Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 0-13507
RURBAN FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Ohio 34-1395608
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
401 Clinton Street, Defiance, Ohio 43512
(Address of principal executive offices)
(Zip Code)
(419) 783-8950
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the proceeding 12 months (or for such shorter period the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
----- -----
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes No X
----- -----
The number of common shares of Rurban Financial Corp. outstanding was 4,571,317
on November 1, 2005.
1
RURBAN FINANCIAL CORP.
FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits
Exhibit 4.1 - Indenture, dated as of September 15, 2005, by and between
Rurban Financial Corp. and Wilmington Trust Company, as
Debenture Trustee, relating to Floating Rate Junior
Subordinated Deferrable Interest Debentures
Exhibit 4.2 - Amended and Restated Declaration of Trust of Rurban
Statutory Trust II, dated as of September 15, 2005
Exhibit 4.3 - Guarantee Agreement, dated as of September 15, 2005, by
and between Rurban Financial Corp. and Wilmington Trust
Company, as Guarantee Trustee
Exhibit 31.1 - Rule 13a-14(a)/15d-14(a) Certification (Principal
Executive Officer)
Exhibit 31.2 - Rule 13a-14(a)/15d-14(a) Certification (Principal
Executive Officer)
Exhibit 32.1 - Section 1350 Certification (Principal Executive Officer)
Exhibit 32.2 - Section 1350 Certification (Principal Executive Officer)
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The interim condensed consolidated financial statements of Rurban Financial
Corp. ("Rurban" or the "Company") are unaudited; however, the information
contained herein reflects all adjustments which are, in the opinion of
management, necessary for a fair presentation of financial condition and results
of operations for the interim periods presented. All adjustments reflected in
these financial statements are of a normal recurring nature in accordance with
Rule 10-01(b)(8) of Regulation S-X. Results of operations for the three and nine
months ended September 30, 2005 are not necessarily indicative of results for
the complete year.
3
RURBAN FINANCIAL CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2005, DECEMBER 31, 2004 AND SEPTEMBER 30, 2004
(UNAUDITED) (UNAUDITED)
--------------------------------------------
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
2005 2004 2004
------------- ------------ -------------
ASSETS
Cash and due from banks $ 8,794,880 $ 10,617,766 $ 12,111,512
Federal funds sold -- -- 4,500,000
------------ ------------ ------------
Cash and cash equivalents 8,794,880 10,617,766 16,611,512
Interest-bearing deposits 150,000 150,000 250,000
Available-for-sale securities 119,075,282 108,720,491 95,599,129
Loans held for sale -- 112,900 --
Loans, net of unearned income 271,409,384 264,480,789 272,955,578
Allowance for loan losses (4,813,956) (4,899,063) (5,368,515)
Premises and equipment, net 9,614,849 7,740,442 7,530,485
Purchased software 4,120,523 4,564,474 4,747,030
Federal Reserve and Federal Home Loan Bank stock 2,875,400 2,793,000 2,814,100
Foreclosed assets held for sale, net 2,227,581 720,000 --
Interest receivable 2,469,046 1,984,452 2,033,254
Deferred income taxes -- -- 2,583,235
Goodwill 6,092,072 2,144,304 2,144,304
Core deposits and other intangibles 1,208,095 542,978 567,992
Cash value of life insurance 9,339,022 9,146,816 9,051,215
Other 6,019,922 6,529,397 4,307,877
------------ ------------ ------------
Total assets $438,582,100 $415,348,746 $415,827,196
============ ============ ============
See notes to condensed consolidated financial statements (unaudited)
Note: The balance sheet at December 31, 2004 has been derived from the
audited consolidated financial statements at that date.
4
RURBAN FINANCIAL CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
SEPTEMBER 30, 2005, DECEMBER 31, 2004 AND SEPTEMBER 30, 2004
(UNAUDITED) (UNAUDITED)
--------------------------------------------
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
2005 2004 2004
------------- ------------ -------------
LIABILITIES
Deposits
Demand $ 37,940,995 $ 37,831,810 $ 36,640,451
Savings, interest checking and money market 104,535,697 87,795,630 94,495,084
Time 176,014,845 153,996,874 158,846,720
------------ ------------ ------------
Total deposits 318,491,537 279,624,314 289,982,255
Notes payable 2,052,794 3,079,656 3,428,574
Federal Home Loan Bank advances 34,000,000 56,000,000 56,000,000
Federal funds purchased 2,100,000 7,500,000 --
Retail repurchase agreements 6,600,152 4,059,151 3,017,151
Trust preferred securities 20,620,000 10,310,000 10,310,000
Interest payable 1,171,173 994,114 734,751
Deferred income taxes 404,334 523,111 --
Other liabilities 2,861,352 2,952,605 2,350,706
------------ ------------ ------------
Total liabilities 388,301,342 365,042,951 365,823,437
------------ ------------ ------------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Common stock, $2.50 stated value; authorized
10,000,000 shares; issued 4,571,317; outstanding
September 30, 2005 - 4,571,317, December 31,
2004 - 4,568,388 and September 30, 2004 - 4,567,968
shares 11,428,293 11,439,255 11,439,255
Additional paid-in capital 10,773,550 11,003,642 11,004,876
Retained earnings 29,275,237 28,943,736 28,229,151
Unearned employee stock ownership plan (ESOP) shares -- -- (45,539)
Accumulated other comprehensive income (loss) (1,196,322) (803,189) (340,450)
Treasury stock, at cost
September 30, 2005 - 0, December 31, 2004 - 7,314
and September 30, 2004 - 7,734 common shares -- (277,649) (283,534)
------------ ------------ ------------
Total stockholders' equity 50,280,758 50,305,795 50,003,759
------------ ------------ ------------
Total liabilities and stockholders' equity $438,582,100 $415,348,746 $415,827,196
============ ============ ============
See notes to condensed consolidated financial statements (unaudited)
Note: The balance sheet at December 31, 2004 has been derived from the
audited consolidated financial statements at that date.
