -------------
(dollars in thousands)
Due after one year but
within five years $ 15,107 $ 41,032 $ 56,139
Due after five years 6,612 53,310 59,922
------------ ------------ -------------
Total $ 21,719 $ 94,342 $ 116,061
============ ============ =============
C. Risk Elements
1. Nonaccrual, Past Due, Restructured and Impaired Loans - The
following schedule summarizes nonaccrual, past due,
restructured and impaired loans at December 31 in each of the
following years.
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
(dollars in thousands)
(a) Loans accounted for on a
nonaccrual basis $ 13,384 $ 18,352 $ 18,259 $ 12,557 $ 2,950
(b) Accruing loans which are
contractually past due
90 days or more as to
interest or principal payments 11 - 476 2,131 1,927
(c) Loans not included in (a)
which are "Troubled Debt
Restructurings" as defined
by Statement of Financial
Accounting Standards No. 15 1,570 5,058 - - 3,911
-------- -------- -------- -------- --------
Total non-performing
loans $ 14,965 $ 23,410 $ 18,735 $ 14,688 $ 8,788
======== ======== ======== ======== ========
(d) Other loans defined as
impaired $ 4,671 $ 9,099 $ 3,166 $ - $ 1,624
======== ======== ======== ======== ========
15.
III. LOAN PORTFOLIO (Continued)
Management believes the allowance for loan losses at December 31, 2004 is
adequate to absorb any losses on nonperforming loans, as the allowance balance
is maintained by management at a level considered adequate to cover losses that
are probable based on past loss experience, general economic conditions,
information about specific borrower situations, including their financial
position and collateral values, and other factors and estimates which are
subject to change over time.
2004
----
(In thousands)
Gross interest income that would have been
recorded in 2004 on impaired loans outstanding at
December 31, 2004 if the loans had been current in
accordance with their original terms and had been
outstanding throughout the period or since
origination, if held for part of the period $433
Interest income actually recorded on impaired
loans and included in net income for the period 456
1. Discussion of the Nonaccrual Policy
The accrual of interest income is discontinued when the
collection of a loan or interest, in whole or in part, is
doubtful. When interest accruals are discontinued, interest
income accrued in the current period is reversed. While loans
which are past due 90 days or more as to interest or principal
payments are considered for nonaccrual status, management may
elect to continue the accrual of interest when the estimated
net realizable value of collateral, in management's judgment,
is sufficient to cover the principal balance and accrued
interest. These policies apply to both commercial and consumer
loans.
2. Potential Problem Loans
As of December 31, 2004, in addition to the $14,965,000 of
loans reported under Item III. C. 1. (which includes all loans
classified by management as doubtful or loss), there are
approximately $16,301,000 in other outstanding loans where
known information about possible credit problems of the
borrowers causes management to have concerns as to the ability
of such borrowers to comply with the present loan repayment
terms (loans classified as substandard by management) and
which may result in disclosure of such loans pursuant to Item
III. C. 1. at some future date. In regard to loans classified
as substandard, management believes that such potential
problem loans have been adequately evaluated in the allowance
for loan losses.
16.
III. LOAN PORTFOLIO (Continued)
3. Foreign Outstandings
None
4. Loan Concentrations
At December 31, 2004, loans outstanding related to
agricultural operations or collateralized by agricultural real
estate aggregated approximately $41,240,000.
D. Other Interest-Bearing Assets
There are no other interest-bearing assets as of December 31, 2004
which are required to be disclosed under Item III. C. 1 or Item III.
C. 2. if such assets were loans.
17.
IV. SUMMARY OF LOAN LOSS EXPERIENCE
A. The following schedule presents an analysis of the allowance for
loan losses, average loan data and related ratios for the years
ended December 31:
2004 2003 2002 2001 2000
--------- --------- --------- --------- ---------
(dollars in thousands)
LOANS
Loans outstanding at end of period (1) $ 264,594 $ 284,323 $ 551,011 $ 600,731 $ 577,803
========= ========= ========= ========= =========
Average loans outstanding during period (1) $ 271,503 $ 385,153 $ 627,685 $ 583,239 $ 542,412
========= ========= ========= ========= =========
ALLOWANCE FOR LOAN LOSSES
Balance at beginning of period $ 10,181 $ 17,694 $ 9,239 $ 7,215 $ 6,194
Balance, Oakwood 1,427
Loans charged-off
Commercial and agricultural loans (6,599) (10,089) (19,584) (6,089) (641)
Real estate mortgage (12) (195) (496) (54) (22)
Leases (70) (225) (173) (146) (89)
Consumer loans to individuals (308) (1,345) (1,520) (884) (817)
--------- --------- --------- --------- ---------
(6,989) (11,854) (21,773) (7,173) (1,569)
Recoveries of loans previously charged-off
Commercial and agricultural loans 1,835 2,497 892 110 106
Real estate mortgage 52 86 28 1 23
Leases 31 109 27 12 38
Consumer loans to individuals 188 447 324 341 324
--------- --------- --------- --------- ---------
2,106 3,139 1,271 464 491
--------- --------- --------- --------- ---------
Net loans charged-off (4,883) (8,715) (20,502) (6,709) (1,079)
Provision for loan losses (399) 1,202 27,530 8,733 2,100
--------- --------- --------- --------- ---------
Balance at end of period $ 4,899 $ 10,181 $ 17,694 $ 9,239 $ 7,215
========= ========= ========= ========= =========
Ratio of net charge-offs during the period to
average loans outstanding during the period 1.80% 2.26% 3.27% 1.15% .20%
========= ========= ========= ========= =========
(1) Net of unearned income and deferred loan fees, including loans held for
sale
The allowance for loan losses balance and the provision for loan losses are
determined by management based upon periodic reviews of the loan portfolio. In
addition, management considered the level of charge-offs on loans as well as the
fluctuations of charge-offs and recoveries on loans in the factors which caused
these changes. Estimating the risk of loss and the amount of loss is necessarily
subjective. Accordingly, the allowance is maintained by management at a level
considered adequate to cover losses that are currently anticipated based on past
loss experience, economic conditions, information about specific borrower
situations including their financial position and collateral values and other
factors and estimates which are subject to change over time.
18.
IV. SUMMARY OF LOAN LOSS EXPERIENCE (Continued)
B. The following schedule is a breakdown of the allowance for loan
losses allocated by type of loan and related ratios.
December 31, 2004 December 31, 2003 December 31, 2002 December 31, 2001*
----------------- ----------------- ----------------- ------------------
(dollars in thousands)
--------------------Allocation of the Allowance for Loan Losses------------------------
Percentage Percentage Percentage Percentage
of Loans of Loans of Loans of Loans
In Each In Each In Each In Each
Category to Category To Category to Category to
Allowance Total Allowance Total Allowance Total Allowance Total
Amount Loans Amount Loans Amount Loans Amount Loans
--------- ----------- --------- ----------- --------- ----------- --------- -----------
Commercial and agricultural $ 4,502 61.9% $ 9,649 66.3% $ 16,518 66.0% $ 8,222 64.7%
Residential first mortgage 141 24.1 75 16.4 204 17.3 126 17.8
Consumer loans to
individuals 256 14.0 457 17.3 972 16.7 891 17.5
Unallocated - N/A - N/A - N/A * N/A
--------- -------- --------- ------- --------- -------- --------- --------
$ 4,899 100.0% $ 10,181 100.0% $ 17,694 100.0% $ 9,239 100.0%
========= ======== ========= ======= ========= ======== ========= ========
December 31, 2000
-----------------
(dollars in thousands)
Allocation of the
Allowance for Loan Losses
-------------------------
Percentage
of Loans
In Each
Category to
Allowance Total
Amount Loans
--------- -----------
Commercial and agricultural $ 5,365 62.9%
Residential first mortgage 202 18.7
Consumer loans to
individuals 814 18.4
Unallocated 834 N/A
--------- --------
$ 7,215 100.0%
========= ========
* In 2001, management established a revised methodology for allocating the
allowance for loan losses which includes identifying specific allocations
for impaired and problem loans and quantifying general allocations for
other loans based on a detailed evaluation of historical loss ratios.
Adjustments are then made to these amounts based on various quantifiable
information related to individual portfolio risk factors. Additional
adjustments are made based on local and national economic trends and their
estimated impact on the industries to which the Company and its
subsidiaries extend credit. Prior to 2001, individual portfolio risk
factor allocations were made on a more subjective basis. Management
believes the new methodology more appropriately allocates the allowance
for known and inherent risks within the individual loan portfolios.
While management's periodic analysis of the adequacy of the allowance for loan
losses may allocate portions of the allowance for specific problem loan
situations, the entire allowance is available for any loan charge-offs that
occur.
19.
V. DEPOSITS
The average amount of deposits and average rates paid are summarized as
follows for the years ended December 31:
2004 2003 2002
------ ------ -------
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
-------- ------- -------- ------- -------- -------
(dollars in thousands)
Savings and interest-bearing demand deposits $ 94,051 0.37% $124,828 0.63% $185,357 1.39%
Time deposits 162,865 2.58 267,227 3.46 409,363 4.33
Demand deposits (noninterest-bearing) 38,134 - 43,729 - 51,888 -
-------- -------- --------
$295,050 $435,784 $646,608
======== ======== ========
Maturities of time certificates of deposit and other time deposits of
$100,000 or more outstanding at December 31, 2004 are summarized as
follows:
Amount
------
(In thousands)
Three months or less $ 8,139
Over three months and through six months 13,063
Over six months and through twelve months 11,175
Over twelve months 12,336
-----------
$ 44,713
===========
20.
VI. RETURN ON EQUITY AND ASSETS
The ratio of net income to average shareholders' equity and average total
assets and certain other ratios are as follows:
2004 2003 2002
--------- --------- ---------
(dollars in thousands)
Average total assets $ 417,801 $ 549,371 $ 791,091
========= ========= =========
Average shareholders' equity $ 49,279 $ 44,599 $ 44,674
========= ========= =========
Net income $ 2,734 $ 12,305 $ (13,408)
========= ========= =========
Cash dividends declared $ - $ - $ 1,187
========= ========= =========
Return on average total assets 0.65% 2.24% (1.69)%
========= ========= =========
Return on average share-
holders' equity 5.55% 27.59% (30.01)%
========= ========= =========
Dividend payout ratio (1) N/A N/A N/A
Average shareholders' equity
to average total assets 11.79% 8.12% 5.65%
========= ========= =========
(1) Cash dividends declared divided by net income.
VII. SHORT-TERM BORROWINGS
The Company did have short-term borrowings during 2004 but the average
ending balance for the period did not exceed 30 percent or more of
shareholders' equity.
The following information is reported for short-term borrowings for 2003
and 2002:
2003 2002
------- -------
(dollars in thousands)
Amount outstanding at end of year $13,924 $ 6,000
======= =======
Weighted average interest rate at end of year 1.08% 5.25%
======= =======
Maximum amount outstanding at any month end $15,765 $30,800
======= =======
Average amount outstanding during the year $11,144 $24,041
======= =======
Weighted average interest rate during the year 1.17% 2.70%
======= =======
21.
Effect of Environmental Regulation
Compliance with federal, state and local provisions regulating the
discharge of materials into the environment, or otherwise relating to the
protection of the environment, has not had a material effect upon the capital
expenditures, earnings or competitive position of the Company and its
subsidiaries. The Company believes that the nature of the operations of its
subsidiaries has little, if any, environmental impact. The Company, therefore,
anticipates no material capital expenditures for environmental control
facilities for its current fiscal year or for the foreseeable future. The
Company's subsidiaries may be required to make capital expenditures for
environmental control facilities related to properties which they may acquire
through foreclosure proceedings in the future; however, the amount of such
capital expenditures, if any, is not currently determinable.
Item 2. Properties.
The following is a listing and brief description of the properties owned
or leased by State Bank and used in its business:
1. State Bank's main office is owned and is located at 401 Clinton
Street, Defiance, Ohio. State Bank leases portions of this facility
to the Company, RDSI and RFS. (Banking, Data Processing, Other)
2. State Bank owns a drive through branch office located in Defiance,
Ohio. (Banking)
3. State Bank owns a full service branch office located on Main Street
in Ney, Ohio. (Banking)
4. State Bank owns a full service branch office located at 1796 North
Clinton Street, Defiance, Ohio.(Banking)
5. State Bank owns a full service branch office located at 1856 East
Second Street, Defiance, Ohio. (Banking)
6. State Bank owns a full service branch office located at 220 North
Main Street, Paulding, Ohio. (Banking)
7. State Bank owns a full service branch office located at 312 Main
Street, Delta, Ohio. (Banking)
8. State Bank owns a full service branch office located at 133 E.
Morenci Street, Lyons, Ohio. (Banking)
9. State Bank owns a full service branch office located at 515
Parkview, Wauseon, Ohio. (Banking)
10. State Bank leases a full service branch located in the Chief Market
Square supermarket at 705 Deatrick Street, Defiance, Ohio, pursuant
to a 15-year lease. (Banking)
11. State Bank owns a full service branch office located at 218 North
First Street, Oakwood, Ohio.(Banking)
RFCBC is headquartered at 401 Clinton Street, Defiance Ohio and leases
space for its operations located at Gemini Tower One, Suite 204, 1991 Crocker
Rd., Westlake, Ohio.
22.
RDSI leases office space located at 2010 South Jefferson, Defiance, Ohio.
RDSI also leases a portion of the State Bank building located at 401 Clinton
Street, Defiance, Ohio, office space located at 517 Clinton Street, Defiance,
Ohio, office space located at 1804 East State Street, Fremont, Ohio, office
space located at 6314 Seeds Road, Grove City (Columbus), Ohio and office space
located at 11952 James Street, Holland, Michigan. In November 2004, RDSI began
to lease office space located at 7622 St. Rt. 66, Defiance, Ohio in which it
plans to consolidate its Defiance office operations in 2005.
Item 3. Legal Proceedings.
There are no pending legal proceedings to which the Company or any of its
subsidiaries is a party or to which any of their property is subject, except
routine legal proceedings incidental to their business. None of such proceedings
are considered by the Company to be material.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
23.
Executive Officers of the Registrant.
The following table lists the names and ages of the executive officers of
the Company as of March 28, 2005, the positions presently held by each executive
officer and the business experience of each executive officer during the past
five years. Unless otherwise indicated, each person has held his principal
occupation(s) for more than five years.
Position(s) Held with the Company and
Name Age its Subsidiaries and Principal Occupation(s)
---- --- --------------------------------------------
Steven D. VanDemark 52 Chairman of the Board of Directors of the Company
since 1992; Chairman of the Board of Directors of
State Bank since 1992; Director of State Bank since
1990; Director of RDSI since 1997; General Manager
of Defiance Publishing Company, Defiance, Ohio, a
newspaper publisher, since 1985.
Kenneth A. Joyce 57 President and Chief Executive Officer of the Company
since August 2002; Chairman and Chief Executive
Officer of RDSI since October 1997; Director of
State Bank since 2002; Director of RDSI since 1997;
Director of RFCBC since 2004.
Robert W. Constien 52 President and Chief Executive Officer of State Bank
since April 2002; Senior Executive Vice President
and Chief Operating Officer of the Company from
November 2000 to April 2002; Executive Vice
President of the Company from March 1997 to November
2000; Chairman of the Board and a Director of RFS
since March 1997; Director of State Bank since 1996.
Henry R. Thiemann 58 Executive Vice President and Chief Operating Officer
of State Bank since 2002; President and Chief
Executive Officer of RFCBC since 2004; Senior Vice
President and Operations Manager of the Company from
1998 to 2001; Director of RFCBC since 2004;
President of RMC since August 1999; Director of RMC
since August 1999.
James E. Adams 60 Executive Vice President and Chief Financial Officer
of the Company since March 2003; Executive Vice
President, Chief Financial Officer and Corporate
Secretary of Integra Bank in Evansville, Indiana
from 1999 through 2001; Executive Vice President and
Chief Financial Officer at MainStreet Financial
Company in Martinsville, Virginia from 1994 to 1999.
24.
PART II
Item 5. Market for Registrant's Common Shares and Related Shareholder Matters.
The common shares of the Company are traded on The NASDAQ National Market
(symbol "RBNF"). The table below sets forth the high and low closing prices and
the cash dividends declared with respect to the common shares of the Company for
the indicated periods. The high and low bid prices reflect actual prices for
purchases and sales of the Company's common shares as reported by NASDAQ and not
inter-dealer prices.
Per Share Per Share
Bid Prices Dividends
High Low Declared
---- --- ---------
2003
First Quarter $ 10.13 $ 9.00 $ .000
Second Quarter 12.99 9.65 .000
Third Quarter 14.00 11.39 .000
Fourth Quarter 14.74 13.78 .000
2004
First Quarter $ 15.50 $ 13.32 $ .000
Second Quarter 15.15 11.25 .000
Third Quarter 13.15 11.90 .000
Fourth Quarter 14.24 12.57 .000
There can be no assurance as to the amount of dividends which will be declared
with respect to the common shares of the Company in the future, since such
dividends are subject to the discretion of the Company's Board of Directors,
cash needs, general business conditions, dividends from the subsidiaries and
applicable governmental regulations and policies.
The approximate number of holders of outstanding common shares of the Company,
based upon the number of record holders as of February 22, 2005, is 1,397.
Available Information
The Company will provide without charge to each shareholder, upon written
request to Rurban Financial Corp., P.O. Box 467, Defiance, Ohio 43512,
Attention: Valda Colbart, Investor Relations Department, a copy of the Company's
Annual Report on Form 10-K, including the Financial Statements and Schedules
thereto required to be filed with the SEC, for the Company's most recent fiscal
year.
25.
Item 6. Selected Financial Data.
SUMMARY OF SELECTED FINANCIAL DATA
(Dollars in thousands except per share data)
Year Ended December 31
2004 2003 2002 2001 2000
--------- --------- --------- --------- ---------
EARNINGS
Interest income $ 20,028 $ 27,774 $ 48,591 $ 56,519 $ 56,023
Interest expense 7,951 13,972 24,813 30,778 29,635
Net interest income 12,077 13,802 23,778 25,741 26,388
Provision for loan losses (399) 1,202 27,531 8,733 2,100
Noninterest income 16,691 34,687 13,779 14,162 11,273
Noninterest expense 25,324 28,678 30,479 28,018 26,754
Provision (credit)
for income taxes 1,109 6,303 (7,044) 899 2,721
Net income (loss) 2,734 12,305 (13,408) 2,253 6,086
PER SHARE DATA (1)
Basic earnings $ 0.60 $ 2.71 $ (2.95) $ 0.50 $ 1.35
Diluted earnings 0.60 2.70 (2.95) 0.50 1.35
Cash dividends declared N/A N/A 0.26 0.47 0.42
AVERAGE BALANCES
Average shareholders' equity $ 49,279 $ 44,599 $ 44,674 $ 52,708 $ 46,627
Average total assets 417,801 549,371 791,091 722,827 665,523
RATIOS
Return on average
shareholders' equity 5.55% 27.59% (30.01)% 4.27% 13.05%
Return on average total assets 0.65 2.24 (1.69) 0.31 0.91
Cash dividend payout
ratio (cash dividends
divided by net income) N/A N/A N/A 95.80 31.02
Average shareholders'
equity to average total
assets 11.79 8.12 5.65 7.29 7.01
PERIOD END TOTALS
Total assets $ 415,349 $ 435,312 $ 742,317 $ 746,209 $ 700,818
Total investments and
fed funds sold 108,720 117,699 129,109 101,140 88,905
Total loans and leases 264,481 284,104 487,475 600,291 576,636
Loans held for sale 113 219 63,536 440 1,167
Total deposits 279,624 317,475 636,035 610,860 566,321
Notes Payable 3,080 10,328 6,000 0 0
Advances from FHLB 56,000 39,000 47,850 54,275 52,164
Trust Preferred Securities 10,310 10,000 10,000 10,000 10,000
Shareholders' equity 50,306 48,383 36,382 50,829 50,140
Shareholders' equity
per share (1) 11.01 10.63 8.01 11.14 10.98
(1) Per share data restated for 5% stock dividend declared in 2000 and 2001.
26.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company is a bank holding company registered with the Federal Reserve Board
under the Bank Holding Company Act of 1956, as amended. Through its direct and
indirect subsidiaries, the Company is engaged in commercial banking,
computerized data processing, and trust and financial services.
The following discussion is intended to provide a review of the consolidated
financial condition and results of operations of the Company. This discussion
should be read in conjunction with the consolidated financial statements and
related footnotes in the Company's 2004 Form 10-K filed with the SEC.
CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of the Company are in accordance with
accounting principles generally accepted in the United States and conform to
general practices within the banking industry. The Company's significant
accounting policies are described in detail in the notes to the Company's
consolidated financial statements for the year ended December 31, 2004. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions. The
Company's financial position and results of operations can be affected by these
estimates and assumptions and are integral to the understanding of reported
results. Critical accounting policies are those policies that management
believes are the most important to the portrayal of the Company's financial
condition and results, and they require management to make estimates that are
difficult, subjective, or complex.
ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses provides coverage for
probable losses inherent in the Company's loan portfolio. Management evaluates
the adequacy of the allowance for loan losses each quarter based on changes, if
any, in underwriting activities, loan portfolio composition (including product
mix and geographic, industry or customer-specific concentrations), trends in
loan performance, regulatory guidance and economic factors. This evaluation is
inherently subjective, as it requires the use of significant management
estimates. Many factors can affect management's estimates of specific and
expected losses, including volatility of default probabilities, rating
migrations, loss severity and economic and political conditions. The allowance
is increased through provisions charged to operating earnings and reduced by net
charge-offs.
The Company determines the amount of the allowance based on relative risk
characteristics of the loan portfolio. The allowance recorded for commercial
loans is based on reviews of individual credit relationships and an analysis of
the migration of commercial loans and actual loss experience. The allowance
recorded for homogeneous consumer loans is based on an analysis of loan mix,
risk characteristics of the portfolio, fraud loss and bankruptcy experiences,
and historical losses, adjusted for current trends, for each homogeneous
category or group of loans. The allowance for credit losses relating to impaired
loans is based on each impaired loan's observable market price, the collateral
for certain collateral-dependent loans, or the discounted cash flows using the
loan's effective interest rate.
Regardless of the extent of the Company's analysis of customer performance,
portfolio trends or risk management processes, certain inherent but undetected
losses are probable within the loan portfolio. This is due to several factors
including inherent delays in obtaining information regarding a customer's
financial condition or changes in their unique business conditions, the
subjective nature of individual loan evaluations, collateral assessments and the
interpretation of economic trends. Volatility of economic or customer-specific
conditions affecting the identification and estimation of losses for larger
non-homogeneous credits and the sensitivity of assumptions utilized to establish
allowances for homogenous groups of loans are also factors. The Company
estimates a range of inherent losses related to the existence of these
exposures. The estimates are based upon the Company's evaluation of imprecise
risk associated with the commercial and consumer allowance levels and the
estimated impact of the current economic environment.
27.
GOODWILL AND OTHER INTANGIBLES - The Company records all assets and liabilities
acquired in purchase acquisitions, including goodwill and other intangibles, at
fair value as required by SFAS 141. Goodwill is subject, at a minimum, to annual
tests for impairment. Other intangible assets are amortized over their estimated
useful lives using straight-line and accelerated methods, and are subject to
impairment if events or circumstances indicate a possible inability to realize
the carrying amount. The initial goodwill and other intangibles recorded and
subsequent impairment analysis requires management to make subjective judgments
concerning estimates of how the acquired asset will perform in the future.
Events and factors that may significantly affect the estimates include, among
others, customer attrition, changes in revenue growth trends, specific industry
conditions and changes in competition.
IMPACT OF ACCOUNTING CHANGES
In December 2003, the Financial Accounting Standards Board ("FASB") issued a
revision to FIN 46 to clarify certain provisions that affected the accounting
for trust preferred securities. As a result of the revisions to FIN 46, RST was
deconsolidated as of March 31, 2004, with the Company accounting for its
investment in RST as assets, its subordinated debentures as debt, and the
interest paid thereon as interest expense. The Company had previously classified
the trust preferred securities as debt, but the Company eliminated its common
stock investment as a result of the revisions to FIN 46.
In December 2004, FASB issued a revision to Statement No. 123. Statement No.
123(R), "Share-Based Payment," will provide investors and other users of
financial statements with more complete and neutral financial information by
requiring that the compensation cost relating to share-based payment
transactions be recognized in the financial statements. The Company intends to
apply the revised Statement in the quarterly financial statements in the third
quarter of 2005. The impact of applying the new Statement has not yet been
determined.
28.
EARNINGS SUMMARY
Net income for 2004 was $2.7 million, or $0.60 per diluted share, compared with
net income of $12.3 million or $2.70 per diluted share and a net loss of $13.4
million or $2.95 per diluted share, reported for 2003 and 2002, respectively.
Cash dividends per share were $.26 in 2002. No cash dividends were paid in 2004
or 2003.
Net income for 2004 was driven by improved credit quality and a higher level of
non-bank revenue. Net income in 2003 was primarily a result of the gains
associated with the sale of selected branches undertaken in order to replenish
capital levels and to rebuild the Company. The loss in 2002 was directly
attributable to the discovery of underwriting deficiencies in the loan portfolio
resulting in a loan loss provision of $27.5 million. The discovery process which
began during late 2001 and initially led to a fourth quarter 2001 loan loss
provision of $5.6 million, broadened during 2002 and culminated at year-end 2002
with the finalization of extensive loan reviews, both internally and externally.
As relevant data became available on each borrower, judgments concerning
collateral values and probable loss estimates were continually updated and
reserve levels appropriately adjusted. At each quarter end, the Company applied
judgment to the best information then available to determine the appropriate
level of the allowance for loan losses and the resulting loan loss provision
required to bring the allowance to the appropriate level. These issues are
discussed further in the sections on Loan Loss Provision, Asset Quality and
Allowance for Loan Losses.
CHANGES IN FINANCIAL CONDITION
At December 31, 2004, total assets were $415.3 million, a decrease of $20.0
million from December 31, 2003. The decrease was primarily attributable to
decreases in loans of $19.6 million and federal funds sold of $10.0 million. The
decrease in loans is due to restructuring the loan portfolio for quality and
actively pursuing a strategy to build on the Company's long held expertise in
agricultural lending and lending to small and mid-sized businesses in our market
area. The year-to-year decrease is partially offset by an increase of $7.3
million in cash value of life insurance as a result of purchasing a bank owned
life insurance policy for $8.0 million in the first quarter of 2004.
29.
SIGNIFICANT EVENTS OF 2003 AND 2004
In addition to the discussion which follows of the results of operations which
affected the income statement and balance sheet, several other significant
events occurred during 2003 and 2004.
On February 12, 2003, the Company notified the trustee of its Trust Preferred
Securities of its election to defer the semi-annual interest payment, which
would have been due on March 7, 2003. During any interest deferral period, the
Trust Preferred Indenture prohibits the payment of a common stock dividend.
On February 22, 2003, an agreement was signed to sell the branches, deposits and
certain performing loans of the Peoples Banking Company and First Bank of Ottawa
divisions of RFCBC at a price substantially in excess of their book value. The
transaction closed in June 2003.
On March 28, 2003, the Citizens Savings Bank, a division of RFC Banking Company,
was sold. As of March 28, Citizens had total loans of $57.2 million, total fixed
assets (net of accumulated depreciation) of $869,000 and total deposits of $70.8
million. A pre-tax gain of approximately $8.0 million was recorded in March from
the sale.
On June 6, 2003, the Peoples Banking Company and First Bank of Ottawa, divisions
of RFC Banking Company, were sold. As of June 6, these branches had total loans
of $76.6 million, total fixed assets (net of accumulated depreciation) of $1.4
million and total deposits of $166.2 million. A pre-tax gain of approximately
$12.0 million was recorded in June from the sale.
In June 2003, RFCBC obtained two loans in the amount of $13.4 million to fund
its loan servicing and work out operations. The Company's note with The Northern
Trust Company of $5.5 million was paid off with a portion of these proceeds.
RFCBC also had a line of credit for $2.0 million. As of December 31, 2004 and
2003, the loan balances were $2.0 and $9.6 million, respectively.
On July 9, 2003, the Company notified the trustee of its Trust Preferred
Securities of its election to defer the semi-annual interest payment, which
would have been due on September 7, 2003. During any interest deferral period,
the Trust Preferred Indenture prohibits the payment of a common stock dividend.
In September 2003, the banking charter of RFCBC, which was primarily engaged in
providing a full range of banking and financial services, was relinquished.
RFCBC now operates as a loan subsidiary that continues to administer problem
loans.
On January 28, 2004, the Company notified the trustee of its Trust Preferred
Securities of its election to defer the semi-annual interest payment, which
would have been due on March 7, 2004. During any interest deferral period, the
Trust Preferred Indenture prohibits the payment of a common stock dividend.
On July 23, 2004, the Company notified the trustee of its Trust Preferred
Securities of its election to defer the semi-annual interest payment, which
would have been due on September 7, 2004. During any interest deferral period,
the Trust Preferred Indenture prohibits the payment of a common stock dividend.
On September 3, 2004, the Company received permission from the Federal Reserve
Bank and the Ohio Department of Financial Institutions to pay the previously
accrued and deferred trust preferred interest on the Company's $10 million issue
of Trust Preferred Securities totaling $2.2 million, and the Company
subsequently paid such accrued and deferred trust preferred interest on
September 7, 2004.
SUBSEQUENT EVENTS
On February 1, 2005, the Company received permission from the Federal Reserve
Bank and the Ohio Department of Financial Institutions to pay a first quarter
common stock dividend to its shareholders. The Company declared a common stock
dividend of $0.05 per share to shareholders of record on
30.
February 11, 2005, payable on February 25, 2005. The Company was required to
obtain regulatory approval to pay dividends in accordance with the requirements
of the Written Agreement dated July 5, 2002.
On February 18, 2005, the Company received notice from the Federal Reserve Bank
and the Ohio Department of Financial Institutions that approval was given
effective as of February 17, 2005 for release of the Written Agreement entered
into on July 5, 2002.
RESULTS OF OPERATIONS
Year Ended Year Ended
December 31, December 31,
------------ ------------
2004 2003 % Change 2003 2002 % Change
-----------------------------------------------------------------------------
(dollars in thousands except per share data)
-----------------------------------------------------------------------------
Total Assets $ 415,349 $ 435,312 -5% $ 435,312 $ 742,317 -41%
Total Securities $ 108,720 $ 107,699 +1% $ 107,699 $ 115,109 -6%
Loans Held for Sale 113 219 N/A 219 63,536 N/A
Loans (Net) 259,582 273,923 -5% 273,923 469,781 -42%
Allowance for Loan Losses 4,899 10,181 -52% 10,181 17,694 -42%
Total Deposits 279,624 317,475 -12% 317,475 567,860 -44%
Total Revenues (Net) 28,768 48,489 -41% 48,489 37,557 +29%
Net Interest Income 12,077 13,802 -12% 13,802 23,778 -42%
Loan Loss Provision (credit) (399) 1,202 133% 1,202 27,531 -96%
Noninterest Income 16,691 34,687 -52% 34,687 13,779 + 152%
Non-interest Expense 25,324 28,678 -12% 28,678 30,479 -6%
Net Income 2,734 12,305 N/A 12,305 (13,408) N/A
Basic Earnings per Share $ 0.60 $ 2.71 N/A $ 2.71 $ (2.95) N/A
Diluted Earnings per Share $ 0.60 $ 2.70 N/A $ 2.70 $ (2.95) N/A
NET INTEREST INCOME
Year Ended Year Ended
December 31, December 31,
------------ ------------
2004 2003 % Change 2003 2002 % Change
-----------------------------------------------------------------------------
(dollars in thousands)
------------------------------------------------------------------------------
Net Interest Income $ 12,077 $ 13,802 -12% $ 13,802 $ 23,778 -42%
NET INTEREST INCOME declined $1.7 million from 2003 to $12.1 million in 2004.
The net interest margin for 2004 was 3.19% compared to 2.72% for the previous
year. The 47 basis point increase in the net interest margin was largely due to
a 65 basis point decrease in the yield on cost of funds partially offset by a
decrease in the yield on earning assets of 18 basis points. The major reason for
the reduction in net interest income was due to a reduced level of earning
assets combined with declines in average loan balances due to the Company's exit
from out of market loans. Contributing to the decrease in the yield on cost of
funds are the results of the Company's disciplined approach to pricing decisions
on deposits and a repositioning of the balance sheet to benefit from an
increasing interest rate environment.
NET INTEREST INCOME declined $10.0 million from 2002 to $13.8 million in 2003.
The net interest margin for 2003 was 2.72% compared to 3.20% for the previous
year. The 45 basis point decline in the net interest margin was largely due to a
101 basis point decrease in the yield on earning assets from 6.47% to
31.
5.46% which was partially offset by a 56 basis point decrease in the Company's
effective cost of funds. The major reasons for the reduction in net interest
income were a reduced level of earning assets due to the sale of the RFCBC
branches combined with declines in average loan balances due to the Company's
exit from out of market loans and interest income foregone on non-performing
loans. Contributing to the decline in the yield on average earning assets was
the higher liquidity level necessary to fund the cash transferred in the branch
sales.
LOAN LOSS PROVISION
THE PROVISION FOR LOAN LOSSES was $(0.4) million in 2004 compared to $1.2
million in 2003. The allowance for loan losses at December 31, 2004 was 1.85% of
loans compared to 3.58% at December 31, 2003. The decrease in the provision was
the result of the continued review and determination of the level of reserves
necessary to absorb probable losses in the loan portfolio. Non-performing loans
decreased to $14.4 million at December 31, 2004 versus $18.4 million at December
31, 2003. Further evidencing the loan quality, and therefore the lower loan loss
provision in 2004, was the significant reduction in classified assets of the
Company. Classified assets which are defined as substandard and doubtful loans,
decreased 50% from December 31, 2003 and totaled $25.6 million at December 31,
2004.
THE PROVISION FOR LOAN LOSSES was $1.2 million in 2003 compared to $27.5 million
in 2002. The allowance for loan losses at December 31, 2003 was 3.58% of loans
compared to 3.21% at December 31, 2002. The decrease in the provision was the
result of the continued review and determination of the level of reserves
necessary to absorb probable losses in the loan portfolio. Non-performing loans
decreased to $18.4 million at December 31, 2003 versus $18.7 million at December
31, 2002.
NON-INTEREST INCOME
Year Ended Year Ended
December 31, December 31,
------------ ------------
2004 2003 % Change 2003 2002 % Change
--------------------------------------------------------------------------
(dollars in thousands)
--------------------------------------------------------------------------
Total Non-interest Income $ 16,691 $ 34,687 -52% $ 34,687 $ 13,779 +152%
- Data Service Fees $ 10,478 $ 8,972 +17% $ 8,972 $ 7,816 +15%
- Trust Fees $ 3,042 $ 2,602 +17% $ 2,602 $ 2,468 +5%
- Deposit Service Fees $ 1,985 $ 2,179 -9% $ 2,179 $ 2,618 -17%
- Gains on Sale of Loans $ 41 $ 416 -90% $ 416 $ 759 -45%
- Gains on Sale of Branches $ - $ 19,901 N/A $ 19,901 - N/A
- Gains (losses) on Sale
of Securities $ 241 $ 24 N/A $ 24 $ (834) N/A
- Other $ 904 $ 593 +52% $ 593 $ 952 -38%
TOTAL NON-INTEREST INCOME decreased $18.0 million to $16.7 million in 2004 from
$34.7 million in 2003. The decrease is primarily the result of recording
approximately $20.0 million in net pre-tax gains from the branch sales in 2003.
Data service fees increased $1.5 million or 17% to $10.5 million in 2004
compared to $9.0 million in 2003 as a result of RDSI's continued expansion of
its customer base. Trust fees at Reliance increased $440,000 or 17% to $3.0
million in 2004 compared to $2.6 million in 2003 through development of
innovative wealth management products and customer sales efforts.
TOTAL NON-INTEREST INCOME increased $20.9 million to $34.7 million in 2003 from
$13.8 million in 2002. The increase is primarily the result of recording
approximately $20.0 million in net pre-tax gains from the branch sales. The
increase was also due to the sale of the Company's investment in WorldCom bonds
in the second quarter of 2002, which resulted in a $1.7 million pre-tax loss.
Data service fees increased $1.2
32.
million or 15% to $9.0 million in 2003 compared to $7.8 million in 2002 and
trust fees increased $134,000 or 5% to $2.6 million in 2003 compared to $2.5
million in 2002.
RURBANC DATA SERVICES, INC. ("RDSI")
Year Ended Year Ended
December 31, December 31,
------------ ------------
2004 2003 % Change 2003 2002 % Change
-----------------------------------------------------------------------
(Dollars in thousands)
-----------------------------------------------------------------------
Data Service Fees $10,478 $ 8,972 +17% $ 8,972 $ 7,816 +15%
DATA SERVICE FEES increased $1.5 million or 17% to $10.5 million in 2004 from
$9.0 million in 2003 and $1.2 million or 15% from 2002 to 2003. The increases in
2004 and 2003 were mainly driven by RDSI's entry into the item processing
market, additions of new bank clients and the result of customer account growth
at client banks.
RDSI PROVIDES data processing services for 54 community banks in Ohio, Michigan,
Indiana and Missouri. 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 95% of the time. RDSI provides 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. Equally important is the
organic growth of existing client banks, both in their number of customer
accounts and in the breadth of services provided. Network services, internet
banking, imaging, and other technical services are a rapidly growing part of
RDSI's revenue.
RELIANCE FINANCIAL SERVICES, N.A. ("RELIANCE")
TRUST FEES increased $440,000 or 17% to $3.0 million from $2.6 million in 2003.
The primary reason for this increase was the development of new innovative
wealth management products and customer sales efforts.
NON-INTEREST EXPENSE
Year Ended Year Ended
December 31, December 31,
------------ ------------
2004 2003 % Change 2003 2002 % Change
----------------------------------------------------------------------
(dollars in thousands)
----------------------------------------------------------------------
Total Non-interest Expense $25,324 $ 28,678 -12% $28,678 $ 30,479 -6%
- Salaries & Employee Benefits $12,993 $ 13,428 -3% $13,428 $ 15,720 -15%
- Professional Fees $ 2,253 $ 4,172 -46% $ 4,172 $ 3,130 +33%
- All Other $10,078 $ 11,078 -9% $11,078 $ 11,629 -5%
NON-INTEREST EXPENSE for the year 2004 was $25.3 million, down $3.4 million or
12% from $28.7 million in 2003. Professional fees decreased $1.9 million due to
a decreased level of consulting, legal and auditing fees associated with the
Company's problem loan workouts.
33.
NON-INTEREST EXPENSE for the year 2003 was $28.7 million, down $1.8 million or
6% from $30.5 million in 2002. Professional fees increased $1.0 million due to
increased consulting, legal and auditing fees associated with the Company's
problem loan workouts and the branch divestitures. Salaries and employee
benefits decreased $2.3 million due to the disposition of the branches and staff
reductions at most subsidiaries.
FINANCIAL CONDITION
LOANS
Period Ended
% of % of % % of %
12/31/04 Total 12/31/03 Total Inc/(Dec) 12/31/02 Total Inc/(Dec)
---------------------------------------------------------------------------
(dollars in thousands)
---------------------------------------------------------------------------
Commercial $ 58,499 22% $ 89,471 31% (35)% $123,053 25% (27)%
Commercial r.e. 64,107 24% 62,340 22% 3% 129,719 27% (52)%
Agricultural 41,240 16% 36,722 13% 12% 68,954 14% (47)%
Residential 63,828 24% 46,718 16% 37% 84,432 17% (45)%
Consumer 31,949 12% 37,310 13% (14)% 60,139 12% (38)%
Leases 5,127 2% 11,774 5% (56)% 21,509 5% (45)%
--------- -------- --------
Loans $ 264,750 $284,335 (7)% $487,806 (42)%
Loans held for sale 113 219 63,536
--------- -------- --------
Total $ 264,863 $284,554 $551,342
LOANS declined $20 million to $265 million at December 31, 2004, due to
restructuring the loan portfolio for quality and actively pursuing a strategy to
build on the Company's long held expertise in agricultural lending and lending
to small and mid-sized businesses in our market area.
In 2003, loans declined $267 million to $285 million at December 31, 2003, due
to the branch sales, the Company's effort to exit from out-of-market loans,
shrinking loan demand and $12 million of gross charged off loans. The increase
in loans held for sale in 2002 was due to a December 30, 2002 agreement to sell
the Citizens Savings Bank division of RFCBC. This transaction closed on March
28, 2003.
34.
