-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OzZLpT5wgrWACyq8SLvpQxdECWXoLtN6EhpnfwAHNtuz71rjeJdLO8Zo5TLI/1Tk jzvE8+aYt1IFLx+LmPwpmA== 0000950152-03-003746.txt : 20030331 0000950152-03-003746.hdr.sgml : 20030331 20030331142839 ACCESSION NUMBER: 0000950152-03-003746 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RURBAN FINANCIAL CORP CENTRAL INDEX KEY: 0000767405 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 341395608 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-13507 FILM NUMBER: 03629200 BUSINESS ADDRESS: STREET 1: 401 CLINTON ST CITY: DEFIANCE STATE: OH ZIP: 43512 BUSINESS PHONE: 4197838950 10-K 1 l99438ae10vk.txt RURBAN FINANCIAL CORP 10-K 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, 2002 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 Incorporation or organization) Identification No.) 401 Clinton Street, Defiance, Ohio 43512 - ---------------------------------------- ------------------------- (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 -------------------- Securities registered pursuant to Section 12(g) of the Act: 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. [ ] 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 were last sold as of the last business day of the Registrant's most recently completed second fiscal quarter was $48,423,314 (the last sale for the second quarter actually occurred June 28, 2002). Common Shares, Without Par Value (4,565,721 outstanding at March 3, 2003) Documents Incorporated by Reference: Portions of the Registrant's definitive Proxy Statement for its Annual Meeting of Shareholders to be held on April 28, 2003 are incorporated by reference into Part III of this Annual Report on Form 10-K. Exhibit Index on Page 96 (as numbered sequentially) 1 PART I Item 1. Business. General Rurban Financial Corp., an Ohio corporation (the "Corporation"), 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 Corporation are located at 401 Clinton Street, Defiance, Ohio 43512. Through its subsidiaries, (1) The State Bank and Trust Company, Defiance, Ohio ("State Bank"), and (2) RFC Banking Company ("RFCBC") which is comprised of the following divisions: The Peoples Banking Company, Findlay, Ohio ("Peoples Bank"), The First Bank of Ottawa ("First Bank of Ottawa") and The Citizens Savings Bank Company, Pemberville, Ohio ("Citizens Savings Bank"), the Corporation is engaged in the business of commercial banking. The Corporation's subsidiary, Rurbanc Data Services, Inc. ("RDSI"), is engaged in the related business of providing data processing services, principally to banks. The Corporation's subsidiary, Rurban Life Insurance Company ("Rurban Life"), is engaged in the related business of accepting life and disability reinsurance ceded in part by American General Assurance Company ("AGAC") from the credit life and disability insurance. State Bank has two wholly-owned subsidiaries: Reliance Financial Services, N.A. ("RFS") and Rurban Mortgage Company ("RMC"). RFS is a nationally-chartered trust and financial services company. RMC is an Ohio corporation and mortgage company with its principle office located in Defiance, Ohio. 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), three branch offices in adjacent Paulding County, Ohio (one each in Paulding, Oakwood and Grover Hill), three branch offices in Fulton County, Ohio (one in each of Delta, Lyons and Wauseon) and one branch office in Summit County (Westlake). The Westlake branch will be closed during the second quarter of 2003. At December 31, 2002, State Bank had 102 full-time equivalent employees. State Bank offers a full range of commercial banking services, including checking and NOW accounts; passbook savings and money market accounts; 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; and other personalized banking services. In addition, State Bank serves as a correspondent (federal funds investing and check clearing purposes) for RFCBC's three operating divisions (Peoples Bank, First Bank of Ottawa and Citizens Savings Bank). 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. The office is located in State Bank's main offices in Defiance, Ohio. At December 31, 2002, RFS had 20 full-time equivalent employees. 2 RMC RMC is an Ohio corporation with its main office located in Defiance, Ohio. RMC is a wholly-owned subsidiary of State Bank. RMC ceased originating mortgage loans in the second quarter of 2000. At December 31, 2002, RMC had no employees. RFC Banking Company Effective June 30, 2001, Peoples Bank, First Bank of Ottawa and Citizens Savings Bank merged to form an Ohio state-chartered bank, RFC Banking Company. RFCBC provides checking and NOW accounts; passbook savings and money market accounts; time certificates of deposit; an automatic teller machine; commercial, consumer, agricultural and residential loans; personal and corporate trust services; commercial leasing; bank credit card services; safe deposit box rentals and other personalized banking services. At December 31, 2002, RFCBC had 55 full-time equivalent employees. On December 30, 2002, an agreement was signed to sell the branches, loans and deposits of the Citizens Savings Bank division of RFCBC to the Union Bank. The transaction is expected to close in late March or early April of 2003. The closing of the transaction is subject to standard closing conditions. On February 22, 2003, an agreement was signed to sell the branches and certain performing loans of the Peoples Banking Company and First bank of Ottawa divisions of RFCBC to First Federal Bank of the Midwest. The transaction is expected to close in June 2003. The closing of the transaction is subject to standard closing conditions. Each of the RFCBC divisions described below maintains the following offices and operates under the following bank names. Peoples Bank The main office of Peoples Bank is located in Findlay, Ohio. Peoples Bank operates one full-service branch in Findlay and one in McComb, Ohio. First Bank of Ottawa The executive offices of First Bank of Ottawa are located at 405 East Main Street, Ottawa, Ohio. At its present location, First Bank of Ottawa operates four drive-in teller lanes and an automatic teller machine with a traditional banking lobby on the first floor. First Bank of Ottawa presently operates no branch offices. Citizens Savings Bank The main office of Citizens Savings Bank is located in Pemberville, Ohio. Citizens Savings Bank also operates a full-service branch in Gibsonburg, Ohio. RDSI Substantially all of RDSI's business is comprised of providing data processing services to 52 financial institutions in Ohio, Michigan and Indiana (including State Bank and RFCBC), including information processing for financial institution customer services, loan and deposit account information and data analysis. At December 31, 2002, RDSI had 55 full-time equivalent employees. Rurban Life Rurban Life commenced its business of transacting insurance as an Arizona life and disability reinsurer in January, 1988. Rurban Life accepts reinsurance ceded in part by AGAC from the credit life and disability insurance purchased by customers of State Bank and RFCBC (through its divisions, 3 Peoples Bank, First Bank of Ottawa and Citizens Savings Bank) from AGAC in connection with revolving credit loans secured by mortgages and with certain installment loans made to such customers by State Bank and RFCBC (though its divisions, Peoples Bank, First Bank of Ottawa and Citizens Savings Bank). The operations of Rurban Life do not materially impact the consolidated results of operations of the Corporation. As of December 31, 2002, Rurban Life has not accepted any other reinsurance. In August 2000, the Corporation's banks ceased issuing credit life and disability insurance contracts through AGAC. In September 2000, the Corporation's banks entered into agreements with Individual Assurance Corporation ("IAC") and began issuing credit life and disability insurance contract through IAC. At December 31, 2002, Rurban Life had no employees. Competition State Bank and RFCBC experience 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 RFCBC, 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. 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. Rurban Life operates in the highly competitive industry of credit life and disability insurance. A large number of stock and mutual insurance companies also operating in this industry have been in existence for longer periods of time and have substantially greater financial resources than does Rurban Life. The principal methods of competition in the credit life and disability insurance industry are the availability of coverages, premium rates and quality of service. 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 Corporation 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 The Corporation is a bank holding company under the Bank Holding Company Act of 1956, as amended, which restricts the activities of the Corporation and the acquisition by the Corporation of voting shares or assets of any bank, savings association or other company. The Corporation 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 OCC. As Ohio state-chartered banks, State Bank and RFCBC are 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. RFCBC is not a member of the Federal Reserve System so its primary federal 4 regulator is the Federal Deposit Insurance Corporation ("FDIC"). The deposits of State Bank and RFCBC are insured by the FDIC and as such those entities 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 institution's capital shortfall, as discussed below. Rurban Life is chartered by the State of Arizona and is subject to regulation, supervision, and examination by the Arizona Department of Insurance. The powers of regulation and supervision of the Arizona Department of Insurance relate generally to such matters as minimum capitalization, the grant and revocation of certificates of authority to transact business, the nature of and limitations on investments, the maintenance of reserves, the form and content of required financial statements, reporting requirements and other matters pertaining to life and disability insurance companies. Various requirements and restrictions under the laws of the United States and the State of Ohio affect the operations of State Bank and RFCBC 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. Subject to the terms and conditions of the written agreement with the federal and state banking regulators described in the paragraph below, the ability of the Corporation to obtain funds for the payment of dividends and for other cash requirements is largely dependent on the amount of dividends which may be declared by its subsidiary banks and other subsidiaries. However, the Federal Reserve Board expects the Corporation to serve as a source of strength to its subsidiary banks, which may require it to retain capital for further investment in the subsidiaries, rather than for dividends to shareholders of the Corporation. State Bank and RFCBC may not pay dividends to the Corporation if, after paying such dividends, they would fail to meet the required minimum levels under the risk-based capital guidelines and the minimum leverage ratio requirements. State Bank and RFCBC must have the approval of their respective regulatory authorities 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 the bank subsidiaries 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 Corporation's ability to pay dividends on its outstanding common shares. Written Agreement On July 9, 2002, the Corporation 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. The results of the November 4, 2002 regulatory examinations indicated that as of that date, Rurban and State Bank were not in full compliance with certain provisions of the Agreement. Management expects to be in substantial compliance with each of the provisions of the Agreement by mid-2003. The Corporation and RFCBC have been advised by RFCBC's regulators, the FDIC and the Ohio Division of Financial Institutions, that the preliminary results of the November 4, 2002 examination of RFCBC indicated that RFCBC may be presented with a formal agreement based on concerns raised. RFCBC's December 31, 2002 total risk-based capital ratio was 8.1%, above the "adequately capitalized" 5 minimum of 8%. The anticipated March closing of the sale of the Citizens division (see note 5 to the consolidated financial statements for further information) is expected to improve the total risk-based capital ratio to approximately 15%. State Bank and RFCBC are prohibited from paying dividends to Rurban without prior regulatory approval. Rurban is prohibited from paying Trust Preferred "dividends" and common stock dividends without prior regulatory approval. Transactions with Affiliates, Directors, Executive Officers and Shareholders On October 31, 2002, the Federal Reserve Board approved Regulation W which comprehensively implements Sections 23A and 23B of the Federal Reserve Act. Sections 23A and 23B and Regulation W restrict transactions by banks and their subsidiaries with their affiliates. An affiliate of a bank is any company or entity which controls, is controlled by or is under common control with the bank. Generally, Sections 23A and 23B and Regulation W: - limit 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); - limit 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 - require that all such transactions be on terms substantially the same, or at least as favorable to the bank or subsidiary, as those provided to a non-affiliate. The term "covered transaction" includes the making of loans, purchase of assets, issuance of a guarantee and other similar types of transactions. Regulation W will become effective on April 1, 2003 and upon its effective date, all existing Federal Reserve Board interpretations of Sections 23A and 23B will be rescinded. 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 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. 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%. At least 4.0 percentage points 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 mandatory convertible debt securities, a limited amount of subordinated debt, other preferred stock and a limited amount of allowance for loan and lease losses. The Federal Reserve Board also imposes a minimum leverage ratio (Tier 1 capital to total assets) of 3% for bank 6 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. State non-member banks such as RFCBC, are subject to similar capital requirements adopted by the FDIC. 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 Corporation and RFCBC at year end 2002 were categorized as adequately capitalized while State Bank was categorized as well capitalized. The Corporation and RFCBC were categorized as well capitalized at year end 2001. State Bank was categorized as adequately capitalized at year end 2001. Prompt Corrective Regulatory Action The federal banking regulators have established regulations governing prompt corrective action to resolve capital deficient banks. 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. Deposit Insurance Assessments and Recent Legislation 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 and RFCBC are members 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 loans, investments and deposits, and the interest rates charged on loans as well as the interest rates paid on deposits and accounts. The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of commercial banks in the past and are expected to continue to have significant effects in the future. In view of the changing conditions in the economy and the money market and the activities of monetary and fiscal authorities, no definitive predictions can be made as to future changes in interest rates, credit availability or deposit levels. Financial Services Modernization Act of 1999 On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act, or the Financial Services Modernization Act of 1999, which, effective March 11, 2000, permits 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 7 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 will be 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 Financial Services Modernization 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 Corporation has opted not to become a financial holding company. The Corporation intends to continue to analyze the proposed advantages and disadvantages of becoming a financial holding company on a periodic basis. RECENT LEGISLATION 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 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 and mandates further studies of certain issues by the SEC and the Comptroller General of the United States. Given the extensive SEC role in implementing rules relating to many of the Sarbanes-Oxley Act's new requirements, the final scope of many of these requirements remains to be determined. The Sarbanes-Oxley Act addresses, among other matters: 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. The Board of Directors of the Corporation is in the process of reviewing the requirements of the Sarbanes-Oxley Act and the rules and regulations promulgated by the SEC implementing the Sarbanes-Oxley Act as well as the rules proposed by Nasdaq related to corporate governance matters. The Board of Directors intends to take appropriate action to comply with Nasdaq and SEC rules as those rules are finalized and implemented. 8 Statistical Financial Information Regarding the Corporation The following schedules and tables analyze certain elements of the consolidated balance sheets and statements of income of the Corporation and its subsidiaries, as required under Exchange Act Industry Guide 3 promulgated by the Securities and Exchange Commission, 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 Corporation and its subsidiaries included at pages F-1 through F-39 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:
2002 2001 2000 ----------------------------- ------------------------------- ----------------------------- Average Avg Average Avg Average Avg Balance Interest Rate Balance Interest Rate Balance Interest Rate ------------------------------------------------------------------------------------------- (dollars in thousands) ASSETS: Securities (1) Taxable $98,383 $4,781 4.86% $86,093 $5,463 6.35% $76,005 $4,978 6.55% Non-taxable (2) 6,276 333 5.31% 8,390 615 7.33% 11,907 897 7.53% Federal funds sold 15,146 295 1.95% 4,758 167 3.51% 842 48 5.70% Loans, net (3) 627,685 43,295 6.90% 583,239 50,483 8.66% 542,412 50,405 9.29% ---------- --------- -------- ----------- ---------- -------- ---------- --------- -------- Total earning assets 747,490 48,704 6.52% 682,480 56,728 8.31% 631,166 56,328 8.92% Cash and due from banks 26,124 24,496 18,474 Allowance for loan losses (15,801) (7,627) (6,652) Premises and equipment 13,658 12,090 10,960 Other assets 19,620 11,388 11,575 ---------- ----------- ---------- Total assets $791,091 $722,827 $665,523 ========== =========== ========== LIABILITIES: Deposits Savings and interest- Bearing Demand deposits $185,357 $2,578 1.39% $160,936 $4,245 2.64% $167,697 $5,858 3.49% Time deposits 409,363 17,723 4.33% 385,059 22,169 5.76% 326,957 19,034 5.82% Short-term borrowings 17,541 305 1.74% 8,916 302 3.39% 19,961 1,359 6.81% Advances from FHLB 53,595 2,923 5.45% 51,760 2,987 5.77% 43,769 2,707 6.18% Junior subordinated debentures 10,000 1,075 10.75% 10,000 1,048 10.48% 3,230 336 10.40% Other borrowed funds 5,400 209 3.87% - 27 - 4,315 341 - ---------- --------- --------- ---------- ---------- --------- ---------- --------- -------- Total interest 681,197 24,813 3.64% 616,373 30,778 4.99% 565,929 29,635 5.24% --------- ---------- ---------
- -------------------------------------------------------------------------------- (1) Securities averages include fair value adjustments. (2) Interest is computed on a tax equivalent basis using a 34% statutory tax rate. The tax equivalent adjustment was $113, $209 and $305 in 2002, 2001 and 2000. (3) Nonaccruing loans and loans held for sale are included in the average balances. 10 ---------- --------- --------- ---------- ---------- --------- ---------- --------- -------- bearing liabilities --------- --------- --------- Demand deposits 51,888 47,208 43,773 Other liabilities 13,273 6,240 9,194 ---------- ---------- ---------- Total liabilities 746,417 670,119 618,896 Shareholder's equity 44,674 52,708 46,627 ---------- ---------- ---------- Total liabilities and shareholders' equity $791,091 $722,827 $665,523 ========== ========== ========== Net interest income (tax equivalent basis) $23,891 $25,950 $26,693 ========= ========== ========= Net interest income as a percent Of average interest-earning 3.20% 3.80% 4.23% assets
- -------------------------------------------------------------------------------- (1) Securities averages include fair value adjustments. (2) Interest is computed on a tax equivalent basis using a 34% statutory tax rate. The tax equivalent adjustment was $113, $209 and $305 in 2002, 2001 and 2000. (3) Nonaccruing loans and loans held for sale are included in the average balances. 11 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 2002, 2001 and 2000.
Total Variance Variance Attributable To 2002/2001 Volume Rate --------- ------ ---- INTEREST INCOME (dollars in thousands) Securities Taxable $ (682) $ 711 $ (1,393) Non-taxable (282) (135) (147) Federal funds sold 128 230 (102) Loans, net of unearned income and deferred loan fees (7,188) 3,634 (10,822) --------------- -------------- ----------------- (8,024) 4,440 (12,464) --------------- -------------- ----------------- INTEREST EXPENSE Deposits Savings and interest-bearing demand deposits (1,667) 570 (2,237) Time deposits (4,446) 1,329 (5,775) Short-term borrowings 3 198 (195) Advances from FHLB (64) 104 (168) Junior subordinated debentures 27 0 27 Other borrowed funds 182 182 0 -------------- -------------- ---------------- (5,965) 2,383 (8,348) --------------- -------------- ----------------- NET INTEREST INCOME $ (2,059) $ 2,057 $ (4,116) =============== ============== =================
12 I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (Continued)
Total Variance Variance Attributable To 2001/2000 Volume Rate --------- ------ ---- INTEREST INCOME (dollars in thousands) Securities Taxable $ 485 $ 644 $ (159) Non-taxable (282) (258) (24) Federal funds sold 119 144 (25) Loans, net of unearned income and deferred loan fees 78 3,658 (3,580) -------------- -------------- ---------------- 400 4,188 (3,788) -------------- -------------- ----------------- INTEREST EXPENSE Deposits Savings and interest-bearing demand deposits (1,613) (228) (1,385) Time deposits 3,136 3,347 (212) Short-term borrowings (1,057) (554) (503) Advances from FHLB 279 470 (190) Junior subordinated debentures 712 709 3 Other borrowed funds (314) (157) (157) -------------- -------------- ---------------- 1,143 3,587 (2,444) -------------- -------------- ---------------- NET INTEREST INCOME $ (743) $ 601 $ (1,344) ============== ============== ================
13 II. INVESTMENT PORTFOLIO A. The book value of securities available for sale as of December 31 are summarized as follows:
2002 2001 2000 ---- ---- ---- (dollars in thousands) U.S. Treasury and Government agencies $ 54,801 $ 16,881 $ 22,896 Mortgage-backed securities 55,643 62,981 49,931 State and political subdivisions 4,518 4,798 12,575 Marketable equity securities 97 300 358 Mutual Funds - 10,000 - Other securities 50 6,180 - --------------- --------------- ---------------- $ 115,109 $ 101,140 $ 85,760 =============== =============== ================
B. The maturity distribution and weighted average yield of securities available for sale at December 31, 2002 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 $ 44,943 $ 8,652 $ 1,206 $ - States and political subdivisions 10 1,094 2,098 1,316 Mortgage-backed securities 770 1,217 13,200 40,456 Other securities 50 ------------- --------------- ------------- -------------- $ 45,723 $ 11,013 $ 16,504 $ 41,772 ============= =============== ============= ============== Weighted average yield (1) 1.37% 2.40% 5.16% 4.54%
(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 the shareholders' equity of the Corporation at December 31, 2002. 14 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:
2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- (dollars in thousands) Commercial and agricultural $ 321,726 $ 388,673 $ 362,928 $ 326,564 $ 248,841 Real estate mortgage 84,432 106,689 107,718 80,704 72,225 Consumer loans to individuals 60,139 76,513 81,063 77,110 60,224 Lease financing 21,509 28,752 25,279 17,300 13,021 ---------------- ---------------- ----------------- ----------------- ----------------- $ 487,806 $ 600,627 $ 576,988 $ 501,678 $ 394,311 ================= ================ ================= ================= ================= Loans held for resale $ 63,536 $ 0 $ 0 $ 0 $ 0 ================ ================ ================= ================= ================= Real estate mortgage loans held for resale $ 0 $ 440 $ 1,167 $ 7,150 $ 18,509 ================ ================ ================= ================= =================
Concentrations of Credit Risk: The Corporation grants commercial, real estate and installment loans to customers mainly in northern Ohio. Commercial loans include loans collateralized by commercial real estate, business assets and agricultural loans collateralized by crops and farm equipment. As of December 31, 2002, commercial and agricultural loans make up approximately 66% of the loan portfolio and the loans are expected to be repaid from cash flow from operations of businesses. As of December 31, 2002, residential first mortgage loans make up approximately 17% of the loan portfolio and are collateralized by first mortgages on residential real estate. As of December 31, 2002, consumer loans to individuals make up approximately 17% 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, 2002 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 $ 122,279 After one year but within five years 106,923 After five years 92,524 -------------- $ 321,726 ============== 15 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 $ 45,673 $ 61,250 $ 106,923 Due after five years 15,013 77,511 92,524 ---------------- --------------- --------------- $ 60,686 $ 138,761 $ 199,447 ================ =============== ===============
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.