5
RURBAN FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004
------------- -------------
INTEREST INCOME
Loans, including fees
Taxable $4,187,543 $4,071,529
Tax-exempt 17,898 15,282
Securities
Taxable 1,095,151 925,549
Tax-exempt 71,264 39,497
Other 57,498 11,994
---------- ----------
Total interest income 5,429,354 5,063,851
---------- ----------
INTEREST EXPENSE
Deposits 1,615,308 1,050,918
Other borrowings 67,162 64,335
Retail repurchase agreements 23,874 8,052
Federal Home Loan Bank advances 440,175 495,192
Trust preferred securities 300,360 290,855
---------- ----------
Total interest expense 2,446,879 1,909,352
---------- ----------
NET INTEREST INCOME 2,982,475 3,154,499
PROVISION (CREDIT) FOR LOAN LOSSES (382,000) 319,517
---------- ----------
NET INTEREST INCOME AFTER PROVISION (CREDIT) FOR
LOAN LOSSES 3,364,475 2,834,982
---------- ----------
NON-INTEREST INCOME
Data service fees 2,834,357 2,566,485
Trust fees 767,969 726,417
Customer service fees 526,197 499,528
Net gains on loan sales 28,895 7,043
Net realized gains on sales of
available-for-sale securities 34,050 112,394
Loan servicing fees 79,186 91,216
Loss on sale of assets (36,011) (10,508)
Other 151,328 87,432
---------- ----------
Total non-interest income 4,385,971 4,080,007
---------- ----------
See notes to condensed consolidated financial statements (unaudited)
6
RURBAN FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (CONTINUED)
THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004
------------- -------------
NON-INTEREST EXPENSE
Salaries and employee benefits $3,607,270 $3,080,476
Net occupancy expense 312,661 235,173
Equipment expense 1,294,686 1,099,129
Data processing fees 99,085 75,702
Professional fees 467,951 512,476
Marketing expense 144,954 84,663
Printing and office supplies 115,320 73,506
Telephone and communications 180,261 171,529
Postage and delivery expense 77,979 85,747
State, local and other taxes 146,683 (5,493)
Employee expense 225,032 165,510
Other 338,556 332,110
---------- ----------
Total non-interest expense 7,010,438 5,910,528
---------- ----------
INCOME BEFORE INCOME TAX 740,008 1,004,461
PROVISION FOR INCOME TAXES 247,824 305,819
---------- ----------
NET INCOME $ 492,184 $ 698,642
========== ==========
BASIC EARNINGS PER SHARE $ 0.11 $ 0.15
========== ==========
DILUTED EARNINGS PER SHARE $ 0.11 $ 0.15
========== ==========
DIVIDENDS DECLARED PER SHARE $ 0.05 $ --
========== ==========
See notes to condensed consolidated financial statements (unaudited)
7
RURBAN FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004
------------- -------------
INTEREST INCOME
Loans, including fees
Taxable $12,098,708 $12,233,058
Tax-exempt 48,227 50,508
Securities
Taxable 3,134,559 2,570,230
Tax-exempt 165,462 119,990
Other 159,716 53,059
----------- -----------
Total interest income 15,606,672 15,026,845
----------- -----------
INTEREST EXPENSE
Deposits 4,012,052 3,481,494
Other borrowings 204,365 297,538
Retail repurchase agreements 60,328 23,147
Federal Home Loan Bank advances 1,581,052 1,332,752
Trust preferred securities 842,170 843,356
----------- -----------
Total interest expense 6,699,967 5,978,287
----------- -----------
NET INTEREST INCOME 8,906,705 9,048,558
PROVISION (CREDIT) FOR LOAN LOSSES (30,000) 129,517
----------- -----------
NET INTEREST INCOME AFTER PROVISION (CREDIT) FOR
LOAN LOSSES 8,936,705 8,919,041
----------- -----------
NON-INTEREST INCOME
Data service fees 8,662,825 7,683,585
Trust fees 2,351,509 2,302,406
Customer service fees 1,409,199 1,518,714
Net gains on loan sales 46,243 27,090
Net realized gains on sales of
available-for-sale securities 25,300 236,356
Loan servicing fees 225,326 285,247
Gain (loss) on sale of assets (18,935) 67,823
Other 513,714 376,685
----------- -----------
Total non-interest income 13,215,181 12,497,906
----------- -----------
See notes to condensed consolidated financial statements (unaudited)
8
RURBAN FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (CONTINUED)
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004
------------- -------------
NON-INTEREST EXPENSE
Salaries and employee benefits $10,339,614 $ 9,631,372
Net occupancy expense 897,058 721,878
Equipment expense 3,831,477 3,158,707
Data processing fees 303,781 284,159
Professional fees 1,697,020 1,658,423
Marketing expense 308,925 263,444
Printing and office supplies 397,153 327,145
Telephone and communications 494,198 483,998
Postage and delivery expense 236,006 262,147
State, local and other taxes 380,036 409,108
Employee expense 726,561 553,739
Other 1,163,450 1,010,319
----------- -----------
Total non-interest expense 20,775,279 18,764,439
----------- -----------
INCOME BEFORE INCOME TAX 1,376,607 2,652,508
PROVISION FOR INCOME TAXES 359,661 632,801
----------- -----------
NET INCOME $ 1,016,946 $ 2,019,707
=========== ===========
BASIC EARNINGS PER SHARE $ 0.22 $ 0.44
=========== ===========
DILUTED EARNINGS PER SHARE $ 0.22 $ 0.44
=========== ===========
DIVIDENDS DECLARED PER SHARE $ 0.15 $ --
=========== ===========
See notes to condensed consolidated financial statements (unaudited)
9
RURBAN FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY (UNAUDITED)
Three Months Ended Nine Months Ended
--------------------------------------- ---------------------------------------
September 30, 2005 September 30, 2004 September 30, 2005 September 30, 2004
------------------ ------------------ ------------------ ------------------
Balance at beginning of period $50,599,536 $48,227,216 $50,305,795 $48,382,756
Net Income 492,184 698,642 1,016,946 2,019,707
Other comprehensive income (loss):
Net change in unrealized gains (losses)
on securities available-for-sale, net (582,396) 1,031,379 (393,135) (541,532)
----------- ----------- ----------- -----------
Total comprehensive income (loss) (90,212) 1,730,021 623,811 1,478,175
Cash dividend (228,566) -- (685,443) --
Stock options exercised -- 7,204 36,595 24,874
Paydown of ESOP loan -- 39,318 -- 117,954
----------- ----------- ----------- -----------
Balance at end of period $50,280,758 $50,003,759 $50,280,758 $50,003,759
=========== =========== =========== ===========
See notes to condensed consolidated financial statements (unaudited)
10
RURBAN FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004
------------- -------------
OPERATING ACTIVITIES
Net income $ 1,016,946 $ 2,019,707
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization 2,280,844 1,761,071
Provision for loan losses (30,000) 129,517
ESOP shares earned -- 117,954
Amortization of premiums and discounts on securities 143,019 465,515
Amortization of intangible assets 77,815 76,995
Deferred income taxes 83,746 --
Proceeds from sale of loans held for sale 4,468,743 3,945,061
Originations of loans held for sale (4,309,600) (3,917,971)
Gain from sale of loans (46,243) (27,090)
Loss on sales of foreclosed assets 19,221 10,508
FHLB Stock Dividends (82,400) (69,200)
Gain on sales of premises and equipment (286) --
Net realized gains on available-for-sale securities (25,300) (236,356)
Changes in
Interest receivable (455,632) (32,522)
Other assets 343,478 1,300,066
Interest payable and other liabilities (22,740) (2,807,557)
------------ ------------
Net cash provided by operating activities 3,461,611 2,735,698
------------ ------------
INVESTING ACTIVITIES
Net change in interest-bearing deposits -- 10,000
Purchases of available-for-sale securities (30,171,309) (60,969,199)
Proceeds from maturities of available-for-sale
securities 13,792,631 49,605,726
Proceeds from the sales of available-for-sale securities 5,310,512 22,413,277
Net change in loans (4,223,001) 6,346,236
Purchase of bank owned life insurance -- (8,000,000)
Proceeds from assumption of net liabilities in business
acquisition 48,645,686 --
Purchase of premises and equipment (2,760,567) (2,893,087)
Purchase of Federal Home Loan and Federal Reserve
Bank stock -- (383,300)
Proceeds from sale of Federal Home Loan and Federal
Reserve Bank stock -- 383,300
Proceeds from sales of premises and equipment 288,553 --
Proceeds from the sale of foreclosed assets 1,573,627 1,459,157
------------ ------------
Net cash provided by investing activities 32,456,132 7,972,110
------------ ------------
See notes to condensed consolidated financial statements (unaudited)
11
RURBAN FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004
------------- -------------
FINANCING ACTIVITIES
Net decrease in demand deposits, money market, interest checking
and savings accounts $ (2,126,650) $(11,670,644)
Net decrease in certificates of deposit (19,389,270) (15,821,850)
Net increase (decrease) in securities sold under agreements to
repurchase 2,541,001 (906,603)
Net decrease in federal funds purchased (5,400,000) --
Proceeds from Federal Home Loan Bank advances 12,500,000 17,000,000
Repayment of Federal Home Loan Bank advances (34,500,000) --
Repayment of notes payable (1,026,862) (6,899,025)
Proceeds from trust preferred 10,310,000 --
Dividends paid (685,443) --
Proceeds from stock options exercised 36,595 24,874
------------ ------------
Net cash used in financing activities (37,740,629) (18,273,248)
------------ ------------
DECREASE IN CASH AND CASH EQUIVALENTS (1,822,886) (7,565,440)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 10,617,766 24,176,952
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,794,880 $ 16,611,512
============ ============
SUPPLEMENTAL CASH FLOWS INFORMATION
Interest paid $ 6,522,908 $ 7,590,839
Transfer of loans to foreclosed assets $ 3,126,638 $ 79,113
See notes to condensed consolidated financial statements (unaudited)
12
RURBAN FINANCIAL CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared by the Company in accordance with generally accepted accounting
principles for interim financial information and with the instructions for Form
10-Q. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. The financial statements reflect all adjustments that are, in the
opinion of management, necessary to fairly present the financial position,
results of operations and cash flows of the Company for the interim periods
presented herein. Those adjustments consist only of normal recurring
adjustments. Results of operations for the three and nine months ended September
30, 2005 are not necessarily indicative of results for the complete year.