ASSET QUALITY
Period Ended December 31,
(dollars in millions)
Change in Change in
Dollars/ Dollars/
12/31/04 12/31/03 percentages 12/31/02 percentages
-------- -------- ----------- -------- -----------
Non-performing loans $ 14.4 $ 18.4 $ -4.0 $ 18.7 $ -0.3
Non-performing assets $ 15.4 $ 19.9 $ -4.5 $ 20.8 $ -0.9
Non-performing assets/loans
plus OREO 5.80% 6.96% -1.16% 4.25% 2.71%
Non-performing assets/total
assets 3.71% 4.57% -0.86% 2.80% 1.77%
Net chargeoffs $ 4.9 $ 8.7 $ -3.8 $ 20.5 $ -11.8
Net chargeoffs/total loans 1.81% 3.06% -1.25% 4.20% -1.14%
Loan loss provision (credit) $ (.4) $ 1.2 $ -1.6 $ 27.5 $ -26.3
Allowance for loan losses $ 4.9 $ 10.2 $ -5.3 $ 17.7 $ 1.2
Allowance/loans 1.85% 3.58% -1.73% 3.21% 0.37%
Allowance/non-performing
loans 34% 55% -21% 95% -40%
Allowance/non-performing
assets 32% 51% -19% 85% -34%
ASSET QUALITY statistics reflect a decrease in both nonperforming assets and
chargeoffs during 2004 compared to 2003 and a decrease from 2003 compared to
2002. Non-performing assets at December 31, 2004 were $15.4 million or 3.71% of
total assets, versus $19.9 million or 4.57% at December 31, 2003 and $20.8
million or 2.80% at year-end 2002. Annual net chargeoffs for 2004 were $4.8
million or 1.81% of total loans compared to $8.7 million or 3.06% for 2003
resulting in the ratio of the allowance to non-performing loans to decrease to
34% at December 31, 2004 compared to 55% at December 31, 2003.
ALLOWANCE FOR LOAN LOSSES
The Company grades its loans using an eight grade system. Problem loans are
classified as either:
- Grade 5 - Special Mention: Potential weaknesses that deserve
management's close attention
- Grade 6 - Substandard: Inadequately protected, with well-defined
weakness that jeopardize liquidation of debt
- Grade 7 - Doubtful: Inherent weaknesses well-defined and high
probability of loss (impaired)
- Grade 8 - Loss: Considered uncollectible. May have recovery or
salvage value with future collection efforts (these
loans are either fully reserved or charged off)
The Company's ALLOWANCE FOR LOAN LOSSES has four components. Those components
are shown in the following table. Commercial, commercial real estate and
agricultural loans of over $100,000 are individually reviewed and assessed
regarding the need for an individual allocation.
35.
12/31/04 12/31/03 INCREASE (DECREASE)
--------------------- --------------------- -----------------------
ALLOCATION ALLOCATION ALLOCATION
LOAN ---------- LOAN ---------- LOAN ----------
BALANCE $ % BALANCE $ % BALANCE $ %
------------------------------------------------------------------------
Allocations for individual loans
graded doubtful (impaired) $ 11.4 $1.3 11.40% $ 19.7 $ 5.7 28.93% $ -8.3 $-4.4 -17.53%
Allocations for individual loans
graded substandard 15.5 1.0 6.45 33.4 2.5 7.49 -17.9 -1.5 -1.04
Allocations for individual loans
graded special mention* 13.6 0.4 2.94 21.0 0.6 2.86 -7.4 -0.2 0.08
"General" allowance based on
chargeoff history of nine
categories of loans 224.4 2.2 0.98 210.5 1.4 0.67 13.9 0.8 0.31
------- ---- ----- ------- ----- ----- ------- ----- ------
TOTAL $ 264.9 $4.9 1.85% $ 284.6 $10.2 3.58% $ -19.7 $-5.3 -1.73%
* The Company changed its methodology during 2003. Special Mention loans are now
allocated at 3%.
In 2004, the amount of loans classified as doubtful decreased $8.3 million to
$11.4 million and substandard loans decreased $17.9 million to $15.5 million.
Allowance allocations on doubtful loans decreased $4.4 million and allowance
allocations on substandard loans decreased $1.5 million. Non-performing loan
balances decreased $4.0 million compared to the prior year while the allowance
for loan losses decreased significantly due to total loans decreasing $20
million and the total of doubtful, substandard and special mention loans
declining $33.6 million. The allowance for loan losses at December 31, 2004 was
$4.9 million or 1.85% of loans compared to $10.2 million or 3.58% at December
31, 2003.
The Company's workout efforts continue to be successful as is apparent in the
reduction of problem loan balances in 2004. The amount of substandard loans has
declined by 54% from $33.4 million in 2003 to $15.5 in 2004 million reflective
of the results of the Company's workout efforts.
Management's estimate of the allowance for loan losses includes judgments
related to the following factors:
- - Borrower financial information received;
- - Physical inspections of collateral securing loans performed, new
appraisals of collateral securing loans received, and other information
regarding borrower collateral levels; and
- - Consideration of exposures to industries potentially most affected by
current risks in the economic and political environment.
- - See Critical Accounting Policies, starting on page 27.
The results of the Company's extensive, ongoing loan review and workout process
suggest that the volume of potential problem loans, nonperforming loans and
charge-offs were attributable to actions prior to mid-2002 such as entering
higher risk lines of business, ineffective oversight and a few lenders
neglecting basic lending fundamentals required by the Company's lending policies
and procedures.
In regard to the effort to reduce the volume of substandard and doubtful
(classified loans), the following actions were taken during the past year:
- Development of a loan subsidiary to manage the classified loans of
RFCBC to focus efforts on the workout of that group of loans
36.
- All classified loans are now assigned to loan workout specialists
unless there is a strong reason for an alternative assignment.
These actions were intended to assure that the loan workout effort can be
concluded within a one and one-half to three year period and that every effort
can be made to minimize losses and maximize associated recoveries.
CAPITAL RESOURCES
STOCKHOLDERS' EQUITY at December 31, 2004 was $50.3 million or 12.04% of average
total assets compared to $48.4 million or 8.81% of average total assets at
December 31, 2003. The Company and State Bank each exceeded the
"well-capitalized" regulatory capital benchmarks at December 31, 2004.
TOTAL CONSOLIDATED REGULATORY (RISK-BASED) CAPITAL was $61.9 million at December
31, 2004 and $59.2 million at December 31, 2003. The excess of total regulatory
capital over total shareholder equity is primarily due to the $10.0 million of
junior subordinated debentures (trust preferred securities) which qualify as
Tier 1 capital, and the Allowance for Loan Losses which qualifies as Tier 2
capital subject to certain limitations.
PLANNED PURCHASES OF PREMISES AND EQUIPMENT
MANAGEMENT PLANS TO PURCHASE additional premises and equipment to meet the
current and future needs of the Company's customers. These purchases, including
buildings and improvements and furniture and equipment (which includes computer
hardware, software, office furniture and license agreements), are currently
expected to total approximately $3.0 million over the next year.
WRITTEN AGREEMENT
On July 5, 2002, the Company and State Bank entered into a Written Agreement
("Agreement") with the Federal Reserve Bank of Cleveland and the Ohio Division
of Financial Institutions. The Agreement was the result of an examination of
State Bank as of December 31, 2001, which was conducted in March and April 2002.
A copy of the Agreement was attached as Exhibit 99(b) to the Form 8-K filed by
the Company on July 11, 2002 and is incorporated by reference as Exhibit 99(b)
to this Form 10-K.
As of December 2004, Management believes that the Company and State Bank were in
full compliance with the terms of the Agreement. However, the Agreement will
continue in place until the Federal Reserve Bank of Cleveland and the Ohio
Division of Financial Institutions determine that the Agreement may be
terminated. The Company believes that additional improvement in problem loans,
earnings and operations, as well as other items described in the Agreement, is
necessary before the Agreement may be terminated, and management cannot predict
when that may occur.
Under the terms of the Agreement, State Bank and RFCBC are prohibited from
paying dividends to the Company without prior regulatory approval. The Agreement
also prohibits the Company from paying trust preferred "dividends" and common
stock dividends without prior regulatory approval.
On February 18, 2005, the Company received notice from the Federal Reserve Bank
and the Ohio Department of Financial Institutions that approval was given
effective as of February 17, 2005 for release of the Written Agreement entered
into on July 5, 2002.
37.
LIQUIDITY
LIQUIDITY RELATES PRIMARILY to the Company's ability to fund loan demand, meet
deposit customers' withdrawal requirements and provide for operating expenses.
Assets used to satisfy these needs consist of cash and due from banks, federal
funds sold, interest earning deposits in other financial institutions,
securities available-for sale and loans held for sale. These assets are commonly
referred to as liquid assets. Liquid assets were $119.6 million at December 31,
2004 compared to $132.4 million at December 31, 2003. The Company views this
level of liquidity as appropriate.
THE COMPANY'S RESIDENTIAL FIRST MORTGAGE PORTFOLIO of $63.8 million at December
31, 2004 and 46.7 million at December 31, 2003, which can and has been readily
used to collateralize borrowings, is an additional source of liquidity.
Management believes the Company's current liquidity level, without these
borrowings, is sufficient to meet its liquidity needs. At December 31, 2004, all
eligible mortgage loans were pledged under an FHLB blanket lien.
THE CASH FLOW STATEMENTS for the periods presented provide an indication of the
Company's sources and uses of cash as well as an indication of the ability of
the Company to maintain an adequate level of liquidity. A discussion of the cash
flow statements for 2004, 2003 and 2002 follows.
THE COMPANY EXPERIENCED positive cash flows from operating activities in 2004,
2003 and 2002. Net cash from operating activities was $5.7 million, $5.6 million
and $15.2 million for the years ended December 31, 2004, 2003 and 2002,
respectively.
NET CASH FLOW FROM INVESTING ACTIVITIES was $1.2 million, $60.4 million and
$94.1 million for the years ended December 31, 2004, 2003 and 2002,
respectively. The changes in net cash from investing activities for 2004 include
a reduction in loan growth. The changes in net cash from investing activities
for 2003 include a reduction in loan growth and cash payments for the net
liabilities from the branch sales. The changes in net cash from investing
activities for 2002 include a reduction in loan growth and cash received for the
net liabilities from the Oakwood acquisition. In 2004, 2003 and 2002, the
Company received $23.1 million, $17.6 million and $81.9 million, respectively,
from sales of securities available for sale, while proceeds from repayments,
maturities and calls of securities were $62.5 million, $121.6 million and $53.9
million in 2004, 2003 and 2002, respectively.
NET CASH FLOW FROM FINANCING ACTIVITIES was $(20.4) million, $(92.8) million,
and $(83.6) million for the years ended December 31, 2004, 2003 and 2002,
respectively. The net cash decrease was primarily due to a reduction in total
deposits of $(37.9) million, $(87.8) million and $(66.6) million for the years
ended December 31, 2004, 2003 and 2002, respectively. Other significant changes
in 2004, 2003 and 2002 included $17.0 million, $(8.9) million and $(6.4) million
in net borrowings from the FHLB.
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 the Company, State Bank,
the Federal Reserve Bank of Cleveland and the Ohio Division of Financial
Institutions did require the Company and State Bank to obtain written approval
from the Federal Reserve Bank of Cleveland and the Ohio Division of Financial
Institutions prior to directly or indirectly incurring any debt with the
exception of federal funds and FHLB borrowings at State Bank. On February 18,
2005, the Company received notice from the Federal Reserve Bank and the Ohio
Department of Financial Institutions that approval was given effective as of
February 17, 2005 for release of the Written Agreement entered into on July 5,
2002.
38.
Approximately $55.2 million residential first mortgage loans of the Company's
$63.8 million portfolio qualify to collateralize FHLB borrowings and have been
pledged to meet FHLB collateralization requirements as of December 31, 2004. In
addition to residential first mortgage loans, $36.7 million in investment
securities are pledged to meet FHLB collateralization requirements. Based on the
current collateralization requirements of the FHLB, approximately $8.5 million
of additional borrowing capacity existed at December 31, 2004.
At December 31, 2004, the Company had unused federal funds lines. As of December
31, 2003, the Company had no unused federal funds lines. Federal funds borrowed
were $7.5 million at December 31, 2004 and $0 at December 31, 2003.
Approximately $8.7 million performing commercial loans are pledged to the
Federal Reserve Discount Window to establish additional borrowing capacity of
$5.3 million. Such loans are pledged for contingency funding purposes and to
date this borrowing capacity has not been used.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
PAYMENT DUE BY PERIOD
--------------------------------------------------------------------
LESS MORE
THAN 1 1 - 3 3 - 5 THAN 5
CONTRACTUAL OBLIGATIONS TOTAL YEAR YEARS YEARS YEARS
- ----------------------------------------- ------------ ------------ ----------- ---------- -----------
Long-Term Debt Obligations $ 56,000,000 $ 22,000,000 5,000,000 $6,000,000 $23,000,000
Other Debt Obligations 13,389,656 1,399,529 1,242,406 437,721 10,310,000
Capital Lease Obligations 0 0 0 0 0
Operating Lease Obligations 2,614,200 261,600 523,200 523,200 1,306,200
Purchase Obligations 0 0 0 0 0
Other Long-Term Liabilities Reflected on
the Registrant's Balance Sheet under GAAP 153,996,873 93,389,709 57,686,444 2,717,753 202,967
------------ ------------ ----------- ---------- -----------
Total $226,000,729 $117,050,838 $64,452,050 $9,678,674 $34,819,167
The Company's contractual obligations as of December 31, 2004 were evident in
long-term debt obligations, other debt obligations, operating lease obligations
and other long-tern liabilities. Long-term debt obligations are comprised of
FHLB Advances of $56.0 million. Other debt obligations are comprised of Trust
Preferred securities of $10.3 million and Notes Payable of $3.1 million. The
operating lease obligation is a lease on the RDSI-South building of $99,600 a
year and the RDSI-North building of $162,000 a year. Other long-term liabilities
are comprised of time deposits of $154.0 million.
ASSET LIABILITY MANAGEMENT
ASSET LIABILITY MANAGEMENT involves developing and monitoring strategies to
maintain sufficient liquidity, maximize net interest income and minimize the
impact that significant fluctuations in market interest rates would have on
earnings. The business of the Company and the composition of its balance sheet
consist of investments in interest-earning assets (primarily loans,
mortgage-backed securities, and securities available for sale) which are
primarily funded by interest-bearing liabilities (deposits and borrowings). With
the exception of specific loans which are originated and held for sale, all of
the financial instruments of the Company are for other than trading purposes.
All of the Company's transactions are denominated in U.S. dollars with no
specific foreign exchange exposure. In addition, the Company has limited
exposure to commodity prices related to agricultural loans. The impact of
changes in foreign exchange rates and commodity prices on interest rates are
assumed to be insignificant. The
39.
Company's financial instruments have varying levels of sensitivity to changes in
market interest rates resulting in market risk. Interest rate risk is the
Company's primary market risk exposure; to a lesser extent, liquidity risk also
impacts market risk exposure.
INTEREST RATE RISK is the exposure of a banking institution's financial
condition to adverse movements in interest rates. Accepting this risk can be an
important source of profitability and shareholder value; however, excessive
levels of interest rate risk could pose a significant threat to the Company's
earnings and capital base. Accordingly, effective risk management that maintains
interest rate risks at prudent levels is essential to the Company's safety and
soundness.
EVALUATING A FINANCIAL INSTITUTION'S EXPOSURE to changes in interest rates
includes assessing both the adequacy of the management process used to control
interest rate risk and the organization's quantitative level of exposure. When
assessing the interest rate risk management process, the Company seeks to ensure
that appropriate policies, procedures, management information systems, and
internal controls are in place to maintain interest rate risks at prudent levels
of consistency and continuity. Evaluating the quantitative level of interest
rate risk exposure requires the Company to assess the existing and potential
future effects of changes in interest rates on its consolidated financial
condition, including capital adequacy, earnings, liquidity, and asset quality
(when appropriate).
THE FEDERAL RESERVE BOARD together with the Office of the Comptroller of the
Currency and the Federal Deposit Insurance Company, adopted a Joint Agency
Policy Statement on interest rate risk effective June 26, 1996. The policy
statement provides guidance to examiners and bankers on sound practices for
managing interest rate risk, which will form the basis for ongoing evaluation of
the adequacy of interest rate risk management at supervised institutions. The
policy statement also outlines fundamental elements of sound management that
have been identified in prior Federal Reserve guidance and discusses the
importance of these elements in the context of managing interest rate risk.
Specifically, the guidance emphasizes the need for active board of director and
senior management oversight and a comprehensive risk management process that
effectively identifies, measures, and controls interest rate risk.
FINANCIAL INSTITUTIONS derive their income primarily from the excess of interest
collected over interest paid. The rates of interest an institution earns on its
assets and owes on its liabilities generally are established contractually for a
period of time. Since market interest rates change over time, an institution is
exposed to lower profit margins (or losses) if it cannot adapt to interest rate
changes. For example, assume that an institution's assets carry intermediate or
long term fixed rates and that those assets are funded with short-term
liabilities. If market interest rates rise by the time the short-term
liabilities must be refinanced, the increase in the institution's interest
expense on its liabilities may not be sufficiently offset if assets continue to
earn at the long-term fixed rates. Accordingly, an institution's profits could
decrease on existing assets because the institution will either have lower net
interest income or possibly, net interest expense. Similar risks exist when
assets are subject to contractual interest rate ceilings, or rate sensitive
assets are funded by longer-term, fixed-rate liabilities in a declining rate
environment.
THERE ARE SEVERAL WAYS an institution can manage interest rate risk including:
1) matching repricing periods for new assets and liabilities, for example, by
shortening terms of new loans or investments; 2) selling existing assets or
repaying certain liabilities; and 3) hedging existing assets, liabilities, or
anticipated transactions. An institution might also invest in more complex
financial instruments intended to hedge or otherwise change interest rate risk.
Interest rate swaps, futures contacts, options on futures contracts, and other
such derivative financial instruments can be used for this purpose. Because
these instruments are sensitive to interest rate changes, they require
management's expertise to be effective. The Company has not purchased derivative
financial instruments in the past and does not presently intend to purchase such
instruments.
40.
QUANTITATIVE MARKET RISK DISCLOSURE. The following table provides information
about the Company's financial instruments used for purposes other than trading
that are sensitive to changes in interest rates as of December 31, 2004. It does
not present when these items may actually reprice. For loans receivable,
securities, and liabilities with contractual maturities, the table presents
principal cash flows and related weighted-average interest rates by contractual
maturities as well as the historical impact of interest rate fluctuations on the
prepayment of loans and mortgage backed securities. For core deposits (demand
deposits, interest-bearing checking, savings, and money market deposits) that
have no contractual maturity, the table presents principal cash flows and,
applicable related weighted-average interest rates based upon the Company's
historical experience, management's judgment and statistical analysis, as
applicable, concerning their most likely withdrawal behaviors. The current
historical interest rates for core deposits have been assumed to apply for
future periods in this table as the actual interest rates that will need to be
paid to maintain these deposits are not currently known. Weighted average
variable rates are based upon contractual rates existing at the reporting date.
41.