2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- (dollars in thousands) (a) Loans accounted for on a nonaccrual basis $ 18,259 $ 12,557 $ 2,950 $ 1,403 $ 1,880 (b) Accruing loans which are contractually past due 90 days or more as to interest or principal payments 476 2,131 1,927 809 (1) 1,742 (c) Loans not included in (a) which are "Troubled Debt Restructurings" as defined by Statement of Financial Accounting Standards No. 15 - - 3,911 - - ---------- ---------- ---------- ---------- ---------- Total non-performing loans $ 18,735 $ 14,688 $ 8,788 $ 2,212 $ 3,622 ---------- ---------- ---------- ---------- ---------- (d) Other loans defined as impaired $ 3,166 $ - $ 1,624 $ 1,103 $ - ========== ========== ========== ========== ==========
16 III. LOAN PORTFOLIO (Continued) Management believes the allowance for loan losses at December 31, 2002 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.
2002 ---- (In thousands) Gross interest income that would have been recorded in 2002 on nonaccrual loans outstanding at December 31, 2002 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 $2,234 Interest income actually recorded on nonaccrual loans and included in net income for the period 694 --------- Interest income not recognized during the period $ 1,540 =========
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, 2002, in addition to the $18,735,000 of loans reported under Item III. C. 1. (which includes all loans classified by management as doubtful or loss), there are approximately $58,802,000 in other outstanding loans where known information about possible credit problems of the borrowers causes management to have serious doubts 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 of loan losses. 17 III. LOAN PORTFOLIO (Continued) 3. Foreign Outstandings None 4. Loan Concentrations At December 31, 2002, loans outstanding related to agricultural operations or collateralized by agricultural real estate aggregated approximately $68,954,000. D. Other Interest-Bearing Assets There are no other interest-bearing assets as of December 31, 2002 which are required to be disclosed under Item III. C. 1 or Item III. C. 2. if such assets were loans. 18 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:
2002 2001 2000 ---- ---- ---- (dollars in thousands) LOANS Loans outstanding at end of period (1) $ 551,011 $ 600,731 $ 577,803 ================== ================ ================ Average loans outstanding during period (1) $ 627,685 $ 583,239 $ 542,412 ================== ================ ================ ALLOWANCE FOR LOAN LOSSES Balance at beginning of period $ 9,239 $ 7,215 $ 6,194 Assumed in acquisition 1,427 Loans charged-off Commercial and agricultural loans (19,584) (6,089) (641) Real estate mortgage (496) (54) (22) Consumer loans to individuals (1,693) (1,030) (906) ------------------ ---------------- ---------------- (21,773) (7,173) (1,569) Recoveries of loans previously charged-off Commercial and agricultural loans 892 110 106 Real estate mortgage 28 1 23 Consumer loans to individuals 351 353 362 ----------------- ---------------- ---------------- 1,271 464 491 ----------------- ---------------- ---------------- Net loans charged-off (20,502) (6,709) (1,079) Provision for loan losses (27,530) 8,733 2,100 ------------------ ---------------- ---------------- Balance at end of period $ 17,694 $ 9,239 $ 7,215 ================== ================ ================ Ratio of net charge-offs during the period to average loans outstanding during the period 3.27% 1.15% .20% ==== ==== ===
1999 1998 ---- ---- (dollars in thousands) LOANS Loans outstanding at end of period (1) $ 508,481 $ 412,479 ================= ================ Average loans outstanding during period (1) $ 461,343 $ 376,126 ================= ================ ALLOWANCE FOR LOAN LOSSES Balance at beginning of period $ 5,409 $ 5,240 Assumed in acquisition Loans charged-off Commercial and agricultural loans (578) (885) Real estate mortgage (25) (60) Consumer loans to individuals (489) (390) ----------------- ---------------- (1,092) (1,335) Recoveries of loans previously charged-off Commercial and agricultural loans 327 248 Real estate mortgage 72 4 Consumer loans to individuals 263 173 ----------------- ---------------- 662 425 ----------------- ---------------- Net loans charged-off (430) (911) Provision for loan losses 1,215 1,080 ----------------- ---------------- Balance at end of period $ 6,194 $ 5,409 ================= ================ Ratio of net charge-offs during the period to average loans outstanding during the period .09% .24% === ===
(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 judgmentally 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. 19 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.
-----------------------Allocation of the Allowance for Loan Losses---------------- ------------------------------------------- Percentage Percentage Percentage of Loans of Loans of Loans In Each In Each In Each Category to Category To Category to Allowance Total Allowance Total Allowance Total Amount Loans --------- Amount Loans Amount ------ ----- ----- ------ ----- Loans December 31, 2002 December 31, 2001* December 31, 2000 ----------------- ----------------- ----------------- Commercial, and agricultural $ 16,518 66.0% $ 8,222 64.7% $ 5,365 62.9% Residential first mortgage 204 17.3 126 17.8 202 18.7 Consumer loans to individuals 972 16.7 891 17.5 814 18.4 Unallocated - N/A * N/A 834 N/A -------------- ---- ------------- ---- -------------- ---- $ 17,694 100.0% $ 9,239 100.0% $ 7,215 100.0% ============== ===== ============= ===== ============== =====
----Allocation of the Allowance for Loan Losses---- ------------------------------------------- Percentage Percentage of Loans of Loans In Each In Each Category to Category to Allowance Total Allowance Total Loans Amount Loans Amount ------ ----- ------ ----------- December 31, 1999 December 31, 1998 ----------- ----------------- (dollars in thousands) Commercial, and agricultural $ 4,371 65.1% $ 2,704 63.1% Residential first mortgage 93 16.1 144 18.3 Consumer loans to individuals 553 18.8 1,026 18.6 Unallocated 1,177 N/A 1,535 N/A ------------- ---- ------------- ---- $ 6,194 100.0% $ 5,409 100.0% ============= ===== ============= =====
* 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 a local and national economic trends and their estimated impact on the industries to which the Company extends credit. Prior to 2001, individual portfolio risk factors 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. 20 V. DEPOSITS The average amount of deposits and average rates paid are summarized as follows for the years ended December 31:
2 0 0 2 2 0 0 1 2 0 0 0 ------- ------- ------- Average Average Average Average Average Average Amount Rate Amount Rate Amount Rate ------ ---- ------ ---- ------ ---- (dollars in thousands) Savings and interest-bearing demand deposits $ 185,357 1.39% $ 160,936 2.64% $ 167,697 3.49% Time deposits 409,363 4.33% 385,059 5.76 326,957 5.82 Demand deposits (noninterest-bearing) 51,888 47,208 - 43,773 - --------------- -------------- --------------- $ 646,608 $ 593,203 $ 538,427 =============== ============== ===============
Maturities of time certificates of deposit and other time deposits of $100,000 or more outstanding at December 31, 2002 are summarized as follows:
Amount Three months or less $ 36,253 Over three months and through six months 33,644 Over six months and through twelve months 42,082 Over twelve months 60,076 --------------- $ 172,055 ===============
21 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:
2002 2001 2000 ---- ---- ---- (dollars in thousands) Average total assets $ 791,091 $ 722,827 $ 665,523 ================= ================== ================== Average shareholders' equity $ 44,674 $ 52,708 $ 46,627 ================= ================== ================== Net income $ (13,408) $ 2,253 $ 6,086 ================== ================== ================== Cash dividends declared $ 1,187 $ 2,158 $ 1,888 ================= ================== ================== Return on average total assets (1.69)% .31% .91% ====== === === Return on average share- holders' equity (30.01)% 4.27% 13.05% ======= ==== ===== Dividend payout ratio (1) N/A 95.80% 31.02% ===== ===== Average shareholders' equity to average total assets 5.65% 7.29% 7.01% ==== ==== ====
(1) Cash dividends declared divided by net income. VII. SHORT-TERM BORROWINGS The Corporation did not have any category of short-term borrowings for which the average balance outstanding during 2001 was 30 percent or more of shareholders' equity at the end of the reported period. The following information is reported for short-term borrowings for 2002 and 2000:
2002 2000 ---- ---- (dollars in thousands) Amount outstanding at end of year $ 6,000 $ 13,200 ================= =================== Weighted average interest rate at end of year 5.25% 6.44% ==== ======== Maximum amount outstanding at any month end $ 30,800 $ 31,005 ================= =================== Average amount outstanding during the year $ 24,041 $ 19,961 ================= =================== Weighted average interest rate during the year 2.70% 6.81% ==== ====
22 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 Corporation and its subsidiaries. The Corporation believes that the nature of the operations of its subsidiaries has little, if any, environmental impact. The Corporation, therefore, anticipates no material capital expenditures for environmental control facilities for its current fiscal year or for the foreseeable future. The Corporation'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. Its main office is a two-story brick building located at 401 Clinton Street, Defiance, Ohio, which was built in 1971. Including a basement addition built in 1991, it contains 33,400 square feet of floor space. Approximately 2,023 square feet on the second floor are leased to RDSI, 7,294 square feet on the second floor are leased to RFS and 2,868 square feet on the lower level are leased to the Corporation. The main office was remodeled in 2002. 2. A drive through branch office located in downtown Defiance, Ohio containing 3,200 square feet of floor space was built in 1961. Most of the space is in the basement which is used for storage. It contains a three-bay drive-thru, two inside teller locations, an ATM and a night deposit unit. 3. A full service branch office located on Main Street in Ney, Ohio containing 1,536 square feet of floor space was opened in 1968. 4. A full service branch office located at 1796 North Clinton Street, Defiance, Ohio containing 2,120 square feet of floor space was opened in 1968. It is a free standing structure located in front of a shopping center. The branch was remodeled in 2000. 5. A full service branch office located at 1856 East Second Street, Defiance, Ohio containing 2,160 square feet of floor space was opened in 1972 and remodeled in 1998. It is a free standing structure located in front of a shopping center. 6. A full service branch office located at 220 North Main Street, Paulding, Ohio containing 6,200 square feet of floor space was opened in 1980. The branch was most recently remodeled in 2002. 7. A full service branch office located at 312 Main Street, Delta, Ohio containing 3,470 square feet of floor space was acquired from Society Bank & Trust ("Society") in 1992. 8. A full service branch office located at 133 E. Morenci Street, Lyons, Ohio containing 2,578 square feet of floor space was acquired from Society in 1992. 9. A full service branch office located at 515 Parkview, Wauseon, Ohio containing 3,850 square feet of floor space was acquired from Society in 1992. This office was remodeled in 1998. 23 10. A full service branch located in the Chief Market Square supermarket at 705 Deatrick Street, Defiance, Ohio and containing 425 square feet was opened in 1993. State Bank leases the space in which this branch is located pursuant to a 15-year lease. This office was remodeled in 2001. 11. A full service branch office located at 1991 Crocker Road, Suite 204, Westlake, Ohio containing 1,364 square feet was opened in 1998. State Bank leases the space in which this branch is located. This office was remodeled in 2001. This branch will close in the second quarter of 2003. 12. A full service branch office located at 218 North First Street, Oakwood, Ohio containing 3,226 square feet of space was acquired from the Federal Deposit Insurance Corporation ("FDIC") in 2002. 13. A full service branch office located at 100 South Main Street, Grover Hill, Ohio containing 1,556 square feet of space was acquired from the FDIC in 2002. The following is a listing and brief description of the properties owned by RFCBC used in its business: Peoples Bank 1. The full service main office located at 301 South Main Street, Findlay, Ohio was opened in 1990. It contains approximately 30,000 square feet of floor space, of which 12,000 is used by an unrelated law firm. This office was remodeled in 2001. 2. A full service branch office located at 124 East Main Street, McComb, Ohio was opened in 1990. It contains approximately 3,600 square feet of floor space. 3. A full service branch office at 101 N. Main Street, Arcadia, Ohio was opened in August 2002. It contains approximately 1,750 square feet of floor space. RFCBC leases the space in which this branch is located. First Bank of Ottawa The real property owned by First Bank of Ottawa is the location of the Bank at 405 East Main Street, Ottawa, Ohio. First Bank of Ottawa's facility is a two-story brick and steel building containing approximately 7,100 square feet of space. The first floor is a traditional banking lobby which was remodeled in 1991. The second floor contains bookkeeping, office and storage space. Citizens Savings Bank 1. The full service main office is located at 132 East Front Street, Pemberville, Ohio and contains 6,389 square feet. It was built near the turn of the century and was completely remodeled and added on to in 1992. 2. A full service branch office located at 230 West Madison Street, Gibsonburg, Ohio occupies 2,520 square feet and was built in 1988. RMC is the master lessee of Oak Creek Offices. This office space is located at Estancia Boulevard, Suite 202, Clearwater, Florida. This space is leased to various tenants. State Bank obtained this property in 2003. RMC vacated in March 2003 and the property is being offered for sale. RDSI leases a 5,616 square foot office space located at 2010 South Jefferson, Defiance, Ohio. This office was first leased on December 21, 1999. RDSI also leases 2,023 square feet on the second floor of the State Bank building located at 401 Clinton Street, Defiance, Ohio. 24 Item 3. Legal Proceedings. There are no pending legal proceedings to which the Corporation or any of its subsidiaries is a party or to which any of their property is subject, except routine legal proceedings to which the Corporation or any of its subsidiaries is a party incidental to its banking business. None of such proceedings are considered by the Corporation to be material. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. 25 Executive Officers of the Registrant. The following table lists the names and ages of the executive officers of the Corporation as of the date of this Annual Report on Form 10-K, the positions presently held by each such executive officer and the business experience of each such executive officer during the past five years. Unless otherwise indicated, each person has held his principal occupation(s) for more than five years. All executive officers serve at the pleasure of the Board of Directors of the Corporation.
Position(s) Held with the Corporation and Name Age its Subsidiaries and Principal Occupation(s) ---- --- -------------------------------------------- Steven D. VanDemark 50 Chairman of the Board of Directors of the Corporation; Chairman of the Board of Directors of State Bank; Chairman of the Board of Directors of RFCBC; Director of RDSI; General Manager of Defiance Publishing Company, Defiance, Ohio, a newspaper publisher. Kenneth A. Joyce 55 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 RFCBC since 2002. Robert W. Constien 50 Senior Executive Vice President & Chief Operating Officer since November 22, 2000; Executive Vice President of the Corporation from March, 1997 to November 2000; Vice President of the Corporation from 1994 to March, 1997; Chief Executive Officer and a Director of RFS since March, 1997; Director of State Bank since 1996; President and Chief Executive Officer of State Bank since April, 2002; Executive Vice President of State Bank from 1994 to 1997, Senior Vice President of State Bank from 1991 to 1993 and Vice President of State Bank from 1987 to 1991. Richard C. Warrener 58 Executive Vice President of the Corporation since December 1997; Chief Financial Officer of the Corporation since December 31, 1996; Senior Vice President of the Corporation from December 31, 1996 to December 1997; Senior Vice President and Chief Financial Officer of FirstMerit Bank, N.A. from March 1994 to December 1996. Richard Warrener has announced his decision to retire from the Corporation effective March 31, 2003. The Corporation intends to retain Mr. Warrener as a consultant for a non-specified period of time thereafter.
26
Position(s) Held with the Corporation and Name Age its Subsidiaries and Principal Occupation(s) ---- --- -------------------------------------------- James E. Adams 58 Chief Financial Officer of the Corporation since March 31, 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 Corporation in Martinsville, Virginia from 1994 to 1999.