The condensed consolidated balance sheet of the Company as of December 31, 2004
has been derived from the audited consolidated balance sheet of the Company as
of that date.
These financial statements should be read in conjunction with the consolidated
financial statements and footnotes included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2004.
The Company accounts for its stock option plan under the recognition and
measurement principles of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees"(APB 25) and related interpretations.
Under APB 25, no stock-based employee compensation cost is reflected in net
income, as all options granted under the Company's stock option plan had an
exercise price equal to the market value of the underlying common stock on the
grant date. Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," as amended by SFAS 148, requires pro
forma disclosures of net income and earnings per share for companies not
adopting its fair value accounting method for stock-based employee compensation.
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
to measure stock-based employee compensation expense.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -----------------------
2005 2004 2005 2004
-------- -------- ---------- ----------
Net income, as reported $492,184 $698,642 $1,016,946 $2,019,707
Less: Total stock-based employee
compensation cost determined under
the fair value based method, net of
income taxes (2,970) (49,183) (640,765) (147,548)
-------- -------- ---------- ----------
Pro forma net income $489,214 $649,459 $ 376,181 $1,872,159
======== ======== ========== ==========
Earnings per share:
Basic - as reported $ 0.11 $ 0.15 $ 0.22 $ 0.44
Basic - pro forma $ 0.11 $ 0.14 $ 0.08 $ 0.41
Diluted - as reported $ 0.11 $ 0.15 $ 0.22 $ 0.44
Diluted - pro forma $ 0.11 $ 0.14 $ 0.08 $ 0.41
13
On April 14, 2005, the Securities and Exchange Commission (SEC) announced the
adoption of a new rule that delays the dates for compliance with Statement of
Financial Accounting Standards No. 123 (revised 2004) (SFAS No. 123R). SFAS No.
123R was previously scheduled to become mandatory for public entities, such as
the Company, that do not file as small business issuers as of the beginning of
the first interim or annual reporting period that begins after June 15, 2005.
The SEC's new rule allows these public entities to implement SFAS No. 123R at
the beginning of the next fiscal year that begins after June 15, 2005. SFAS No.
123R prohibits companies from using APB 25 for the accounting of stock options
and requires that grants of stock options be charged to expense. Companies are
permitted to adopt SFAS No. 123R earlier than the beginning of their next fiscal
year, but management of the Company intends to adopt SFAS No. 123R in the first
quarter of 2006.
SFAS No. 123R permits public companies to adopt its requirements using one of
two methods. The "modified prospective" method recognizes compensation expense
beginning with the effective date for all stock options granted after the
effective date and for all stock options that become vested after the effective
date. The "modified retrospective" method includes the requirements of the
"modified prospective" method described above, but also permits entities to
restate prior period results based on the amounts previously recognized under
SFAS No. 123 for purpose of pro forma disclosures. The Company has not made a
determination as to which method it will utilize upon adoption of SFAS no. 123R.
NOTE B--EARNINGS PER SHARE
Earnings per share have been computed based on the weighted average number of
shares outstanding during the periods presented. For the periods ended September
30, 2005 and 2004, stock options totaling 235,066 and 302,122 shares of common
stock, respectively, were not considered in computing EPS as they were
anti-dilutive. The number of shares used in the computation of basic and diluted
earnings per share was:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- --------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Basic earnings per share 4,573,033 4,555,590 4,570,266 4,555,207
Diluted earnings per share 4,574,492 4,557,019 4,584,070 4,570,010
14
NOTE C - LOANS, RISK ELEMENTS AND ALLOWANCE FOR LOAN LOSSES
Total loans on the balance sheet are comprised of the following classifications
at:
September 30, December 31, September 30,
2005 2004 2004
------------- ------------ -------------
Commercial $ 53,918,640 $ 58,498,557 $ 62,788,372
Commercial real estate 69,955,831 64,107,549 63,586,814
Agricultural 41,838,103 41,239,895 43,300,968
Residential real estate 65,671,854 63,828,237 64,009,425
Consumer 37,844,514 31,948,581 32,982,783
Lease financing 2,403,323 5,127,639 6,579,814
------------ ------------ ------------
Total loans 271,632,265 264,750,458 273,248,176
Less
Net deferred loan fees, premiums and discounts (222,881) (269,669) (292,598)
------------ ------------ ------------
Loans, net of unearned income $271,409,384 $264,480,789 $272,955,578
============ ============ ============
Allowance for loan losses $ (4,813,956) $ (4,899,063) $ (5,368,515)
============ ============ ============
The following is a summary of the activity in the allowance for loan losses
account for the three and nine months ended September 30, 2005 and September 30,
2004.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -------------------------
2005 2004 2005 2004
---------- ----------- ----------- -----------
Balance, beginning of year $5,210,464 $ 6,922,995 $ 4,899,063 $10,181,135
Provision charged to expense (382,000) 319,517 (30,000) 129,517
Recoveries 304,140 204,041 1,419,602 1,279,283
Loans charged off (318,648) (2,078,038) (1,474,709) (6,221,420)
---------- ----------- ----------- -----------
Balance, end of period $4,813,956 $ 5,368,515 $ 4,813,956 $ 5,368,515
========== =========== =========== ===========
The following schedule summarizes nonaccrual, past due and impaired loans at:
September 30, December 31, September 30,
2005 2004 2004
------------- ------------ -------------
Non-accrual loans $12,507,000 $13,384,000 $16,524,000
Accruing loans which are contractually
past due 90 days or more as to interest or
principal payments 0 11,000 0
----------- ----------- -----------
Total non-performing loans $12,507,000 $13,395,000 $16,524,000
=========== =========== ===========
15
Individual loans determined to be impaired, including non-accrual loans, were as
follows:
September 30, December 31, September 30,
2005 2004 2004
------------- ------------ -------------
Loans with no allowance for loan losses allocated $ 923,000 $ 975,000 $ 443,000
Loans with allowance for loan losses allocated 8,525,000 10,411,000 12,402,000
---------- ----------- -----------
Total impaired loans $9,448,000 $11,386,000 $12,845,000
========== =========== ===========
Amount of allowance allocated $1,299,000 $ 1,265,000 $ 2,472,000
========== =========== ===========
NOTE D - ACQUISITIONS
PURCHASE OF LIMA, OHIO BRANCHES
On March 15, 2005, State Bank and Trust Company ("State Bank"), a wholly owned
subsidiary of Rurban, 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 provided for the sale
to State Bank of two of Liberty Savings' bank branches and one non-banking
facility located in Lima, Ohio. The transaction, which included the acquisition
of approximately $60.6 million in deposits and $5.9 million in loans, closed on
June 17, 2005 and the branches opened as State Bank branches on June 20, 2005.
As of September 30, 2005, the Lima branches had $48.3 million in deposits and
$9.4 million in loans.