PRINCIPAL/NOTIONAL AMOUNT MATURING OR ASSUMED TO BE WITHDRAWN IN:
(DOLLARS IN THOUSANDS)
2005 2006 2007 2008 2009 Thereafter Total
-------- -------- -------- -------- -------- ---------- --------
Rate-sensitive assets
Variable rate loans $ 33,537 $ 10,183 $ 6,105 $ 4,859 $ 2,409 $ 6,846 $ 63,938
Average interest rate 6.01% 5.70% 5.76% 5.81% 5.86% 6.00% 5.91%
Adjustable rate loans $ 31,377 $ 23,059 $ 15,897 $ 10,539 $ 8,293 $ 18,114 $107,279
Average interest rate 5.93% 5.95% 5.83% 5.82% 5.81% 5.72% 5.86%
Fixed rate loans $ 37,810 $ 16,655 $ 11,689 $ 6,475 $ 4,445 $ 16,573 $ 93,647
Average interest rate 4.40% 5.62% 5.00% 5.40% 4.97% 3.98% 4.71%
Total loans $102,724 $ 49,897 $ 33,691 $ 21,873 $ 15,147 $ 41,533 $264,864
Average interest rate 5.39% 5.79% 5.53% 5.69% 5.57% 5.07% 5.47%
Fixed rate investment securities $ 27,897 $ 4,415 $ 14,190 $ 8,219 $ 1,570 $ 35,221 $ 91,512
Average interest rate 4.08% 4.31% 4.98% 3.44% 4.06% 4.51% 4.34%
Variable rate investment securities $ 645 $ 666 $ 687 $ 709 $ 731 $ 16,563 $ 20,001
Average interest rate 3.10% 3.10% 3.11% 3.11% 3.12% 3.24% 3.22%
Federal Funds Sold & Other $ 0 $ 0 $ 150 $ 0 $ 0 $ 0 $ 150
Average interest rate 1.01% 0.00% 2.64% 0.00% 0.00% 0.00% 2.64%
Total rate sensitive assets $131,266 $ 54,978 $ 48,718 $ 30,801 $ 17,448 $ 93,317 $376,527
Average interest rate 5.10% 5.64% 5.33% 5.03% 5.33% 4.53% 5.07%
RATE SENSITIVE LIABILITIES:
Demand - non interest-bearing $ 7,429 $ 7,429 $ 7,429 $ 7,429 $ 8,116 $ 0 $ 37,832
Demand - interest bearing $ 7,728 $ 7,728 $ 7,728 $ 7,728 $ 7,651 $ 0 $ 38,563
Average interest rate 0.75% 0.75% 0.75% 0.75% 0.75% 0.00% 0.75%
Money market accounts $ 7,396 $ 7,396 $ 7,396 $ 7,396 $ 7,322 $ 0 $ 36,906
Average interest rate 0.55% 0.55% 0.55% 0.55% 0.55% 0.00% 0.55%
Savings $ 2,504 $ 2,406 $ 2,406 $ 2,406 $ 2,605 $ 0 $ 12,327
Average interest rate 0.15% 0.15% 0.15% 0.15% 0.15% 0.00% 0.15%
Certificates of deposit $ 93,170 $ 36,852 $ 21,106 $ 1,885 $ 835 $ 149 $153,997
Average interest rate 2.33% 2.87% 2.94% 3.03% 2.92% 1.36% 2.55%
Fixed rate FHLB advances $ 4,000 $ 5,000 $ 0 $ 5,000 $ 1,000 $ 23,000 $ 38,000
Average interest rate 2.44% 2.84% 0.00% 5.53% 4.52% 4.31% 4.08%
Variable rate FHLB advances $ 18,000 $ 0 $ 0 $ 0 $ 0 $ 0 $ 18,000
Average interest rate 2.42% 0.00% 0.00% 0.00% 0.00% 0.00% 2.42%
Fixed rate Notes Payable $ 0 $ 0 $ 0 $ 0 $ 1,080 $ 10,310 $ 11,390
Average interest rate 0.00% 0.00% 0.00% 0.00% 6.50% 10.60% 10.21%
Variable rate Notes Payable $ 1,200 $ 800 $ 0 $ 0 $ 0 $ 0 $ 2,000
Average interest rate 6.25% 6.25% 0.00% 0.00% 0.00% 0.00% 6.25%
Fed Funds Purchased & Repos $ 11,559 $ 0 $ 0 $ 0 $ 0 $ 0 $ 11,559
Average interest rate 1.56% 0.00% 0.00% 0.00% 0.00% 0.00% 1.56%
Total rate sensitive liabilities $152,986 $ 67,611 $ 46,065 $ 31,844 $ 28,609 $ 33,459 $360,574
Average interest rate 2.00% 2.00% 1.57% 1.37% 0.84% 6.23% 2.19%
42.
PRINCIPAL/NOTIONAL AMOUNT MATURING OR ASSUMED TO BE WITHDRAWN IN:
(DOLLARS IN THOUSANDS)
First Years
Year 2 - 5 Thereafter Total
----------- ------------ ----------- -----------
Comparison of 2004 to 2003:
Total rate-sensitive assets:
At December 31, 2004 $ 131,266 $ 151,944 $ 93,317 $ 376,527
At December 31, 2003 152,522 160,505 92,230 405,257
----------- ------------ ----------- -----------
Increase (decrease) $ (21,256) $ (8,561) $ 1,087 $ (28,730)
Total rate-sensitive liabilities:
At December 31, 2004 $ 152,986 $ 174,129 $ 33,459 $ 360,574
At December 31, 2003 168,024 177,733 34,970 380,727
----------- ------------ ----------- -----------
Increase (decrease) $ (15,038) $ (3,604) $ (1,511) $ (20,153)
THE ABOVE TABLE reflects expected maturities, not expected repricing. The
contractual maturities adjusted for anticipated prepayments and anticipated
renewals at current interest rates, as shown in the preceding table, are only
part of the Company's interest rate risk profile. Other important factors
include the ratio of rate-sensitive assets to rate sensitive liabilities (which
takes into consideration loan repricing frequency but not when deposits may be
repriced) and the general level and direction of market interest rates. For core
deposits, the repricing frequency is assumed to be longer than when such
deposits actually reprice. For some rate sensitive liabilities, their repricing
frequency is the same as their contractual maturity. For variable rate loans
receivable, repricing frequency can be daily or monthly. For adjustable rate
loans receivable, repricing can be as frequent as annually for loans whose
contractual maturities range from one to thirty years. While increasingly
aggressive local market competition in lending rates has pushed loan rates
lower; the Company's increased reliance on non-core funding sources had
restricted the Company's ability to reduce funding rates in concert with
declines in lending rates during 2002 and 2003. In 2004, maturities of non-core
funding sources positively impacted net interest income and the net interest
margin. Therefore, tax equivalent net interest income as a percentage of average
interest earning assets declined from 3.20% in 2002 to 2.72% in 2003 but
increased to 3.19% in 2004.
THE COMPANY MANAGES its interest rate risk by the employment of strategies to
assure that desired levels of both interest-earning assets and interest-bearing
liabilities mature or reprice with similar time frames. Such strategies include;
1) loans receivable which are renewed (and repriced) annually, 2) variable rate
loans, 3) certificates of deposit with terms from one month to six years, 4)
securities available for sale which mature at various times primarily from one
through ten years, 5) federal funds borrowings with terms of one day to 90 days,
and 6) Federal Home Loan Bank borrowings with terms of one day to ten years.
IMPACT OF INFLATION AND CHANGING PRICES
THE MAJORITY OF ASSETS AND LIABILITIES of the Company are monetary in nature and
therefore the Company differs greatly from most commercial and industrial
companies that have significant investments in fixed assets or inventories.
However, inflation does have an important impact on the growth of total assets
in the banking industry and the resulting need to increase equity capital at
higher than normal rates in order to maintain an appropriate equity to assets
ratio. Inflation significantly affects noninterest expense, which tends to rise
during periods of general inflation.
MANAGEMENT BELIEVES the most significant impact on financial results is the
Company's ability to react to changes in interest rates. Management seeks to
maintain an essentially balanced position between interest sensitive assets and
liabilities and actively manages the amount of securities available for sale in
order to protect against the effects of wide interest rate fluctuations on net
income and shareholders' equity.
43.
FORWARD-LOOKING STATEMENTS
WHEN USED IN THIS FILING and in future filings by the Company with the SEC, in
the Company's press releases or other public or shareholder communications, or
in oral statements made with the approval of an authorized executive officer,
the words or phases, "anticipate," "would be," "will allow," "intends to," "will
likely result," "are expected to," "will continue," "is anticipated,"
"estimated," "project," or similar expressions are intended to identify,
"forward looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to risks and
uncertainties, including but not limited to changes in economic conditions in
the Company's market area, changes in policies by regulatory agencies,
fluctuations in interest rates, demand for loans in the Company's market area,
and competition, all or some of which could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected.
THE COMPANY WISHES TO CAUTION readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and advise
readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investing activities, and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially form those
anticipated or projected.
THE COMPANY DOES NOT UNDERTAKE, and specifically disclaims any obligation, to
update any forward looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
44.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The disclosures required by this item appear in this Annual Report on Form
10-K under the caption "Asset Liability Management" contained in the
Management's Discussion and Analysis of Financial Condition and Results of
Operations section of this Annual Report on Form 10-K.
Item 8. Financial Statements and Supplementary Data.
The Consolidated Balance Sheets of the Company and its subsidiaries as of
December 31, 2004 and December 31, 2003, the related Consolidated Statements of
Income, Changes in Shareholders' Equity and Cash Flows for each of the years in
the three-year period ended December 31, 2004, the related Notes to Consolidated
Financial Statements and the Report of Independent Registered Public Accounting
Firm, appear on pages F-1 through F-41 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not Applicable.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
With the participation of the President and Chief Executive Officer (the
principal executive officer) and the Executive Vice President and Chief
Financial Officer (the principal financial officer) of the Company, the
Company's management evaluated the effectiveness of the Company's disclosure and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934, as amended (the "Exchange Act") as of the end of the period covered by
this Annual Report on Form 10-K. Based on that evaluation, the Company's
President and Chief Executive Officer and Executive Vice President and Chief
Financial Officer concluded that:
- information required to be disclosed by the Company in this
Annual Report on Form 10-K would be accumulated and
communicated to the Company's management, including its
principal executive officer and principal financial officer,
as appropriate to allow timely decisions regarding required
disclosures;
- information required to be disclosed by the Company in this
Annual Report on Form 10-K would be recorded, processed,
summarized and reported within the time periods specified in
the SEC's rules and forms; and
- the Company's disclosure controls and procedures are effective
as of the end of the period covered by this Annual Report on
Form 10-K to ensure that material information relating to the
Company and its consolidated subsidiaries is made known to
them, particularly during the period for which the Company's
periodic reports, including this Annual Report on Form 10-K,
are being prepared.
Changes in Internal Controls Over Financial Reporting
No changes were made in the Company's internal control over financial
reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred
during the Company's fiscal quarter ended December 31, 2004, that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
45.
Item 9B. Other Information
The following information is disclosed pursuant to Item 1.01 - Entry into
a Material Definitive Agreement of Form 8-K:
On February 16, 2005, the Company's Board of Directors, upon the
recommendation of the Compensation Committee of the Board of Directors, approved
an "At-Risk Compensation Plan" for fiscal 2005 (the "At-Risk Compensation
Plan"). The intent of the At-Risk Compensation Plan is to align the performance
and thinking of employees of the Company and its subsidiaries with the following
objectives of the Company: building a high financial performance organization;
growing the Company's business; ensuring sound operations, policies and
procedures; and building on the value proposition strength within each business
unit.
All employees of the Company and its subsidiaries employed prior to
October 1, 2005 are eligible to participate in the At-Risk Compensation Plan,
except temporary and seasonal employees, officers who receive sales commissions
that make up a significant portion of their compensation, and officers who have
contractual incentives (unless such officers elect to opt out of their existing
agreements with the approval of management). Employees who are employed by the
Company or one of its subsidiaries prior to October 1, 2005, but for less than
the full fiscal year, are eligible to participate in the At-Risk Compensation
Plan on a prorated basis. All of the Company's executive officers participate in
the At-Risk Compensation Plan. In order to receive an award under the At-Risk
Compensation Plan, a participant must be actively employed by the Company or one
of its subsidiaries and in good standing at the time awards are paid
(anticipated to be by the end of February 2006).
The amount of the bonuses awarded under the At-Risk Compensation Plan will
be equal to a percentage of the participant's base salary plus overtime
compensation received during fiscal 2005. Automobile allowances, commissions,
bonuses and other forms of compensation are not included in the calculation of a
participant's base salary. The percentage of base salary awarded is calculated
on sliding scale based on the participant's title, employer and the amount by
which the Company or the participant's business unit (as applicable) exceeded
its budget. The bonus range for the Company's executive officers is 10% to 22.5%
of base salary, except for the Company's Chief Executive Officer whose bonus
range is 15% to 27.5% of base salary.
Under the At-Risk Compensation Plan:
- All non-officer employees of the Company and its subsidiaries
and officers of RDSI will receive up to 100% of the maximum
bonus payout if the officer's business unit meets or exceeds
its fiscal 2005 budget and receives a rating of "satisfactory"
or better on regulatory examinations and significant audits;
- Officers of State Bank and officers of RFS will receive (a) up
to 80% of the maximum bonus payout if the officer's business
unit meets or exceeds its fiscal 2005 budget and receives a
rating of "satisfactory" or better on regulatory examinations
and significant audits and (b) up to 20% of the maximum bonus
payout if the Company meets or exceeds its fiscal 2005 budget;
- Business unit managers will receive (a) up to 50% of the
maximum bonus payout if the manager's business unit meets or
exceeds its fiscal 2005 budget and receives a rating of
"satisfactory" or better on regulatory examinations and
significant audits and (b) up to 50% of the maximum bonus
payout if the Company meets or exceeds its fiscal 2005 budget;
and
46.
- Officers of the Company (including the executive officers)
will receive bonuses only if the Company meets or exceeds is
fiscal 2005 budget and all business units receive a rating of
"satisfactory" or better on regulatory examinations and
significant audits.
The payment of bonuses under the At-Risk Compensation Plan to the
Company's executive officers and business unit managers is subject to the
discretion of the Compensation Committee of the Company's Board of Directors.
The payment of bonuses under the At-Risk Compensation Plan to all other eligible
participants is subject to the discretion of management.
PART III
Item 10. Directors and Executive Officers of the Registrant.
In accordance with General Instruction G(3), the information called for in
this Item 10 is incorporated herein by reference to the Company's definitive
Proxy Statement, filed with the SEC pursuant to Regulation 14A of the General
Rules and Regulations under the Exchange Act,relating to the Company's Annual
Meeting of Shareholders to be held on April 21, 2005 (the "2005 Proxy
Statement"), under the captions "ELECTION OF DIRECTORS" and "SECTION 16(a)
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE." In addition, certain information
concerning the executive officers of the Company called for in this Item 10 is
set forth at the end of Part I of this Annual Report on Form 10-K under the
caption "Executive Officers of the Registrant" in accordance with General
Instruction G(3).
In 2003, the Company implemented a Code of Conduct and Ethics that applies
to its principal executive officer, principal financial officer and principal
accounting officer. A copy of that policy can be found on the Company's website
at www.rurbanfinancial.net under the "Corporate Governance" tab.
Item 11. Executive Compensation.
In accordance with General Instruction G(3), the information called for in
this Item 11 is incorporated herein by reference to the information contained in
the Company's 2005 Proxy Statement under the captions "COMPENSATION OF EXECUTIVE
OFFICERS."
Item 12. Security Ownership of Certain Beneficial Owners and Management.
In accordance with General Instruction G(3), the information called for in
this Item 12 is incorporated herein by reference to the information contained in
the Company's 2005 Proxy Statement under the caption "SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
47.
Equity Compensation Plan Information
The following table provides information regarding certain equity
compensation plans of the Company:
(c)
(a) Number of securities remaining
Number of securities to be (b) available for future issuance
issued upon exercise of Weighted-average exercise under equity compensation
outstanding options, warrants price of outstanding options, plans (excluding securities
Plan Category and rights warrants and rights reflected in column (a))
- --------------------------------- ----------------------------- ----------------------------- ------------------------------
Equity compensation plans approved 339,227 $13.46 101,773
by security holders (1)
Equity compensation plans not N/A N/A N/A
approved by security holders (2)
Total 339,227 $13.46 101,773
(1) Information relates to the 1997 Rurban Financial Corp. Stock Option Plan.
(2) Information relates to the Rurban Financial Corp. Employee Stock Purchase
Plan (the "ESPP"). All employees of the Company and its subsidiaries are
eligible to participate in the ESPP subject to the completion of three (3)
months employment with the Company or one of its subsidiaries. Participants are
allowed to deduct from their compensation for each payroll period an amount to
be used to purchase common shares of the Company. These funds are forwarded to
Registrar and Transfer Company at the end of each payroll period and Registrar
and Transfer Company uses the funds to purchase common shares of the Company on
the open market for the participants. There is no limit as to the number of
shares to be purchased through the ESPP and as of December 31, 2004, there were
no accrued purchased rights. The ESPP was not approved by shareholders of the
Company.
Item 13. Certain Relationships and Related Transactions.
In accordance with General Instruction G(3), the information called for in
this Item 13 is incorporated herein by reference to the information contained in
the Company's 2005 Proxy under the caption "TRANSACTIONS INVOLVING MANAGEMENT."
48.
Item 14. Principal Accounting Fees
In accordance with General Instruction G(3), the information called for in
this Item 14 is incorporated herein by reference to the information contained in
the Company's 2005 Proxy under the caption "AUDIT COMMITTEE MATTERS" provided
that the "Report of the Audit Committee" included in the 2005 Proxy Statement
shall not be deemed to be incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) (1) Financial Statements.
For a list of all financial statements included in this Annual
Report on Form 10-K, see "Index to Financial Statements" at page 54.
(a) (2) Financial Statement Schedules.
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and, therefore, have
been omitted.
(a) (3) Exhibits.
Exhibits filed with this Annual Report on Form 10-K are attached hereto.
For a list of such exhibits, see "Index to Exhibits" at page 96. The
following table provides certain information concerning executive
compensation plans and arrangements required to be filed as exhibits to
this Annual Report on Form 10-K.
49.
Executive Compensation Plans and Arrangements
Exhibit No. Description Location
- ----------- ----------- --------
10(a) Executive Salary Continuation Agreement, Incorporated herein by reference to the
dated December 3, 2001, between Rurban Company's Annual Report on Form 10-K for the
Financial Corp. and Kenneth A. Joyce; and fiscal year ended December 31, 2002 (File No.
Amended Schedule A to Exhibit 10(s) 0-13507) [Exhibit 10(s)].
identifying other identical Executive Salary
Continuation Agreements between executive
officers of Rurban Financial Corp. and Rurban
Financial Corp.
10(b) Split-Dollar Dollar Insurance Agreement, Incorporated herein by reference to the
dated April 3, 2002, between Robert Constien Company's Annual Report on Form 10-K for the
and Rurban Financial Corp. fiscal year ended December 31, 2002 (File No.
0-13507) [Exhibit 10(t)].
10(c) Rurban Financial Corp. Stock Option Plan Incorporated herein by reference to the
Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 (File No.
0-13507) [Exhibit 10(u)].
10(d) Rurban Financial Corp. Plan to Allow Incorporated herein by reference to the
Directors to Elect to Defer Compensation Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 (File No.
0-13507) [Exhibit 10(v)].
10(e) Form of Non-Qualified Stock Option Agreement Incorporated herein by reference to the
with Five-Year Vesting under Rurban Financial Company's Annual Report on Form 10-K for the
Corp. Stock Option Plan fiscal year ended December 31, 1997 (File No
0-13507) [Exhibit 10(w)].
10(f) Form of Non-Qualified Stock Option Agreement Incorporated herein by reference to the
with Vesting After One Year of Employment Company's Current Report on Form 8-K filed
under Rurban Financial Corp. Stock Option March 21, 2005 (File No. 0-13507) [Exhibit
Plan 10(a)].
10(g) Form of Incentive Stock Option Agreement with Incorporated herein by reference to the
Five-Year Vesting under Rurban Financial Company's Annual Report on Form 10-K for the
Corp. Stock Option Plan fiscal year ended December 31, 1997 (File No.
0-13507 [Exhibit 10(x)].
50.
Exhibit No. Description Location
- ----------- ----------- --------
10(h) Form of Incentive Stock Option Incorporated herein by reference to
Agreement with Vesting After One the Company's Current Report on
Year of Employment under Rurban Form 8-K filed March 21, 2005
Financial Corp. Stock Option Plan (File No. 0-13507) [Exhibit 10(c)]
10(i) Form of Stock Appreciation Rights Incorporated herein by reference to
Agreement under Rurban Financial the Company's Current Report on
Corp. Stock Option Plan Form 8-K filed March 21, 2005
(File No. 0-13507) [Exhibit 10(b)]
10(j) Employees' Stock Ownership and Incorporated herein by reference to
Savings Plan of Rurban Financial the Company's Annual Report on
Corp. Form 10-K for the fiscal year
ended December 31, 1999 (File
No. 0-13507 [Exhibit 10(y)].
10(k) Rurban Financial Corp. Employee Incorporated herein by reference to
Stock Purchase Plan the Company's Annual Report on
Form 10-K for the fiscal year ended
December 31, 2002 (File No.
0-13507) [Exhibit 10(z)].
10(l) Change in Control Agreement, dated Incorporated herein by reference to
March 14, 2001, between Rurban the Company's Annual Report on
Financial Corp. and Kenneth A. Joyce; Form 10-K for fiscal year ended
and Schedule A to Exhibit 10(aa) December 31, 2003 (File No. 0-
identifying other substantially identical 13507) [Exhibit 10(aa)].
agreements between Rurban Financial
Corp. and certain executive officers of
Rurban Financial Corp.