27 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") effective November 6, 2001. Prior to that date, the common shares of the Company were traded on the OTC Bulletin Board. 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 closing prices reflect actual prices for purchases and sales of the Company's common shares as reported by NASDAQ and not inter-dealer prices. The per share amounts have been restated for the 5% stock dividend declared in 2001. Per Share Per Share Closing Prices Dividends 2001 High Low Declared ---- ---- --- -------- First Quarter $ 12.38 $ 11.07 $ .114 Second Quarter 13.33 11.78 .114 Third Quarter 14.75 12.85 .114 Fourth Quarter 15.29 13.45 .130 2002 ---- First Quarter $ 13.95 $ 12.90 $ .130 Second Quarter 13.60 12.00 .130 Third Quarter 13.02 8.00 .000 Fourth Quarter 10.84 9.00 .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 Company is prohibited from payment of common stock dividends without prior regulatory approval by the terms of the Written Agreement. The approximate number of holders of outstanding common shares of the Company, based upon the number of record holders as of March 3, 2003, is 1,484. FORM 10-K THE COMPANY WILL PROVIDE WITHOUT CHARGE TO EACH SHAREHOLDER, UPON WRITTEN REQUEST TO RURBAN FINANCIAL CORP., P.O. BOX 467, DEFIANCE, OHIO 43512, ATTENTION: SANDRA STOCKHORST, 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 SECURITIES AND EXCHANGE COMMISSION, FOR THE COMPANY'S MOST RECENT FISCAL YEAR. 28 Item 6. Selected Financial Data. SUMMARY OF SELECTED FINANCIAL DATA
(Dollars in thousands except per share data) Year Ended December 31, 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- EARNINGS Total interest income $ 48,591 $ 56,519 $ 56,023 $ 44,953 $ 39,293 Total interest expense 24,813 30,778 29,635 21,744 18,743 Net interest income 23,778 25,741 26,388 23,209 20,550 Provision for loan losses 27,531 8,733 2,100 1,215 1,080 Total noninterest income 13,779 14,162 11,273 11,064 10,511 Total noninterest expense 30,479 28,018 26,754 25,466 23,630 Provision (credit) for income taxes (7,044) 899 2,721 2,361 2,073 Net income (loss) (13,408) 2,253 6,086 5,231 4,278 - ------------------------------------------------------------------------------------------------------------------- PER SHARE DATA (1) Basic earnings $ (2.95) $ .50 $ 1.35 $ 1.16 $ .95 Diluted earnings (2.95) .50 1.35 1.16 .94 Cash dividends declared .26 .47 .42 .37 .36 - ------------------------------------------------------------------------------------------------------------------- AVERAGE BALANCES Average shareholders' equity $ 46,320 $ 52,708 $ 46,627 $ 42,967 $ 40,431 Average total assets 795,125 722,827 665,523 580,200 493,957 - ------------------------------------------------------------------------------------------------------------------- RATIOS Return on average shareholders' equity - 4.27% 13.05% 12.17% 10.58% Return on average total assets - .31 .91 .90 .87 Cash dividend payout ratio (cash dividends divided by net income) - 92.61 31.02 32.36 38.83 Average shareholders' equity to average total assets 5.84 7.29 7.01 7.41 8.19 - ------------------------------------------------------------------------------------------------------------------- PERIOD END TOTALS Total assets $ 742,317 $ 746,209 $ 700,818 $ 627,784 $ 537,155 Total loans and leases 551,342 600,627 576,988 501,678 394,311 Total deposits 636,035 610,860 566,321 519,296 450,813 Advances from FHLB 47,850 54,275 52,164 40,035 28,890 Junior subordinated debentures 10,000 10,000 10,000 - - Shareholders' equity 36,382 50,829 50,140 43,900 41,903 Shareholders' equity per share (1) 8.01 11.14 10.98 9.62 9.18 - -------------------------------------------------------------------------------------------------------------------
29 Per share data restated for two-for-one stock split declared in 1998, 5% stock dividend declared in 2000 and 5% stock dividend declared in 2001. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Rurban Financial Corp. ("Rurban") or ("Company") was incorporated on February 23, 1983, under the laws of the State of Ohio. Rurban is a bank holding company registered with the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended. Rurban's subsidiaries, The State Bank and Trust Company ("State Bank") and RFC Banking Company ("RFCBC") are engaged in the industry segment of commercial banking. RFCBC was created June 30, 2001 through the merger of The Peoples Banking Company, The First National Bank of Ottawa and The Citizens Savings Bank Company, which were wholly owned subsidiaries of Rurban prior to the merger, and now operate as separate divisions. Rurban's subsidiary, Rurbanc Data Services, Inc. ("RDSI"), provides computerized data processing services to community banks and businesses including Rurban's subsidiary banks. Rurban's subsidiary, Rurban Life Insurance Company ("Rurban Life") has a certificate of authority from the State of Arizona to transact insurance as a domestic life and disability insurer. Rurban's subsidiary, Rurban Statutory Trust I ("RST") was established in September 2000 for the purpose of managing the Company's junior subordinated debentures. Reliance Financial Services, N.A. ("Reliance"), a wholly owned subsidiary of State Bank, provides trust and financial services to customers nationwide. The following discussion is intended to provide a review of the consolidated financial condition and results of operations of Rurban. This discussion should be read in conjunction with the consolidated financial statements and related footnotes. This section may contain statements that are forward-looking as defined by the Securities and Exchange Commission in its rules, regulations and releases. The Company intends that such forward-looking statements be subject to the safe harbors created thereby. All forward-looking statements are based on current expectations regarding important risk factors including those identified in the Company's most recent periodic report and other filings with the Securities and Exchange Commission. Accordingly, actual results may differ materially from those expressed in the forward-looking statements, and the making of such statements should not be regarded as a representation by the Company, or any other person, that the results expressed therein will be achieved. EARNINGS SUMMARY The net loss for the year was $13.4 million, or $2.95 per diluted share, compared with net income of $2.3 and $6.1 million, or $.50 and $1.35 per diluted share, reported for 2001 and 2000, respectively. Cash dividends declared per share decreased to $.26 for 2002 compared to $.47 in 2001 and $.42 in 2000. Per share data has been adjusted to reflect the 5% stock dividends paid in September 2001 and 2000. The primary reason for the loss in 2002 and the reduced level of earnings in 2001 was the discovery of extensive underwriting deficiencies in the loan portfolio which resulted in a loan loss provision of $27.5 million in 2002 and $5.6 million in the fourth quarter of 2001. The discovery process began during late 30 2001, broadened during 2002 and culminated at year-end with the completion of extensive loan reviews both internally and by auditors, consultants and regulators. By year-end 2002, the Company had reviewed nearly every commercial and agricultural loan greater than $100,000 and identified the problem loans. Those loan reviews also resulted in considerable progress in identifying the level of both the potential and probable losses in each of the problem loans. However, assessing and reserving for probable losses on problem loans is in part a judgmental process and a moving target. As additional information about a borrower's recent and future operations and collateral values becomes available, judgments and loss estimates change. At each quarter end, the Company applies 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. SIGNIFICANT EVENTS OF 2002 AND 2003 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 and subsequent to 2002. On February 2, 2002, the Company acquired certain loans and insured deposits of the failed Oakwood Deposit Bank from the FDIC. The operations of the two Oakwood branches made a positive contribution to the Company's bottom line. Refer to note 21 to the consolidated financial statements for further information. On May 22, 2002, the Company announced its technology group, RDSI Banking Systems Inc. (RDSI), had acquired the principal assets of BancServ, Inc., a data services company jointly owned by National Bank of Oak Harbor and Genoa Bank. BancServ provided data processing, item processing and imaging to these two independent banks located in North Central Ohio. These services are now being provided by RDSI. On July 25, 2002, the Company announced its technology group, RDSI Banking Systems Inc. (RDSI), had acquired the principal assets of Northwest Financial Services, Inc. (Northwest). Northwest was a limited liability corporation providing item processing and imaging services for eight RDSI client banks. This acquisition, which provides item processing and imaging critical mass, will increase RDSI's franchise value by providing additional services to its client base. On December 30, 2002, an agreement was signed to sell the branches, loans and deposits of the Citizens Savings Bank division of RFCBC to the Union Bank at a price substantially in excess of their book value. The transaction is expected to close in March 2003. Refer to note 5 to the consolidated financial statements for further information. 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, until no sooner than September 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 to First Federal Bank of the Midwest at a price substantially in excess of their book value. The transaction is expected to close in June 2003. Refer to note 27 to the consolidated financial statements for further information. RESULTS OF OPERATIONS 31
Year Ended Year Ended December 31, December 31, ----------- ----------- 2002 2001 %Change 2001 2000 %Change ----------------------------------------------------------------------------- (dollars in thousands except per share data) ----------------------------------------------------------------------------- Total Assets $742,317 $746,209 -1% $746,209 $700,818 +6% Loans Held for Sale 63,536 440 - 440 1,167 -62% Loans (Net) 469,781 591,052 -21% 591,052 569,421 +4% Allowance for Loan Losses 17,694 9,239 +92% 9,239 7,215 +28% Total Deposits 567,860 610,860 -7% 610,860 566,321 +8% Total Revenues (Net) 37,557 39,903 -6% 39,903 37,661 +6% Net Interest Income 23,778 25,741 -8% 25,741 26,388 -2% Loan Loss Provision 27,531 8,733 +215% 8,733 2,100 +316% Noninterest Income 13,779 14,162 -3% 14,162 11,273 +26% Noninterest Expense 30,479 28,018 +9% 28,018 26,754 +5% Net Income (13,408) 2,253 -695% 2,253 6,086 -63% Basic Earnings per Share $(2.95) $.50 -695% $.50 $1.35 -63% Diluted Earnings per Share $(2.95) $.50 -695% $.50 $1.35 -63%
32 NET INTEREST INCOME
Year Ended Year Ended December 31, December 31, ----------- ----------- 2002 2001 % Change 2001 2000 % Change ------------------------------------------------------------------------------- (dollars in thousands) ------------------------------------------------------------------------------- Net Interest Income $23,778 $25,741 -8% $25,741 $26,388 -2%
NET INTEREST INCOME declined $2.0 million from 2001 to $23.8 million in 2002. The net interest margin for 2002 was 3.17% compared to 3.81% for the previous year. The 64 basis point decline in the net interest margin was largely due to a 187 basis point decrease in the yield on earning assets from 8.34% to 6.47% which was not fully offset by a 117 basis point decrease in the Company's cost of funds. The major reason for the reductions in net interest income and in earning asset yield was a $1.1 million increase in the loss of interest income on non-performing and charged off loans. The decline in asset yield was also the result of higher liquidity and a corresponding higher average balance of funds invested in lower yielding investments. NET INTEREST INCOME declined $647,000 from 2000 to $25.7 million in 2001 despite a 4% growth in the net loan portfolio. The decrease was a direct result of the effect on the Company's asset sensitive balance sheet of 11 rate decreases which reduced the prime rate from 9.50% to 4.75%. The net interest margin for 2001 was 3.81% compared to 4.23% for the previous year. The unprecedented steep decline in the prime rate compressed the net interest margin as the decline in interest income on loans exceeded the pace of the decline in funding costs. The 42 basis point decline in the net interest margin was largely due to a 58 basis point decrease in the yield on earning assets from 8.92% to 8.34% which was not fully offset by a 25 basis point decrease in the Company's cost of funds. LOAN LOSS PROVISION THE PROVISION FOR LOAN LOSSES was $27.5 million in 2002 compared to $8.7 million in 2001. The allowance for loan losses at December 31, 2002 was 3.21% of loans compared to 1.54% at December 31, 2001. The increase in the provision resulted primarily from net chargeoffs of $20.5 million of loans in 2002 and from nonperforming loans increasing to $18.7 million at December 31, 2002 versus $14.7 million at December 31, 2001. THE PROVISION FOR LOAN LOSSES was $8.7 million in 2001 compared to $2.1 million in 2000. The allowance for loan losses at December 31, 2001 was 1.54% of loans compared to 1.25% at December 31, 2000. The increase in the provision resulted primarily from net chargeoffs of $6.7 million of loans in 2001 and from nonperforming loans increasing to $14.7 million at December 31, 2001 versus $8.8 million at December 31, 2000. 30 NONINTEREST INCOME
Year Ended Year Ended December 31, December 31, ----------- ----------- 2002 2001 % Change 2001 2000 % Change ----------------------------------------------------------------------------- (dollars in thousands) ----------------------------------------------------------------------------- Total Noninterest Income $13,779 $ 14,162 -3% $ 14,162 $ 11,273 +26% - Data Service Fees $ 7,816 $ 6,126 +28% $ 6,126 $ 5,124 +20% - Deposit Service Fees $ 2,618 $ 2,593 +1% $ 2,593 $ 1,744 +49% - Gains on Sale of Loans $ 759 $ 889 -15% $ 889 $ 387 +130% - Gains on Sale of Securities $ (834) $ 490 -270% $ 490 $ (81) --
TOTAL NONINTEREST INCOME decreased $383,000 to $13.8 million in 2002 from $14.2 million in 2001. The decrease was primarily due to a $1.7 million loss on the sale of the Company's investment in WorldCom bonds, which resulted in a $1.1 million after tax loss in the second quarter of 2002. This decrease was offset by data service fees which increased $1.7 million or 28% to $7.8 million in 2002 compared to $6.1 million in 2001. NONINTEREST INCOME increased $2.9 million, or 26%, from 2000 to $14.2 million in 2001. The increase was primarily due to a $1.0 million increase in data service fees from the Company's bank data processing subsidiary, Rurbanc Data Services, Inc. ("RDSI"), an $849,000 increase in deposit service fees due to a new product introduction, and a $1.1 million increase in gains on sale of loans and securities. RURBANC DATA SERVICES, INC. ("RDSI")
Year Ended Year Ended December 31, December 31, ----------- ----------- 2002 2001 % Change 2001 2000 % Change ------------------------------------------------------------------------------- (Dollars in thousands) ------------------------------------------------------------------------------- Data Service Fees $7,816 $6,126 +28% $6,126 $5,124 +20%
DATA SERVICE FEES increased $1.7 million or 28% to $7.8 million from $6.1 million in 2001 and $1.0 million or 20% from 2000 to 2001. The primary reasons for these increases were increases in the number of customer accounts processed and in the level of sales of complementary data processing products. The increase in the number of accounts was primarily the result of customer account growth at client banks and the addition of new client banks. RDSI PROVIDES data processing services for nearly 60 community banks in Ohio, Michigan and Indiana. RDSI differentiates itself from its competition through the quality of its products and the excellence of its customer service. The applications utilized by RDSI are driven by world-class software used by over 3,600 banks nationwide. Customer service encompasses on-time delivery every morning and a discipline of responding to and resolving customer questions and issues within one hour in excess of 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. In the past five years, the number of bank clients has more than doubled. Equally important is the growth of client banks, both in their number of customer accounts and in the breadth of services provided. Network services, internet banking and other technical services are a rapidly growing part of RDSI's revenue. 31 NONINTEREST EXPENSE Year Ended Year Ended December 31, December 31, ----------- ----------- 2002 2001 %Change 2001 2000 %Change ------------------------------------------------------------------------------- (dollars in thousands) ------------------------------------------------------------------------------- Total Noninterest Expense $30,479 $28,018 +9% $28,018 $26,754 +5% - Salaries & Employee Benefits $15,720 $15,448 +2% $15,448 $15,095 +2% - Professional Fees 3,130 1,712 +83% 1,712 1,263 +36% - All Other $11,629 $10,858 +7% $10,858 $10,396 +4%
NONINTEREST EXPENSE for the year 2002 was $30.5 million, up $2.5 million or 9% from $28.0 million in 2001. Professional fees increased $1.4 million due to increased consulting, legal and auditing fees associated with the evaluation and management of the Company's problem loans. The noninterest expenses of the acquired Oakwood branches and the data processing acquisitions were $1.2 million. Excluding the professional fees associated with problem loans and acquired entity expenses; noninterest expense declined $132,000. NONINTEREST EXPENSE for the year 2001 was $28.0 million, up 5% from $26.8 million in 2000. The noninterest expense increase was limited to 5% as incentive compensation declined by $750,000, resulting in an increase in compensation of less than 1%. Employee benefits increased $270,000 or 9% primarily due to a $224,000 or 28% increase in group insurance. Noninterest expense other than salaries and benefits increased $911,000 or 8%. LOANS
Period Ended % of % of % % of % 12/31/02 Total 12/31/01 Total Inc/(Dec) 12/31/00 Total Inc/(Dec) ----------------------------------------------------------------------------------------------- (dollars in thousands) ----------------------------------------------------------------------------------------------- Commercial $123,053 25% $185,654 31% (34)% $176,911 31% 5% Commercial real 129,719 27% 135,883 23% (5)% 123,758 21% 10% estate Agricultural 68,954 14% 67,136 11% 3% 62,259 11% 8% Residential 84,432 17% 106,689 18% (21)% 107,718 19% (1)% Consumer 60,139 12% 76,512 12% (21)% 81,064 14% (6)% Leasing loans 21,509 5% 28,752 5% (25)% 25,278 4% 14% -------------- -------------- -------------- Loans $487,806 $600,626 (19)% $576,988 4% Loans held for sale 63,536 440 1,167 -------------- -------------- -------------- Total $551,342 $601,066 $578,155
LOANS declined $113 million to $488 million at December 31, 2002, due to an increase in loans held for sale of $63 million, reduced new loan demand and $21 million of charged off loans. The increase in loans held for sale is due to a December 30, 2002 agreement to sell the Citizens Savings Bank division of RFCBC, to the Union Banking Company. This transaction is scheduled to close in late March 2003. Refer to note 5 to the consolidated financial statements for further information. Commercial, commercial real estate, residential, consumer and leasing loans declined 34%, 5%, 21%, 21% and 25%, respectively for the year while agricultural loans increased 3%. In 2001, loans increased $24 million or 4% to $601 million. 32 ASSET QUALITY Period Ended December 31, ------------------------- (dollars in millions) --------------------- Change in Change in Dollars/ Dollars/ 12/31/02 12/31/01 Percentages 12/31/00 percentages -------- -------- ----------- -------- ----------- Non-performing loans $ 18.7 $14.7 $ 4.0 $ 8.8 $5.9 Non-performing assets $ 20.8 $15.0 $ 5.8 $ 8.9 $6.1 Non-performing assets/loans Plus OREO 4.25% 2.49% 1.76% 1.55% .94% Non-performing assets/total assets 2.80% 2.00% .80% 1.27% .73% Net chargeoffs $20.5 $ 6.7 $ 13.8 $ 1.1 $5.6 Net chargeoffs/total loans 4.20% 1.12% 3.08% .19% .93% Loan loss provision $27.5 $ 8.7 $ 18.8 $ 2.1 $6.6 Allowance for loan losses $17.7 $ 9.2 $ 8.5 $ 7.2 $2.00 Allowance/loans 3.21% 1.54% 1.67% 1.25% .29% Allowance/non-performing Loans 95% 63% 32% 82% -19% Allowance/non-performing Assets 85% 62% 23% 81% -19%
ASSET QUALITY statistics reflect a significant increase in both nonperforming assets and chargeoffs during 2002 compared to 2001 and 2001 compared to 2000. Non-performing assets at December 31, 2002 were $20.8 million or 2.80% of total assets, versus $15.0 million or 2.00% at December 31, 2001 and $8.9 million or 1.27% at year-end 2000. Annual net chargeoffs for 2002 were $20.5 million or 4.20% of total loans compared to $6.7 million or 1.12% for 2001. The ratio of the allowance for loan losses to nonperforming loans was 95% at December 31, 2002 compared to 63% at December 31, 2001. ALLOWANCE FOR LOAN LOSSES The Company grades its loans using a seven grade system. Problem loans are classified as either: - Grade 5 - Substandard: Inadequately protected, with well-defined weakness that jeopardize liquidation of debt - Grade 6 - Doubtful: Inherent weaknesses well-defined and high probability of loss (impaired) - Grade 7 - 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. 33
----------12/31/02----------- -----------12/31/01----------- ---INCREASE (DECREASE)--- ALLOCATION ALLOCATION ALLOCATION LOAN ---------- LOAN ---------- LOAN ---------- BALANCE $ % BALANCE $ % BALANCE $ % ----------- -------- ---------- ------------ -------- ---------- ------------ -------- -------- Allocations for individual loans $14.9 $5.1 34.23% $11.1 $3.6 32.94% $7.4 $1.9 -8.44% graded doubtful (impaired) Allocations for individual loans 57.7 6.6 11.44 29.3 2.3 7.85 28.4 4.3 3.59 graded substandard "General" allowance based on 478.7 5.2 1.09 560.7 2.9 0.52 -85.6 1.9 0.51 chargeoff history of nine categories of loans Allocation based on current risk -- 0.8 -- -- 0.4 -- -- 0.4 -- factor statistics as compared to historical risk factor statistics ----------- -------- ---------- ------------ -------- ---------- ------------ -------- -------- TOTAL $551.3 $17.7 3.21% $601.1 $9.2 1.54% $-49.8 $8.5 1.67%