The following table summarizes the estimated fair values of the assets and
liabilities acquired during the acquisition as of September 30, 2005:
Loans $ 5,887,339
Core deposits 752,574
Goodwill 3,928,552
Accrued interest receivable 28,962
Premises and equipment 1,239,000
-------------
Total assets acquired 11,836,427
Deposits 60,623,457
CD premium (249,890)
Accrued interest payable 62,114
Other liabilities 46,432
-------------
Total liabilities acquired 60,482,113
-------------
Net liabilities assumed ($48,645,686)
=============
The total deposit premium paid for this transaction was $4.9 million. Of this
amount, $752,574 was allocated to a core deposit intangible asset, $249,890 was
allocated to a CD premium, and $3.9 million was allocated to goodwill.
The operating information from the purchased branches was not available from
Liberty Savings and therefore, the pro forma information is omitted.
16
ACQUISITION OF EXCHANGE BANCSHARES, INC.
On April 13, 2005, Rurban entered into an Agreement and Plan of Merger (the
"Merger Agreement") with Exchange Bancshares, Inc., an Ohio corporation
("Exchange"), headquartered in Luckey, Ohio. In accordance with the terms and
conditions of the Merger Agreement, Exchange will be merged with and into
Rurban, with Rurban being the surviving corporation in the merger. Exchange's
wholly-owned subsidiary, Exchange Bank, will operate as a separate bank
subsidiary of Rurban following the completion of the merger. This transaction is
expected to be completed later this year.
Pursuant to the terms of the Merger Agreement, approximately one-half of the
outstanding common shares of Exchange will be exchanged for cash and
approximately one-half of the outstanding common shares will be exchanged for
common shares of Rurban. Subject to certain adjustments set forth in the Merger
Agreement, each outstanding common share of Exchange will be converted into
either $22.00 in cash or 1.555 common shares of Rurban. Shareholders of Exchange
who hold 100 or fewer shares will receive all cash, while shareholders holding
more than 100 shares may elect cash, Rurban common shares or a combination of
cash and Rurban common shares.
The merger is subject to approval by federal and state regulators, as well as
the satisfaction of other customary conditions set forth in the Merger
Agreement. As of the date of this filing, final regulatory approval had not been
received. The shareholders of Exchange approved the acquisition at a special
board meeting held on October 11, 2005.
As stated in the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2005, the Merger Agreement provides for a reduction in the purchase
price per share to be paid by the Company in the merger in the event the
shareholders' equity of Exchange (as adjusted in accordance with the Merger
Agreement) falls below $8.1 million prior to the closing.
On or about July 13, 2005, Exchange filed Amendment No. 1 to its Form 10-KSB for
the fiscal year ended December 31, 2004 and Amendment No. 1 to its Form 10-QSB
for the quarterly period ended March 31, 2005 in response to a comment letter
received from the Securities and Exchange Commission relating to the accounting
and reporting by Exchange of its valuation allowance for deferred tax assets.
The impact of the Amendments was to decrease Exchange's shareholder's equity at
December 31, 2004 by $196,000 and to further decrease Exchange's shareholders'
equity at March 31, 2005 by $35,000. The impact of these reductions could result
in a reduction in the per share purchase price to be paid by Rurban in the
merger.
NOTE E - NOTES PAYABLE AND TRUST PREFERRED SECURITIES
RFCBC, Inc. has a note payable to an unaffiliated bank secured by the common
stock of Rurbanc Data Services, Inc. ("RDSI") and substantially all of the
assets of RFCBC, Inc. The note requires quarterly principal payments of $300,000
together with interest at the prime rate plus 1% (7.75% at September 30, 2005)
and matures on June 6, 2006. The principal note balance was $1,100,000 as of
September 30, 2005, $2,000,000 as of December 31, 2004 and $2,300,000 as of
September 30, 2004. The outstanding balance of $1,100,000 was paid off on
October 7, 2005.
RDSI has two notes payable to State Bank. The notes were originated in September
of 2004 and had a combined original principal balance of $2,028,574, of which
$1,128,574 was participated to an unaffiliated bank. The first note is secured
by equipment and second lien positions on all business assets and requires
monthly payments of $15,857, with interest at 6.50%. The participated principal
17
note balance was $666,793 as of September 30, 2005 and $773,654 as of December
31, 2004. The second note is secured by equipment and second lien positions on
all business assets and requires monthly payments of $6,272, with interest at
6.50%. The participated principal note balance was $263,736 as of September 30,
2005 and $306,002 as of December 31, 2004.
State Bank has a note payable to Ford Motor Credit Company which is secured by a
vehicle. The note requires monthly payments of $795 at a zero percent interest
rate and matures on January 5, 2008. The principal note balance was $22,265 as
of September 30, 2005.
The company established Rurban Statutory Trust II ("RST II") in August 2005. In
September 2005, RST II completed a pooled private offering of 10,000 Capital
Securities with a liquidation amount of $1,000 per security. The proceeds of the
offerings were loaned to the Company in exchange for junior subordinated
debentures of the Company with terms substantially similar to the Capital
Securities. The balance of trust preferred securities was $20,620,000 as of
September 30, 2005.
NOTE F - REGULATORY MATTERS
The Company and State Bank are subject to various regulatory capital
requirements administered by federal and state banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators. If undertaken, these actions
could have a direct material adverse effect on the Company's consolidated
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 in the regulations), and of
Tier I capital (as defined in the regulations) to average assets (as defined as
in the regulations). As of September 30, 2005, the Company and State Bank
exceeded all "well-capitalized" requirements to which they are subject.
As of September 30, 2005, the most recent notification to the regulators
categorized 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 following table. There are no
conditions or events since that notification that management believes have
changed State Bank's categorization as well capitalized.
18
The Company's consolidated and State Bank's actual capital amounts (in millions)
and ratios are presented in the following table.
MINIMUM REQUIRED TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
-------------- ----------------- -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
As of September 30, 2005
Total Capital
(to Risk-Weighted Assets)
Consolidated $67.9 23.0% $23.6 8.0% $ -- N/A
State Bank 35.8 13.1 22.0 8.0 27.5 10.0
Tier I Capital
(to Risk-Weighted Assets)
Consolidated 61.3 20.8 11.8 4.0 -- N/A
State Bank 32.8 11.9 11.0 4.0 16.5 6.0
Tier I Capital
(to Average Assets)
Consolidated 61.3 14.0 17.5 4.0 -- N/A
State Bank 32.8 7.9 16.6 4.0 20.7 5.0
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
NOTE G - CONTINGENT LIABILITIES
There are various contingent liabilities that are not reflected in the Company's
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.
NOTE H - NEW ACCOUNTING PRONOUNCEMENTS
On April 14, 2005, the Securities and Exchange Commission (SEC) announced the
adoption of a new rule that delays the dates for compliance with Statement of
Financial Accounting Standards No. 123 (revised 2004) (SFAS No. 123R). SFAS No.
123R was previously scheduled to become mandatory for public entities, such as
the Company, that do not file as small business issuers as of the beginning of
the first interim or annual reporting period that begins after June 15, 2005.
The SEC's new rule allows these public entities to implement SFAS No. 123R at
the beginning of the next fiscal year that begins after June 15, 2005. SFAS No.
123R prohibits companies from using APB 25 for the
19
accounting of stock options and requires that grants of stock options be charged
to expense. Companies are permitted to adopt SFAS No. 123R earlier than the
beginning of their next fiscal year, but management of the Company intends to
adopt SFAS No. 123R in the first quarter of 2006.
SFAS No. 123R permits public companies to adopt its requirements using one of
two methods. The "modified prospective" method recognizes compensation expense
beginning with the effective date for all stock options granted after the
effective date and for all stock options that become vested after the effective
date. The "modified retrospective" method includes the requirements of the
"modified prospective" method described above, but also permits entities to
restate prior period results based on the amounts previously recognized under
SFAS No. 123 for purpose of pro forma disclosures. The Company has not made a
determination as to which method it will utilize upon adoption of SFAS no. 123R.