10(m) Supplemental Severance Agreement, Incorporated herein by reference to
dated June 25, 2002, between Rurban the Company's Annual Report on
Financial Corp. and Robert W. Form 10-K for fiscal year ended
Constien; and Schedule A to Exhibit December 31, 2003 (File No. 0-
10(bb) identifying other substantially 13507) [Exhibit 10(bb)].
identical agreements between Rurban
Financial Corp. and certain executive
officers of Rurban Financial Corp.
51.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RURBAN FINANCIAL CORP.
/s/ James E. Adams
---------------------------------------
Date: March 28, 2005 By: James E. Adams, Executive Vice President,
Chief Financial Officer & Chief Accounting
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each undersigned officer and/or
director of Rurban Financial Corp., an Ohio Company which is about to file with
the Securities and Exchange Commission, Washington, D.C., under the provisions
of the Securities Exchange Act of 1934, as amended, the Annual Report on Form
10-K for the fiscal year ended December 31, 2004, hereby constitutes and
appoints Kenneth A. Joyce and James E. Adams as his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign both the Annual Report on Form 10-K and any and all
amendments and documents related thereto, and to file the same, and any and all
exhibits, financial statements and schedules related thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and substitute or substitutes,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them or his or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Name Date Capacity
/s/ Kenneth A. Joyce March 28, 2005 President, Chief Executive
- ---------------------------- Officer, Principal Executive
Kenneth A. Joyce Officer and Director
/s/ Thomas A. Buis March 28, 2005 Director
- ----------------------------
Thomas A. Buis
/s/ Thomas M. Callan March 28, 2005 Director
- ----------------------------
Thomas M. Callan
/s/ John R. Compo March 28, 2005 Director
- ----------------------------
John R. Compo
/s/ John Fahl March 28, 2005 Director
- ----------------------------
John Fahl
52.
/s/ Robert A. Fawcett, Jr. March 28, 2005 Director
- ----------------------------
Robert A. Fawcett, Jr.
/s/ Richard L. Hardgrove March 28, 2005 Director
- ----------------------------
Richard L. Hardgrove
/s/ Eric C. Hench March 28, 2005 Director
- ----------------------------
Eric C. Hench
/s/ Rita A. Kissner March 28, 2005 Director
- ----------------------------
Rita A. Kissner
/s/ Steven D. VanDemark March 28, 2005 Director
- ----------------------------
Steven D. VanDemark
/s/ J. Michael Walz, D.D.S. March 28, 2005 Director
- ----------------------------
J. Michael Walz, D.D.S.
53.
RURBAN FINANCIAL CORP.
DECEMBER 31, 2004 AND 2003
CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.................................... F-1
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets.......................................................................... F-2 to F-3
Statements of Income.................................................................... F-4 to F-5
Statements of Stockholders' Equity...................................................... F-6
Statements of Cash Flows................................................................ F-7 to F-8
Notes to Financial Statements........................................................... F-9 to F-41
54.
[BKD LLP LOGO]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Audit Committee, Board of Directors and Stockholders
Rurban Financial Corp.
Defiance, Ohio
We have audited the accompanying consolidated balance sheets of Rurban Financial
Corp. as of December 31, 2004 and 2003, and the related consolidated statements
of income, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Rurban Financial
Corp. as of December 31, 2004 and 2003, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
2004, in conformity with accounting principles generally accepted in the United
States of America.
BKD, LLP
Cincinnati, Ohio
February 11, 2005, except for Note 16 as to
which the date is February 18, 2005
F-1.
RURBAN FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
2004 2003
------------- -------------
ASSETS
Cash and due from banks $ 10,617,766 $ 14,176,952
Federal funds sold 0 10,000,000
------------- -------------
Cash and cash equivalents 10,617,766 24,176,952
------------- -------------
Interest-bearing deposits 150,000 260,000
Available-for-sale securities 108,720,491 107,698,595
Loans held for sale 112,900 218,753
Loans, net of unearned income 264,480,789 284,104,311
Allowance for loan losses (4,899,063) (10,181,135)
Premises and equipment 7,740,442 6,950,090
Federal Reserve and Federal Home Loan Bank stock 2,793,000 2,744,900
Foreclosed assets held for sale, net 720,000 1,390,552
Interest receivable 1,984,452 2,000,732
Deferred income taxes - 2,304,264
Goodwill 2,144,304 2,144,304
Core deposits and other intangibles 542,978 644,987
Purchased software 4,564,474 4,195,409
Cash value of life insurance 9,146,816 1,815,070
Other 6,529,397 4,844,088
------------- -------------
Total assets $ 415,348,746 $ 435,311,872
============= =============
See Notes to Consolidated Financial Statements
F-2
2004 2003
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Demand $ 37,831,810 $ 46,084,861
Savings, interest checking and money market 87,795,630 96,721,318
Time 153,996,874 174,668,570
------------- -------------
Total deposits 279,624,314 317,474,749
------------- -------------
Short-term borrowings 11,559,151 3,923,754
Notes payable 3,079,656 10,327,599
Federal Home Loan Bank advances 56,000,000 39,000,000
Trust preferred securities 10,310,000 10,000,000
Interest payable 994,114 2,347,303
Deferred income taxes 523,111 -
Other liabilities 2,952,605 3,855,711
------------- -------------
Total liabilities 365,042,951 386,929,116
------------- -------------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Common stock, $2.50 stated value; authorized 10,000,000 shares;
issued 4,575,702 shares; outstanding 2004 - 4,568,388 shares,
2003 - 4,565,879 shares 11,439,255 11,439,255
Additional paid-in capital 11,003,642 11,009,268
Retained earnings 28,943,736 26,209,444
Unearned employee stock ownership plan (ESOP) shares - (163,493)
Accumulated other comprehensive income (loss) (803,189) 201,082
Treasury stock, at cost
Common; 2004 - 7,314 shares, 2003 - 9,823 shares (277,649) (312,800)
------------- -------------
Total stockholders' equity 50,305,795 48,382,756
------------- -------------
Total liabilities and stockholders' equity $ 415,348,746 $ 435,311,872
============= =============
See Notes to Consolidated Financial Statements
F-3
RURBAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31
2004 2003 2002
------------ ----------- ------------
INTEREST INCOME
Loans
Taxable $ 16,151,220 $24,305,358 $ 43,126,585
Tax-exempt 65,711 89,356 168,188
Securities
Taxable 3,567,819 2,805,614 4,781,105
Tax-exempt 164,541 172,063 219,713
Other 78,549 401,459 295,053
------------ ----------- ------------
Total interest income 20,027,840 27,773,850 48,590,644
------------ ----------- ------------
INTEREST EXPENSE
Deposits 4,554,093 10,024,718 20,300,799
Notes payable 386,450 596,418 247,171
Federal funds purchased 13,896 - 267,344
Federal Home Loan Bank advances 1,877,284 2,276,439 2,923,090
Trust preferred securities 1,118,751 1,074,722 1,074,577
------------ ----------- ------------
Total interest expense 7,950,474 13,972,297 24,812,981
------------ ----------- ------------
NET INTEREST INCOME 12,077,366 13,801,553 23,777,663
PROVISION (CREDIT) FOR LOAN LOSSES (399,483) 1,202,000 27,530,583
------------ ----------- ------------
NET INTEREST INCOME AFTER PROVISION (CREDIT) FOR
LOAN LOSSES 12,476,849 12,599,553 (3,752,920)
------------ ----------- ------------
NON-INTEREST INCOME
Data service fees 10,478,245 8,971,632 7,815,589
Trust fees 3,042,297 2,602,270 2,468,159
Customer service fees 1,985,389 2,179,036 2,617,708
Net gains on loan sales 40,603 415,851 758,663
Net realized gains (losses) on sales of
available-for-sale securities 241,008 23,632 (833,515)
Loan servicing fees 367,753 394,647 402,143
Gain on sale of branches - 19,900,945 -
Other 535,336 199,343 550,521
------------ ----------- ------------
Total non-interest income 16,690,631 34,687,356 13,779,268
------------ ----------- ------------
See Notes to Consolidated Financial Statements
F-4
2004 2003 2002
----------- ----------- ------------
NON-INTEREST EXPENSE
Salaries and employee benefits $12,993,449 $13,428,366 $ 15,719,892
Net occupancy expense 981,700 1,183,569 1,349,537
Equipment expense 4,336,573 4,201,260 3,960,712
Data processing fees 371,153 435,700 492,534
Professional fees 2,252,677 4,171,758 3,129,592
Marketing expense 339,968 397,137 487,754
Printing and office supplies 423,030 472,193 755,814
Telephone and communications 637,528 716,227 792,168
Postage and delivery expense 347,494 540,339 625,173
Insurance expense 292,418 568,946 324,530
Employee expense 796,556 951,997 1,221,891
State, local and other taxes 591,142 617,036 780,515
Other 960,643 993,807 838,608
----------- ----------- ------------
Total non-interest expense 25,324,331 28,678,335 30,478,720
----------- ----------- ------------
INCOME BEFORE INCOME TAX 3,843,149 18,608,574 (20,452,372)
PROVISION (CREDIT) FOR INCOME TAXES 1,108,857 6,303,342 (7,044,488)
----------- ----------- ------------
NET INCOME (LOSS) $ 2,734,292 $12,305,232 $(13,407,884)
=========== =========== ============
BASIC EARNINGS (LOSS) PER SHARE $ 0.60 $ 2.71 $ (2.95)
=========== =========== ============
DILUTED EARNINGS (LOSS) PER SHARE $ 0.60 $ 2.70 $ (2.95)
=========== =========== ============
See Notes to Consolidated Financial Statements
F-5
RURBAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31
ACCUMULATED
ADDITIONAL UNEARNED OTHER
COMMON PAID-IN RETAINED ESOP COMPREHENSIVE TREASURY
STOCK CAPITAL EARNINGS SHARES INCOME (LOSS) STOCK TOTAL
---------- ----------- ----------- --------- ------------- --------- -----------
BALANCE, JANUARY 1, 2002 11,439,255 $11,013,284 $28,499,026 $(512,146) $ 721,851 $(331,938) $50,829,332
Comprehensive income
Net loss (13,407,884) (13,407,884)
Change in unrealized
gain (loss) on
securities
available for
sale, net of
reclassification
adjustment and tax
effect (56,940) (56,940)
-----------
Total comprehensive
income (13,464,824)
-----------
Dividends on common
stock, $0.26 per
share (1,186,930) (1,186,930)
Stock options
exercised (1,208
treasury shares) (3,551) 16,924 13,373
ESOP shares earned 191,381 191,381
---------- ----------- ----------- --------- ------------- --------- -----------
BALANCE, DECEMBER 31,
2002 11,439,255 11,009,733 13,904,212 (320,765) 664,911 (315,014) 36,382,332
Comprehensive income
Net income 12,305,232 12,305,232
Change in unrealized
gain (loss) on
securities
available for
sale, net of
reclassification
adjustment and tax
effect (463,829) (463,829)
-----------
Total comprehensive
income 11,841,403
-----------
Stock options
exercised (158
treasury shares) (465) 2,214 1,749
ESOP shares earned 157,272 157,272
---------- ----------- ----------- --------- ------------- --------- -----------
BALANCE, DECEMBER 31,
2003 11,439,255 11,009,268 26,209,444 (163,493) 201,082 (312,800) 48,382,756
Comprehensive income
Net income 2,734,292 2,734,292
Change in unrealized
gain (loss) on
securities
available for
sale, net of
reclassification
adjustment and tax
effect (1,004,271) (1,004,271)
-----------
Total-comprehensive
income 1,730,021
-----------
Stock options
exercised (2,509
treasury shares) (5,626) 35,151 29,525
ESOP shares earned 163,493 163,493
---------- ----------- ----------- --------- ------------- --------- -----------
BALANCE, DECEMBER 31,
2004 11,439,255 $11,003,642 $28,943,736 $ - $ (803,189) $(277,649) $50,305,795
========== =========== =========== ========= ============= ========= ===========
See Notes to Consolidated Financial Statements
F-6
RURBAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
2004 2003 2002
------------ ------------- -------------
OPERATING ACTIVITIES
Net income (loss) $ 2,734,292 $ 12,305,232 $ (13,407,884)
Items not requiring (providing) cash
Depreciation and amortization 2,492,661 2,310,122 2,277,322
Provision (credit) for loan losses (399,483) 1,202,000 27,530,583
ESOP shares earned 163,493 157,272 191,381
Amortization of premiums and discounts on
securities 469,148 1,049,838 1,963,325
Amortization of intangible assets 102,009 125,790 138,284
Deferred income taxes 3,344,719 3,083,200 (1,334,489)
Proceeds from sale of loans held for sale 5,709,084 39,124,752 37,748,464
Originations of loans held for sale (5,562,628) (38,927,654) (36,549,810)
FHLB Stock Dividends (93,400) (120,400) (141,100)
Gain from sale of loans (40,603) (415,851) (758,663)
Gain on sale of branches - (19,900,945) -
(Gain) loss on sale of foreclosed assets (33,758) 248,951 -
Gain on sales of fixed assets - (79,084) -
Net realized (gains) losses on
available-for-sale securities (241,008) (23,632) 833,515
Changes in
Interest receivable 16,280 1,965,989 1,674,277
Other assets (707,055) 3,218,909 (6,050,115)
Interest payable and other liabilities (2,256,287) 237,820 1,060,233
------------ ------------- -------------
Net cash provided by operating
activities 5,697,464 5,562,309 15,175,323
------------ ------------- -------------
INVESTING ACTIVITIES
Net change in interest-bearing deposits 110,000 - -
Purchases of available-for-sale securities (88,396,063) (133,540,054) (134,355,439)
Proceeds from maturities of
available-for-sale securities 62,537,668 121,586,538 53,890,402
Proceeds from sales of available-for-sale
securities 23,086,736 17,634,708 81,916,528
Net change in loans 13,852,870 127,071,877 59,829,614
Purchase of premises and equipment (3,652,078) (2,851,908) (6,910,438)
Proceeds from sales of premises and equipment - 1,561,574 -
Purchase bank owned life insurance (8,000,000) - -
Proceeds from sale of foreclosed assets 1,592,373 2,577,604 -
Purchase of Federal Home Loan and Federal
Reserve Bank stock (383,300) - (291,900)
Proceeds from sale of Federal Home Loan Bank
stock 428,600 1,041,400 -
Proceeds from assumption of net liabilities
in business acquisition - - 40,069,328
Payments for assumption of liabilities in
branch sales - (74,680,022) -
------------ ------------- -------------
Net cash provided by investing
activities 1,176,806 60,401,717 94,148,095
------------ ------------- -------------
See Notes to Consolidated Financial Statements
F-7
2004 2003 2002
------------ ------------- ------------
FINANCING ACTIVITIES
Net increase (decrease) in demand deposits,
money market, interest checking and
savings accounts $(17,178,739) $ 33,380,843 $(43,508,229)
Net increase (decrease) in certificates of
deposit (20,671,696) (121,226,188) (23,096,882)
Net increase in securities sold under
agreements to repurchase 135,397 3,923,754 -
Net increase (decrease) in federal funds
purchased 7,500,000 - (14,850,000)
Proceeds from Federal Home Loan Bank advances 66,500,000 10,000,000 5,000,000
Repayment of Federal Home Loan Bank advances (49,500,000) (18,850,000) (11,425,069)
Proceeds from notes payable 1,219,863 10,097,881 6,000,000
Repayment of notes payable (8,467,806) (10,133,450) -
Proceeds from stock options exercised 29,525 1,749 13,373
Dividends paid - - (1,780,317)
------------ ------------- ------------
Net cash used in financing activities (20,433,456) (92,805,411) (83,647,124)
------------ ------------- ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (13,559,186) (26,841,385) 25,676,294
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 24,176,952 51,018,337 25,342,043
------------ ------------- ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 10,617,766 $ 24,176,952 $ 51,018,337
============ ============= ============
SUPPLEMENTAL CASH FLOWS INFORMATION
Interest paid $ 9,303,363 $ 14,596,442 $ 25,472,126
Income taxes paid (net of refunds) $ (717,666) $ (1,602,512) $ -
Note payable in lieu of cash as
consideration in branch sale $ - $ 4,363,168 $ -
Transfer of loans to foreclosed assets $ 888,063 $ 2,256,831 $ -
See Notes to Consolidated Financial Statements
F-8
RURBAN FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Rurban Financial Corp. ("Company") is a bank holding company whose
principal activity is the ownership and management of its
wholly-owned subsidiaries, The State Bank and Trust Company ("State
Bank"), RFCBC, Inc. ("RFCBC"), Rurbanc Data Services, Inc. ("RDSI"),
and Rurban Statutory Trust 1 ("RST"). State Bank owns all of the
outstanding stock of Reliance Financial Services, N.A. ("RFS") and
Rurban Mortgage Company ("RMC"). State Bank is primarily engaged in
providing a full range of banking and financial services to
individual and corporate customers in northern Ohio. State Bank is
subject to competition from other financial institutions. State Bank
is regulated by certain federal and state agencies and undergoes
periodic examinations by those regulatory authorities. RFCBC was
primarily engaged in providing a full range of banking and financial
services until September 2003, at which time banking powers were
relinquished. RFCBC now operates as a loan subsidiary that continues
to administer classified loans that were not included in the sale of
branches in 2003. RDSI provides data processing services to
financial institutions located in Ohio, Michigan, Indiana, and
Missouri. Rurban Life provided credit life and disability insurance
to customers. Rurban Life was liquidated in 2004. RFS offers a
diversified array of trust and financial services to customers
nationwide. RST is a trust which was organized in 2000 to manage the
Company's trust preferred securities.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company, State Bank, RFCBC, RDSI, RST, RFS and RMC. All significant
intercompany accounts and transactions have been eliminated in
consolidation. In December 2003, FASB issued a revision to FIN 46 to
clarify certain provisions that affected the accounting for trust
preferred securities. As a result of the revisions to FIN 46, RST
was deconsolidated as of March 31, 2004, with the Company accounting
for its investment in RST as assets, its subordinated debentures as
debt, and the interest paid thereon as interest expense. The Company
had previously classified the trust preferred securities as debt,
but eliminated its common stock investment as a result of the
revisions to FIN 46.
USE OF ESTIMATES
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for loan losses
(and the valuation of real estate acquired in connection with
foreclosures or in satisfaction of loans). In connection with the
determination of the allowance for loan losses (and the valuation of
foreclosed assets held for sale), management obtains independent
appraisals for significant properties.
See Notes to Consolidated Financial Statements
F-9
RURBAN FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
CASH EQUIVALENTS
The Company considers all liquid investments with original
maturities of three months or less to be cash equivalents except for
short-term U.S. Treasury securities which are classified as
available-for-sale securities.
SECURITIES
Available-for-sale securities, which include any security for which
the Company has no immediate plan to sell but which may be sold in
the future, are carried at fair value. Unrealized gains and losses
are recorded, net of related income tax effects, in other
comprehensive income.
Held-to-maturity securities, which include any security for which
the Company has the positive intent and ability to hold until
maturity, are carried at historical cost adjusted for amortization
of premiums and accretion of discounts.
Amortization of premiums and accretion of discounts are recorded as
interest income from securities. Realized gains and losses are
recorded as net security gains (losses). Gains and losses on sales
of securities are determined on the specific-identification method.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans originated and intended for sale in the secondary
market are carried at the lower of cost or fair value in the
aggregate. Net unrealized losses, if any, are recognized through a
valuation allowance by charges to income.
LOANS
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoffs are reported at
their outstanding principal balances adjusted for any charge-offs,
the allowance for loan losses, any deferred fees or costs on
originated loans and unamortized premiums or discounts on purchased
loans. Interest income is reported on the interest method and
includes amortization of net deferred loan fees and costs over the
loan term. Generally, loans are placed on non-accrual status not
later than 90 days past due, unless the loan is well-secured and in
the process of collection.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established as losses are estimated
to have occurred through a provision for loan losses charged to
income. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is
probable. Subsequent recoveries, if any, are credited to the
allowance.
See Notes to Consolidated Financial Statements
F-10
RURBAN FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the
collectibility of the loans in light of historical experience, the
nature and volume of the loan portfolio, adverse situations that may
affect the borrower's ability to repay, estimated value of any
underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that
are susceptible to significant revision as new information becomes
available.