In 2002, the amount of loans classified as doubtful increased $3.8 to $14.9 million and substandard loans increased $28.4 to $57.7 million. Allowance allocations on doubtful loans increased $1.9 million while allowance allocations on substandard loans increased $4.3 million. The allowance for loan losses at December 31, 2002 was $17.7 million or 3.21% of loans compared to $9.2 million or 1.54% at December 31, 2001. While the amount of doubtful and substandard loans and their related allowance allocations increased during 2002, the pace of increase has slowed. Management believes that these problem loan statistics have peaked and that workout efforts will begin to reduce these balances in 2003. 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. 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 a combination of 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 order to assure that new loan underwriting is prudent and in compliance with policy and procedures, the following actions were taken during the past year: - Several lending officers were terminated - The presidents of the banks and the holding company were replaced - The senior credit administration officer was replaced - A new loan policy and loan procedures were adopted - Loan officer training was dramatically increased - The independence of the internal loan review staff was improved by the creation of a Loan Review Committee of the board of directors which the loan review manager reports to - The independence of the internal audit function was improved by: 34 - The hiring of a staff internal audit manager - The separation of the internal audit outsourcing firm and the independent audit firm - Loan officer and loan committee authorization limits were reduced - A plan was put in place to exit the Cleveland lending market and other loan relationships outside of northwestern Ohio. In regard to the effort to reduce the volume of substandard and doubtful (classified loans), the following actions were taken during the past year: - The Company's loan workout group was increased to four staff employees and two consultants - The planned creation of a loan subsidiary to manage the classified loans of RFCBC will focus the efforts of four additional staff employees on the workout of that group of loans - Most classified loans are now assigned to a loan workout specialist These actions are 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, 2002 decreased to $36.3 million or 4.57% of average total assets as compared to $50.8 million or 7.03% of average total asset at December 31, 2001. The Company and RFCBC exceed all "adequately-capitalized" regulatory capital benchmarks while State Bank exceeded all "well-capitalized" regulatory capital benchmarks. Banking regulatory authorities periodically perform examinations of the Company's subsidiary banks and, as an integral part of the examination process, periodically review the allowance for loan losses. Such authorities may require additions to the allowance for loan losses based upon their judgment of the information available to them at the time of their examination. Such authorities may also require other adjustments or place various restrictions on the activities of the Company's subsidiary banks. TOTAL REGULATORY (RISK-BASED) CAPITAL was $49.4 million at December 31, 2002 and $67.4 million at December 31, 2001. 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. The Company's business plan includes strategies to sell the branches of RFCBC and use that bank's current capital and the gain on sale which would result from the branch sales as the capital and primary funding source for a non-banking subsidiary. This subsidiary would manage RFCBC's classified loans that are not included in the sale agreements. Cash flow from the principal and interest payments as well as the payoffs of classified loans would be available to repay debt of the loan subsidiary and to dividend to Rurban the cash for resumption of the Trust Preferred interest payments, common stock dividends and ultimately to reinvest in the expansion of Rurban's banking and data processing operations. 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 $6 million over the next year. WRITTEN AGREEMENT 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. 35 The results of the November 4, 2002 regulatory examinations indicated that as of that date, Rurban and State Bank were not in full compliance with certain provisions of the Agreement. Management expects to be in substantial compliance with each of the provisions of the Agreement by mid-2003. The Company and RFCBC have been advised by RFCBC's regulators, the FDIC and the Ohio Division of Financial Institutions, that the preliminary results of the November 4, 2002 examination of RFCBC indicated that the Bank may be presented with a formal agreement based on concerns raised. RFCBC's December 31, 2002 total risk-based capital ratio was 8.1%, above the "adequately capitalized" minimum of 8%. The anticipated March closing of the sale of the Citizens division (see note 5 to the consolidated financial statements for further information) is expected to improve the total risk-based capital ratio to approximately 15%. State Bank and RFCBC are prohibited from paying dividends to Rurban without prior regulatory approval. Rurban is prohibited from paying Trust Preferred "dividends" and common stock dividends without prior regulatory approval. 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, 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 $235.9 million at December 31, 2002 compared to $130 million at December 31, 2001. THE COMPANY'S RESIDENTIAL FIRST MORTGAGE PORTFOLIO of $84.4 million at December 31, 2002 and $106.7 million at December 31, 2001, which can and has been readily used to collateralize borrowings, is an additional source of liquidity. Management believes its current liquidity level is sufficient to meet its liquidity needs. At December 31, 2002, 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 2002, 2001 and 2000 follows. THE COMPANY EXPERIENCED a net increase in cash from operating activities in 2002, 2001 and 2000. Net cash from operating activities was $15.3 million, $8.5 million and $13.0 million for the years ended December 31, 2002, 2001 and 2000, respectively. NET CASH FLOW FROM INVESTING ACTIVITIES was $94.0 million, $(47.8) million and $(75.7) million for the years ended December 31, 2002, 2001 and 2000, respectively. 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. The changes in net cash from investing activities for 2001 and 2000 include loan growth, as well as normal maturities and reinvestments of securities and premises and equipment expenditures. In 2002, 2001 and 2000, the Company received $81.9 million, $19.0 million and $9.1 million, respectively, from sales of securities available for sale, while proceeds from repayments, maturities and calls of securities were $53.9 million, $38.1 million and $8.8 million in 2002, 2001 and 2000, respectively. NET CASH FLOW FROM FINANCING ACTIVITIES was $(83.6) million, $46.2 million, and $62.6 million for the years ended December 31, 2002, 2001 and 2000, respectively. The net cash decrease was primarily due to a reduction in total deposits of $(66.6) million in 2002. The net cash increase in 2001 and 2000 was primarily attributable to growth in total deposits of $44.5 million and $47.0 million, respectively. Other significant changes in 2002, 2001 and 2000 included $(6.4) million, $2.1 million and $12.1 million in net borrowings from the Federal Home Loan Bank. 36 OFF-BALANCE-SHEET BORROWING ARRANGEMENTS: Significant additional off-balance-sheet liquidity is available in the form of FHLB advances, unused federal funds lines from correspondent banks, and the national certificate of deposit market. While such additional off-balance-sheet liquidity is available, the Written Agreement between Rurban, State Bank, the Federal Reserve Bank of Cleveland and the Ohio Division of Financial Institutions requires Rurban and State Bank to obtain written approval of the Federal Reserve Bank of Cleveland and the Ohio Division of Financial Institutions prior to directly or indirectly incurring any debt. Approximately $62.6 million residential first mortgage loans of the Company's $84.4 million portfolio qualify to collateralize FHLB borrowings and have been pledged to meet FHLB collateralization requirements as of December 31, 2002. In addition to residential first mortgage loans, $14.9 million in investment securities are pledged to meet FHLB collateralization requirements. Based on the current collateralization requirements of the FHLB, approximately $6.0 million of additional borrowing capacity existed at December 31, 2002. Subsequent to year-end, all loans originated at RFC Banking Company were designated as held for sale and no longer qualified as collateral for FHLB advances. These loans have been replaced with investment securities to meet FHLB collateralization requirements. At December 31, 2001, the Company had unused federal funds lines totaling approximately $32.2 million from five correspondent banks. As of December 31, 2002, the Company had unused federal funds lines totaling approximately $26 million from 2 correspondent banks. Federal funds borrowed were $0 at December 31, 2002 and $14.9 million at December 31, 2001. Because RFCBC was not classified as well capitalized at December 31, 2002, it required approval from its respective regulatory agencies prior to accepting any new brokered certificates of deposit. At December 31, 2002, RFCBC had approximately $40.1million in certificates of deposit which have been accepted from brokers. Approximately $22.6 million of those certificates of deposit mature within the next year. Approximately $16.4 million performing commercial loans and $5 million in investment securities are pledged to the Federal Reserve Discount Window to establish additional borrowing capacity of $15.9 million. Such loans are pledged for contingency funding purposes and to date this borrowing capacity has not been used. Totals do not include $5 million in securities pledged for daylight overdraft (Payments System Risk). 37 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 $63,850,000 $18,350,000 $5,000,000 $0 $40,500,000 Capital Lease Obligations 0 0 0 0 0 Operating Lease Obligations 896,400 99,600 199,200 199,200 398,400 Purchase Obligations 0 0 0 0 Other Long-Term Liabilities Reflected on the Registrant's Balance Sheet under GAAP 0 0 0 0 0 ----------------- ---------------- --------------- ------------ ---------------- Total $64,746,400 $18,449,600 $5,199,200 $199,200 $40,898,400
The Company's contractual obligations as of December 31, 2002 were evident in long-term debt obligations and operating lease obligations. The long-term debt obligations were comprised of FHLB Advances of $47,850,000, Trust Preferred securities of $10,000,000 and Note Payable of $6,000,000. The operating lease obligation is a lease on the RDSI building of $99,600 a year. 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 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 38 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. SEVERAL WAYS an institution can manage interest rate risk include: 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. 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, 2002. 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 of the 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, 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 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. 39 PRINCIPAL/NOTIONAL AMOUNT MATURING OR ASSUMED TO WITHDRAW IN: (DOLLARS IN THOUSANDS) 2003 2004 2005 2006 2007 Thereafter Total -------- -------- -------- -------- -------- ---------- -------- RATE-SENSITIVE ASSETS Variable rate loans $132,683 $ 21,066 $ 11,726 $ 8,053 $ 3,467 $ 7,642 $184,638 Average interest rate 5.72% 5.36% 5.42% 6.61% 5.40% 5.72% 5.69% Adjustable rate loans $ 27,380 $ 22,398 $ 16,344 $ 13,646 $ 12,881 $ 87,460 $180,109 Average interest rate 7.08% 7.08% 6.93% 6.92% 7.18% 6.56% 6.81% Fixed rate loans $ 75,736 $ 36,031 $ 25,125 $ 15,582 $ 6,635 $ 27,486 $186,595 Average interest rate 6.81% 7.42% 7.08% 6.99% 6.80% 5.66% 6.81% Total loans $235,799 $ 79,495 $ 53,195 $ 37,281 $ 22,983 $122,588 $551,342 Average interest rate 6.22% 6.78% 6.67% 6.88% 6.80% 6.31% 6.44% Fixed rate investment securities $ 67,275 $ 13,226 $ 3,404 $ 5,373 $ 2,505 $ 26,993 $118,776 Average interest rate 2.47% 3.47% 4.46% 3.04% 4.60% 4.60% 3.20% Variable rate investment securities $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Average interest rate 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Federal Funds Sold & Other $ 14,100 $ 160 $ 0 $ 0 $ 0 $ 0 $ 14,260 Average interest rate 1.24% 3.64% 0.00% 0.00% 0.00% 0.00% 1.26% Total rate sensitive assets $317,174 $ 92,881 $ 56,599 $ 42,654 $ 25,488 $149,581 $684,378 Average interest rate 5.20% 6.30% 6.54% 6.40% 6.59% 6.00% 5.76% RATE SENSITIVE LIABILITIES: Demand - non interest-bearing $ 10,440 $ 9,224 $ 9,224 $ 9,224 $ 7,915 $ 87 $ 46,114 Demand - interest bearing $ 12,855 $ 12,811 $ 12,811 $ 12,811 $ 12,638 $ 0 $ 63,926 Average interest rate 1.67% 1.67% 1.67% 1.67% 1.67% 0.00% 1.67% Money market accounts $ 21,663 $ 18,071 $ 18,071 $ 18,071 $ 14,298 $ 0 $ 90,174 Average interest rate 1.49% 1.24% 0.83% 0.83% 0.83% 0.00% 1.07% Savings $ 6,652 $ 6,300 $ 6,300 $ 6,300 $ 6,233 $ 457 $ 32,242 Average interest rate 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% Certificates of deposit $247,372 $114,664 $ 21,575 $ 10,621 $ 7,430 $ 1,917 $403,579 Average interest rate 3.59% 4.01% 4.09% 4.23% 4.70% 0.25% 3.75% Fixed rate FHLB advances $ 12,350 $ 5,000 $ 0 $ 0 $ 0 $ 30,500 $ 47,850 Average interest rate 6.39% 6.70% 0.00% 0.00% 0.00% 5.31% 5.73% Variable rate FHLB advances $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Average interest rate 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Fixed rate debentures $ 0 $ 0 $ 0 $ 0 $ 0 $ 10,000 $ 10,000 Average interest rate 0.00% 0.00% 0.00% 0.00% 0.00% 10.60% 10.60% Note payable $ 6,000 $ 0 $ 0 $ 0 $ 0 $ 0 $ 6,000 Average interest rate 4.25% 0.00% 0.00% 0.00% 0.00% 0.00% 4.25% Total rate sensitive liabilities $317,332 $166,070 $ 67,981 $ 57,027 $ 48,514 $ 42,961 $699,885 Average interest rate 3.24% 3.12% 1.56% 1.11% 1.03% 2.48% 2.67%
40 PRINCIPAL/NOTIONAL AMOUNT MATURING OR ASSUMED TO WITHDRAW IN: (DOLLARS IN THOUSANDS)
Comparison of 2002 to 2001: First Years Total rate-sensitive assets: Year 2 - 5 Thereafter Total ---------------------------- ---- ----- ---------- ----- At December 31, 2002 $ 317,174 $ 217,623 $ 149,581 $ 684,378 At December 31, 2001 304,536 297,113 103,614 705,263 ----------- ----------- ----------- ----------- Increase (decrease) $ 12,638 $ (79,490) $ 45,967 $ (20,885) Total rate-sensitive liabilities: At December 31, 2002 $ 317,332 $ 339,592 $ 42,961 $ 699,885 At December 31, 2001 371,811 199,079 119,095 689,985 ----------- ----------- ----------- ----------- Increase (decrease) $ (54,479) $ 140,513 $ (76,134) $ 9,900
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 and 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. Therefore, tax equivalent net interest income as a percentage of average interest earning assets declined from 4.23% in 2000 and 3.81% in 2001 to 3.18% in 2002. 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 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. 41 FORWARD-LOOKING STATEMENTS WHEN USED IN THIS FILING and in future filings by the Company with the Securities and Exchange Commission, 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. 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 section of this Annual Report on Form 10-K. Item 8. Financial Statements and Supplementary Data. The Consolidated Balance Sheets of the Corporation and its subsidiaries as of December 31, 2002 and December 31, 2001, 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, 2002, the related Notes to Consolidated Financial Statements and the Report of Independent Auditors, appear on pages F-1 through F-39 of this Annual Report on Form 10-K. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. On September 24, 2002, the Company announced that it had retained BKD, LLP ("BKD") as its principal accountants and independent auditors effective November 15, 2002. BKD replaced Crowe, Chizek and Company LLP ("Crowe") which had served as the company's independent auditor since 1988. The Company filed a Form 8-K with the Securities and Exchange Commission disclosing the change as required by federal securities law. The decision was not the result of any disagreement between Rurban and Crowe on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. The change in independent auditors was recommended by Rurban's Audit Committee and approved by the Board of Directors on September 18, 2002. BKD was selected based on the results of an extensive proposal and interview process to evaluate several well qualified accounting firms. The Company also retained the services of Plante & Moran, LLP to perform an independent loan review. Plante & Moran was selected by the Audit Committee and approved by the Board of Directors 42 based on the results of a similar search process which involved the review of proposals and interviews of several well-qualified firms. 43 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 Corporation's definitive Proxy Statement, filed with the Securities and Exchange Commission pursuant to Regulation 14A of the General Rules and Regulations under the Securities Exchange Act of 1934, relating to the Corporation's Annual Meeting of Shareholders to be held on April 28, 2003, under the captions "ELECTION OF DIRECTORS" and "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." In addition, certain information concerning the executive officers of the Corporation called for in this Item 10 is set forth in the portion of Part I, Item 4 of this Annual Report on Form 10-K entitled "Executive Officers of the Registrant" in accordance with General Instruction G(3). 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 Corporation's definitive Proxy Statement, filed with the Securities and Exchange Commission pursuant to Regulation 14A of the General Rules and Regulations under the Securities Exchange Act of 1934, relating to the Corporation's Annual Meeting of Shareholders to be held on April 28, 2003, under the captions "COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS" and "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION." Neither the "REPORT ON EXECUTIVE COMPENSATION" nor the "PERFORMANCE GRAPH" included in the Corporation's definitive Proxy Statement relating to the Corporation's Annual Meeting of Shareholders to be held on April 28, 2003, shall be deemed to be incorporated herein by reference. 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 Corporation's definitive Proxy Statement, filed with the Securities and Exchange Commission pursuant to Regulation 14A of the General Rules and Regulations under the Securities Exchange Act of 1934, relating to the Corporation's Annual Meeting of Shareholders to be held on April 28, 2003, under the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." Equity Plan Information The following table provides information regarding certain equity plans of the Corporation: 44
(a) (b) (c) Plan Category Number of securities to be Weighted-average Number of securities issued upon exercise of exercise price of remaining available for outstanding options, outstanding options, future issuance under warrants and rights warrants and rights equity compensation plans (excluding securities reflected in column (a)) Equity compensation plans 241,289 $13.02 199,711 approved by security holders (1) Equity compensation plans N/A N/A N/A not approved by security holders (2) Total 241,289 $13.02 199,711
(1) Information relates to the 1997 Rurban Financial Corp. Stock Option Plan. (2) The Corporation has an employee stock purchase plan. All employees of the Corporation and its subsidiaries are eligible to participate subject to the completion of three (3) months employment with the Corporation 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 Corporation. These funds are forwarded to Registrar and Transfer Company at the end of each payroll period and Registrar & Transfer uses the funds to purchase common shares of the Corporation on the open market for the participants. The Corporation's employee stock purchase plan was not approved by shareholders of the Corporation. 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 Corporation's definitive Proxy Statement, filed with the Securities and Exchange Commission pursuant to Regulation 14A of the General Rules and Regulations under the Securities Exchange Act of 1934, relating to the Corporation's Annual Meeting of Shareholders to be held on April 28, 2003, under the caption "TRANSACTIONS INVOLVING MANAGEMENT." Item 14. Controls and Procedures Evaluation of Disclosure Controls and Procedures Within the 90 day period prior to the filing date of this Annual Report on Form 10-K, the Corporation, under the supervision, and with the participation, of its management, including its principal executive officer and principal financial officer, performed an evaluation of the Corporation's disclosure controls and procedures, as contemplated by Rule 13a-15 under the Securities Exchange Act of 1934, as amended. Based on that evaluation, the Corporation's principal executive officer and principal financial officer concluded that such disclosure controls and procedures are effective to ensure that material 45 information relating to the Corporation, including its consolidated subsidiaries, is made known to them, particularly during the period for which the periodic reports are being prepared. Changes in Internal Controls No significant changes were made in the Corporation's internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation performed pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended, referred to above. PART IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (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 57. (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. 46 Executive Compensation Plans and Arrangements
Exhibit No. Description Location - ----------- ----------- -------- 10(a) Employees' Stock Ownership Plan of Rurban Incorporated herein by reference to the Financial Corp. Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 0-13507) [Exhibit 10(a)]. 10(b) First Amendment to Employees' Stock Ownership Incorporated herein by reference to the Plan of Rurban Financial Corp., dated June 14, Corporation's Annual Report on Form 10-K 1993 and made to be effective as of January 1, for the fiscal year ended December 31, 1993 1993 (File No. 0-13507) [Exhibit 10(b)]. 10(c) Second Amendment to Employees' Stock Ownership Incorporated herein by reference to the Plan of Rurban Financial Corp., dated March 14, Corporation's Annual Report on Form 10-K 1994 and made to be effective as of January 1, for the fiscal year ended December 31, 1993 1993 (File No. 0-13507) [Exhibit 10(c)]. 10(d) Third Amendment to Employees' Stock Ownership Incorporated herein by reference to the Plan of Rurban Financial Corp., dated March 13, Corporation's Annual Report on Form 10-K 1995 for the fiscal year ended December 31, 1994 (File No. 0-13507) [Exhibit 10(d)]. 10(e) Fourth Amendment to Employees' Stock Ownership Incorporated herein by reference to the Plan of Rurban Financial Corp., dated June 10, Corporation's Annual Report on Form 10-K 1995 and made to be effective as of January 1, for the fiscal year ended December 31, 1995 1995 (File No. 0-13507) [Exhibit 10(e)]. 10(f) The Rurban Financial Corp. Savings Plan and Incorporated herein by reference to the Trust Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (File No. 0-13507) [Exhibit 10(g)]. 10(g) First Amendment to The Rurban Financial Corp. Incorporated herein by reference to the Savings Plan and Trust, dated December 10, 1990 Corporation's Annual Report on Form 10-K and effective January 1, 1990 for the fiscal year ended December 31, 1990 (File No. 0-13507) [Exhibit 10(g)]. 10(h) Second Amendment to The Rurban Financial Corp. Incorporated herein by reference to the Savings Plan and Trust, dated March 11, 1991, Corporation's Annual Report on Form 10-K effective February 1, 1991 for the fiscal year ended December 31, 1992 (File No. 0-13507) [Exhibit 10(d)].
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Exhibit No. Description Location - ----------- ----------- -------- 10(i) Third Amendment to The Rurban Financial Corp. Incorporated herein by reference to the Savings Plan and Trust, dated June 11, 1991 Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (File No. 0-13507) [Exhibit 10(e)]. 10(j) Fourth Amendment to The Rurban Financial Corp. Incorporated herein by reference to the Savings Plan and Trust, dated July 14, 1992, Corporation's Annual Report on Form 10-K effective May 1, 1992 for the fiscal year ended December 31, 1992 (File No. 0-13507) [Exhibit 10(f)]. 10(k) Fifth Amendment to The Rurban Financial Corp. Incorporated herein by reference to the Savings Plan and Trust, dated March 14, 1994 Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 0-13507) [Exhibit 10(i)]. 10(l) Sixth Amendment to The Rurban Financial Corp. Incorporated herein by reference to the Savings Plan and Trust dated May 1, 1995 Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (File No. 0-13507) [Exhibit 10(l)]. 10(m) Summary of Incentive Compensation Plan of State Incorporated herein by reference to the Bank Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 0-13507) [Exhibit 10(j)]. 10(n) Summary of Bonus Program adopted by the Trust Incorporated herein by reference to the Department of State Bank for the benefit of Corporation's Annual Report on Form 10-K Robert W. Constien in his capacity as Manager for the fiscal year ended December 31, of the Trust Department 1991 (File No. 0-13507) [Exhibit 10(e)]. 10(o) Summary of Bonus Program for the Trust Incorporated herein by reference to the Department of State Bank Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (File No. 0-13507) [Exhibit 10(i)]. 10(p) Summary of Sales Bonus Program of State Bank Incorporated herein by reference to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (File No. 0-13507) [Exhibit 10(n)].
48
Exhibit No. Description Location - ----------- ----------- -------- 10(q) Summary of Rurban Financial Corp. Bonus Plan Incorporated herein by reference to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 0-13507) [Exhibit 10(q)]. 10(r) Executive Salary Continuation Agreement, dated Incorporated herein by reference to the December 15, 1994, between Rurban Financial Corporation's Annual Report on Form 10-K Corp. and Richard C. Burrows for the fiscal year ended December 31, 1994 (File No. 0-13507) [Exhibit 10(p)]. 10(s) Executive Salary Continuation Agreement, dated Included in this Annual Report on Form December 3, 2001, between Rurban Financial 10-K as Exhibit 10(s). Corp. and Kenneth A. Joyce; and Amended Schedule A to Exhibit 10(s) identifying other identical Executive Salary Continuation Agreements between executive officers of Rurban Financial Corp. and Rurban Financial Corp. 10(t) Split-Dollar Dollar Insurance Agreement, dated Included in this Annual Report on Form April 3, 1992, between Robert Constein and 10-K as Exhibit 10(s). Rurban Financial Corp. 10(u) Rurban Financial Corp. Stock Option Plan Incorporated herein by reference to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-13507) [Exhibit 10(u)]. 10(v) Rurban Financial Corp. Plan to Allow Directors Incorporated herein by reference to the to Elect to Defer Compensation Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-13507) [Exhibit 10(v)]. 10(w) Form of Non-Qualified Stock Option Agreement Incorporated herein by reference to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 0-13507 [Exhibit 10(w)]. 10(x) Form of Incentive Stock Option Agreement Incorporated herein by reference to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 0-13507 [Exhibit 10(x)].
49
Exhibit No. Description Location - ----------- ----------- -------- 10(y) Employees' Stock Ownership and Savings Plan Incorporated herein by reference to the of Rurban Financial Corp. Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 0-13507 [Exhibit 10(y)]. 10(z) Rurban Financial Corp. Employee Stock Included in this Annual Report on Form Purchase Plan 10-K as Exhibit 10(z)
(b) Reports on Form 8-K Form 8-K filed on September 25, 2002 regarding "Changes in Registrant's Certifying Accountant." (c) 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. (d) Financial Statement Schedules. None. 50 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/ Richard C. Warrener ----------------------- Date: March 28, 2003 By: Richard C. Warrener, 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 corporation 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, 2002, hereby constitutes and appoints Kenneth A. Joyce and Richard C. Warrener 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, 2003 President, Chief Executive Officer, Principal - -------------------- -------------- Executive Officer and Director Kenneth A. Joyce /s/ Thomas A. Buis March 28, 2003 Director - ------------------ -------------- Thomas A. Buis /s/ Thomas M. Callan March 28, 2003 Director - -------------------- -------------- Thomas M. Callan /s/ John R. Compo March 28, 2003 Director - ----------------- -------------- John R. Compo /s/ John Fahl March 28, 2003 Director - ------------- -------------- John Fahl /s/ Robert A. Fawcett, Jr. March 28, 2003 Director - -------------------------- -------------- Robert A. Fawcett, Jr.