NOTE I - COMMITMENTS AND CREDIT RISK
As of September 30, 2005, loan commitments and unused lines of credit totaled
$55,351,000 standby letters of credit totaled $451,000 and no commercial letters
of credit were outstanding.
NOTE J - SEGMENT INFORMATION
The reportable segments are determined by the products and services offered,
primarily distinguished between banking and data processing operations. Other
segments include the accounts of the holding company, Rurban, which provides
management and operational services to its subsidiaries; and Reliance Financial
Services, N.A., which provides trust and financial services to customers
nationwide. Information reported internally for performance assessment follows.
20
As of and for the nine months ended September 30, 2005
Data Total Intersegment Consolidated
Banking Processing Other Segments Elimination Totals
------------ ----------- ----------- ------------ ------------ ------------
Income statement information:
Net interest income (expense) $ 9,955,738 $ (183,276) $ (865,757) $ 8,906,705 $ 8,906,705
Non-interest income - external
customers 2,159,638 8,662,825 2,392,718 13,215,181 13,215,181
Non-interest income - other segments -- 1,016,193 1,321,091 2,337,284 (2,337,284) --
------------ ----------- ----------- ------------ ------------ ------------
Total revenue 12,115,376 9,495,742 2,848,052 24,459,170 (2,337,284) 22,121,886
Non-interest expense 11,872,865 7,707,020 3,532,678 23,112,563 (2,337,284) 20,775,279
Significant non-cash items:
Depreciation and
amortization 482,951 1,712,128 85,765 2,280,844 -- 2,280,844
Provision for loan losses (30,000) -- -- (30,000) -- (30,000)
Income tax expense (benefit) 150,152 648,504 (438,995) 359,661 -- 359,661
Segment profit (loss) $ 712,325 $ 1,140,218 $ (835,597) $ 1,016,946 $ -- $ 1,016,946
Balance sheet information:
Total assets $433,565,505 $10,182,412 $15,405,372 $459,153,289 $(20,571,189) $438,582,100
Goodwill and intangibles 7,300,167 -- -- 7,300,167 -- 7,300,167
Premises and equipment
expenditures, Nine months
ended September 30, 2005 700,081 1,935,221 125,265 2,760,567 -- 2,760,567
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Rurban is a bank holding company registered with the Federal Reserve Board.
State Bank is engaged in commercial banking. Rurban's subsidiary, Rurbanc Data
Services, Inc. ("RDSI"), provides computerized data processing services to
community banks and businesses.
Rurban Statutory Trust I ("RST") was established in August 2000. In September
2000, RST completed 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 of the
Company with terms substantially 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.
Rurban Statutory Trust II ("RST II") was established in August 2005. In
September 2005, RST II completed 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 of the Company with terms substantially similar to the Capital
Securities. The sole assets of RST II 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 II under the
Capital Securities.
Reliance Financial Services, N.A. ("Reliance"), a wholly owned subsidiary of
State Bank, provides trust and financial services to customers nationwide.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements within this document which are not statements of historical
fact constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements involve
risks and uncertainties and actual results may differ materially from those
predicted by the forward-looking statements. These risks and uncertainties
include, but are not limited to, risks and uncertainties inherent in the
national and regional banking, insurance and mortgage industries, competitive
factors specific to markets in which Rurban and its subsidiaries operate, future
interest rate levels, legislative and regulatory actions, capital market
conditions, general economic conditions, geopolitical events, the loss of key
personnel and other factors.
Forward-looking statements speak only as of the date on which they are made, and
Rurban undertakes no obligation to update any forward-looking statement to
reflect unanticipated events or circumstances occurring after the date on which
the statement is made. All subsequent written and oral forward-looking
statements attributable to Rurban or any person acting on our behalf are
qualified by these cautionary statements.
The following discussion is intended to provide a review of the consolidated
financial condition and results of operations of Rurban. This discussion should
be read in conjunction with the consolidated financial statements and related
footnotes in Rurban's Annual Report on Form 10-K for the fiscal year ended
December 31, 2004 filed with the SEC.
22
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 the 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.
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 or accelerated methods, and are subject to
impairment if events or circumstances indicate a possible inability to realize
the carrying amount. The initial goodwill and
23
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
effect the estimates include, among others, customer attrition, changes in
revenue growth trends, specific industry conditions and changes in competition.
IMPACT OF ACCOUNTING CHANGES
On April 14, 2005, the Securities and Exchange Commission (SEC) announced the
adoption of a new rule that delays the dates for compliance with Statement of
Financial Accounting Standards No. 123 (revised 2004) (SFAS No. 123R). SFAS No.
123R was previously scheduled to become mandatory for public entities, such as
the Company, that do not file as small business issuers as of the beginning of
the first interim or annual reporting period that begins after June 15, 2005.
The SEC's new rule allows these public entities to implement SFAS No. 123R at
the beginning of the next fiscal year that begins after June 15, 2005. SFAS No.
123R prohibits companies from using APB 25 for the accounting of stock options
and requires that grants of stock options be charged to expense. Companies are
permitted to adopt SFAS No. 123R earlier than the beginning of their next fiscal
year, but management of the Company intends to adopt SFAS No. 123R in the first
quarter of 2006.
SFAS No. 123R permits public companies to adopt its requirements using one of
two methods. The "modified prospective" method recognizes compensation expense
beginning with the effective date for all stock options granted after the
effective date and for all stock options that become vested after the effective
date. The "modified retrospective" method includes the requirements of the
"modified prospective" method described above, but also permits entities to
restate prior period results based on the amounts previously recognized under
SFAS No. 123 for purpose of pro forma disclosures. The Company has not made a
determination as to which method it will utilize upon adoption of SFAS no. 123R.
PURCHASE OF LIMA, OHIO BRANCHES
On June 17, 2005, State Bank acquired two bank branches and one non-banking
facility located in Lima, Ohio from Liberty Savings Bank, FSB, a subsidiary of
Liberty Capital, Inc. The acquisition included approximately $60.6 million in
deposits and $5.9 million in loans. The branches opened as State Bank branches
on June 20, 2005. As of September 30, 2005, the Lima branches had $48.3 million
in deposits and $9.4 million in loans.
ACQUISITION OF EXCHANGE BANCSHARES, INC.
On April 13, 2005, Rurban entered into an Agreement and Plan of Merger (the
"Merger Agreement") with Exchange Bancshares, Inc., an Ohio corporation
("Exchange") headquartered in Luckey, Ohio. In accordance with the terms and
conditions of the Merger Agreement, Exchange will be merged with and into
Rurban, with Rurban being the surviving corporation in the merger. Exchange's
wholly-owned subsidiary, Exchange Bank, will operate as a separate bank
subsidiary of Rurban following the completion of the merger. This transaction is
expected to be completed later this year.
Pursuant to the terms of the Merger Agreement, approximately one-half of the
outstanding common shares of Exchange will be exchanged for cash and
approximately one-half of the outstanding common shares will be exchanged for
common shares of Rurban. Subject to certain adjustments set forth in the Merger
Agreement, each outstanding common share of Exchange will be converted into
either $22.00 in cash or 1.555 common shares of Rurban. Shareholders of Exchange
who hold 100 or fewer shares will
24
receive all cash, while shareholders holding more than 100 shares may elect
cash, Rurban common shares or a combination of cash and Rurban common shares.
The merger is subject to approval by federal and state regulators, as well as
the satisfaction of other customary conditions set forth in the Merger
Agreement. As of the date of this filing, final regulatory approval had not been
received. The shareholders of Exchange approved the acquisition at a special
board meeting held on October 11, 2005.