A loan is considered impaired when, based on current information and
events, it is probable that the Company will be unable to collect
the scheduled payments of principal or interest when due according
to the contractual terms of the loan agreement. Factors considered
by management in determining impairment include payment status,
collateral value and the probability of collecting scheduled
principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are
not classified as impaired. Management determines the significance
of payment delays and payment shortfalls on a case-by-case basis,
taking into consideration each of the circumstances surrounding the
loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower's prior payment record and the
amount of the shortfall in relation to the principal and interest
owed. Impairment is measured on a loan-by-loan basis for commercial,
agricultural, and construction loans by either the present value of
expected future cash flows discounted at the loan's effective
interest rate, the loan's obtainable market price or the fair value
of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogenous loans are collectively
evaluated for impairment. Accordingly, the Bank does not separately
identify individual consumer and residential loans for impairment
measurements.
PREMISES AND EQUIPMENT
Depreciable assets are stated at cost less accumulated depreciation.
Depreciation is charged to expense using the straight-line method
for buildings and the declining balance method for equipment over
the estimated useful lives of the assets.
FEDERAL RESERVE AND FEDERAL HOME LOAN BANK STOCK
Federal Reserve and Federal Home Loan Bank stock are required
investments for institutions that are members of the Federal Reserve
and Federal Home Loan Bank systems. The required investment in the
common stock is based on a predetermined formula.
FORECLOSED ASSETS HELD FOR SALE
Assets acquired through, or in lieu of, loan foreclosure are held
for sale and are initially recorded at fair value at the date of
foreclosure, establishing a new cost basis. Subsequent to
foreclosure, valuations are periodically performed by management and
the assets are carried at the lower of carrying amount or fair value
less cost to sell. Revenue and expenses from operations related to
foreclosed assets and changes in the valuation allowance are
included in net income or expense from foreclosed assets.
See Notes to Consolidated Financial Statements
F-11
RURBAN FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
GOODWILL
Goodwill is tested for impairment annually. If the implied fair value of
goodwill is lower than its carrying amount, goodwill impairment is
indicated and goodwill is written down to its implied fair value.
Subsequent increases in goodwill value, if any, are not recognized in the
financial statements.
INTANGIBLE ASSETS
Intangible assets are being amortized on an accelerated basis over
weighted-average periods ranging from one to seven years. Such assets are
periodically evaluated as to the recoverability of their carrying value.
Purchased software is being amortized using the straight-line method over
periods ranging from one to three years.
TREASURY STOCK
Treasury stock is stated at cost. Cost is determined by the first-in,
first-out method.
STOCK OPTIONS
At December 31, 2004, the Company has a stock-based employee compensation
plan, which is described more fully in Note 19. The Company accounts for
this plan under the recognition and measurement principles of APB Opinion
No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. No stock-based employee compensation cost is reflected in
net income, as all options granted under those plans had an exercise price
equal to the market value of the underlying common stock on the grant
date. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value provisions of
FASB Statement No. 123, Accounting for Stock-Based Compensation, to
stock-based employee compensation.
In December 2004, FASB issued a revision to Statement No. 123. Statement
No. 123(R), "Share-Based Payment," will provide investors and other users
of financial statements with more complete and neutral financial
information by requiring that the compensation cost relating share-based
payment transactions be recognized in the financial statements. The
Company intends to apply the revised Statement in the quarterly financials
in the third quarter of 2005. The impact of applying the new Statement has
not yet been determined.
See Notes to Consolidated Financial Statements
F-12
RURBAN FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
2004 2003 2002
-------------- ------------- --------------
Net income (loss), as reported $ 2,734,292 $ 12,305,232 $ (13,407,884)
Less: Total stock-based employee
compensation cost determined under
the fair value based method, net of
income taxes (196,730) (63,108) (78,974)
------------- ------------ --------------
Pro forma net income $ 2,537,562 $ 12,242,124 $ (13,486,858)
============= ============ ==============
Earnings per share:
Basic - as reported $ 0.60 $ 2.71 $ (2.95)
============= ============ ==============
Basic - pro forma $ 0.56 $ 2.69 $ (2.97)
============= ============ ==============
Diluted - as reported $ 0.60 $ 2.70 $ (2.95)
============= ============ ==============
Diluted - pro forma $ 0.56 $ 2.69 $ (2.97)
============= ============ ==============
INCOME TAXES
Deferred tax assets and liabilities are recognized for the tax effects of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax
assets if it is more likely than not that a deferred tax asset will not be
realized. The Company files consolidated income tax returns with its
subsidiaries.
EARNINGS AND DIVIDENDS PER SHARE
Earnings per share have been computed based upon the weighted-average
common shares outstanding during each year. Unearned ESOP shares which
have not vested have been excluded from the computation of average shares
outstanding.
RECLASSIFICATIONS
Certain reclassifications have been made to the 2003 and 2002 financial
statements to conform to the 2004 financial statement presentation. These
reclassifications had no effect on net income.
NOTE 2: RESTRICTION ON CASH AND DUE FROM BANKS
The Banks are required to maintain reserve funds in cash and/or on deposit
with the Federal Reserve Bank. The reserve required at December 31, 2004,
was $5,309,000.
See Notes to Consolidated Financial Statements
F-13
RURBAN FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 3: SECURITIES
The amortized cost and approximate fair values of securities were as
follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAINS LOSSES FAIR VALUE
-------------- -------------- --------------- --------------
AVAILABLE-FOR-SALE SECURITIES:
December 31, 2004:
U.S. Treasury and
government agencies $ 64,483,532 $ 2,848 $ (838,900) $ 63,647,481
Mortgage-backed
securities 40,703,975 64,949 (452,420) 40,316,504
State and political
subdivision 4,691,938 97,459 (90,890) 4,698,506
Equity securities 8,000 -- -- 8,000
Other securities 50,000 -- -- 50,000
-------------- -------------- --------------- --------------
$ 109,937,445 $ 165,256 $ (1,382,210) $ 108,720,491
============== ============== =============== ==============
December 31, 2003:
U.S. Treasury and
government agencies $ 43,867,812 $ 63,023 $ (11,746) $ 43,919,089
Mortgage-backed
securities 59,237,791 339,412 (317,253) 59,259,950
State and political
subdivision 4,202,856 232,199 (965) 4,434,090
Equity securities 35,466 -- -- 35,466
Other securities 50,000 -- -- 50,000
-------------- -------------- --------------- --------------
$ 107,393,925 $ 634,634 $ (329,964) $ 107,698,595
============== ============== =============== ==============
The amortized cost and fair value of securities available for sale at December
31, 2004, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because issuers may have the right to call or
prepay obligations with or without call or prepayment penalties.
See Notes to Consolidated Financial Statements
F-14
RURBAN FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
AVAILABLE FOR SALE
AMORTIZED FAIR
COST VALUE
---------------- ----------------
Within one year $ 15,047,876 $ 14,788,440
One to five years 6,806,732 6,821,467
Five to ten years 44,711,178 44,167,317
After ten years 2,667,687 2,626,763
---------------- ----------------
Mortgage-backed securities 40,703,975 40,316,504
---------------- ----------------
Totals $ 109,937,445 $ 108,720,491
================ ================
The carrying value of securities pledged as collateral, to secure public
deposits and for other purposes, was $79,517,341 at December 31, 2004, and
$71,606,721 at December 31, 2003.
Gross gains of $251,846, $42,051 and $1,117,251 and gross losses of $10,838,
$18,419 and $1,950,766 resulting from sales of available-for-sale securities
were realized for 2004, 2003 and 2002, respectively. The tax expense for net
security gains (losses) for 2004, 2003 and 2002 was $82,000, $8,000 and
$(283,000), respectively.
Certain investments in debt securities are reported in the financial statements
at an amount less than their historical cost. Total fair value of these
investments at December 31, 2004, was $93,092,272, which is approximately 86% of
the Company's available-for-sale investment portfolio. These declines primarily
resulted from recent increases in market interest rates.
Based on evaluation of available evidence, including recent changes in market
interest rates, credit rating information and information obtained from
regulatory filings, management believes the declines in fair value for these
securities are temporary.
Should the impairment of any of these securities become other than temporary,
the cost basis of the investment will be reduced and the resulting loss
recognized in net income in the period the other-than-temporary impairment is
identified.
See Notes to Consolidated Financial Statements
F-15
RURBAN FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
Securities with unrealized losses at December 31, 2004 are as follows:
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
--------------------------- -------------------------- --------------------------
UNREALIZED UNREALIZED UNREALIZED
FAIR VALUE LOSSES FAIR VALUE LOSSES FAIR VALUE LOSSES
------------- ----------- ------------ ----------- ------------ -----------
AVAILABLE-FOR-SALE
SECURITIES:
U.S. Treasury
and
government
agencies $ 56,657,342 $ (838,900) $ 0 $ 0 $ 56,657,342 $ (838,900)
Mortgage-backed
securities 22,520,674 (239,195) 11,950,258 (213,225) 34,470,932 (452,420)
State and
political
subdivisions 1,963,998 (90,890) 0 0 1,963,998 (90,890)
------------- ----------- ------------ ----------- ------------ -----------
$ 81,142,014 $(1,168,985) $ 11,950,258 $ (213,225) $ 93,092,272 $(1,382,210)
============= =========== ============ =========== ============ ===========
Securities with unrealized losses at December 31, 2003 are as follows:
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
--------------------------- -------------------------- --------------------------
UNREALIZED UNREALIZED UNREALIZED
FAIR VALUE LOSSES FAIR VALUE LOSSES FAIR VALUE LOSSES
------------- ----------- ------------ ----------- ------------ -----------
AVAILABLE-FOR-SALE
SECURITIES:
U.S. Treasury
and
government
agencies $ 3,370,349 $ (11,746) $ 0 $ 0 $ 3,370,349 $ (11,746)
Mortgage-backed
securities 33,512,674 (299,388) 1,726,820 (17,865) 35,239,494 (317,253)
State and
political
subdivisions 118,493 (965) 0 0 118,493 (965)
------------- ----------- ------------ ----------- ------------ -----------
$ 37,001,516 $ (312,099) $ 1,726,820 $ (17,865) $ 38,728,336 $ (329,964)
============= =========== =========== =========== ============ ===========
See Notes to Consolidated Financial Statements
F-16
RURBAN FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 4: LOANS AND ALLOWANCE FOR LOAN LOSSES
Categories of loans at December 31, include:
2004 2003
---------------- ----------------
Commercial $ 58,498,557 $ 89,470,661
Commercial real estate 64,107,549 62,339,628
Agricultural 41,239,895 36,721,822
Residential real estate 63,828,237 46,717,917
Consumer 31,948,581 37,309,999
Leasing 5,127,639 11,774,730
---------------- ----------------
Total loans 264,750,458 284,334,757
Less
Net deferred loan fees, premiums and discounts (269,669) (230,446)
---------------- ----------------
Loans, net of unearned income $ 264,480,789 $ 284,104,311
================ ================
Allowance for loan losses $ (4,899,063) $ (10,181,135)
================ ================
Activity in the allowance for loan losses was as follows:
2004 2003 2002
-------------- -------------- --------------
Balance, beginning of year $ 10,181,135 $ 17,693,841 $ 9,238,936
Amounts assumed in acquisition -- -- 1,427,000
Provision (credit) charged (credited) to
expense (399,483) 1,202,000 27,530,583
Recoveries 2,106,470 3,139,534 1,270,773
Losses charged off (6,989,059) (11,854,240) (21,773,451)
-------------- -------------- --------------
Balance, end of year $ 4,899,063 $ 10,181,135 $ 17,693,841
============== ============== ==============
See Notes to Consolidated Financial Statements
F-17
RURBAN FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
Individual loans determined to be impaired were as follows:
2004 2003 2002
--------------- --------------- ---------------
Year-end impaired loans with no allowance
for loan losses allocated $ 975,000 $ 153,000 $ 1,186,000
Year-end loans with allowance for loan
losses allocated 10,411,000 19,685,000 13,736,000
--------------- --------------- ---------------
Total impaired loans $ 11,386,000 $ 19,838,000 $ 14,922,000
=============== =============== ===============
Amount of allowance allocated $ 1,265,000 $ 5,651,000 $ 5,067,000
Average of impaired loans during the year $ 14,313,000 $ 18,633,000 $ 17,340,000
Interest income recognized during
impairment $ 433,242 $ 1,186,762 $ 718,626
Cash-basis interest income recognized $ 455,872 $ 153,000 $ 1,186,000
At December 31, 2004 and 2003, accruing loans delinquent 90 days or more
totaled $11,000 and $0, respectively. Non-accruing loans at December 31,
2004 and 2003 were $13,384,000 and $18,352,000, respectively.
NOTE 5: ASSETS AND LIABILITIES HELD FOR SALE
On December 30, 2002, an agreement was signed to sell the branches of
RFCBC which comprised the Citizens Savings Bank division. As of December
31, 2002, these branches had total loans of $63,536,309, total fixed
assets (net of accumulated depreciation) of $909,205 and total deposits of
$68,175,660. When this transaction was closed in March 2003, assets sold
and liabilities transferred to the buyer included loans of approximately
$57,200,000, fixed assets (net of accumulated depreciation) of
approximately $869,000, and deposits of approximately $70,800,000. A net
gain of $7,776,166 was recorded on this transaction.
On June 6, 2003 additional branches of RFCBC which comprised the Peoples
Banking Company and First Bank of Ottawa divisions were sold. Assets sold
and liabilities transferred to the buyer included loans of approximately
$76,600,000, fixed assets (net of accumulated depreciation) of
approximately $1,400,000 and deposits of approximately $166,200,000. A net
gain of $12,124,779 was recorded on this transaction.
The Company does not maintain a separate statement of operations for each
division.
See Notes to Consolidated Financial Statements
F-18
RURBAN FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 6: PREMISES AND EQUIPMENT
Major classifications of premises and equipment stated at cost, were as
follows:
2004 2003
------------- -------------
Land $ 684,825 $ 695,625
Buildings and improvements 5,260,531 5,259,930
Equipment 8,599,360 7,584,816
------------- -------------
14,544,716 13,540,371
Less accumulated depreciation (6,804,274) (6,590,281)
------------- -------------
Net premises and equipment $ 7,740,442 $ 6,950,090
============= =============
NOTE 7: GOODWILL
During 2002, the Company changed its method of accounting and financial
reporting for goodwill and other intangible assets by adopting the
provisions of Statement of Financial Accounting Standards No. 142. There
was no material impact of the adoption on the financial statements.
The changes in the carrying amount of goodwill for the years ended
December 31, 2004 and 2003, were:
2004 2003 2002
---------------- ---------------- ----------------
Balance as of January 1 $ 2,144,304 $ 2,323,643 $ 179,339
Goodwill acquired during the year -- -- 2,144,304
Write down due to branch sales -- (179,339) --
Amortization -- -- --
---------------- ---------------- ----------------
Balance as of December 31 $ 2,144,304 $ 2,144,304 $ 2,323,643
================ ================ ================
All goodwill is allocated to the banking segment of the business.
See Notes to Consolidated Financial Statements
F-19
RURBAN FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 8: OTHER INTANGIBLE ASSETS
The carrying basis and accumulated amortization of recognized intangible
assets at December 31, 2004 and 2003, were:
2004 2003
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
--------------- ------------- -------------- ------------
Core deposits $ 708,435 $ (313,668) $ 708,435 $ (226,224)
Purchased software 7,984,840 (3,420,366) 6,578,979 (2,383,570)
Other 200,627 (52,416) 200,627 (37,851)
------------- ------------- ------------ ------------
$ 8,893,902 $ (3,786,450) $ 7,488,041 $ (2,647,645)
============= ============= ============ ============
Amortization expense for core deposits and other for the years ended
December 31, 2004, 2003 and 2002, was $102,009, $125,790 and $138,285,
respectively. Amortization expense for purchased software for the years
ended December 31, 2004, 2003 and 2002 was $1,036,796, $850,754 and
$598,129, respectively. Purchased software was reclassified in 2004 to
intangible assets. Estimated amortization expense for each of the
following five years is:
Core Deposits Purchased
And Other Software
------------- -----------
2005 $ 84,790 $ 1,130,039
2006 70,753 990,632
2007 59,370 916,358
2008 49,935 769,832
2009 43,349 513,193
See Notes to Consolidated Financial Statements
F-20
RURBAN FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 9: INTEREST-BEARING DEPOSITS
Interest-bearing deposits in denominations of $100,000 or more were
$44,713,000 on December 31, 2004, and $54,858,000 on December 31, 2003.
Certificates of deposit obtained from brokers totaled approximately
$11,388,000 and $21,892,000 at December 31, 2004 and 2003, respectively.
At December 31, 2004, the scheduled maturities of time deposits were as
follows:
2005 $ 93,389,709
2006 36,834,576
2007 20,851,868
2008 1,884,867
2009 832,886
Thereafter 202,967
----------------
$ 153,996,874
================
Of the $11.4 million in brokered deposits held at State Bank at December
31, 2004, $7.4 million mature within the next year.
NOTE 10: SHORT-TERM BORROWINGS
2004 2003
-------------- -------------
Federal funds purchased $ 7,500,000 $ --
Securities sold under repurchase agreements 4,059,151 3,923,754
-------------- -------------
Total short-term borrowings $ 11,559,151 $ 3,923,754
============== =============
Securities sold under agreements to repurchase consist of obligations of
the Company to other parties and are used by the Company to facilitate
cash management transactions with commercial customers. The obligations
are secured by agency securities and such collateral is held by The
Federal Home Loan Bank. The maximum amount of outstanding agreements at
any month end during 2004 and 2003 totaled $5,014,000 and $5,765,000 and
the monthly average of such agreements totaled $3,853,000 and $1,215,000.
The agreements at December 31, 2004 and 2003, mature within one month.
See Notes to Consolidated Financial Statements
F-21
RURBAN FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 11: NOTES PAYABLE
Notes payable at December 31, include:
2004 2003
------------- -------------
Note payable in the amount of $9,000,000, secured by the common stock
of RDSI and substantially all assets of RFCBC, principal payments
of $300,000 quarterly together with interest at prime plus 2.5%
(6.25% at December 31, 2004), maturing June 6, 2006 $ 2,000,000 $ 5,900,000
Note payable in the amount of $319,863, secured by equipment of RDSI,
monthly payments of $6,272, interest at 6.5%, maturing September 14, 2009 $ 306,002 --
Note payable in the amount of $1,708,711, of which, 47.328% was sold to
Farmers and Merchants Bank, secured by equipment and disk systems of RDSI,
monthly payments of $33,504, interest at 6.5%, maturing September 14, 2009 $ 773,654 --
Revolving Credit Note payable in the amount of $750,000, secured by assigned
contracts and receivables of RDSI, interest at prime plus .50%, maturing
on April 1, 2005 -- --
Note payable in the amount of $4,363,168, secured by certain identified loans
held by RFCBC, monthly principal payments equal to the greater of $100,000
or all payments received by RFCBC on collateralized loans, with interest
at the lesser of prime plus 0.5% or 9%, (paid in 2004) -- 3,657,775
Note payable in the amount of $870,480, secured by equipment, monthly payments
of $13,416, interest at 7.65%, (paid in 2004) -- 389,673
Note payable in the amount of $542,113, secured by equipment, monthly payments
of $10,902, interest at 7.65%, (paid in 2004) -- 380,151
------------- -------------
$ 3,079,656 $ 10,327,599
============= =============
See Notes to Consolidated Financial Statements
F-22
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
Aggregate annual maturities of notes payable at December 31, 2004, are:
DEBT
------------
2005 $ 1,399,529
2006 1,013,937
2007 228,469
2008 243,913
2009 193,808
------------
$ 3,079,656
============
NOTE 12: FEDERAL HOME LOAN BANK ADVANCES
The Federal Home Loan Bank advances were secured by mortgage loans and
investment securities totaling $92,053,907 at December 31, 2004. Advances,
at interest rates from 2.32 to 6.25 percent, are subject to restrictions
or penalties in the event of prepayment.