51
/s/ Eric C. Hench March 28, 2003 Director - ----------------- -------------- Eric C. Hench /s/ Gary A. Koester March 28, 2003 Director - ------------------- -------------- Gary A. Koester /s/ Steven D. VanDemark March 28, 2003 Director - ----------------------- -------------- Steven D. VanDemark /s/ J. Michael Walz, D.D.S March 28, 2003 Director - -------------------------- -------------- J. Michael Walz, D.D.S /s/ Richard C. Warrener March 28, 2003 Executive Vice President, Chief Financial - --------------------------- -------------- Officer and Chief Accounting Officer Richard C. Warrener Date: March 28, 2003 --------------
52 CERTIFICATION I, Kenneth A, Joyce, certify that: 1. I have reviewed this annual report on Form 10-K of Rurban Financial Corp.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing of this annual report (the "Evaluation Date"); and c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 53 Dated: March 28, 2003 By: /s/ Kenneth A. Joyce ---------------------- Kenneth A. Joyce President and Chief Executive Officer 54 CERTIFICATION I, Richard C. Warrener, certify that: 1. I have reviewed this annual report on Form 10-K of Rurban Financial Corp.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing of this annual report (the "Evaluation Date"); and c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 55 Dated: March 28, 2003 By: /s/ Richard C. Warrener ------------------------------------------ Richard C. Warrener Executive Vice President, Chief Financial Officer and Chief Accounting Officer 56 RURBAN FINANCIAL CORP. ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 2002 INDEX TO FINANCIAL STATEMENTS
Pages in this Annual Report Description on Form 10-K - ----------- ------------ Report of Independent Auditors................................................................... F-1 Consolidated Balance Sheets at December 31, 2002 and 2001.................................................................................... F-2 to F-3 Consolidated Statements of Income for the years ended December 31, 2002, 2001 and 2000...................................................... F-4 to F-5 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2002, 2001 and 2000................................. F-6 Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000................................................ F-7 to F-8 Notes to Consolidated Financial Statements....................................................... F-9 to F-39
57 INDEPENDENT ACCOUNTANTS' REPORT Board of Directors Rurban Financial Corp. Defiance, Ohio We have audited the accompanying consolidated balance sheet of Rurban Financial Corp. and subsidiaries as of December 31, 2002, and the related consolidated statements of income, stockholders' equity, and cash flows for the year ended December 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 consolidated financial statements described above present fairly, in all material respects, the consolidated financial position of Rurban Financial Corp. and subsidiaries as of December 31, 2002, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. /s/ BKD, LLLP Cincinnati, Ohio February 14, 2003, except for note 27, for which the date is February 22, 2003 F-1 RURBAN FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2002 AND 2001
ASSETS 2002 2001 ----------------------------------- Cash and due from banks $ 37,018,337 $ 25,342,043 Federal funds sold 14,000,000 -- --------------- --------------- Cash and cash equivalents 51,018,337 25,342,043 --------------- --------------- Interest-bearing deposits 260,000 260,000 Available-for-sale securities 115,108,762 101,139,636 Mortgage loans held for sale -- 439,991 Loans held for sale 63,536,309 -- Loans, net of allowance for loan losses of $17,693,841 and $9,238,936 at December 31, 2002 and 2001 469,780,785 591,051,994 Premises and equipment 13,786,408 11,491,056 Premises and equipment held for sale 909,205 -- Federal Reserve and Federal Home Loan Bank stock 3,665,900 3,235,915 Foreclosed assets held for sale, net 1,960,276 325,501 Interest receivable 3,966,721 4,939,741 Deferred income taxes 5,148,523 3,784,701 Goodwill 2,323,643 179,339 Core deposits and other intangibles 770,777 -- Other 10,081,033 4,019,176 --------------- --------------- Total assets $ 742,316,679 $ 746,209,093 =============== ===============
See Notes to Consolidated Financial Statements F-2 LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2001 ---------------------------------------- LIABILITIES Deposits Demand $ 46,114,153 $ 52,830,193 Savings, NOW and money market 117,738,013 177,688,506 Time 404,007,515 380,341,110 --------------- --------------- Total deposits 567,859,681 610,859,809 --------------- --------------- Deposits held for sale 68,175,660 -- Federal funds purchased -- 14,850,000 Note payable 6,000,000 -- Federal Home Loan Bank advances 47,850,000 54,275,069 Trust preferred securities 10,000,000 10,000,000 Interest payable 2,971,448 3,630,623 Other liabilities 3,077,558 1,764,260 --------------- --------------- Total liabilities 705,934,347 695,379,761 --------------- --------------- COMMITMENTS AND CONTINGENT LIABILITIES STOCKHOLDERS' EQUITY Common stock, $2.50 stated value; authorized 10,000,000 shares; issued 4,575,702; outstanding 2002 - 4,565,721 shares, 2001 - 4,564,513 shares 11,439,255 11,439,255 Additional paid-in capital 11,009,733 11,013,284 Retained earnings 13,904,212 28,499,026 Unearned employee stock ownership plan (ESOP) shares (320,765) (512,146) Accumulated other comprehensive income 664,911 721,851 Treasury stock, at cost Common; 2002 - 9,981 shares, 2001 - 11,189 shares (315,014) (331,938) --------------- --------------- Total stockholders' equity 36,382,332 50,829,332 --------------- --------------- Total liabilities and stockholders' equity $ 742,316,679 $ 746,209,093 =============== ===============
See Notes to Consolidated Financial Statements F-3 RURBAN FINANCIAL CORP. CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000 ------------------------------------------- INTEREST INCOME Loans $ 43,294,773 $ 50,482,611 $ 50,404,396 Securities Taxable 4,781,105 5,462,886 4,978,266 Tax-exempt 219,713 406,199 592,240 Other 295,053 167,133 48,035 ------------ ------------ ------------ Total interest income 48,590,644 56,518,829 56,022,937 ------------ ------------ ------------ INTEREST EXPENSE Deposits 20,300,799 26,414,346 24,892,370 Short-term borrowings 514,515 328,340 1,699,687 Federal Home Loan Bank advances 2,923,090 2,986,829 2,707,345 Junior subordinated debentures 1,074,577 1,048,109 335,667 ------------ ------------ ------------ Total interest expense 24,812,981 30,777,624 29,635,069 ------------ ------------ ------------ NET INTEREST INCOME 23,777,663 25,741,205 26,387,868 PROVISION FOR LOAN LOSSES 27,530,583 8,733,000 2,100,000 ------------ ------------ ------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES (3,752,920) 17,008,205 24,287,868 ------------ ------------ ------------ NONINTEREST INCOME Data service fees 7,815,589 6,125,970 5,123,805 Trust fees 2,468,159 2,744,743 2,635,047 Customer service fees 2,617,708 2,592,704 1,744,446 Net gains on loan sales 758,663 889,462 387,493 Net realized gains (losses) on sales of available-for-sale securities (833,515) 489,641 (80,540) Loan servicing fees 402,143 559,648 662,665 Other 550,521 759,445 799,945 ------------ ------------ ------------ Total noninterest income 13,779,268 14,161,613 11,272,861 ------------ ------------ ------------
See Notes to Consolidated Financial Statements F-4
2002 2001 2000 ----------------------------------------------------------- NONINTEREST EXPENSE Salaries and employee benefits $ 15,719,892 $ 15,448,319 $ 15,094,596 Net occupancy expense 1,349,537 1,210,915 1,137,377 Equipment expense 3,960,712 3,488,586 3,347,608 Data processing fees 492,534 473,196 551,200 Professional fees 3,129,592 1,712,161 1,263,095 Marketing expense 487,754 612,234 513,411 Printing and office supplies 755,814 705,583 615,660 Telephone and communications 792,168 681,450 590,345 Postage and delivery expense 625,173 590,570 545,648 State, local and other taxes 780,515 641,452 611,481 Other 2,385,029 2,453,828 2,483,596 --------------- --------------- --------------- Total noninterest expense 30,478,720 28,018,294 26,754,017 --------------- --------------- --------------- INCOME BEFORE INCOME TAX (20,452,372) 3,151,524 8,806,712 PROVISION (CREDIT) FOR INCOME TAXES (7,044,488) 898,566 2,720,534 --------------- --------------- --------------- NET INCOME (LOSS) $ (13,407,884) $ 2,252,958 $ 6,086,178 =============== =============== =============== BASIC EARNINGS (LOSS) PER SHARE $ (2.95) $ 0.50 $ 1.35 =============== =============== ============== DILUTED EARNINGS (LOSS) PER SHARE $ (2.95) $ 0.50 $ 1.35 =============== =============== ==============
See Notes to Consolidated Financial Statements F-5 RURBAN FINANCIAL CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
ACCUMULATED ADDITIONAL UNEARNED OTHER COMMON PAID-IN RETAINED ESOP COMPREHENSIVE TREASURY STOCK CAPITAL EARNINGS SHARES INCOME (LOSS) STOCK TOTAL --------------------------------------------------------------------------------------- BALANCE, JANUARY 1, 2000 $11,439,255 $11,518,469 $30,047,158 $(908,014) $(1,533,547) $(6,662,850) $43,900,471 Comprehensive income Net income 6,086,178 6,086,178 Change in unrealized gain (loss) on securities available for sale, net of reclassification adjustment and tax effect 1,862,037 1,862,037 --------- Total comprehensive income 7,948,215 --------- Dividends on common stock, $0.42 per share (1,888,104) (1,888,104) Declaration of 5% stock dividend net of cash paid in lieu of fractional shares and issuance of 206,520 treasury shares (405,129) (2,794,988) 3,193,149 (6,968) ESOP shares earned 186,572 186,572 ----------- ----------- ----------- --------- --------- --------- ----------- BALANCE, DECEMBER 31, 2000 11,439,255 $11,113,340 $31,450,244 $(721,442) $328,490 $(3,469,701) $50,140,186 Comprehensive income Net income 2,252,958 2,252,958 Change in unrealized gain (loss) on securities available for sale, net of reclassification adjustment and tax effect 393,361 393,361 --------- Total comprehensive income 2,646,319 --------- Dividends on common stock, $0.47 per share (2,158,392) (2,158,392) Purchase of stock (3,049 shares) (45,400) (45,400) Stock options exercised 3,580 treasury shares) (4,180) 50,162 45,982 Declaration of 5% stock dividend net of cash paid in lieu of fractional shares and issuance of 216,744 treasury shares (95,876) (3,045,784) 3,133,001 (8,659) ESOP shares earned 209,296 209,296 ----------- ----------- ----------- --------- --------- --------- ----------- BALANCE, DECEMBER 31, 2001 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 (13,464,82) ---------- 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 =========== =========== =========== ========= ========= ========= ===========
See Notes to Consolidated Financial Statements F-6 RURBAN FINANCIAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 2002 2001 2000 ----------------------------------------------------------- OPERATING ACTIVITIES Net income (loss) $ (13,407,884) $ 2,252,958 $ 6,086,178 Items not requiring (providing) cash Depreciation and amortization 2,277,322 1,942,325 1,893,129 Provision for loan losses 27,530,583 8,733,000 2,100,000 ESOP shares earned 191,381 209,296 186,572 Amortization of premiums and discounts on securities 1,963,325 -- -- Amortization of intangible assets 138,284 120,661 210,000 Deferred income taxes (1,334,489) (2,078,874) (1,479,825) Proceeds from sale of loans held for sale 37,748,464 31,467,939 14,102,762 Originations of loans held for sale (36,549,810) (29,851,752) (13,076,583) (Gain) loss from sale of loans (758,663) (889,462) (387,493) Net realized (gains) losses on available-for-sale securities 833,515 (489,641) 80,540 Changes in Interest receivable 1,674,277 776,307 (1,568,727) Other assets (6,050,115) 63,385 2,543,351 Interest payable and other liabilities 1,060,273 3,669,980 2,275,289 --------------- --------------- --------------- Net cash provided by (used in) operating activities 15,316,463 8,459,392 12,965,193 --------------- --------------- --------------- INVESTING ACTIVITIES Net change in interest-bearing deposits -- (150,000) -- Purchases of available-for-sale securities (134,355,439) (71,576,221) (20,954,482) Proceeds from maturities of available-for-sale securities 53,890,402 38,131,013 8,845,593 Proceeds from the sales of available-for-sale securities 81,916,528 19,060,258 9,063,566 Net change in loans 59,829,614 30,363,739 71,039,406 Purchase of premises and equipment (6,910,438) (2,856,133) (1,655,551) Purchase of Federal Home Loan and Federal Reserve Bank stock (433,000) -- -- Proceeds from assumption of net liabilities in business acquisition 40,069,328 -- -- --------------- --------------- --------------- Net cash provided by (used in) investing activities 94,006,995 47,754,822 75,740,280 --------------- --------------- ---------------
See Notes to Consolidated Financial Statements F-7
2002 2001 2000 ----------------------------------------------------------- FINANCING ACTIVITIES Net increase (decrease) in demand deposits, money market, NOW and savings accounts $ (43,508,229) $ 19,808,390 $ (9,696,444) Net increase (decrease) in certificates of deposit (23,096,882) 24,730,658 56,721,121 Net increase (decrease) in federal funds purchased (14,850,000) 1,650,000 2,300,000 Proceeds from Federal Home Loan Bank advances 5,000,000 16,500,000 20,000,000 Repayment of Federal Home Loan Bank advances (11,425,069) (14,388,845) (7,871,389) Proceeds from note payable 6,000,000 -- -- Proceeds from junior subordinated debentures -- -- 10,000,000 Repayment of advances on line of credit -- -- (7,000,000) Proceeds from stock options exercised 13,373 45,982 -- Purchase of treasury stock -- (45,400) -- Dividends paid (1,780,317) (2,086,370) (1,822,218) Cash paid in lieu of fractional shares for 5% stock dividend -- (8,659) (6,968) --------------- --------------- --------------- Net cash provided by (used in) financing activities (83,647,124) 46,205,756 62,624,102 --------------- --------------- --------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 25,676,334 6,910,326 (150,985) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 25,342,043 18,431,717 18,582,702 --------------- --------------- --------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 51,018,377 $ 25,342,043 $ 18,431,717 =============== =============== =============== SUPPLEMENTAL CASH FLOWS INFORMATION Interest paid $ 25,472,126 $ 31,760,174 $ 27,535,694 Income taxes paid (net of refunds) -- 5,250,000 1,961,537
See Notes to Consolidated Financial Statements F-8 RURBAN FINANCIAL CORP. AND SUBSIDIARIES 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"), RFC Banking Company ("RFCBC") collectively (Banks), Rurbanc Data Services, Inc. ("RDSI"), Rurban Life Insurance Company ("Rurban Life") 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"). The Banks are primarily engaged in providing a full range of banking and financial services to individual and corporate customers in northern Ohio. The Banks are subject to competition from other financial institutions. The Banks are subject to the regulation of certain federal and state agencies and undergo periodic examinations by those regulatory authorities. RDSI provides data processing services to financial institutions located in Ohio, Michigan and Indiana. Rurban Life provides credit life and disability insurance to customers. 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, the Banks, RDSI, Rurban Life, RST, RFS and RMC. All significant intercompany accounts and transactions have been eliminated in consolidation. 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. 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. (Continued) F-9 RURBAN FINANCIAL CORP. AND SUBSIDIARIES 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 91 days past due and interest is considered a loss, 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. 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. (Continued) F-10 RURBAN FINANCIAL CORP. AND SUBSIDIARIES A loan is considered impaired when, based on current information and events, it is probable that the Bank 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. (Continued) F-11 RURBAN FINANCIAL CORP. AND SUBSIDIARIES 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 periods ranging from one to seven years. Such assets are periodically evaluated as to the recoverability of their carrying value. MORTGAGE SERVICING RIGHTS Mortgage servicing rights on originated loans that have been sold are capitalized by allocating the total cost of the mortgage loans between the mortgage servicing rights and the loans based on their relative fair values. Capitalized servicing rights are amortized in proportion to and over the period of estimated servicing revenues. Impairment of mortgage-servicing rights is assessed based on the fair value of those rights. Fair values are estimated using discounted cash flows based on a current market interest rate. For purposes of measuring impairment, the rights are stratified based on the predominant risk characteristics of the underlying loans. The predominant characteristic currently used for stratification is type of loan. The amount of impairment recognized is the amount by which the capitalized mortgage servicing rights for a stratum exceed their fair value. TREASURY STOCK Treasury stock is stated at cost. Cost is determined by the first-in, first-out method. STOCK OPTIONS At December 31, 2002, 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. (Continued) F-12 RURBAN FINANCIAL CORP. AND SUBSIDIARIES
2002 2001 2000 ----------------------------------------------------------- Net income (loss), as reported $ (13,407,884) $ 2,252,958 $ 6,086,178 Less: Total stock-based employee compensation cost determined under the fair value based method, net of income taxes (78,974) (148,908) (142,744) --------------- --------------- --------------- Pro forma net income $ (13,486,858) $ 2,104,050 $ 5,943,434 =============== =============== =============== Earnings per share: Basic - as reported $ (2.95) $ 0.50 $ 1.35 =============== =============== =============== Basic - pro forma $ (2.97) $ 0.46 $ 1.32 =============== =============== =============== Diluted - as reported $ (2.95) $ 0.50 $ 1.35 =============== =============== =============== Diluted - pro forma $ (2.97) $ 0.46 $ 1.32 =============== =============== ===============
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. Earnings and dividends per share are restated for all stock dividends. RECLASSIFICATIONS Certain reclassifications have been made to the 2001 and 2000 financial statements to conform to the 2002 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, 2002, was $5,283,000. (Continued) F-13 RURBAN FINANCIAL CORP. AND SUBSIDIARIES 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, 2002: U.S. Treasury and government agencies $ 54,770,502 $ 46,271 $ (15,731) $ 54,801,042 Mortgage-backed securities 54,875,436 796,267 (28,713) 55,642,990 State and political subdivision 4,308,675 209,346 -- 4,518,021 Equity securities 96,709 -- -- 96,709 Other securities 50,000 -- -- 50,000 ------------- ------------- -------------- ------------- $ 114,101,322 $ 1,051,884 $ (44,444) $ 115,108,762 ============= ============= ============== ============= December 31, 2001: U.S. Treasury and government agencies $ 16,663,883 $ 231,951 $ (14,716) $ 16,881,118 Mortgage-backed securities 61,935,534 1,075,697 (30,185) 62,981,046 State and political subdivisions 4,859,755 46,343 (108,236) 4,797,862 Mutual funds 10,050,505 -- (50,505) 10,000,000 Corporate securities 6,236,118 -- (56,635) 6,179,483 Other securities 300,127 -- -- 300,127 ------------- ------------- -------------- ------------- $ 100,045,922 $ 1,353,991 $ (260,277) $ 101,139,636 ============= ============= ============== =============
(Continued) F-14 RURBAN FINANCIAL CORP. AND SUBSIDIARIES The amortized cost and fair value of securities available for sale at December 31, 2002, 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. AVAILABLE FOR SALE AMORTIZED FAIR COST VALUE ---------------------------------------- Within one year $ 48,873,840 $ 48,890,532 One to five years 6,952,792 7,004,237 Five to ten years 3,119,899 3,279,971 After ten years 279,355 291,032 --------------- --------------- 59,225,886 59,465,772 Mortgage-backed securities 54,875,436 55,642,990 --------------- --------------- Totals $ 114,101,322 $ 115,108,762 =============== ===============
The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $91,330,997 at December 31, 2002, and $76,471,000 at December 31, 2001. Gross gains of $1,117,251, $666,458 and $6,080 and gross losses of $1,950,766, $176,817 and $86,620 resulting from sales of available-for-sale securities were realized for 2002, 2001 and 2000, respectively. NOTE 4: LOANS AND ALLOWANCE FOR LOAN LOSSES Categories of loans at December 31, include: 2002 2001 ---------------------------------------- Commercial $ 123,053,492 $ 185,654,185 Commercial real estate 129,718,943 135,882,972 Agricultural 68,953,865 67,136,182 Residential real estate 84,431,599 106,689,148 Consumer 60,138,463 76,512,215 Leasing loans 21,509,394 28,752,169 --------------- --------------- Total loans 487,805,756 600,626,871 Less Net deferred loan fees, premiums and discounts (331,130) (335,941) Allowance for loan losses (17,693,841) (9,238,936) --------------- --------------- Net loans $ 469,780,785 $ 591,051,994 =============== ===============
(Continued) F-15 RURBAN FINANCIAL CORP. AND SUBSIDIARIES Activity in the allowance for loan losses was as follows: 2002 2001 2000 ------------------------------------------------------ Balance, beginning of year $ 9,238,936 $ 7,214,970 $ 6,193,712 Amounts assumed in acquisition 1,427,000 -- -- Provision charged to expense 27,530,583 8,733,000 2,100,000 Recoveries 1,270,773 463,923 490,752 Losses charged off (21,773,451) (7,172,957) (1,569,494) ------------- ------------- ------------- Balance, end of year $ 17,693,841 9,238,936 $ 7,214,970 ============= ============= =============
Individual loans determined to be impaired were as follows:
2002 2001 2000 ----------------------------------------------------------- Year-end impaired loans with no allowance for loan losses allocated $ 1,186,000 $ 1,937,000 $ 4,189,000 Year-end loans with allowance for loan losses allocated 13,736,000 9,134,000 3,923,000 -------------- -------------- --------------- Total impaired loans $ 14,922,000 $ 11,071,000 $ 8,112,000 ============== ============== =============== Amount of allowance allocated $ 5,067,000 $ 3,647,000 $ 2,410,000 Average of impaired loans during the year $ 17,340,000 $ 7,999,000 $ 6,020,000 Interest income recognized during impairment $ 718,626 $ 421,000 $ 416,000 Cash-basis interest income recognized $ 693,390 $ 412,000 $ 89,000
At December 31, 2002 and 2001, accruing loans delinquent 90 days or more totaled $476,000 and $2,131,000, respectively. Non-accruing loans at December 31, 2002 and 2001 were $18,259,000 and $12,557,000, respectively. NOTE 5: ASSETS AND LIABILITIES HELD FOR SALE On December 30, 2002, an agreement was signed to sell the branches of RFCBC which comprise the Citizens Savings Bank division to the Union Banking Company. 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. This transaction is scheduled to close late March 2003. The Company does not maintain a separate statement of operations for each division. (Continued) F-16 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTE 6: PREMISES AND EQUIPMENT Major classifications of premises and equipment including those held for sale, stated at cost, were as follows:
2002 2001 ---------------------------------------- Land $ 1,021,212 $ 1,056,691 Buildings and improvements 8,252,239 7,845,265 Equipment 14,955,945 10,711,339 --------------- --------------- 24,229,396 19,613,295 Less accumulated depreciation (9,533,783) (8,122,239) --------------- --------------- Net premises and equipment $ 14,695,613 $ 11,491,056 =============== ===============
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, 2002 and 2001, were:
2002 2001 2000 ----------------------------------------------------------- Balance as of January 1 $ 179,339 $ 276,731 $ 374,123 Goodwill acquired during the year 2,144,304 -- -- Impairment losses -- -- -- Amortization -- (97,392) (97,392) --------------- --------------- --------------- Balance as of December 31 $ 2,323,643 $ 179,339 $ 276,731 =============== =============== ===============
All goodwill is allocated to the banking segment of the business. (Continued) F-17 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTE 8: OTHER INTANGIBLE ASSETS The carrying basis and accumulated amortization of recognized intangible assets at December 31, 2002 and 2001, were:
2002 2001 GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED AMOUNT AMORTIZATION AMOUNT AMORTIZATION ------------------------------------------------------------------------------- Core deposits $ 708,435 $ (119,042) $ 568,000 $ 568,000 Other 200,627 (19,243) -- -- --------------- --------------- --------------- --------------- $ 909,062 $ (138,285) $ 568,000 $ 568,000 =============== =============== =============== ===============
Amortization expense for the years ended December 31, 2002 and 2001, was $138,285 and $23,269, respectively. Estimated amortization expense for each of the following five years is: 2003 $ 148,472 2004 144,429 2005 142,678 2006 141,165 2007 139,991
NOTE 9: LOAN SERVICING Mortgage loans sold to and serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage loans serviced for others were $32,057,079 and $40,767,177 at December 31, 2002 and 2001, respectively. (Continued) F-18 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTE 10: INTEREST-BEARING DEPOSITS Interest-bearing deposits in denominations of $100,000 or more were $172,055,000 on December 31, 2002, and $164,043,000 on December 31, 2001. Certificates of deposit obtained from brokers totaled approximately $93,045,000 and $70,426,000 at December 31, 2002 and 2001, respectively. At December 31, 2002, the scheduled maturities of time deposits were as follows:
2003 $ 247,652,215 2004 114,812,993 2005 21,574,935 2006 10,620,204 2007 7,430,444 Thereafter 1,916,724 --------------- $ 404,007,515 ================
In August 2002, RFCBC received approval from FDIC to issue up to $10.5 million in broker certificates of deposit to replace maturing brokered deposits. That waiver expired October 31, 2002. At December 31, 2002, RFCBC had approximately $40 million in certificates of deposit which have been accepted from brokers. Approximately $22.6 million of those certificates of deposit mature within the next year. NOTE 11: NOTE PAYABLE The Company has a note payable to The Northern Trust Company, secured by stock in the Company's subsidiaries, payable in equal monthly principal installments of $166,667 together with interest at a variable rate. Final payment is due March 31, 2003. The stock of the Banks and RDSI is pledged as security for the note. The Company is negotiating with the lender to extend the maturity of the note to June 30, 2003 and plans to refinance the note with another lender as part of the financing of a loan subsidiary to be created upon the sale of RFCBC's deposits, branches, and performing loans. (Continued) F-19 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTE 12: FEDERAL HOME LOAN BANK ADVANCES The Federal Home Loan Bank advances were secured by mortgage loans and investment securities totaling $62,572,861 at December 31, 2002. Advances, at interest rates from 4.52 to 7.02 percent are subject to restrictions or penalties in the event of prepayment. Aggregate annual maturities of Federal Home Loan Bank advances at December 31, 2002, are:
DEBT -------------------- 2003 $ 12,350,000 2004 5,000,000 2005 -- 2006 -- 2007 -- Thereafter 30,500,000 --------------- $ 47,850,000 ================
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, 2002 and 2001, the outstanding principal balance of the Capital Securities was $10,000,000. 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 Capital Securities from time to time for a period not to exceed 10 consecutive semi-annual periods. On February 12, 2003, the Trustee was notified that the Company elected to defer the semi-annual distributions which would have been due on March 7, 2003, until September 7, 2003. (Continued) F-20 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTE14: INCOME TAXES The provision (credit) for income taxes includes these components:
2002 2001 2000 ----------------------------------------------------------- Taxes currently payable $ (5,709,999) $ 2,977,440 $ 4,200,359 Deferred income taxes (1,334,489) (2,078,874) (1,479,825) --------------- --------------- --------------- Income tax expense (credit) $ (7,044,488) $ 898,566 $ 2,720,534 =============== =============== ===============
A reconciliation of income tax expense at the statutory rate to the Company's actual income tax expense is shown below:
2002 2001 2000 ----------------------------------------------------------- Computed at the statutory rate (34%) $ (6,953,806) $ 1,071,518 $ 2,994,282 Increase (decrease) resulting from Tax exempt interest (115,581) (162,859) (268,587) Nondeductible expenses 24,899 (10,093) (5,161) --------------- --------------- --------------- Actual tax expense (credit) $ (7,044,488) $ 898,566 $ 2,720,534 =============== =============== ===============
The tax effects of temporary differences related to deferred taxes shown on the balance sheets are:
2002 2001 ---------------------------------------- Deferred tax assets Allowance for loan losses $ 5,692,566 $ 3,752,000 Mark to market adjustment 342,530 371,863 Accrued compensation and benefits 284,979 395,970 Net deferred loan fees 112,584 102,277 ESOP contributions -- 70,071 Other 52,709 21,281 --------------- --------------- 6,485,368 4,713,462 --------------- --------------- Deferred tax liabilities Depreciation (831,950) (368,411) Mortgage servicing rights (70,649) (131,215) Purchase accounting adjustments (43,742) (49,210) Other (47,974) (8,062) Unrealized gains on available-for-sale securities (342,530) (371,863) --------------- --------------- (1,336,845) (928,761) --------------- --------------- Net deferred tax asset $ 5,148,523 $ 3,784,701 =============== ===============
(Continued) F-21 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTE 15: OTHER COMPREHENSIVE INCOME (LOSS) Other comprehensive income (loss) components and related taxes are as follows:
2002 2001 2000 ----------------------------------------------------------- Unrealized gains (losses) on securities available for sale $ (919,788) $ 1,085,643 $ 2,740,727 Reclassification for realized amount included in income 833,515 (489,641) 80,540 --------------- --------------- --------------- Other comprehensive income (loss), before tax effect (86,273) 596,002 2,821,267 Tax expense (benefit) (29,333) 202,641 959,230 --------------- --------------- --------------- Other comprehensive income (loss) $ (56,940) $ 393,361 $ 1,862,037 =============== =============== ===============
NOTE 16: REGULATORY MATTERS The Company and the subsidiary banks 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 the subsidiary banks 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 the subsidiary banks 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, 2002, that the Company and the subsidiary banks meet all capital adequacy requirements to which they are subject. As of December 31, 2002, the most recent notification to the regulators categorized the Company as adequately capitalized, State Bank as well capitalized, and RFCBC as adequately capitalized under the regulatory framework for prompt corrective action. To be categorized, the Company must maintain capital ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Company's category. (Continued) F-22 RURBAN FINANCIAL CORP. AND SUBSIDIARIES The Company and significant subsidiary banks' actual capital amounts (in millions) and ratios are also presented in the following table.