As stated in the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2005, the Merger Agreement provides for a reduction in the purchase
price per share to be paid by the Company in the merger in the event the
shareholders' equity of Exchange (as adjusted in accordance with the Merger
Agreement) falls below $8.1 million prior to the closing.
On or about July 13, 2005, Exchange filed Amendment No. 1 to its Form 10-KSB for
the fiscal year ended December 31, 2004 and Amendment No. 1 to its Form 10-QSB
for the quarterly period ended March 31, 2005 in response to a comment letter
received from the Securities and Exchange Commission relating to the accounting
and reporting by Exchange of its valuation allowance for deferred tax assets.
The impact of the Amendments was to decrease Exchange's shareholder's equity at
December 31, 2004 by $196,000 and to further decrease Exchange's shareholders'
equity at March 31, 2005 by $35,000. The impact of these reductions could result
in a reduction in the per share purchase price to be paid by Rurban in the
merger.
QUARTERLY AND YTD EARNINGS SUMMARY
The net income for the third quarter of 2005 was $492,000, or $0.11 per diluted
share, versus net income of $699,000, or $0.15 per diluted share, for the third
quarter of 2004. Net income for the nine months was $1,017,000, or $0.22 per
diluted share, versus net income of $2.0 million, or $0.44 per diluted share,
for the same period in 2004. The third quarter net income was mainly driven by
the reduction in the loan loss provision as a result of continued improvement in
asset quality offset by higher levels of non-interest expense associated with
expansion initiatives.
Net interest income decreased $172,000 to $3.0 million in the third quarter of
2005 compared to $3.2 million for the third quarter of 2004. The net interest
margin was 3.10% for the third quarter of 2005 compared to 3.35% for the third
quarter of 2004. Net interest income for the nine months was $8.9 million versus
$9.0 million for the same period in 2004. The decline in net interest income
resulted from higher funding costs driven by the rapid rise in short-term market
rates plus the acquisition of the Lima branch deposits during the second quarter
of 2005. The Company has begun utilizing the excess liquidity from its Lima
branch acquisition by paying down higher-cost time deposits and borrowings as
they mature. The Company continues to maintain its conservative posture on asset
quality and adheres to its disciplined approach to loan growth. The Company has
managed its balance sheet so that rate-sensitive assets are greater than
rate-sensitive liabilities, and as a result, the Company will benefit from
rising interest rates.
The provision for loan losses was a credit of $382,000 for the third quarter of
2005 compared to a provision of $320,000 for the third quarter of 2004. The
provision for loan losses for the nine months was a credit of $30,000 versus a
provision of $130,000 for the same period in 2004. Loan loss reserves were 1.77%
of total loans in the third quarter of 2005 compared to 1.97% in the third
quarter of 2004. The $382,000 reduction for the quarter and the $30,000
reduction for the nine month period to the Company's reserve was specifically
the result of continued asset quality improvement.
25
Non-interest income increased $306,000 to $4.4 million in the third quarter of
2005 compared to $4.1 million for the third quarter of 2004. Non-interest income
for the nine months was $13.2 million versus non-interest income of $12.5
million for the same period in 2004. The quarterly increase in non-interest
income was mainly the result of the increase in data processing fees of $268,000
associated with the expansion of RDSI's customer base, a $42,000 increase in
trust fees, and a $27,000 in customer service fees. The quarterly increase was
partially offset by a $26,000 increase in the loss on the sale of repossessed
assets. The year-to-date increase is mainly attributed to the increase in data
processing fees of $979,000 as a result in the expansion of RDSI's customer
base.
Non-interest expense increased $1.1 million to $7.0 million for the third
quarter of 2005 compared to $5.9 million for the third quarter of 2004.
Non-interest expense for the nine months was $20.8 million versus $18.8 million
for the same period in 2004. The increase in non-interest expense was impacted
by the operating expenses of the Lima branches that totaled $446,000 for the
quarter and $584,000 year-to-date, certain costs associated with the pending
Exchange acquisition, and the branch market optimization study.
CHANGES IN FINANCIAL CONDITION
SEPTEMBER 30, 2005 VS. DECEMBER 31, 2004
At September 30, 2005, total assets were $438.6 million, an increase of $23.3
million from December 31, 2004. The increase in assets was mainly attributable
to the branch acquisitions in Lima and the issuance of new trust preferred debt.
As of September 30, 2005, the Lima branches had $48.3 million in deposits and
$9.4 million in loans. The increase was partially offset by the maturity of some
higher-cost FHLB advances and allowing the Brokered Deposit portfolio to
run-down.
SEPTEMBER 30, 2005 VS. SEPTEMBER 30, 2004
As of September 30, 2005, total assets increased $22.8 million from September
30, 2004. The increase was mainly due to the aforementioned Lima branch
acquisition. The Lima branch acquisition added significant asset liquidity to
the September 30, 2005 balance sheet compared to the same period a year ago most
notably in the increase of available-for-sale securities of almost $23.5
million. Liability liquidity was also favorably impacted through the purchase of
lower cost deposit liabilities which allowed the Company the ability to reduce
its reliance on higher cost borrowings and brokered deposits and the new trust
preferred debt.
LINKED QUARTER COMPARISON
The Company reported net income for the third quarter of 2005 of $492,000, or
$0.11 per diluted share, versus a net loss of $114,000, or $0.02 per diluted
share, for the second quarter of 2005. The third quarter was impacted favorably
by a reduction in the loan loss provision as asset quality continues to improve,
an increase in net interest income from an increase in average earning asset
balances, and a decrease in non-interest expense. The second quarter loss was
mainly driven by the Lima branch acquisition and the pending acquisition of
Exchange, as well as a higher loan loss provision to address changing collateral
values in the auto lease portfolio in response to recent automakers' discount
programs.
26
Net interest income increased $55,000 or 2% to $3.0 million for the third
quarter of 2005 when compared to the second quarter of 2005. This increase was
driven principally as a result of the Lima market expansion.
A comparison of financial results for the quarter ended September 30, 2005 to
the previous quarter ended June 30, 2005 is as follows:
Linked
Three Months Ended Quarter
09/30/05 06/30/05 % Change
-------- -------- --------
(dollars in millions, except
per share data)
Total Assets $ 439 $ 451 -3%
Loans Held for Sale -- 0.4 --
Loans (net of unearned income) 271 272 --
Allowance for Loan Losses 4.8 5.2 -8%
Total Deposits 318 340 -6%
FHLB Advances & Federal Funds
Purchased 36.1 38.0 -5%
Net interest Income 3.0 2.9 +2%
Loan Loss Provision (0.4) 0.4 --
Non-interest Income 4.4 4.4 --
Non-interest Expense 7.0 7.2 -3%
Net Income (Loss) 0.5 (0.1) --
Basic Earnings (Loss) Per Share $0.11 $(0.02) --
Diluted Earnings (Loss) Per Share $0.11 $(0.02) --
On a linked quarter basis, total loans decreased $1 million and total assets
decreased $12 million. These decreases are mainly attributable to expected
deposit run-offs in the Lima market. The Company continues to promote the
exiting of out-of-market loans. FHLB advances and federal funds purchased,
combined, decreased $1.9 million as a result of purchasing lower cost deposit
liabilities in the Lima branch acquisition, which allowed the Company to reduce
its reliance on higher cost borrowings and brokered deposits.
TOTAL REVENUE
Three Months Ended
---------------------------------------
09/30/05 06/30/05 $Change %Change
-------- -------- ------- -------
(dollars in thousands)
Total Revenue $7,368 $7,346 $+22 +0.3%
Total revenue (net interest income plus noninterest income) was $7.4 million for
the third quarter of 2005 compared to $7.3 million for the second quarter of
2005, up $22,000 or 0.3%.