Aggregate annual maturities of Federal Home Loan Bank advances at December
31, 2004, are:
DEBT
----------------
2005 $ 22,000,000
2006 5,000,000
2007 --
2008 5,000,000
2009 1,000,000
Thereafter 23,000,000
----------------
$ 56,000,000
================
(Continued)
F-23
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTE 13: TRUST PREFERRED SECURITIES
On September 7, 2000, Rurban Statutory Trust 1 ("RST"), a wholly owned
subsidiary of the Company, closed a pooled private offering of 10,000
Capital Securities with a liquidation amount of $1,000 per security. The
proceeds of the offering were loaned to the Company in exchange for junior
subordinated debentures with terms similar to the Capital Securities. The
sole assets of RST are the junior subordinated debentures of the Company
and payments thereunder. The junior subordinated debentures and the
back-up obligations, in the aggregate, constitute a full and unconditional
guarantee by the Company of the obligations of RST under the Capital
Securities. Distributions on the Capital Securities are payable
semi-annually at the annual rate of 10.6% and are included in interest
expense in the consolidated financial statements. These securities are
considered Tier 1 capital (with certain limitations applicable) under
current regulatory guidelines. As of December 31, 2004 and 2003, the
outstanding principal balance of the Capital Securities was $10,000,000.
In December 2003, FASB issued a revision to FIN 46 to clarify certain
provisions that affected the accounting for trust preferred securities. As
a result of the revisions to FIN 46, RST was deconsolidated as of March
31, 2004, with the Company accounting for its investment in RST as assets,
its subordinated debentures as debt, and the interest paid thereon as
interest expense. The Company had previously classified the trust
preferred securities as debt, but eliminated its common stock investment
as a result of the revisions to FIN 46.
The junior subordinated debentures are subject to mandatory redemption, in
whole or in part, upon repayment of the Capital Securities at maturity or
their earlier redemption at the liquidation amount. Subject to the Company
having received prior approval of the Federal Reserve, if then required,
the Capital Securities are redeemable prior to the maturity date of
September 7, 2030, at the option of the Company; on or after September 7,
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
Company has the option to defer distributions on the junior subordinated
debentures from time to time for a period not to exceed 10 consecutive
semi-annual periods.
The Company elected to defer the semi-annual distributions that would have
been due on March 7, 2003, September 7, 2003 and March 7, 2004.
On September 3, 2004, the Company received permission from the Federal
Reserve Bank and the Ohio Department of Financial Institutions to pay the
previously accrued and deferred trust preferred interest on the Company's
junior subordinated debentures to the Trustee, and the Company
subsequently paid such accrued and deferred trust preferred interest on
September 7, 2004 in the amount of $2.2 million.
NOTE 14: INCOME TAXES
The provision (credit) for income taxes includes these components:
2004 2003 2002
---------------- ---------------- -----------------
Taxes currently payable $ (2,235,862) $ 3,220,142 $ (5,709,999)
Deferred income taxes 3,344,719 3,083,200 (1,334,489)
---------------- ---------------- ----------------
Income tax expense (credit) $ 1,108,857 $ 6,303,342 $ (7,044,488)
================ ================ ================
(Continued)
F-24
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
A reconciliation of income tax expense at the statutory rate to the
Company's actual income tax expense is shown below:
2004 2003 2002
---------------- ---------------- ----------------
Computed at the statutory rate (34%) $ 1,306,670 $ 6,326,915 $ (6,953,806)
Increase (decrease) resulting from
Tax exempt interest (72,091) (78,962) (115,581)
Nondeductible expenses (125,722) 55,389 24,899
---------------- ---------------- ----------------
Actual tax expense (credit) $ 1,108,857 $ 6,303,342 $ (7,044,488)
================ ================ ================
The tax effects of temporary differences related to deferred taxes shown
on the balance sheets are:
2004 2003
-------------- --------------
Deferred tax assets
Allowance for loan losses $ 1,313,891 $ 3,461,586
Mark to market adjustment -- 103,588
Accrued compensation and benefits 388,745 310,808
Net deferred loan fees 91,688 78,352
Unrealized losses on available-for-sale securities 413,756 (103,588)
Other 29,971 3,732
-------------- --------------
2,238,051 3,958,066
-------------- --------------
Deferred tax liabilities
Depreciation (1,742,905) (1,210,450)
Mortgage servicing rights (51,222) (51,222)
Mark to market adjustment (413,756) --
Purchase accounting adjustments (289,303) (193,001)
Other (263,976) (95,541)
Unrealized gains on available-for-sale securities -- (103,588)
-------------- --------------
(2,761,162) (1,653,802)
-------------- --------------
Net deferred tax asset (liability) $ (523,111) $ 2,304,264
============== ==============
(Continued)
F-25
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTE 15: OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) components and related taxes are as
follows:
2004 2003 2002
---------------- ---------------- ----------------
Unrealized gains (losses) on securities
available for sale $ (1,280,615) $ (679,139) $ (919,788)
Reclassification for realized amount
included in income (241,008) (23,632) 833,515
---------------- ---------------- ----------------
Other comprehensive income (loss),
before tax effect (1,521,623) (702,771) (86,273)
Tax expense (benefit) (517,352) (238,942) (29,333)
---------------- ---------------- ----------------
Other comprehensive income (loss) $ (1,004,271) $ (463,829) $ (56,940)
================ ================ ================
NOTE 16: REGULATORY MATTERS
The Company and State Bank are subject to various regulatory capital
requirements administered by the federal and state banking agencies.
Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the Company's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and State Bank must
meet specific capital guidelines that involve quantitative measures of
assets, liabilities and certain off-balance-sheet items as calculated
under regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and State Bank to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I
capital (as defined) to average assets (as defined). Management believes,
as of December 31, 2004, that the Company and State Bank meet all capital
adequacy requirements to which they are subject.
As of December 31, 2004, the most recent notification to the regulators
categorized the State Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized, State Bank must maintain capital ratios as set forth in the
table. There are no conditions or events since that notification that
management believes have changed State Bank's status as well-capitalized.
The Company and State Bank's actual capital amounts (in millions) and
ratios are also presented in the following table. During 2003, RFCBC's
banking powers were relinquished.
(Continued)
F-26
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
TO BE WELL CAPITALIZED
FOR CAPITAL ADEQUACY UNDER PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- ----- --------- ----- ------- -----
As of December 31, 2004
Total Capital
(to Risk-Weighted Assets)
Consolidated $ 61.9 22.0% $ 22.5 8.0% $ -- N/A
State Bank 39.4 15.3 20.7 8.0 25.8 10.0%
Tier I Capital
(to Risk-Weighted Assets)
Consolidated 58.4 20.7 11.3 4.0 -- N/A
State Bank 36.3 14.0 10.3 4.0 15.5 6.0
Tier I Capital
(to Average Assets)
Consolidated 58.4 14.2 16.5 4.0 -- N/A
State Bank 36.3 9.3 15.6 4.0 19.5 5.0
As of December 31, 2003
Total Capital
(to Risk-Weighted Assets)
Consolidated $ 59.2 19.7% $ 24.1 8.0% $ -- N/A
State Bank 37.5 13.7 21.9 8.0 27.3 10.0%
Tier I Capital
(to Risk-Weighted Assets)
Consolidated 55.4 18.4 12.0 4.0 -- N/A
State Bank 34.1 12.5 10.9 4.0 16.4 6.0
Tier I Capital
(to Average Assets)
Consolidated 55.4 12.8 17.4 4.0 -- N/A
State Bank 34.1 8.4 16.3 4.0 20.4 5.0
On July 9, 2002, the Company and State Bank announced they entered into a
Written Agreement (Agreement) with the Federal Reserve Bank of Cleveland
and the Ohio Division of Financial Institutions on July 5, 2002. The
Agreement was the result of an examination of State Bank as of December 31,
2001, which was conducted in March and April 2002.
State Bank and RFCBC were prohibited from paying dividends to Rurban
without prior regulatory approval. Rurban was prohibited from paying Trust
Preferred "dividends" and common stock dividends without prior regulatory
approval.
On February 18, 2005, the Company received notice from the Federal Reserve
Bank of Cleveland and the Ohio Division of Financial Institutions that
approval was given effective as of February 17, 2005 for release of the
Written Agreement entered into on July 5, 2002.
(Continued)
F-27.
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTE 17: RELATED PARTY TRANSACTIONS
Certain directors, executive officers and principal shareholders of the
Company, including associates of such persons, are loan customers. A
summary of the related party loan activity, for loans aggregating $60,000
or more to any one related party, follows for the years ended December 31,
2004 and 2003:
2004 2003
----------- -----------
Balance, January 1 $ 2,065,000 $ 7,535,000
New loans 7,277,000 4,781,000
Repayments (7,205,000) (7,889,000)
Other changes 1,822,000 (2,362,000)
----------- -----------
Balance, December 31 $ 3,959,000 $ 2,065,000
=========== ===========
In management's opinion, such loans and other extensions of credit and
deposits were made in the ordinary course of business and were made on
substantially the same terms (including interest rates and collateral) as
those prevailing at the time for comparable transactions with other
persons. Further, in management's opinion, these loans did not involve more
than normal risk of collectibility or present other unfavorable features.
Deposits from related parties held by the Bank at December 31, 2004 and
2003 totaled $1,539,000 and $1,185,000, respectively.
NOTE 18: EMPLOYEE BENEFITS
The Company has retirement savings 401(k) plans covering substantially all
employees. Employees contributing up to 6% of their compensation receive a
Company match of 50% of the employee's contribution. Employee contributions
are vested immediately and the Company's matching contributions are fully
vested after three years. Employer contributions charged to expense for
2004, 2003 and 2002 were $238,000, $258,000 and $285,000, respectively.
Also, the Company has deferred compensation agreements with certain active
and retired officers. The agreements provide monthly payments for up to 15
years that equal 15% of average compensation prior to retirement or death.
The charge to expense for the current agreements was $319,000, $145,000 and
$164,000 for 2004, 2003 and 2002 respectively. In 2004 and 2003, previously
accrued benefits under the agreements in the amount of $76,000 and $33,000,
respectively, were reversed and credited to expense as a result of
termination of certain officers. Such charges reflect the straight-line
accrual over the period until full eligibility of the present value of
benefits due each participant on the full eligibility date, using a 6%
discount factor.
Life insurance plans are provided for certain executive officers on a
split-dollar basis. The Company is the owner of the split-dollar policies.
The officers are entitled to a sum equal to two times either the employee's
annual salary at death, if actively employed, or final annual salary, if
retired, less $50,000, not to exceed the employee's portion of the death
benefit. The Company is
(Continued)
F-28.
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
entitled to the portion of the death proceeds which equates to the cash
surrender value less any loans on the policy and unpaid interest or cash
withdrawals previously incurred by the Company. The employees have the
right to designate a beneficiary(s) to receive their share of the proceeds
payable upon death. The cash surrender value of these life insurance
policies and life insurance policies related to the Company's supplemental
retirement plan totaled approximately $1,861,391 less policy loans of
$1,014,523 at December 31, 2004 and $2,826,745 less policy loans of
$1,014,523 at December 31, 2003, and is included in other assets in the
consolidated balance sheets.
The Company has a noncontributory employee stock ownership plan ("ESOP")
covering substantially all employees of the Company and its subsidiaries.
Voluntary contributions are made by the Company to the plan. Each eligible
employee is vested based upon years of service, including prior years of
service. The Company's contributions to the account of each employee become
fully vested after three years of service.
During 1986, the ESOP acquired 103,368 shares of Company common stock at a
weighted-average cost of $14.57 per share with funds provided by a loan
from the Company. Accordingly, the $1,505,527 of common stock acquired by
the ESOP was shown as a reduction of stockholders' equity. Shares are
released to participants proportionately as the loan is repaid. Dividends
on allocated shares are recorded as dividends and charged to retained
earnings. Dividends on unallocated shares are used to repay the loan or
distributed to participants and are treated as compensation expense.
Compensation expense is recorded equal to the fair market value of the
stock when contributions, which are determined annually by the Board of
Directors of the Company, are made to the ESOP.
ESOP expense for the years ended December 31, 2004, 2003 and 2002 was
$430,000, $440,000 and $503,000, respectively.
2004 2003
--------- ---------
Allocated shares 580,740 664,086
Unearned shares 0 16,308
--------- ---------
Total ESOP shares 580,740 680,394
========= =========
Fair value of unearned shares at December 31 $ 0 $ 225,866
========= =========
(Continued)
F-29.
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTE 19: STOCK OPTION PLAN
The Company has a fixed option plan under which the Company may grant
options that vest over five years to selected employees for up to 522,921
shares of common stock. The exercise price of each option is equal the fair
value of the Company's stock on the date of grant. An option's maximum term
is ten years.
A summary of the status of the plan at December 31, 2004, 2003 and 2002,
and changes during the years then ended is presented below:
2004 2003 2002
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- --------- -------- --------- ---------- ---------
Outstanding beginning of year 183,584 $ 13.07 241,289 $ 13.02 326,732 $ 12.96
Granted 177,000 13.85 -- 3,500 10.51
Exercised (2,509) 11.77 (158) 11.07 (1,208) 11.07
Forfeited (18,848) 13.52 (57,547) 12.89 (87,735) 12.85
------- ------- ---------
Outstanding, end of year 339,227 13.46 183,584 13.07 241,289 13.02
======= ======= =========
Options exercisable, end of year 192,140 13.29 168,901 13.17 186,113 13.29
======= ======= =========
The fair value of options granted is estimated on the date of the grant
using an option-pricing model with the following weighted-average
assumptions:
2004 2002
------------ ------------
Dividend yields 0.00% 3.41%
Volatility factors of expected market price of common stock 24.52% 15.00%
Risk-free interest rates 1.24% 1.50%
Expected life of options 10 years 10 years
Weighted-average fair value of options granted during the year $ 4.79 $ 0.92
(Continued)
F-30.
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
The following table summarizes information about stock options under the
plan outstanding at December 31, 2004:
OPTIONS OUTSTANDING
---------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED-AVERAGE --------------------------------
RANGE OF EXERCISE NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ----------------- ----------- ---------------- ---------------- ----------- ----------------
$ 9.90 to $12.87 135,132 3.94 years $ 12.31 126,660 $ 12.39
$13.30 to $14.00 176,788 8.92 years $ 13.83 38,273 $ 13.80
$15.20 to $16.78 27,307 4.03 years $ 16.77 27,207 $ 16.77
NOTE 20: EARNINGS PER SHARE
Earnings per share (EPS) are computed as follows:
YEAR ENDED DECEMBER 31, 2004
WEIGHTED-
AVERAGE PER SHARE
INCOME SHARES AMOUNT
---------- ---------- ----------
Basic earnings per share
Net loss available to common stockholders $2,734,292 4,559,459 $ 0.60
==========
Effect of dilutive securities
Stock options -- 12,680
---------- ---------
Diluted earnings per share
Income available to common stockholders and assumed conversions $2,734,292 4,572,139 $ 0.60
========== ========= ==========
Options to purchase 197,558 common shares at $13.85 to $16.78 per share
were outstanding at December 31, 2004, but were not included in the
computation of diluted EPS because the options' exercise price was greater
than the average market price of the common shares.
(Continued)
F-31.
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
YEAR ENDED DECEMBER 31, 2003
WEIGHTED-
AVERAGE PER SHARE
INCOME SHARES AMOUNT
----------- --------- -----------
Basic earnings per share
Net loss available to common stockholders $12,305,232 4,545,320 $ 2.71
===========
Effect of dilutive securities
Stock options -- 6,829
----------- ---------
Diluted earnings per share
Income available to common stockholders and assumed conversions $12,305,232 4,552,149 $ 2.70
=========== ========= ===========
Options to purchase 29,778 common shares at $15.20 to $16.78 per share were
outstanding at December 31, 2003, but were not included in the computation
of diluted EPS because the options' exercise price was greater than the
average market price of the common shares.
YEAR ENDED DECEMBER 31, 2002
WEIGHTED-
AVERAGE PER SHARE
INCOME SHARES AMOUNT
------------- --------- -------------
Basic earnings per share
Net loss available to common stockholders $ (13,407,884) 4,539,720 $ (2.95)
=============
Effect of dilutive securities
Stock options -- --
------------- ---------
Diluted earnings per share
Income available to common stockholders and assumed conversions $ (13,407,884) 4,539,720 $ (2.95)
============= ========= =============
Options to purchase 241,289 common shares at $9.90 to $16.78 per share were
outstanding at December 31, 2002, but were not included in the computation
of diluted EPS because the options' exercise price was greater than the
average market price of the common shares.
(Continued)
F-32.
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTE 21: LEASES
The Company's subsidiary, RDSI, has several noncancellable operating leases
for business use, that expire over the next ten years. These leases
generally contain renewal options for periods of five years and require the
lessee to pay all executory costs such as taxes, maintenance and insurance.
Rental expense for these leases were $126,600, $99,600 and $99,600 for the
years ended December 31, 2004, 2003 and 2002, respectively.
Future minimum lease payments under operating leases are:
2005 $ 261,600
2006 261,600
2007 261,600
2008 261,600
2009 261,600
Thereafter 1,306,200
--------------
Total minimum lease payments $ 2,614,200
==============
(Continued)
F-33.
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTE 22: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents estimated fair values of the Company's
financial instruments. The fair values of certain of these instruments were
calculated by discounting expected cash flows, which involves significant
judgments by management and uncertainties. Fair value is the estimated
amount at which financial assets or liabilities could be exchanged in a
current transaction between willing parties, other than in a forced or
liquidation sale. Because no market exists for certain of these financial
instruments and because management does not intend to sell these financial
instruments, the Company does not know whether the fair values shown below
represent values at which the respective financial instruments could be
sold individually or in the aggregate.
DECEMBER 31, 2004 DECEMBER 31, 2003
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------ ------------
Financial assets
Cash and cash equivalents $ 10,617,766 $ 10,618,000 $ 24,176,952 $ 24,177,000
Interest-bearing deposits 150,000 150,000 260,000 260,000
Available-for-sale securities 108,720,491 108,720,000 107,698,595 107,699,000
Loans including loans held for sale, net 259,694,626 259,181,000 274,141,929 276,010,000
Stock in FRB and FHLB 2,793,000 2,793,000 2,744,900 2,745,000
Cash surrender value of life insurance 9,146,816 9,147,000 1,815,070 1,815,000
Interest receivable 1,984,452 1,984,000 2,000,732 2,001,000
Financial liabilities
Deposits including deposits held for sale $279,624,314 $277,954,000 $317,474,749 $318,351,000
Securities sold under agreements to repurchase 4,059,151 4,059,000 3,923,754 3,924,000
Federal funds purchased 7,500,000 7,500,000 0 0
Note payable 3,079,656 3,080,000 10,327,599 10,328,000
FHLB advances 56,000,000 58,231,000 39,000,000 43,077,000
Trust preferred securities 10,310,000 11,298,000 10,000,000 11,285,000
Interest payable 994,114 994,000 2,347,303 2,347,000
For purposes of the above disclosures of estimated fair value, the
following assumptions were used as of December 31, 2004 and 2003. The
estimated fair value for cash and cash equivalents, interest-bearing
deposits, FRB and FHLB stock, cash surrender value of life insurance,
accrued interest receivable, demand deposits, savings accounts, interest
checking accounts, certain money market deposits, short-term borrowings and
interest payable is considered to approximate cost. The estimated fair
value for securities is based on quoted market values for the individual
securities or for equivalent securities. The estimated fair value for loans
receivable, including loans held for sale, net, is based on estimates of
the rate State Bank would charge for similar loans at December 31, 2004 and
2003 applied for the time period until the loans are assumed to reprice or
be paid. The estimated fair value for fixed-maturity time deposits as well
as borrowings is based on estimates of the rate State Bank would pay on
such liabilities at December 31, 2004 and 2003, applied for the time period
until maturity. The fair value of commitments is estimated using the
(Continued)
F-34.
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present
creditworthiness of the counterparties. The estimated fair value for other
financial instruments and off-balance sheet loan commitments approximate
cost at December 31, 2004 and 2003 and are not considered significant to
this presentation.
NOTE 23: COMMITMENTS AND CREDIT RISK
State Bank grants commercial, agribusiness, consumer and residential loans
to customers throughout the state. Although State Bank has a diversified
loan portfolio, agricultural loans comprised approximately 16% and 13% of
the portfolio as of December 31, 2004 and 2003, respectively.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since a portion of the
commitments may expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. Each
customer's creditworthiness is evaluated on a case-by-case basis. The
amount of collateral obtained, if deemed necessary, is based on
management's credit evaluation of the customer. Collateral held varies, but
may include accounts receivable, inventory, property, plant and equipment,
commercial real estate and residential real estate.
Letters of credit are conditional commitments issued by State Bank to
guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements,
including commercial paper, bond financing and similar transactions. The
credit risk involved in issuing letters of credit is essentially the same
as that involved in extending loans to customers.