TO BE WELL CAPITALIZED FOR CAPITAL ADEQUACY UNDER PROMPT CORRECTIVE ACTUAL PURPOSES ACTION PROVISIONS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO -------------------------------------------------------------------------------- As of December 31, 2002 Total Capital (to Risk-Weighted Assets) Consolidated $ 49.4 9.2% $ 43.0 8.0% $ -- N/A State Bank 36.2 10.2 28.5 8.0 35.6 10.0 RFCBC 14.8 8.1 14.6 8.0 18.2 10.0 Tier I Capital (to Risk-Weighted Assets) Consolidated 42.6 7.9 21.5 4.0 -- N/A State Bank 31.7 8.9 14.3 4.0 21.4 6.0 RFCBC 12.4 6.8 7.3 4.0 10.9 6.0 Tier I Capital (to Average Assets) Consolidated 42.6 5.4 31.7 4.0 N/A State Bank 31.7 6.7 19.1 4.0 23.8 5.0 RFCBC 12.4 4.2 11.7 4.0 14.6 5.0 As of December 31, 2001 Total Capital (to Risk-Weighted Assets) Consolidated $ 67.4 10.9% $ 49.5 8.0% -- N/A State Bank 35.3 9.7 29.2 8.0 36.5 10.0 RFCBC 25.7 10.2 20.0 8.0 25.1 10.0 Tier I Capital (to Risk-Weighted Assets) Consolidated 59.6 9.6 24.7 4.0 -- N/A State Bank 30.1 8.3 14.5 4.0 21.9 6.0 RFCBC 22.6 9.0 10.0 4.0 15.1 6.0 Tier I Capital (to Average Assets) Consolidated 59.6 8.1 29.5 4.0% -- N/A State Bank 30.1 7.0 17.2 4.0 21.5 5.0 RFCBC 22.6 7.5 12.0 4.0 15.0 5.0
(Continued) F-23 RURBAN FINANCIAL CORP. AND SUBSIDIARIES 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. The results of the November 4, 2002 regulatory examination indicated that as of that date, Rurban and State Bank were not in full compliance with certain provisions of the Written Agreement. Management expects to be in substantial compliance with each of the provisions of the Written Agreement by mid-2003. The Company and RFCBC have been advised by RFCBC's regulators, the FDIC and the Ohio Division of Financial Institutions, that the preliminary results of the November 4, 2002 examination of RFCBC indicated that the Bank may be presented with a formal agreement based on concerns raised. State Bank and RFCBC are prohibited from paying dividends to Rurban without prior regulatory approval. Rurban is prohibited from paying Trust Preferred "dividends" and common stock dividends without prior regulatory approval. 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, 2002 and 2001:
2002 2001 ------------------------------------------- Balance, January 1 $ 7,614,000 $ 4,678,000 New loans 1,777,000 875,000 Repayments (1,595,000) (1,494,000) Previously existing loans to new directors -- 3,668,000 Other changes (261,000) (113,000) --------------- --------------- Balance, December 31 $ 7,535,000 $ 7,614,000 =============== ===============
In regard to the 2002 related party loan activity, 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(s) at December 31, 2002 and 2001 totaled $3,213,000 and $3,094,000, respectively. F-24 NOTE 18: EMPLOYEE BENEFITS The Company has retirement savings 401(k) plans covering substantially all employees. Employees may contribute up to 6% of their compensation with the Company matching 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 2002, 2001 and 2000 were $285,000, $297,000, and $278,000 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 $164,000, $192,000, and $236,000 for 2002, 2001 and 2000 respectively. In 2002, previously accrued benefits under the agreements in the amount of $489,000 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 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 $2,731,911 less policy loans of $1,014,523 at December 31, 2002 and $2,610,000 at December 31, 2001, 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 the 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. (Continued) F-25 RURBAN FINANCIAL CORP. AND SUBSIDIARIES ESOP expense for the years ended December 31, 2002, 2001 and 2001 was $503,000, $886,000 and $967,000.
2002 2001 ---------------------------------------- Allocated shares 716,289 735,258 Unearned shares 24,811 26,514 -------------- -------------- Total ESOP shares 741,100 761,772 ============== ============== Fair value of unearned shares at December 31 $ 230,246 $ 362,738 ============== ==============
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 441,000 shares of common stock. The exercise price of each option is intended to 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, 2002, 2001 and 2000, and changes during the years then ended is presented below:
2002 2001 2000 WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE ---------------------------------------------------------------------------------- Outstanding, beginning of year 326,732 $ 12.96 332,797 $ 13.00 241,107 $ 13.77 Granted 3,500 10.51 8,313 13.62 95,703 11.08 Exercised (1,208) 11.07 (3,580) 13.11 Forfeited (87,735) 12.85 (10,798) 14.12 (4,013) 13.85 ------- -------- ----------- Outstanding, end of year 241,289 13.02 326,732 12.96 332,797 13.00 ======= ======== =========== Options exercisable, end of year 186,113 13.29 184,581 13.31 122,210 13.45 ======= ======== ===========
(Continued) F-26 RURBAN FINANCIAL CORP. AND SUBSIDIARIES 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: 2002 2001 2000 ----------------------------------------------------------- Dividend yields 3.41% 3.77% 3.54% Volatility factors of expected market price of common stock 15.00% 10.84% 17.35% Risk-free interest rates 1.50% 4.78% 5.68% Expected life of options 10 years 8 years 10 years Weighted-average fair value of options granted during the year $ 0.92 $ 1.69 $ 2.37
The following table summarizes information about stock options under the plan outstanding at December 31, 2002: 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 $11.07 65,423 8.09 years $ 11.02 24,969 $ 11.07 $12.87 to $14.00 136,253 5.23 years $ 12.90 129,903 $ 12.88 $15.20 to $16.78 39,613 6.06 years $ 16.75 31,241 $ 16.77
(Continued) F-27 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTE 20: EARNINGS PER SHARE Earnings per share (EPS) are computed as follows: YEAR ENDED DECEMBER 31, 2002 WEIGHTED-AVERAGE INCOME SHARES PER SHARE 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 shares of common stock 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. YEAR ENDED DECEMBER 31, 2001 WEIGHTED-AVERAGE INCOME SHARES PER SHARE AMOUNT ----------------------------------------------------------- Basic earnings per share Net income available to common stockholders $ 2,252,958 4,525,714 $ .50 ============== Effect of dilutive securities Stock options -- 18,737 --------------- --------------- Diluted earnings per share Income available to common stockholders and assumed conversions $ 2,252,958 4,544,451 $ .50 =============== =============== ==============
(Continued) F-28 RURBAN FINANCIAL CORP. AND SUBSIDIARIES Options to purchase 143,685 shares of common stock were outstanding at December 31, 2001, 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, 2000 WEIGHTED-AVERAGE INCOME SHARES PER SHARE AMOUNT ----------------------------------------------------------- Basic earnings per share Net income available to common stockholders $ 6,086,178 4,510,504 $ 1.35 ============== Effect of dilutive securities Stock options -- 208 --------------- --------------- Diluted earnings per share Income available to common stockholders and assumed conversions $ 6,086,178 4,510,712 $ 1.35 =============== =============== ==============
Options to purchase 237,148 shares of common stock were outstanding at December 31, 2000, 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. NOTE 21: BUSINESS ACQUISITIONS On February 2, 2002, the Company acquired certain assets and assumed certain liabilities of the Oakwood Deposit Bank Company of Oakwood, Ohio ("Oakwood") from the FDIC following the Ohio Superintendent of Financial Institutions placing Oakwood in receivership and appointing the FDIC as receiver for a net premium of approximately $2.0 million. As a result of the acquisition, the Company will have an opportunity to increase its deposit base and reduce transaction costs. The Company also expects to reduce costs through economies of scale. (Continued) F-29 RURBAN FINANCIAL CORP. AND SUBSIDIARIES The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. Securities available for sale $ 18,271,342 Loans 29,625,297 Core deposit and other intangibles 909,062 Goodwill 2,144,304 Accrued interest receivable 701,257 Other assets 247,290 --------------- Total assets acquired 51,898,552 --------------- Deposits 91,780,643 Accrued interest payable 187,237 --------------- Total liabilities acquired 91,967,880 --------------- Net liabilities assumed $ (40,069,328) ===============
The difference between the book value of assets acquired and liabilities assumed from the FDIC was paid to the Company in cash, which was used to fund withdrawals of insured deposits from non-local depositors. The only significant intangible assets acquired were the core deposit base and customer relationships, which has a useful life of approximately seven years and will be amortized using the accelerated method. The $2,144,304 of goodwill was assigned entirely to the banking segment of the business and is expected to be deductible for tax purposes. The proforma disclosures to depict the results of operations as though the merger had taken place at the beginning of each period are not presented as records are not available from the FDIC for prior periods. 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. (Continued) F-30 RURBAN FINANCIAL CORP. AND SUBSIDIARIES
DECEMBER 31, 2002 DECEMBER 31, 2001 CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ----------------------------------------------------------------- Financial assets Cash and cash equivalents $ 51,018,337 $ 51,018,000 $ 25,342,043 $ 25,342,043 Interest-bearing deposits 260,000 260,000 260,000 260,000 Available-for-sale securities 115,108,762 115,109,000 101,139,636 101,139,636 Loans including loans held for sale, net 533,317,094 540,143,000 591,491,985 595,917,000 Stock in FRB and FHLB 3,665,900 3,666,000 3,235,915 3,235,915 Cash surrender value of life insurance 1,017,573 1,018,000 2,610,000 2,610,000 Interest receivable 3,966,721 3,967,000 4,939,741 4,939,741 Financial liabilities Deposits including deposits held for sale 636,035,341 641,643,000 610,859,809 615,804,000 Federal funds purchased 14,850,000 14,850,000 FHLB advances 47,850,000 52,474,000 54,275,069 57,165,000 Trust preferred securities 10,000,000 11,444,000 10,000,000 10,202,000 Note payable 6,000,000 6,000,000 -- -- Interest payable 2,971,448 2,971,448 3,630,623 3,630,623
For purposes of the above disclosures of estimated fair value, the following assumptions were used as of December 31, 2002 and 2001. 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, NOW accounts, certain money market deposits, short-term borrowings, interest payable and advances by borrowers for taxes and insurance 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 the Bank would charge for similar loans at December 31, 2002 and 2001 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 the Bank would pay on such liabilities at December 31, 2002 and 2001, applied for the time period until maturity. The fair value of commitments is estimated using the 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, 2002 and 2001 and are not considered significant to this presentation. (Continued) F-31 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTE 23: COMMITMENTS AND CREDIT RISK The Bank grants commercial, agribusiness, consumer and residential loans to customers throughout the state. Although the Bank has a diversified loan portfolio, agricultural loans comprised approximately 11% of the portfolio as of December 31, 2002 and 2001, 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 counterparty. 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 the 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 counterparty. 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. 2002 2001 ------------------------------------------- Loan commitments and unused lines of credit $ 97,937,000 $ 152,106,000 Standby letters of credit 1,349,000 1,795,000 Commercial letters of credit 11,000 11,000 --------------- --------------- $ 99,297,000 $ 153,912,000 =============== ===============
At December 31, 2002, the Banks had committed to purchase $13,800,000 of Agency mortgage backed securities. (Continued) F-32 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: 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 2002 2001 ---------------------------------------- ASSETS Cash and cash equivalents $ 155,892 $ 5,214,886 Investment in common stock of subsidiaries 52,475,247 57,959,883 Loans to banking subsidiaries -- 600,000 Other assets 1,123,426 1,736,930 --------------- --------------- Total assets $ 53,754,565 $ 65,511,699 =============== =============== LIABILITIES Cash dividend payable $ -- $ 593,387 Trust preferred securities 10,000,000 10,000,000 Notes payable 6,000,000 -- Borrowings from nonbanking subsidiaries 310,000 310,000 Other liabilities 1,062,233 3,778,980 --------------- --------------- Total liabilities 17,372,233 14,682,367 STOCKHOLDERS' EQUITY 36,382,332 50,829,332 --------------- --------------- Total liabilities and stockholders' equity $ 53,754,565 $ 65,511,699 =============== ===============
(Continued) F-33 RURBAN FINANCIAL CORP. AND SUBSIDIARIES CONDENSED STATEMENTS OF INCOME
2002 2001 2000 ----------------------------------------------------------- INCOME Interest income $ 114,566 $ 187,179 $ 89,644 Dividends from subsidiaries Banking subsidiaries -- 3,090,000 11,680,000 Nonbanking subsidiaries 1,825,000 300,000 240,000 --------------- --------------- --------------- Total 1,825,000 3,390,000 11,920,000 Other income 5,356,332 3,775,452 2,726,073 --------------- --------------- --------------- Total income 7,295,898 7,352,631 14,735,717 --------------- --------------- --------------- EXPENSES Interest expense 1,292,416 1,150,382 710,711 Other expenses 7,381,220 5,753,396 5,181,941 --------------- --------------- --------------- Total expenses 8,673,636 6,903,778 5,892,652 --------------- --------------- --------------- INCOME (LOSS) BEFORE INCOME TAX AND EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES (1,377,738) 448,853 8,843,065 INCOME TAX EXPENSE (BENEFIT) (1,088,931) 999,990 1,214,076 --------------- --------------- --------------- INCOME (LOSS) BEFORE EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES (288,807) 1,448,843 10,057,141 EQUITY IN UNDISTRIBUTED (EXCESS DISTRIBUTED) INCOME OF SUBSIDIARIES Banking subsidiaries (12,827,147) (227) (4,335,143) Nonbanking subsidiaries (291,930) 804,342 364,180 --------------- --------------- --------------- Total (13,119,077) 804,115 (3,970,963) --------------- --------------- --------------- NET INCOME (LOSS) $ (13,407,884) $ 2,252,958 $ 6,086,178 =============== =============== ===============
(Continued) F-34 RURBAN FINANCIAL CORP. AND SUBSIDIARIES CONDENSED STATEMENTS OF CASH FLOWS
2002 2001 2000 ----------------------------------------------------------- OPERATING ACTIVITIES Net income $ (13,407,884) $ 2,252,958 $ 6,086,178 Items not requiring (providing) cash Equity in (undistributed) excess distributed net income of subsidiaries 13,119,077 (804,115) 3,970,963 Other assets 613,504 299,526 2,391,288 Other liabilities (3,310,134) 1,292,688 1,803,356 --------------- --------------- --------------- Net cash provided by (used in) by operating activities (2,985,437) 3,041,057 14,251,785 --------------- --------------- --------------- INVESTING ACTIVITIES Investment in banking subsidiaries (7,500,000) (8,150,000) (2,350,000) Investment in nonbanking subsidiaries -- -- (310,000) Proceeds from note payable 6,000,000 -- -- Proceeds from loans to banking subsidiaries -- (600,000) (7,600,000) Repayment of loans to banking subsidiaries 600,000 7,600,000 -- --------------- --------------- --------------- Net cash provided by (used in) investing activities (900,000) (1,150,000) (10,260,000) --------------- --------------- --------------- FINANCING ACTIVITIES Net proceeds from issuance of trust preferred securities -- -- 9,697,385 Proceeds from borrowings from nonbanking subsidiaries -- -- 310,000 Net proceeds from (repayment of) advances on line of credit -- -- (7,000,000) Cash dividends paid (1,186,930) (2,086,370) (1,822,218) Proceeds from exercise of stock options 13,373 45,982 -- Cash paid for purchase of treasury stock -- (45,400) -- Cash paid in lieu of fractional shares for 5% stock dividend -- (8,659) (6,968) --------------- --------------- --------------- Net cash provided by (used in) financing activities (1,173,557) (2,094,447) 1,178,199 --------------- --------------- --------------- NET CHANGE IN CASH AND CASH EQUIVALENTS (5,058,994) (203,390) 5,169,984 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 5,214,886 5,418,276 248,292 --------------- --------------- --------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 155,892 $ 5,214,886 $ 5,418,276 =============== =============== ===============
(Continued) F-35 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTE 25: 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.