NET INTEREST INCOME
Three Months Ended
---------------------------------------
09/30/05 06/30/05 $Change %Change
-------- -------- ------- -------
(dollars in thousands)
Net Interest Income $2,982 $2,927 $+55 +2%
Net interest income increased $55,000 in the third quarter of 2005 when compared
to the second quarter of 2005. The tax equivalent net interest margin for the
third quarter of 2005 was 3.10%, flat
27
compared to the previous quarter. The increase in net interest income was driven
by an increase in earning assets as a result of the Lima branch acquisition that
took place late in the second quarter.
LOAN LOSS PROVISION
The provision for loan losses was a credit of $382,000 for the third quarter of
2005 compared to a charge of $352,000 in the second quarter of 2005. The
$382,000 reduction to the Company's reserve was the result of the continued
improvement in asset quality. The results of the third quarter are discussed in
the "Allowance for Loan Losses" section.
NON-INTEREST INCOME
Three Months Ended
---------------------------------------
09/30/05 06/30/05 $Change %Change
-------- -------- ------- -------
(dollars in thousands)
Total Non-interest Income $ 4,386 $4,419 $-33 -1%
- - Data Service Fees 2,834 2,873 -39 -1%
- - Trust Fees 768 779 -11 -1%
- - Deposit Service Fees 526 446 +80 +18%
- - Gains on Sale of Loans 29 9 +20 +222%
- - Gains on Sale of Securities 34 -- +34 --
- - Gain (Loss) on Assets (36) 56 -92 -164%
- - Other 231 256 +25 +10%
Non-interest income decreased by $33,000 in the third quarter of 2005 compared
to the second quarter of 2005. The third quarter slight decrease is mainly due
to the Company liquidating various repossessed assets resulting in a loss of
$36,000 in the third quarter of 2005 versus a gain of $56,000 in the second
quarter of 2005. The third quarter decrease was mostly offset by an increase in
customer service fees of $80,000 due to the expansion in the Lima market.
NON-INTEREST EXPENSE
Three Months Ended
---------------------------------------
09/30/05 06/30/05 $Change %Change
-------- -------- ------- -------
(dollars in thousands)
Total Non-interest Expense $7,010 $7,244 $-234 -3%
- - Salaries & Employee Benefits 3,607 3,501 +106 +3%
- - Equipment Expense 1,295 1,283 +12 +1%
- - Professional Fees 468 711 -243 -34%
- - All Other 1,640 1,749 -109 -6%
Non-interest expense for the third quarter of 2005 was $7.0 million compared to
$7.2 million for the second quarter of 2005, a decrease of $234,000 or 3%. The
linked quarter comparison reflects a gradual improvement in operating
efficiencies throughout the Company, despite the $446,000 increase in quarterly
operating expense related to the Lima acquisition.
28
LOANS
As of
-------------------------------------------
% of % of Inc
09/30/05 Total 06/30/05 Total (Dec)
-------- ----- -------- ----- -----
(dollars in millions)
Commercial $ 54 20% $ 55 20% $ (1)
Commercial real estate 70 26% 70 26% 0
Agricultural 42 15% 44 16% (2)
Residential 66 24% 64 24% 2
Consumer 38 14% 36 13% 2
Leasing loans 2 1% 3 1% (1)
---- ---- -----
Total $272 $272 $ 0
Loans held for sale 0 0.4 (0.4)
---- ---- -----
Total $272 $272 $ 0
Loans remained constant from June 30, 2005 to September 30, 2005. However, the
increase in the second quarter was mainly attributable to the Lima branch
acquisition which resulted in approximately $6 million in loans. As of September
30, 2005, the Lima branches had $9.4 million in total loans. During the first
quarter of 2005, the Company intensified its marketing efforts in Northwest Ohio
and continued its focus on sales resulting in an improvement in loan volume,
some of which is seasonally related to agriculture and some of which may be
attributed to an improved local economy. These marketing efforts will continue
throughout 2005.
ASSET QUALITY
As of and For the Quarter Ended
(dollars in millions)
09/30/05 06/30/05 Change
-------- -------- -------
Non-performing loans $12.5 $13.5 $ -1.0
Non-performing assets 15.0 16.1 -1.1
Non-performing assets/ loan plus OREO 5.47% 5.87% -0.40%
Non-performing assets/ total assets 3.42% 3.57% -0.15%
Net chargeoffs -- (0.1) +0.1
Net chargeoffs (annualized)/ total loans N/A N/A N/A
Loan loss provision (0.4) 0.4 -0.8
Allowance for loan loss - $ 4.8 5.2 -0.4
Allowance for loan loss - % 1.77% 1.91% -0.14%
Allowance/non-performing loans 38% 39% --
Allowance/non-performing assets 32% 32% --
Non-performing assets at September 30, 2005 decreased to $15 million or 3.42% of
total assets, versus $16.1 million, or 3.57% of total assets at June 30, 2005, a
decrease of $1.1 million. This decrease is attributable to a $1 million decrease
in non-accrual loans. The Company had net chargeoffs of $14,000 for the third
quarter of 2005 compared to net recovery of $0.1 million in the second quarter
of 2005.
29
ALLOWANCE FOR LOAN LOSSES
The Company grades its loans using an eight grade system. Loans with concerns
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 pay off of debt;
- Grade 7 - Doubtful: Inherent weaknesses which are well-defined and a
high probability of loss (impaired) (these loans are typically
reserved down to collateralized values); or
- 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.
09/30/05 06/30/05
---------------------- ----------------------
ALLOCATION ALLOCATION
LOAN ------------ LOAN ------------
BALANCE $ % BALANCE $ %
------- ---- ----- ------- ---- -----
Allocations for individual
commercial loans graded Doubtful
(impaired) $ 9.4 $1.3 13.83% $ 10.3 $1.8 17.48%
Allocations for individual
commercial loans graded
Substandard 7.0 0.6 8.57 9.2 0.7 7.61
Allocation based on Special Mention
loan balance 11.3 0.3 2.65 12.1 0.4 3.31
"General" allowance based on
chargeoff history of nine
categories of loans 243.9 2.6 1.07 240.8 2.3 0.96
------ ---- ----- ------ ---- -----
TOTAL $271.6 $4.8 1.77% $272.4 $5.2 1.91%
The amount of loans classified as doubtful decreased $.9 million to $9.4 million
for the quarter ended September 30, 2005 and substandard loans decreased $2.2
million to $7.0 million. Allowance allocations on doubtful loans decreased $0.5
million and the allowance allocations on substandard loans decreased $0.1
million from June 30, 2005. The allowance for loan losses at September 30, 2005
was $4.8 million or 1.77% of loans compared to $5.2 million or 1.91% at June 30,
2005.
CAPITAL RESOURCES
At September 30, 2005, actual capital levels (in millions) and minimum required
levels were:
Minimum Required
Minimum Required To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
-------------- ----------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Total capital (to risk weighted assets)
Consolidated $67.9 23.0% $23.6 8.0% $ -- N/A
State Bank 35.8 13.1 22.0 8.0 27.5 10.0
The Company and State Bank were categorized as well capitalized at
September 30, 2005.
30
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 $128.0 million at September 30,
2005 compared to $119.6 million at December 31, 2004. Management believes its
current liquidity level is sufficient to meet its operating needs.
The Company's residential first mortgage portfolio of $65.7 million at September
30, 2005 and $63.8 million at June 30, 2005, which can and has been used to
collateralize borrowings, is an additional source of liquidity. At September 30,
2005, all eligible mortgage loans were pledged under a 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 the nine months ended September 30, 2005 and 2004 follows.
The Company experienced positive cash flows from operating activities for the
nine months ended September 30, 2005 and 2004. Net cash from operating
activities was $3.5 million and $2.7 million, respectively, for the nine months
ended September 30, 2005 and 2004.