Lines of credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Lines of credit
generally have fixed expiration dates. Since a portion of the line may
expire without being drawn upon, the total unused lines do not necessarily
represent future cash requirements. Each customer's creditworthiness is
evaluated on a case-by-case basis. The amount of collateral obtained, if
deemed necessary, is based on management's credit evaluation of the
customer. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, commercial real estate and
residential real estate. Management uses the same credit policies in
granting lines of credit as it does for on-balance-sheet instruments.
2004 2003
----------- -----------
Loan commitments and unused lines of credit $49,242,000 $53,431,000
Standby letters of credit -- --
Commercial letters of credit 392,000 436,000
----------- -----------
$49,634,000 $53,867,000
=========== ===========
State Bank had federal funds sold to LaSalle Bank, N.A. in the amount of $0
at December 31, 2004 and $10,000,000 at December 31, 2003. From time to
time certain due from bank accounts are in excess of federally insured
limits.
(Continued)
F-35.
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
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 Company's
consolidated financial condition or results of operations.
Salary continuation agreements with certain executive officers contain
provisions regarding certain events leading to separation from the Company,
before the executive officer's normal retirement date, which could result
in cash payments in excess of amounts accrued.
NOTE 24: FUTURE CHANGE IN ACCOUNTING PRINCIPLE
The Financial Accounting Standards Board recently issued Statement No.
123(R) "Share-Based Payment," which requires the compensation cost relating
to share-based payment transactions be recognized in financial statements.
The Company expects to first apply the new statement during its fiscal year
ending December 31, 2005. The impact of applying the new statement has not
been determined.
NOTE 25: CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
Presented below is condensed financial information as to financial
position, results of operations and cash flows of the Company:
CONDENSED BALANCE SHEETS
2004 2003
------------- -------------
ASSETS
Cash and cash equivalents $ 326,775 $ 699,797
Investment in common stock of banking subsidiaries 53,846,585 54,555,584
Investment in nonbanking subsidiaries 5,776,392 4,880,073
Other assets 1,500,072 440,783
------------- -------------
Total assets $ 61,449,824 $ 60,576,237
============= =============
LIABILITIES
Trust preferred securities $ 10,000,000 $ 10,000,000
Notes payable -- --
Borrowings from nonbanking subsidiaries 310,000 310,000
Other liabilities 834,029 1,883,481
------------- -------------
Total liabilities 11,144,029 12,193,481
STOCKHOLDERS' EQUITY 50,305,795 48,382,756
------------- -------------
Total liabilities and stockholders' equity $ 61,449,824 $ 60,576,237
============= =============
(Continued)
F-36.
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF INCOME
2004 2003 2002
---------------- ---------------- ----------------
INCOME
Interest income $ 1,875 $ 2,014 $ 114,566
Dividends from subsidiaries
Banking subsidiaries 2,185,720 5,169,456 --
Nonbanking subsidiaries 995,043 1,150,000 1,825,000
---------------- ---------------- ----------------
Total 3,180,763 6,319,456 1,825,000
Other income 1,128,316 2,496,981 5,356,332
---------------- ---------------- ----------------
Total income 4,310,954 8,818,451 7,295,898
---------------- ---------------- ----------------
EXPENSES
Interest expense 1,155,729 1,263,741 1,292,416
Other expenses 2,206,457 3,176,605 7,381,220
---------------- ---------------- ----------------
Total expenses 3,362,186 4,440,346 8,673,636
---------------- ---------------- ----------------
INCOME (LOSS) BEFORE INCOME TAX AND
EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARIES 948,768 4,378,105 (1,377,738)
INCOME TAX EXPENSE (BENEFIT) (757,526) (660,060) (1,088,931)
----------------- ---------------- ----------------
INCOME (LOSS) BEFORE EQUITY IN
UNDISTRIBUTED INCOME OF
SUBSIDIARIES 1,706,294 5,038,165 (288,807)
EQUITY IN UNDISTRIBUTED (EXCESS
DISTRIBUTED) INCOME OF
SUBSIDIARIES
Banking subsidiaries 131,679 6,901,065 (12,827,147)
Nonbanking subsidiaries 896,319 366,002 (291,930)
---------------- ---------------- ----------------
Total 1,027,998 7,267,067 (13,119,077)
---------------- ---------------- ----------------
NET INCOME (LOSS) $ 2,734,292 $ 12,305,232 $ (13,407,884)
================ ================ ================
(Continued)
F-37.
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CASH FLOWS
2004 2003 2002
-------------- ------------- -------------
OPERATING ACTIVITIES
Net income $ 2,734,292 $ 12,305,232 $ (13,407,884)
Items not requiring (providing) cash
Equity in (undistributed) excess
distributed net income of
subsidiaries (1,027,998) (7,267,067) 13,119,077
Other assets (1,059,391) 220,878 613,504
Other liabilities (1,049,450) 1,283,113 (3,310,134)
-------------- ------------- -------------
Net cash provided by (used in)
operating activities (402,547) 6,542,156 (2,985,437)
-------------- ------------- -------------
INVESTING ACTIVITIES
Investment in banking subsidiaries -- -- (7,500,000)
Repayment of note payable -- (6,000,000) --
Proceeds from note payable -- -- 6,000,000
Repayment of loans to banking subsidiaries -- -- 600,000
-------------- ------------- -------------
Net cash provided by (used in)
investing activities -- (6,000,000) (900,000)
-------------- ------------- -------------
FINANCING ACTIVITIES
Cash dividends paid -- -- (1,186,930)
Proceeds from exercise of stock options 29,525 1,749 13,373
-------------- ------------- -------------
Net cash provided by (used in)
financing activities 29,525 1,749 (1,173,557)
-------------- ------------- -------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (373,022) 543,905 (5,058,994)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 699,797 155,892 5,214,886
-------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 326,775 $ 699,797 $ 155,892
============== ============= =============
(Continued)
F-38.
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTE 26: SEGMENT INFORMATION
The reportable segments are determined by the products and services
offered, primarily distinguished between banking and data processing
operations. Loans, investments, deposits and financial services provide
the revenues in the banking segment and include the accounts of State Bank
and RFCBC. Service fees provide the revenues in the data processing
operation and include the accounts of RDSI. Other segments include the
accounts of the holding company, Rurban Financial Corp., which provides
management services to its subsidiaries and RFS, which provides trust and
financial services to customers nationwide and Rurban Life, which provides
insurance products to customers of the Company's subsidiary banks.
The accounting policies used are the same as those described in the
summary of significant accounting policies. Segment performance is
evaluated using net interest income, other revenue, operating expense and
net income. Goodwill is allocated. Income taxes and indirect expenses are
allocated on revenue. Transactions among segments are made at fair value.
The holding company allocates certain expenses to other segments.
Information reported internally for performance assessment follows.
DATA TOTAL INTERSEGMENT CONSOLIDATED
2004 BANKING PROCESSING OTHER SEGMENTS ELIMINATION TOTALS
------------- -------------- ------------- ------------- ------------ -------------
INCOME STATEMENT INFORMATION:
Net interest income
(expense) $ 13,427,694 $ (217,829) $ (1,120,559) $ 12,089,306 $ (11,940) $ 12,077,366
Other revenue-external
customers 3,169,122 10,478,245 3,031,324 16,678,691 11,940 16,690,631
Other revenue-other
segments -- 1,314,942 1,995,973 3,310,915 (3,310,915) --
------------- -------------- ------------- ------------- ------------ -------------
Net interest income and
other revenue 16,596,816 11,575,358 3,906,738 32,078,912 (3,310,915) 28,767,997
Noninterest expense 15,258,307 8,965,124 4,441,815 28,635,246 (3,310,915) 25,324,331
Significant noncash items:
Depreciation and
amortization 534,415 1,857,524 100,722 2,492,661 -- 2,492,661
Provision for loan losses (399,483) -- -- (399,483) -- (399,483)
Income tax expense 919,192 688,498 (498,833) 1,108,857 -- 1,108,857
Segment profit 1,742,705 1,921,737 (930,150) 2,734,292 -- 2,734,292
BALANCE SHEET
INFORMATION:
Total assets 407,831,742 10,974,521 4,030,214 422,836,477 (7,487,731) 415,348,746
Goodwill and intangibles 2,687,282 -- -- 2,687,282 -- 2,687,282
Premises and equipment
expenditures 415,402 3,098,388 138,288 3,652,078 -- 3,652,078
(Continued)
F-39.
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
DATA TOTAL INTERSEGMENT CONSOLIDATED
2003 BANKING PROCESSING OTHER SEGMENTS ELIMINATION TOTALS
---------------- ---------------- -------------- ---------------- ---------------- --------------
INCOME STATEMENT INFORMATION:
Net interest income
(expense) $ 15,293,092 $ (286,906) $ (1,204,633) $ 13,801,553 $ -- $ 13,801,553
Other revenue-external
customers 23,047,951 8,971,632 2,667,773 34,687,356 -- 34,687,356
Other revenue-other
segments -- 1,580,426 3,249,904 4,830,330 (4,830,330) --
---------------- ---------------- -------------- ---------------- ---------------- --------------
Net interest income and
other revenue 38,341,043 10,265,152 4,713,044 53,319,239 (4,830,330) 48,488,909
Noninterest expense 20,308,343 7,986,031 5,214,291 33,508,665 (4,830,330) 28,678,335
Significant noncash items:
Depreciation and
amortization 585,735 1,592,380 132,007 2,310,122 -- 2,310,122
Provision for loan losses 1,202,000 -- -- 1,202,000 -- 1,202,000
Income tax expense 5,968,819 774,902 (440,379) 6,303,342 -- 6,303,342
Segment profit 11,655,187 1,504,220 (854,175) 12,305,232 -- 12,305,232
BALANCE SHEET
INFORMATION:
Total assets 435,203,288 8,434,735 3,577,550 447,215,573 (11,903,701) 435,311,872
Goodwill and intangibles 2,789,291 -- -- 2,789,291 -- 2,789,291
Premises and equipment
expenditures 529,051 2,252,992 69,865 2,851,908 -- 2,851,908
DATA TOTAL INTERSEGMENT CONSOLIDATED
2002 BANKING PROCESSING OTHER SEGMENTS ELIMINATION TOTALS
-------------- ------------- ------------- -------------- --------------- --------------
INCOME STATEMENT
INFORMATION:
Net interest income
(expense) $ 25,035,177 $ (150,430) $ (1,107,084) $ 23,777,663 $ -- $ 23,777,663
Other revenue-external
customers 3,362,235 7,815,589 2,601,444 13,779,268 -- 13,779,268
Other revenue-other
segments -- 1,790,381 5,439,203 7,229,584 (7,229,584) --
-------------- ------------- ------------- -------------- --------------- --------------
Net interest income and
other revenue 28,397,412 9,455,540 6,933,563 44,786,515 (7,229,584) 37,556,931
Noninterest expense 20,583,831 7,163,698 9,960,774 37,708,303 (7,229,584) 30,478,719
Significant noncash items:
Depreciation and
amortization 1,009,168 1,211,934 194,504 2,415,606 -- 2,415,606
Provision for loan losses 27,530,583 -- -- 27,530,583 -- 27,530,583
Income tax expense (6,794,462) 779,226 (1,029,252) (7,044,488) -- (7,044,488)
Segment profit (loss) (12,922,539) 1,512,615 (1,997,960) (13,407,884) -- (13,407,884)
BALANCE SHEET
INFORMATION:
Total assests 732,635,201 9,143,898 2,810,052 744,589,151 (2,272,473) 742,316,679
Goodwill and intangibles 3,094,419 -- -- 3,094,419 -- 3,094,419
Premises and equipment
expenditures, net 2,705,525 3,964,064 240,849 6,910,438 -- 6,910,438
(Continued)
F-40.
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTE 27: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following tables summarize selected quarterly results of operations
for 2004 and 2003.
DECEMBER 31, 2004 MARCH JUNE SEPTEMBER DECEMBER
----- ---- --------- --------
Interest income $ 5,113,877 $ 4,849,118 $ 5,063,851 $ 5,000,994
Interest expense 2,129,697 1,939,239 1,909,352 1,972,186
Net interest income 2,984,180 2,909,879 3,154,499 3,028,808
Provision for loan losses 150,000 (340,000) 319,517 (529,000)
Noninterest income 4,335,014 4,082,884 4,080,007 4,192,724
Noninterest expense 6,289,199 6,564,712 5,910,528 6,559,892
Income tax expense 267,973 59,008 305,819 476,055
Net income 612,022 709,043 698,642 714,585
Earnings per share
Basic 0.13 0.16 0.15 0.16
Diluted 0.13 0.16 0.15 0.16
Dividends per share -- -- -- --
DECEMBER 31, 2003 MARCH JUNE SEPTEMBER DECEMBER
----- ---- --------- --------
Interest income $ 9,742,449 $ 7,224,646 $ 5,483,277 $ 5,323,478
Interest expense 4,852,066 3,904,814 2,778,633 2,436,785
Net interest income 4,890,383 3,319,832 2,704,644 2,886,693
Provision for loan losses 962,000 300,000 -- (60,000)
Noninterest income 11,763,405 15,671,394 3,583,966 3,668,591
Noninterest expense 7,669,485 8,853,374 6,011,061 6,144,415
Income tax expense 2,722,672 3,358,451 77,754 144,464
Net income 5,299,631 6,479,401 199,795 326,405
Earnings per share
Basic 1.17 1.42 .04 .07
Diluted 1.17 1.42 .04 .07
Dividends per share -- -- -- --
Noninterest income was higher during the first and second quarters of 2003
as a result of the branch sales.
During the second and fourth quarters of 2004 a reduction to the
provisions for loan losses were recorded as a result from the continued
improvement in credit quality.
(Continued)
F-41.
RURBAN FINANCIAL CORP.
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 2004
INDEX TO EXHIBITS
Exhibit No. Description Location
- ----------- ----------- --------
2 Branch Purchase and Assumption Incorporated herein by
Agreement dated as of March reference to the Company's
15, 2005 between Liberty Current Report on Form 8-K
Savings Bank, FSB and State filed March 21, 2005 (File No.
Bank and Trust Company 0- 13507) [Exhibit 2]
3(a) Amended Articles of Incorporated herein by reference to the
Registrant, as amended Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1989 (File
No. 0-13507) [Exhibit 3(a)(i)].
3(b) Certificate of Amendment to Incorporated herein by reference to the
the Amended Articles of Rurban Company's Annual Report on Form 10-K for the
Financial Corp. fiscal year ended December 31, 1993 (File
No. 0-13507) [Exhibit 3(b)].
3(c) Certificate of Amendment to Incorporated herein by reference to the
the Amended Articles of Rurban Company's Annual Report on Form 10-K for the
Financial Corp. fiscal year ended December 31, 1997 (File
No. 0-13507) [Exhibit 3(c)].
3(d) Amended and Restated Articles of Incorporated herein by reference to the
Rurban Financial Corp. Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 (File
No. 0-13507) [Exhibit 3(d)].
3(e) Regulations of Registrant, Incorporated herein by reference to the
as amended Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1986 (File
No. 0-13507) [Exhibit 3(b)].
96.
Exhibit No. Description Location
- ----------- ----------- --------
10(a) Executive Salary Incorporated herein by
Continuation Agreement, reference to the
dated December 3, 2001, Company's Annual Report
between Rurban Financial on Form 10-K for the
Corp. and Kenneth A. Joyce; fiscal year ended
and Amended Schedule A to December 31, 2002 (File
Exhibit 10(s) identifying No. 0-13507)
other identical Executive [Exhibit 10(s)].
Salary Continuation
Agreements between
executive officers of
Rurban Financial Corp. and
Rurban Financial Corp.
10(b) Split-Dollar Dollar Incorporated herein by
Insurance Agreement, dated reference to the
April 3, 2002, between Company's Annual Report
Robert Constien and Rurban on Form 10-K for the
Financial Corp. fiscal year ended
December 31, 2002 (File
No. 0-13507)
[Exhibit 10(t)].
10(c) Rurban Financial Corp. Incorporated herein by reference to the
Stock Option Plan Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 (File
No. 0-13507) [Exhibit 10(u)].
10(d) Rurban Financial Corp. Plan Incorporated herein by
to Allow Directors to Elect reference to the
to Defer Compensation Company's Annual Report
on Form 10-K for the
fiscal year ended
December 31, 1996 (File
No. 0- 13507)
[Exhibit 10(v)].
10(e) Form of Non-Qualified Stock Incorporated herein by
Option Agreement with Five- reference to the
Year Vesting under Rurban Company's Annual Report
Financial Corp. Stock on Form 10-K for the
Option Plan fiscal year ended
December 31, 1997
(File No. 0-13507)
[Exhibit 10(w)].
10(f) Form of Non-Qualified Stock Incorporated herein by
Option Agreement with reference to the
Vesting After One Year of Company's Current Report
Employment under Rurban on Form 8-K filed March
Financial Corp. Stock 21, 2005 (File No. 0-
Option Plan 13507) [Exhibit 10(a)]
10(g) Form of Incentive Stock Incorporated herein by
Option Agreement with Five- reference to the
Year Vesting under Rurban Company's Annual Report
Financial Corp. Stock on Form 10-K for the
Option Plan fiscal year ended
December 31, 1997
(File No. 0-13507)
[Exhibit 10(x)].
10(h) Form of Incentive Stock Incorporated herein by
Option Agreement with reference to the
Vesting After One Year of Company's Current Report
Employment under Rurban on Form 8-K filed March
Financial Corp. Stock 21, 2005 (File No. 0-
Option Plan 13507) [Exhibit 10(c)]
97.
Exhibit No. Description Location
- ----------- ----------- --------
10(i) Form of Stock Appreciation Incorporated herein by
Rights under Rurban reference to the
Financial Corp. Stock Company's Current Report
Option Plan on Form 8-K filed March
21, 2005 (File No. 0-
13507) [Exhibit 10(b)]
10(j) Employees' Stock Ownership Incorporated herein by
and Savings Plan of Rurban reference to the
Financial Corp. Company's Annual Report
on Form 10-K for the
fiscal year ended
December 31, 1999
(File No. 0-13507)
[Exhibit 10(y)].
10(k) Rurban Financial Corp. Incorporated herein by
Employee Stock Purchase reference to the
Plan Company's Annual Report
on Form 10-K for the
fiscal year ended
December 31, 2002 (File
No. 0-13507)
[Exhibit 10(z)].
10(l) Change in Control Incorporated herein by
Agreement, dated March 14, reference to the
2001, between Rurban Company's Annual Report
Financial Corp. and Kenneth on Form 10-K for fiscal
A. Joyce; and Schedule A to year ended December 31,
Exhibit 10(aa) identifying 2003 (File No. 0-13507)
other substantially [Exhibit 10(aa)].
identical agreements
between Rurban Financial
Corp. and certain executive
officers of Rurban
Financial Corp.
10(m) Supplemental Severance Incorporated herein by
Agreement, dated June 25, reference to the
2002, between Rurban Company's Annual Report
Financial Corp. and Robert on Form 10-K for fiscal
W. Constien; and Schedule A year ended December 31,
to Exhibit 10(bb) 2003 (File No. 0-13507)
identifying other [Exhibit 10(bb)].
substantially identical
agreements between Rurban
Financial Corp. and certain
executive officers of
Rurban Financial Corp.
11 Statement re: Computation Included in Note 1 of the Notes to
of Per Share Earnings Consolidated Financial Statements of
Registrant in the financial statements
portion of this Annual Report on Form 10-K.
21 Subsidiaries of Registrant Included in this Annual
Report on Form 10-K as
Exhibit 21.
23.1 Consent of BKD, LLP Included in this Annual
Report on Form 10-K as
Exhibit 23.1.
31.1 Rule 13a-14(a)/15d-14(a) Included in this Annual
Certification - Principal Report on Form 10-K as
Executive Officer Exhibit 31.1.
31.2 Rule 13a-14(a)/15d-14(a) Included in this Annual
Certification - Principal Report on Form 10-K as
Financial Officer Exhibit 31.2.
98.
Exhibit No. Description Location
- ----------- ----------- --------
32.1 Section 1350 Certification Included in this Annual
- Principal Executive Report on Form 10-K as
Officer and Principal Exhibit 32.1.
Financial Officer
99(a) Report of Written Agreement Incorporated herein by
reference to the
Company's Form 8-K filed
July 11, 2002 (File No.
0-13507) [Exhibit
99(b)].
99(b) Termination of Written Incorporated herein by
Agreement reference to the
Company's Form 8-K filed
February 22, 2005 (File
No. 0-13507) [Exhibit
99]
99.