INTERSEGMENT 2002 BANKING DATA PROCESSING OTHER TOTAL SEGMENTS ELIMINATION CONSOLIDATED TOTALS -------------------------------------------------------------------------------------------------------- INCOME STATEMENT INFORMATION: Net interest income (expense) $ 25,068,431 $ (150,430) $ (1,107,084) $ 23,810,917 $ -- $ 23,810,917 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 28,430,666 9,455,540 6,933,563 44,819,769 (7,229,584) 37,590,185 Noninterest expense 20,617,085 7,163,698 9,960,774 37,741,557 (7,229,584) 30,511,973 Significant noncash items: Depreciation and amortization 983,411 1,211,934 194,504 2,389,849 -- 2,389,849 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 2,755,567 3,964,064 240,849 6,960,480 -- 6,960,480
(Continued) F-36 RURBAN FINANCIAL CORP. AND SUBSIDIARIES
INTERSEGMENT 2001 BANKING DATA PROCESSING OTHER TOTAL SEGMENTS ELIMINATION CONSOLIDATED TOTALS -------------------------------------------------------------------------------------------------------- INCOME STATEMENT INFORMATION: Net interest income (expense) $ 25,674,656 $ (126,933) $ 193,482 $ 25,741,205 $ -- $ 25,741,205 Other revenue-external customers 5,088,701 6,125,970 2,946,942 14,161,613 -- 14,161,613 Other revenue-other segments -- 1,564,758 3,851,576 5,416,334 (5,416,334) -- ------------- ------------- ------------- ------------- ------------- ------------- Net interest income and other revenue 30,763,357 7,563,795 6,992,000 45,319,152 (5,416,334) 39,902,818 Noninterest expense 17,644,172 6,001,048 9,789,408 33,434,628 (5,416,334) 28,018,294 Significant noncash items: Depreciation and amortization 884,466 988,703 198,837 2,072,006 -- 2,072,006 Provision for loan losses 8,733,000 -- -- 8,733,000 -- 8,733,000 Income tax expense 1,318,714 531,334 (951,482) 898,566 -- 898,566 Segment profit (loss) 3,067,471 1,031,413 (1,845,926) 2,252,958 -- 2,252,958 BALANCE SHEET INFORMATION: Total assets 739,852,844 5,683,449 9,753,342 755,289,635 (9,080,542) 746,209,093 Goodwill and intangibles 179,339 -- -- 179,339 -- 179,339 Premises and equipment expenditures, net 594,743 2,142,649 118,741 2,856,133 -- 2,856,133
INTERSEGMENT CONSOLIDATED 2000 BANKING DATA PROCESSING OTHER TOTAL SEGMENTS ELIMINATION TOTALS ----------------------------------------------------------------------------------------------------- INCOME STATEMENT INFORMATION: Net interest income (expense) $ 26,156,349 $ (47,415) $ 278,934 $ 26,387,868 $ -- $ 26,387,868 Other revenue-external customers 3,061,748 5,123,805 3,087,308 11,272,861 -- 11,272,861 Other revenue-other segments -- 1,389,863 2,929,625 4,319,488 (4,319,488) -- ------------ ------------ ------------ ------------ ------------ ------------ Net interest income and other revenue 29,218,097 6,466,253 6,295,867 41,980,217 (4,319,488) 37,660,729 Noninterest expense 16,372,598 5,681,075 9,019,832 31,073,505 (4,319,488) 26,754,017 Significant noncash items: Depreciation and amortization 959,416 938,102 205,611 2,103,129 -- 2,103,129 Provision for loan losses 2,100,000 -- -- 2,100,000 -- 2,100,000 Income tax expense 3,549,622 266,961 (1,096,049) 2,720,534 -- 2,720,534 Segment profit (loss) 7,195,877 518,217 (1,627,916) 6,086,178 -- 6,086,178 BALANCE SHEET INFORMATION: Total assets 691,764,552 4,763,318 27,714,578 724,242,448 (23,424,746) 700,817,702 Goodwill and intangibles 300,000 -- -- 300,000 -- 300,000 Premises and equipment expenditures, net 555,021 916,141 184,389 1,655,551 -- 1,655,551
(Continued) F-37 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTE 26: QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following tables summarize selected quarterly results of operations for 2002 and 2001.
DECEMBER 31, 2002 MARCH JUNE SEPTEMBER DECEMBER ----- ---- --------- -------- Interest income $ 12,752,703 $ 12,644,230 $ 12,263,786 $ 10,929,925 Interest expense 6,557,632 6,325,257 6,223,362 5,706,730 Net interest income 6,195,071 6,318,973 6,040,424 5,223,195 Provision for loan losses 2,132,000 11,852,000 2,007,000 11,539,583 Noninterest income 3,398,386 1,714,935 3,857,992 4,807,955 Noninterest expense 7,190,342 7,765,869 7,674,804 7,847,705 Income tax expense 64,566 (3,953,676) 51,151 (3,206,529) Net income 206,549 (7,630,285) 165,461 (6,149,609) Earnings per share Basic 0.05 (1.68) 0.04 (1.35) Diluted 0.05 (1.68) 0.04 (1.35) Dividends per share 0.130 0.130 -- --
DECEMBER 31, 2001 MARCH JUNE SEPTEMBER DECEMBER ----- ---- --------- -------- Interest income $ 14,840,486 $ 14,507,461 $ 13,947,793 $ 13,223,089 Interest expense 8,189,469 7,955,778 7,635,414 6,996,963 Net interest income 6,651,017 6,551,683 6,312,379 6,226,126 Provision for loan losses 525,000 1,458,000 1,125,000 5,625,000 Noninterest income 3,237,957 3,416,619 3,709,819 3,797,218 Noninterest expense 7,021,012 6,866,523 6,944,282 7,186,477 Income tax expense 748,711 522,662 644,034 (1,016,841) Net income 1,594,251 1,121,117 1,308,882 (1,771,292) Earnings per share Basic 0.35 0.25 0.29 (0.39) Diluted 0.35 0.25 0.29 (0.39) Dividends per share 0.114 0.114 0.114 0.130
During the fourth quarters of 2002 and 2001 and the second quarter of 2002, additional provisions for loan losses were recorded due to identification of increased levels of impaired loans and loan charge-offs. During the second quarter of 2002, a loss was recorded to write down the value of the Company's investment in WorldCom bonds which reduced noninterest income by $1.7 million. Noninterest expense increased during the second quarter of 2002 and succeeding quarters as a result of the expenses of acquisitions. (Continued) F-38 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTE 27: SUBSEQUENT EVENT AND MANAGEMENT'S PLAN FOR FUTURE LIQUIDITY NEEDS On January 15, 2003, as part of the effort to improve the Company's and RFCBC's capital levels and to provide for future liquidity needs, the Company's Board of Directors announced that it intended to make available for purchase its bank branches located in Hancock and Putnam Counties. These offices comprise the Peoples Banking Company Division and the First Bank of Ottawa Division. 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 to First Federal Bank of the Midwest at a price substantially in excess of their book value. Under the agreement, First Federal Bank of the Midwest would acquire loans (including accrued interest) of approximately $116 million, total fixed assets (net of accumulated depreciation) of approximately $1.5 million and total deposits (including accrued interest) of approximately $177 million. The transaction is expected to close in May 2003. The Company's business plan includes strategies to sell all of the branches of RFCBC and use that bank's current capital and the capital which would result from the branch sales as the capital and primary funding source for a non-banking subsidiary. This subsidiary would manage RFCBC's classified loans that are not included in the sale agreements. Cash flow from the principal and interest payments as well as the payoffs of classified loans would be available to repay debt of the loan subsidiary and to dividend to Rurban the cash for resumption of the Trust Preferred interest payments, common stock dividends and ultimately to reinvest in the expansion of Rurban's banking and data processing operations. Management believes that cash flows resulting from the planned branch sales combined with normal operating cash flows will be sufficient to meet the Company's liquidity needs for the foreseeable future. (Continued) F-39 RURBAN FINANCIAL CORP. ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 2002 INDEX TO EXHIBITS
Exhibit No. Description Reference No. - ----------- ----------- ------------- 3(a) Amended Articles of Registrant, as amended Incorporated herein by reference to Registrant'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 the Amended Incorporated herein by reference to Articles of Rurban Financial Corp. Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 0-13507) [Exhibit 3(b)]. 3(c) Certificate of Amendment to the Amended Incorporated herein by reference to Articles of Rurban Financial Corp. Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 0-13507) [Exhibit 3(c)]. 3(d) Amended and Restated Articles of Rurban Incorporated herein by reference to Financial Corp. Registrant'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, as amended Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1986 (File No. 0-13507) [Exhibit 3(b)]. 10(a) Employees' Stock Ownership Plan of Rurban Incorporated herein by reference to Financial Corp. Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 0-13507) [Exhibit 10(a)]. 10(b) First Amendment to Employees' Stock Incorporated herein by reference to Ownership Plan of Rurban Financial Corp., Registrant's Annual Report on Form 10-K dated June 14, 1993 and made to be for the fiscal year ended effective as of January 1, 1993 December 31, 1993 (File No. 0-13507) [Exhibit 10(b)].
Exhibit No. Description Reference No. - ----------- ----------- ------------- 10(c) Second Amendment to Employees' Stock Incorporated herein by reference to Ownership Plan of Rurban Financial Corp., Registrant's Annual Report on Form 10-K dated March 14, 1994 and made to be for the fiscal year ended effective as of January 1, 1993 December 31, 1993 (File No. 0-13507) [Exhibit 10(c)]. 10(d) Third Amendment to Employees' Stock Incorporated herein by reference to Ownership Plan of Rurban Financial Corp., Registrant's Annual Report on Form 10-K dated March 13, 1995 for the fiscal year ended December 31, 1994 (File No. 0-13507) [Exhibit 10(d)]. 10(e) Fourth Amendment to Employees' Stock Incorporated herein by reference to Ownership Plan of Rurban Financial Corp., Registrant's Annual Report on Form 10-K dated June 10, 1995 and made to be for the fiscal year ended December 31, effective as of January 1, 1995 1995 (File No. 0-13507) [Exhibit 10(e)]. 10(f) The Rurban Financial Corp. Savings Plan and Incorporated herein by reference to Trust Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (File No. 0-13507) [Exhibit 10(g)]. 10(g) First Amendment to The Rurban Financial Incorporated herein by reference to Corp. Savings Plan and Trust, dated Registrant's Annual Report on Form 10-K December 10, 1990 and effective January 1, for the fiscal year ended December 1990 31, 1990 (File No. 0-13507) [Exhibit 10(g)]. 10(h) Second Amendment to The Rurban Financial Incorporated herein by reference to Corp. Savings Plan and Trust, dated Registrant's Annual Report on Form 10-K March 11, 1991, effective February 1, 1991 for the fiscal year ended December 31, 1992 (File No. 0-13507) [Exhibit 10(d)]. 10(i) Third Amendment to The Rurban Financial Incorporated herein by reference to Corp. Savings Plan and Trust, dated Registrant's Annual Report on Form 10-K June 11, 1991 for the fiscal year ended December 31, 1992 (File No. 0-13507) [Exhibit 10(e)]. 10(j) Fourth Amendment to The Rurban Financial Incorporated herein by reference to Corp. Savings Plan and Trust, dated Registrant's Annual Report on Form 10-K July 14, 1992, effective May 1, 1992 for the fiscal year ended December 31, 1992 (File No. 0-13507) [Exhibit 10(f)].
Exhibit No. Description Reference No. - ----------- ----------- ------------- 10(k) Fifth Amendment to The Rurban Financial Incorporated herein by reference to Corp. Savings Plan and Trust, dated March Registrant's Annual Report on Form 10-K 14, 1994 for the fiscal year ended December 31, 1993 (File No. 0-13507) [Exhibit 10(i)]. 10(l) Sixth Amendment to The Rurban Financial Incorporated herein by reference to Corp. Savings Plan and Trust dated May 1, Registrant's Annual Report on Form 10-K 1995 for the fiscal year ended December 31, 1995 (File No. 0-13507) [Exhibit 10(l)]. 10(m) Summary of Incentive Compensation Plan of Incorporated herein by reference to State Bank Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 0-13507) [Exhibit 10(j)]. 10(n) Summary of Bonus Program adopted by the Incorporated herein by reference to Trust Department of State Bank for the Registrant's Annual Report on Form 10-K benefit of Robert W. Constien in his for the fiscal year ended December 31, capacity as Manager of the Trust Department 1991 (File No. 0-13507) [Exhibit 10(e)]. 10(o) Summary of Bonus Program for the Trust Incorporated herein by reference to Department of State Bank Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (File No. 0-13507 [Exhibit 10(i)]. 10(p) Summary of Sales Bonus Program of State Bank Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (File No. 0-13507) [Exhibit 10(n)]. 10(q) Summary of Rurban Financial Corp. Bonus Plan Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 0-13507) [Exhibit 10(q)]. 10(r) Executive Salary Continuation Agreement, Incorporated herein by reference to dated December 15, 1994, between Rurban Registrant's Annual Report on Form 10-K Financial Corp. and Richard C. Burrows for the fiscal year ended December 31, 1994 (File No. 0-13507) [Exhibit 10(p)].
Exhibit No. Description Reference No. - ----------- ----------- ------------- 10(s) Executive Salary Continuation Agreement, Included in this Annual Report on Form dated December 3, 2001, between Rurban 10-K as Exhibit 10(s). Financial Corp. and Kenneth A. Joyce; and Amended Schedule A to Exhibit 10(s) identifying other identical Executive Salary Continuation Agreements between executive officers of Rurban Financial Corp. and Rurban Financial Corp. 10(t) Split-Dollar Dollar Insurance Agreement, Included in this Annual Report on Form dated April 3, 2002, between Robert 10-K as Exhibit 10(s). Constein and Rurban Financial Corp. 10(u) Rurban Financial Corp. Stock Option Plan Incorporated herein by reference to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-13507) [Exhibit 10(u)]. 10(v) Rurban Financial Corp. Plan to Allow Incorporated herein by reference to the Directors to Elect to Defer Compensation Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0- 13507) [Exhibit 10(v)]. 10(w) Form of Non-Qualified Stock Option Incorporated herein by reference to Agreement Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 0-13507) [Exhibit 10(w)]. 10(x) Form of Incentive Stock Option Agreement Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 0-13507) [Exhibit 10(x)]. 10(y) Employees' Stock Ownership and Savings Plan Incorporated herein by reference to of Rurban Financial Corp. Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 0-13507) [Exhibit 10(y)]. 10(z) Rurban Financial Corp. Employee Stock Included in this Annual Report on Form Purchase Plan 10-K as Exhibit 10(z).
Exhibit No. Description Reference No. - ----------- ----------- ------------- 11 Statement re: Computation of Per Share Included in Note 1 of the Notes to 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 Consent of Independent Auditor Included in this Annual Report on Form 10-K as Exhibit 23. 99(a) Certification of the Chief Executive Included in this Annual Report on Form Officer and Chief Financial Officer 10-K as Exhibit 99(a). Pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes -Oxley Act of 2002. 99(b) Report of Independent Auditors for 2001 Included in this Annual Report on Form and 2000. 10-K as Exhibit 99(b).