Net cash flow from investing activities was $32.5 million and $8.0 million for
the nine months ended September 30, 2005 and 2004, respectively. The changes in
net cash from investing activities for the nine months ended September 30, 2005
include increases in loan growth and securities of $4.2 million and $11.1
million, respectively, offset by the proceeds from the Lima branch acquisition.
The changes in net cash from investing activities for the nine months ended
September 30, 2004 include a increase in securities of $11.0 million, a decrease
in loans of $(6.3) million and changes in interest-bearing deposits, purchases
of premises and equipment and other investing activities.
Net cash flow from financing activities was $(37.7) million and $(18.3) million
for the nine months ended September 30, 2005 and 2004, respectively. The net
cash variance was primarily due to repayments of FHLB advances of $34.5 million
for the nine months ended September 30, 2005 compared to a reduction of total
deposits of $(27.5) million for the nine months ended September 30, 2004.
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.
Approximately $56.7 million of the Company's $65.7 million residential first
mortgage loan portfolio qualifies to collateralize FHLB borrowings and was
pledged to meet FHLB collateralization requirements as of September 30, 2005. In
addition to residential first mortgage loans, $14.7 million in investment
securities are pledged to meet FHLB collateralization requirements. Based on the
current collateralization requirements of the FHLB, approximately $16.7 million
of additional borrowing capacity existed at September 30, 2005.
31
As of September 30, 2005 and June 30, 2005, the Company had unused federal funds
lines totaling $20.0 million from three correspondent banks. Federal funds
borrowed were $2.1 million at September 30, 2005 and $0 at June 30, 2005.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
SEPTEMBER 30, 2005
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 $ 34,000,000 $ 5,000,000 $ 8,000,000 $5,000,000 $16,000,000
Other Debt Obligations 22,672,794 1,299,529 464,671 288,594 20,620,000
Capital Lease Obligations 0 0 0 0 0
Operating Lease Obligations 2,103,072 261,600 523,200 523,200 795,072
Purchase Obligations 0 0 0 0 0
Other Long-Term Liabilities
Reflected on the Registrant's
Balance Sheet under GAAP 176,014,845 108,516,781 63,751,598 2,902,934 843,532
------------ ------------ ----------- ---------- -----------
Total $234,790,711 $115,077,910 $72,739,469 $8,714,728 $38,258,604
============ ============ =========== ========== ===========
The Company's contractual obligations as of September 30, 2005 were evident in
long-term debt obligations, other debt obligations, operating lease obligations
and other long-term liabilities. Long-term debt obligations are comprised of
FHLB advances of $34.0 million. Other debt obligations are comprised of Trust
Preferred Securities of $20.6 million and Notes Payable of $2.1 million. The
operating lease obligation is a lease on the State Bank operations building
(formerly 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 $176,014,845.
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
consists of investments in interest-earning assets (primarily loans,
mortgage-backed securities, and securities available for sale) which are
primarily funded by interest-bearing liabilities (deposits and borrowings). With
the exception of loans which are originated and held for sale, all of the
financial instruments of the 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 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 stockholder value; however, excessive
levels of interest rate risk could pose a significant threat to the Company's
earnings
32
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).
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.
GOALS FOR 2005 AND 2006
The Company's near term goals include:
- Continued focus on the quality of the loan underwriting process
- Continued efforts to reduce the level of problem loans
- Continued focus on Customer Relationship Management (CRM)
- Continued efforts to improve operational efficiencies
- Continue to build shareholder value and franchise value.
33
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 September 30, 2005. 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
Company's historical experience regarding 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, as
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
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.
PRINCIPAL/NOTIONAL AMOUNT MATURING OR ASSUMED TO WITHDRAW IN:
(DOLLARS IN THOUSANDS)
First Years
Year 2 - 5 Thereafter Total
-------- -------- ---------- --------
Comparison of 2005 to 2004:
Total rate-sensitive assets:
At September 30, 2005 $181,776 $135,403 $ 76,554 $393,733
At December 31, 2004 131,266 151,944 93,318 376,528
-------- -------- -------- --------
Increase (decrease) $ 50,510 $(16,541) $(16,764) $ 17,205
Total rate-sensitive liabilities:
At September 30, 2005 $152,227 $191,055 $ 40,583 $383,865
At December 31, 2004 152,986 174,129 33,459 360,574
-------- -------- -------- --------
Increase (decrease) $ (759) $ 16,926 $ 7,124 $ 23,291
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 has
restricted the Company's ability to reduce funding rates in concert with
declines in lending rates.
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 and 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 three
days, and 6) FHLB borrowings with terms of one day to ten years.
34
ITEM 4. 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 has evaluated the effectiveness of the Company's disclosure
controls 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
quarterly period covered by this Quarterly Report on Form 10-Q. Based on that
evaluation, the Company's President and Chief Executive Officer and Executive
Vice President and Chief Financial Officer have concluded that:
- information required to be disclosed by the Company in this Quarterly
Report on Form 10-Q and other reports which the Company files or
submits under the Exchange Act 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 disclosure;
- information required to be disclosed by the Company in this Quarterly
Report on Form 10-Q and other reports which the Company files or
submits under the Exchange Act 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 quarterly period covered by this Quarterly Report on
Form 10-Q to ensure that material information relating to the Company
and its consolidated subsidiaries is made known to them, particularly
during the period in which this Quarterly Report on Form 10-Q is being
prepared.
Changes in Internal Control Over Financial Reporting
There were no changes 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 September 30, 2005, that have
materially affected or are reasonably likely to materially affect, the Company's
internal control over financial reporting.
35
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not party to any pending legal proceedings other than
routine litigation which management does not believe will have a material
adverse effect on the Company.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
a. Not applicable
b. Not applicable
c. The following table provides information regarding repurchases of the
Company's common shares during the three months ended September 30,
2005:
Maximum Number (or
Total Number of Approximate Dollar
Shares Purchased as Value) of Shares
Part of Publicly that May Yet Be
Total Number of Average Price Paid Announced Plans or Purchased Under the
Period Shares Purchased (1) per Share Programs Plans or Programs
- --------------------- -------------------- ------------------ ------------------- -------------------
Julyl 1 thru July 31,
2005 2,655 $12.94 -- --
August 1 thru August
31, 2005 771 $13.01 -- --
September 1 thru
September 30, 2005 3,404 $12.94 -- --
(1) All of the repurchased shares were purchased by Reliance Financial
Services, N.A., an indirect subsidiary of the Company, in its capacity as
the administrator of the Company's Employee Stock Ownership and Savings
Plan.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
36
ITEM 6. EXHIBITS
Exhibit No. Description Location
- ----------- ----------- --------
4.1 Indenture, dated as of September 15, 2005, by and between Rurban Filed herewith
Financial Corp. and Wilmington Trust Company, as Debenture
Trustee, relating to Floating Rate Junior Subordinated Deferrable
Interest Debentures
4.2 Amended and Restated Declaration of Trust of Rurban Statutory Filed herewith
Trust II, dated as of September 15, 2005
4.3 Guarantee Agreement, dated as of September 15, 2005, by and Filed herewith
between Rurban Financial Corp. and Wilmington Trust Company, as
Guarantee Trustee
31.1 Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Filed herewith
Officer)
31.2 Rule 13a-14(a)/15d-14(a) Certification (Principal Financial Filed herewith
Officer)
32.1 Section 1350 Certification (Principal Executive Officer) Filed herewith
32.2 Section 1350 Certification (Principal Financial Officer) Filed herewith
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
RURBAN FINANCIAL CORP.
Date: November 14, 2005 By /S/ Kenneth A. Joyce
-------------------------------------
Kenneth A. Joyce
President & Chief Executive Officer
By /S/ James E. Adams
-------------------------------------
James E. Adams
Executive Vice President &
Chief Financial Officer
38