EX-10.S 3 l99438aexv10ws.txt EXHIBIT 10(S) EXHIBIT 10(s) EXECUTIVE SALARY CONTINUATION AGREEMENT THE AGREEMENT, made and entered into this 3rd day of December, 2001 by and between Rurban Financial Corp., (hereinafter called "the Company"), and Kenneth A. Joyce (hereinafter called the "Executive"). WITNESSETH: WHEREAS, the Executive has been and continues to be a valued Executive of the Company, and is now serving the Company as its Chairman and CEO of Rurbanc Data Services, Inc.; and, WHEREAS, it is the consensus of the Board of Directors that the Executive's services to the Company in the past have been of exceptional merit and have constituted an invaluable contribution to the general welfare of the Company and in bringing it to its present status of operating efficiency, and its present position in its field of activity; and, WHEREAS, the experience of the Executive, his knowledge of the affairs of the Company, his reputation and contacts in the industry are so valuable that assurance of his continued services is essential for the future growth and profits of the Company and it is in the best interest of the Company to arrange terms of continued employment for the Executive so as to reasonably assure his remaining in the Company's employment during his lifetime or until the age of retirement; and, WHEREAS, it is the desire of the Company that his services be retained as herein provided; and, WHEREAS, the Executive is willing to continue in the employ of the Company provided the Company agrees to pay to him or his beneficiaries certain benefits in accordance with the terms and conditions hereinafter set forth: ACCORDINGLY, it is the desire of the Company and the Executive to enter into this agreement under which the Company will agree to make certain payments to the Executive at retirement or his beneficiary in the event of his premature death while employed by the Company; and, FURTHERMORE, it is the intent of the parties hereto that this agreement be considered an unfunded arrangement maintained primarily to provide supplemental benefits for the Executive, as a member of a select group of management or highly compensated employees of the Company for the purposes of the Employee Retirement Income Security Act of 1974, (E.R.I.S.A.): NOW, THEREFORE, inconsideration of services performed in the past and to be performed in the future as well as of the mutual promises and covenants herein contained it is agreed as follows: EMPLOYMENT 1. The Company agrees to employ the Executive in such capacity as the Company may from time to time determine. The Executive will continue in the employ of the Company in such capacity and with such duties and responsibilities as may be assigned to him, and with such compensation as may be determined from time to time by the Board of Directors of the Company. Active employment shall include temporary disability not to exceed six months and other "leave of absences" specifically granted by the Board of Directors. FRINGE BENEFITS 2. The salary continuation benefits provided by this agreement are granted by the Company as a fringe benefit to the Executive and are not part of any salary reduction plan or an arrangement deferring a bonus or a salary increase. The Executive has no option to take any current payment or bonus in lieu of these salary continuation benefits except as set forth hereinafter. RETIREMENT DATE 3. If Executive remains in the continuous employ of the Company, he shall retire from active employment with the Company on the first December 31st after his sixty-fifth (65th) birthday, unless by action of the Board of Directors his period of active employment shall be shortened or extended. RETIREMENT BENEFIT AND POST-RETIREMENT DEATH BENEFIT 4. Upon said retirement, the Company, commencing with the first day of the month following the date of such retirement, shall pay Executive an annual benefit equal to 15% of Executive's highest annual salary during the three years immediately prior to his retirement in equal monthly installments (of 1/12 of the annual benefit) for a period of one hundred eighty (180) months, provided that if less than one hundred eighty (180) such monthly payments have been made prior to the death of the Executive, the Company shall continue such monthly payments to whomever the Executive shall designate in writing and filed with the Company, until the full number of one hundred eighty (180) monthly payments have been made. In the absence of any effective designation of beneficiary, any such amounts becoming due and payable upon the death of the Executive shall be payable to the duly qualified executor or administrator of his estate. DEATH BENEFIT PRIOR TO RETIREMENT 5. In the event the Executive should die while actively employed by the Company at any time after the date of this Agreement but prior to his attaining the age of sixty-five (65) years (or such later date as may be agreed upon), the Company will pay an annual benefit equal to 15% of Executive's highest annual salary during the three years immediately prior to his death in equal monthly installments (each equal to 1/12 of the annual benefit) for a period of one hundred eighty (180) months to such individual or individuals as the Executive may have designated in writing and filed with the Company. The said monthly payments shall begin the first day of the first month following the month of the decease of the Executive. In the absence of any effective designation of beneficiary, any such amounts becoming due and payable upon the death of the executive shall be payable to the duly qualified executor or administrator of his estate. BENEFIT ACCOUNTING 6. The Company shall account for this benefit using the regulatory accounting principles of the Company's primary federal regulator. The Company shall establish an accrued liability retirement account for the Executive into which appropriate reserves shall be accrued. VESTING 7. Executive benefits are payable in accordance with the following vesting schedule: 5% of base salary at age 55 to 60 10% of base salary at age 60 to 65 15% of base salary at age 65 and over In the event of employee termination prior to attaining age 65, the payment will be based on the base salary paid on employee's date of termination. OTHER TERMINATION OF EMPLOYMENT 8. In the event that the employment of the Executive shall terminate prior to retirement from active employment, as provided in Paragraph 3, by his voluntary action, then this Agreement shall terminate upon the date of such termination of employment and the Company shall pay to the Executive as severance compensation an amount of money as of attained age under vesting schedule Paragraph 7 and subject to payment schedule in Paragraph 4. An employee discharged by the Company for cause will have no compensation payable under this agreement. In the event the Executive's death should occur after such severance but prior to the completion of the monthly payments provided for in this Paragraph 8, the remaining installments shall be paid to such individual or individuals as the executive may have designated in writing, and filed with the Company. In the absence of any effective designation of beneficiary, any such amounts shall be payable to the duly qualified executor or administrator of his estate. PARTICIPATION IN OTHER PLANS 9. The benefits provided hereunder shall be in addition to Executive's annual salary as determined by the Board of Directors, and shall not affect the right of Executive to participate in any current or future Company retirement plan, group insurance, bonus, or in any supplemental compensation arrangement which constitutes a part of the Company's regular compensation structure. NON-COMPETE 10. The payment of benefits under this Agreement shall be contingent upon the Executive not engaging in any activity that directly or indirectly competes with the Company's interests, within 25 miles of the principal office of the Company existing at the time of Executive's retirement or termination. 11. In the event there is a change in control of the ownership of the Company, Executive shall become 100% vested for the purposes of Paragraph 7 hereinabove, as if the Executive had attained age 65. 12 If after the retirement of Executive, the capital of the Company should fall below the minimum required by the Company's regulatory authority and/or the Company fails to make a profit in any two (2) successive years, Executive may, at his option, demand that the Company pay him the balance of the benefits due him in a lump sum. The balance due Executive shall be an amount of money equal to his accrued liability benefit account balance and shall be paid to him by the Company within thirty (30) days of his demand. 13. It is agreed that neither Executive, nor his/her spouse, nor any other designee, shall have any right to commute, sell, assign, transfer, or otherwise convey the right to receive any payments hereunder, which payments and the right thereto are expressly declared to be non-assignable and non-transferable. RESTRICTIONS ON FUNDING 14. The Company shall have no obligation to set aside, earmark, or entrust any fund or money with which to pay its obligation under this Agreement. The Company reserves the absolute right at its sole discretion to either fund the obligations undertaken by this Agreement or to refrain from funding the same and determine the extent, nature, and method of such funding. GENERAL ASSETS OF THE COMPANY 15. The rights of the Executive under this Agreement and of any beneficiary of the Executive shall be solely those of an unsecured creditor of the Company. If the Company shall acquire an insurance policy or any other asset in connection with the liabilities assumed by it hereunder, it is expressly understood and agreed that neither Executive nor any beneficiary of Executive shall have any right with respect to, or claim against, such policy or other asset. Such policy as asset shall not be deemed to be held under any trust for the benefits of Executive or his beneficiaries or to be held in any way as collateral security for the fulfilling of the obligations of the company under this Agreement. It shall be, and remain, a general, unpledged, unrestricted asset of the Company and Executive or any of his beneficiaries shall not have a greater claim to the insurance policy or other assets, or any interest in either of them, than any other general creditor of the Company. REORGANIZATION 16. The Company agrees that if the Company merges or consolidates with any other company or organization, or permits its business activities to be taken over by any other organization, or ceases its business activities or terminates its existence, the Executive will be considered to be vested in one hundred percent (100%) of the retirement benefit to be paid to the Executive pursuant to Paragraph 4 above. amendment. 17. This Agreement may be amended in whole or in part from time to time by the Employer, but only in writing. Amendments are not to effect Executive benefits for those who are in pay-out or eligible for payments under the vesting schedule. NOT A CONTRACT OF EMPLOYMENT 18. This Agreement shall not be deemed to constitute a contract of employment between the parties hereto, nor shall any provision hereof restrict the right of the Company to discharge the Executive, or restrict the right of the Executive to terminate his employment. HEADINGS 19. Headings and subheadings of this Agreement are inserted for reference and convenience only and shall not be deemed a part of this agreement. APPLICABLE LAW 20. The validity and interpretation of this Agreement shall be governed by the laws of the State of Ohio. EFFECTIVE DATE 21. The effective date of this agreement shall be February 25, 1998. CLAIMS PROCEDURE 22. In the event that benefits under this Agreement are not paid to the Executive (or his beneficiary in the case of the Executive's death), and such person feels entitled to receive them, a claim shall be made in writing to the Plan Administrator within sixty (60) days from the date payments are not made. Such claim shall be reviewed by the Plan Administrator and the Company's Board of Directors. If the claim is denied, in full or in part, the Plan Administrator shall provide a written notice within ninety (90) days setting forth the specific reasons for denial, specific reference to the provisions of this Agreement upon which the denial is based. NAMED FIDUCIARY AND PLAN ADMINISTRATOR 23. For purposes of implementing this claims procedure (but not for any other purpose), the Human Resource Director of Rurban Financial Corp., is hereby designated as the Named Fiduciary and Plan Administrator of Plan Agreement. As Named Fiduciary and Plan Administrator, said Human Resource Director shall be responsible for the management, control, and administration of the agreement as established herein. The Company may delegate certain aspects of the management or operation responsibilities of the Plan including the employment of advisors and the delegation of ministerial duties to qualified individuals. This document supersedes and replaces in its entirety the Executive Salary Continuation Agreement between Kenneth A. Joyce and Rurban Mortgage Company dated December 3, 2001. IN WITNESS WHEREOF, the Company has caused this Agreement to be signed in its corporate name by its duly authorized officer, and attested by its Secretary, and Executive hereunto set his hand and seal, all on the day and year first above written. ATTEST: RURBAN FINANCIAL CORP. /s/ Keeta J. Diller By: /s/ Thomas C. Williams Secretary ----------------------------------- /s/ Kenneth A. Joyce ----------------- Executive SCHEDULE A TO EXHIBIT 10(s) The following executive officers of Rurban Financial Corp. (the "Corporation") entered into Executive Salary Continuation Agreements with the Corporation which are identical to the Executive Salary Continuation Agreement, dated December 3, 2001, between Kenneth A. Joyce and the Corporation filed as Exhibit 10(s) to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 2002:
POSITION WITH DATE OF EXECUTIVE SALARY NAME OF EXECUTIVE OFFICER THE CORPORATION CONTINUATION AGREEMENT Robert W. Constien Senior Executive Vice President December 21, 2000 Richard C. Warrener Executive Vice President February 25, 1998
EX-10.T 4 l99438aexv10wt.txt EXHIBIT 10(T) EXHIBIT 10(t) SPLIT-DOLLAR AGREEMENT This Agreement made this 3rd day of April, 1992, by and between THE STATE BANK OF DEFIANCE, Defiance, Ohio, (hereafter the "Bank") and Robert W. Constein (hereafter the "Employee"). WITNESSETH: WHEREAS, in consideration for the contemplated services of Employee to the Bank, the Bank desires to assist the Employee in providing life insurance for the benefit and protection of his family on a split-dollar basis; and, WHEREAS, the Bank desires to continue to own the insurance policy provided so the Bank will have security for the repayment of the amounts which it will contribute toward payment of the premiums due on the policy; NOW, THEREFORE, in consideration of the mutual covenants contained herein, it is agreed between the parties hereto as follows: I. DEFINITION OF "NET AMOUNT AT RISK": Net Amount at Risk as used herein shall mean the difference between the death proceeds of the insurance policy identified in Exhibit A (hereafter the "Policy") and the cash accumulation account of the Policy, determined at date of death. II. POLICY TITLE AND OWNERSHIP The Bank shall be the owner of the Policy on the Employee's life and may exercise all rights of ownership with respect to the Policy. III. BENEFICIARY DESIGNATION RIGHTS The Employee shall have the right to designate in Exhibit A the beneficiary(s) to receive his share of the proceeds payable on his death and to elect and change a payment option for such beneficiary(s) but subject to any right or interest the Bank may have in such proceeds as provided herein. IV. PREMIUM PAYMENT METHOD The Bank agrees to remit to the Insurer the entire premium amount when due. V. DIVISION OF DEATH PROCEEDS OF THE POLICY The division of the death proceeds of the Policy is as follows: A. The Employee's beneficiary(s), designated in accordance with Paragraph III, shall be entitled to a sum equal to two (2) times either the Employee's annual salary at death, if actively employed, or final annual salary, if retired, less $50,000. Such sum shall not exceed the Net Amount at Risk in the Policy as of the date of Employee's death. Said annual salary or final annual salary shall include all base salary received by the Employee from all corporations owned by Rurban Financial Corp. B. The Bank shall be entitled to the remainder bf the death proceeds less any loans on the Policy and unpaid interest or cash withdrawals previously incurred by the Bank. VI. DISTRIBUTION OF THE POLICY CASH SURRENDER VALUE The Bank shall be entitled to the Policy's net cash surrender value, as defined in the Policy, should a surrender occur. VII. TERMINATION OF AGREEMENT This Agreement shall terminate if the Employee terminates his employment with the Bank prior to his Early Retirement Date as specified in the Employee's Stock Ownership Plan of Rurban Financial Corp. VIII. AGREEMENT BINDING UPON PARTIES This Agreement shall bind the Employee and the Bank, their heirs, successors, personal representatives and assigns. IX. NAMED FIDUCIARY AND PLAN ADMINISTRATOR David E. Manz is hereby designated the "Named Fiduciary" until resignation or removal by the Board of Directors of the Bank. The Named Fiduciary, shall be responsible for the management, control and administration of the Split Dollar Plan as established herein. The Named Fiduciary may allocate to others certain aspects of the management and operation responsibilities of the Plan including the employment of advisors and the delegation of any ministerial duties to qualified individuals. X. FUNDING The funding policy for this Plan shall be to maintain the Policy in force by paying all premiums required, when due. XI. AMENDMENT This Split Dollar Plan may be amended at any time and from time to time by a written instrument executed by the Employee and the Bank. XII. BASIS OF PREMIUM PAYMENTS AND BENEFITS Payments to and from the Plan established herein shall be in accordance with the provisions of paragraphs II through VI, inclusive. XIII. CLAIMS PROCEDURE Claim forms or claim information as to the subject Policy can be obtained by contacting: Turner & Shepard Financial Services, Inc. ---------------------------------------------------------------------- . -------- (Agent or Agency) When the Named Fiduciary has a claim which may be covered under the provisions described in an insurance Policy, he or she should contact the office or the person named above who will either complete a claim form and forward it to an authorized representative of the Insurer or advise the Named Fiduciary what further requirements are necessary. The Insurer will evaluate the claim and make a decision as to payment within 90 days of the date the claim is received by the Insurer. If the claim is payable, a benefit check will be issued to the Named Fiduciary and forwarded through the office or person named above. In the event that a claim is not eligible under a Policy, the Insurer will notify the Named Fiduciary of the denial. Such notification will be made in writing within 90 days of the date the claim is received and will be transmitted through the office or person named above. The notification will include the specific reasons for the denial as well as specific reference to the policy provisions upon which the denial is based. The Named Fiduciary will also be informed as to the steps which may be taken to have the claim denial reviewed. A decision as to the validity of a claim will ordinarily be made within 10 working days of the date the claim is received by the Insurer. Occasionally, however, certain questions may prevent the Insurer from rendering a decision on the validity of the claim within the specific 90-day period. If this occurs, the Named Fiduciary will be notified of the reasons for the delay as well as the anticipated length of the delay, in writing and through the office or person named above. If further information or other material is required, the Named Fiduciary will be so informed. If the Named Fiduciary is dissatisfied with the denial of the claim or the amount paid, he or she has 60 days from the date he or she receives notice of a claim denial to file his or her objections to the action taken by the Insurer. If the `Named Fiduciary wishes to contest a claim denial, he or she should notify the person or office named above who will assist in making inquiry to the Insurer. All objections to the Insurer's actions should be in writing and submitted to the person or office named above for transmittal to the Insurer. The Insurer will review the claim denial and render a decision on such objections. The Named Fiduciary will be informed in writing of the decision of the Insurer within 60 days of the date the claim request is received by the Insurer. This decision will be final. Once a decision has been rendered as to the distribution of Policy proceeds under the claim procedure described above, claims for any benefits due under the Plan or the surrender of a Policy may be made in writing by the Bank or the Bank's designated representative and Employee or his designated beneficiary, as the case may be, to the Named Fiduciary. In the event a claim for benefits is wholly or partly denied or disputed, the Named Fiduciary shall, within a reasonable period of time after receipt of the claim, notify the Bank or the Bank's designated representative and Insured or his designated beneficiary, as the case may be, of such total or partial denial or dispute listing: A. The specific reason or reasons for the denial or dispute; B. Specific reference to pertinent plan provisions upon which the denial or dispute is based; C. A description of any additional information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and, D. An explanation of the Plan's review procedure. Within 60 days of denial or notice of claim under the Plan, a claimant may request that the claim be reviewed by the Named Fiduciary in a full and fair hearing. A final decision shall be rendered by the Named Fiduciary within 60 days after receipt of request for review. XIV. SEVERABILITY AND INTERPRETATION If a provision of this Agreement is held to be invalid or unenforceable, the remaining provisions shall nonetheless be enforceable according their terms. Further, in the event that any provision is held to be over broad as written, such provision shall be deemed amended to narrow its application to the extent necessary to make the provision enforceable according to law and enforced as amended. XV. INSURANCE COMPANY NOT A PARTY TO AGREEMENT The Insurer shall not be deemed a party to this Agreement but will respect the rights of the parties as herein developed upon receiving an executed copy of this Agreement. Payment or other performance of its contractual obligations in accordance with Policy provisions shall fully discharge the Insurer for any and all liability. Executed at Defiance, Ohio, on this 3rd day of April, 1992. THE STATE BANK OF DEFIANCE Keeta J. Diller (witness) By: David E. Manz, Executive Vice - ---------------------------------- President (Title) Michele Green Robert W. Constein - ---------------------------------- EMPLOYEE (WITNESS) EX-10.Z 5 l99438aexv10wz.txt EXHIBIT 10(Z) EXHIBIT 10(z) RURBAN FINANCIAL CORP. EMPLOYEE STOCK PURCHASE PLAN 1. PURPOSE The purpose of the Rurban Financial Corp. Employee Stock Purchase Plan (the "Plan") is to provide employees of Rurban Financial Corp. (the "Company") and its subsidiaries with a convenient means by which they may purchase common shares of the Company ("Common Shares") on the open market. 2. ELIGIBILITY All employees of the Company and its subsidiaries shall be eligible to participate in the Plan as of the first day of the month coincident with or immediately following the completion of three (3) months of employment with the Company or one of its subsidiaries, and will be a Participant as of that date. In order to participate in the Plan with respect to a "Purchase Period" (as defined below), a completed enrollment form must be submitted to the Company's Human Resources Department no later than the tenth day of the month preceding the Purchase Period for which a Participant elects to participate. For purpose of the Plan, a "Purchase Period" shall mean a calendar month. 3. CONTRIBUTIONS If a Participant elects to participate in the Plan, the Participant shall authorize the Company to deduct from his or her compensation for each payroll period during a Purchase Period the amount so elected on the applicable enrollment form. The amount so elected as a payroll deduction may not be less than $10.00 and must be in increments of $10.00. All payroll deductions under the Plan shall be made on an after-tax basis. 4. STOCK PURCHASES All payroll deductions made under the Plan for a Purchase Period will be forwarded by the Company to Registrar and Transfer Company (the "Agent") on the first business day following the end of the Purchase Period. When the Agent receives the payroll deductions, as soon as practicable the Agent will purchase on the open market such number of Common Shares as may be purchased with such payroll deductions. Notwithstanding the preceding sentence, if the Agent determines in good faith that it is not reasonably feasible to effectuate the purchases of Common Shares on the same day it receives the payroll deductions from the Company, the Agent shall complete such purchases on the next business day. All buys will be conducted through open market transactions through an unaffiliated, registered broker-dealer. In the event the Agent purchases Common Shares for a Purchase Period in more than one purchase price equal to the weighted average of the actual purchase prices paid (exclusive of applicable brokerage fees and expenses) for all such Common Shares. In addition, the Agent will apply all cash dividends, if any, paid with respect to Common Shares held in a Participant's Investment Account, as described in Section 5, to the purchase on the open market of additional Common Shares as soon as practicable after any such dividends are paid by the Company and, in any event, within 30 days of such payment. In the event the Agent purchases Common Shares with such cash dividends in more than one purchase transaction, all such Common Shares shall be deemed to have been purchased at a purchase price equal to the weighted average of the actual purchase prices paid (exclusive of applicable brokerage fees and expenses) for all such Common Shares. 5. INVESTMENT ACCOUNTS The Agent will establish on behalf of each Participant participating in the Plan an Investment Account to which shall be allocated the number of whole and fractional Common Shares that are purchased with the Participant's payroll deductions (and, as applicable, any cash dividends paid with respect to Common Shares in such Investment Account) under the Plan. The number of whole and fractional Common Shares allocated to a Participant's Investment account for a Purchase Period shall be equal to the total payroll deductions made by the Participant for such Purchase Period (and, as the applicable, any cash dividends paid with respect to Common Shares in such Investment Account) divided by the purchase price per share for Common Shares acquired during such Purchase Period, as determined above. Stock certificates representing the Common Shares acquired under the Plan shall be held by the Agent, as custodian under the Plan. Each Participant shall receive, as soon as practicable after the end of each quarter for which there is account activity, an Investment Account Statement which will indicate the number of whole and fractional Common Shares allocated to his or her Investment Account, the market value of such Common Shares based on the closing price for such Common Shares on the last day of such calendar month, as reported on the OTC-BB (or, if on such day the Common Shares shall not have been traded on the OTC-BB, the closing price as reported on the OTC-BB for the first day prior thereto on which the Common Shares were traded), and such other information regarding the Participant's Investment Account as the Agent so determines. The Agent will forward to Participants a copy of each proxy statement, annual report and other communication material otherwise distributed by the Company to the holders of Common Shares. Each Participant will have the right to vote with respect to all whole Common Shares allocated to his or her Investment Account under the Plan. Any such common Shares for which voting instructions are not provided by Participants shall not be voted by either the Agent or the Company. Certificates for any number of whole Common Shares credited to a Participant's Investment Account will be issued at any time upon written request of the Participant to the Agent. Certificates for fractional Common Shares will not be issued under any circumstance. 6. CHANGING PAYROLL DEDUCTIONS AND WITHDRAWALS FROM THE PLAN A Participant may elect to increase or decrease his or her payroll deductions by completing a form, as prescribed by the Company, and returning it to the Human Resources Department no later than the tenth day of the month in order to become effective as of the first payroll period in the following month. A Participant may withdraw from the Plan by completing a form, as prescribed by the Company, and returning it to the Human Resources Department. Any such withdrawal shall become effective no earlier than the date the required form is received by the Human Resources Department. If a Participant withdraws from the Plan after the commencement of a Purchase Period but prior to the date Common Shares are purchased on his or her behalf for such Purchase Period, the Company shall return to such Participant the payroll deductions, if any, made for that Purchase Period. No interest shall be paid on any such payroll deductions that are returned to a Participant. If a Participant withdraws from the Plan, the Participant may elect to receive a stock certificate representing the whole Common Shares held in his or her Investment Account and cash representing the net proceeds of the sale of any fractional Common Shares held in the Investment Account. Alternatively, a Participant may elect to sell all whole and fractional Common Shares held in his or her Investment Account and in such event the Participant shall receive cash representing the net proceeds (after deducting any applicable brokerage fees and expenses of such sale). However, notwithstanding the foregoing, upon a Participant's termination of employment with the Company and/or its subsidiaries, the Participant shall receive a stock certificate representing the whole Common Shares held in his or her Investment Account and cash representing the net proceeds (after deducting any applicable brokerage fees and expenses of the sale) of any fractional Common Shares held in his or her Investment Account unless an election has been made by the Participant to sell all such Common Shares, in which event all whole and fractional Common Shares held in the Participant's Investment Account shall be sold and he or she shall receive cash representing the net proceeds (after deducting any applicable brokerage fees and expenses of such sale). A Participant requesting a sale of shares may not set sale price specifications nor dictate the timing of such sales. If Common Shares are distributed from the Plan, they shall be transferable by the Participant to the extent consistent with applicable law, including any applicable federal and state securities laws. 7. ADMINISTRATION OF THE PLAN Except as otherwise provided herein, and subject to the terms hereof, the Plan shall be administered by the Agent. However, notwithstanding the general administrative responsibilities of the Agent under the Plan, and subject to Section 12 hereof, the Company may (i) announce the establishment of the Plan, (ii) hold meetings with employees to explain the Plan and (iii) perform such other ministerial and administrative functions as it deems appropriate. In addition, the Company may make available to the Agent the names and addresses of employees (the "Mailing List") for purposes of facilitating direct communication between the Agent and employees for the Company and its subsidiaries. The Agent may use the Mailing List solely for the purpose of providing information to employees regarding the Plan. 8. AMENDMENT OR TERMINATION The Company may, in its sole discretion, amend or termination the Plan at any time; provided, however, any amendment which materially affects the duties and responsibilities of the Agent shall not become effective with respect to the Agent unless consented to in writing by the Agent. 9. EXPENSES Except as provided in the following sentence, the Company shall pay all administrative, brokerage, and custodian fees and expenses relating to the Plan. Notwithstanding the preceding sentence, all brokerage fees and expenses relating to the sale of Common Shares under the Plan on behalf of Participants shall be borne by the Participants. 10. TAXES Notwithstanding any other provisions of the Plan, the company shall be authorized to deduct from any Common Shares purchased or from the proceeds of any Common Shares sold under the Plan, or from such other amounts payable by the Company to a Participant all federal, state, local or other taxes required by law to be withheld with respect to Common Shares purchased or sold under the Plan. Commissions are considered income and shall be reported as such. 11. NO RIGHT TO CONTINUED EMPLOYMENT Neither the Plan nor any right to purchase Common Shares under the Plan shall confer upon any employee any right to a continuation of employment by the Company or its subsidiaries. In addition, the Company and its subsidiaries reserve the right to dismiss any employee or otherwise deal with any employee to the same extent as though the Plan had not been adopted. 12. CONSTRUCTION It is intended that the Plan shall be construed and administered so as to comply with applicable pronouncements of the Securities and Exchange Commission such that neither the Plan nor any participation interests thereunder would be required to be registered under applicable federal securities law, and to otherwise comply with all other applicable requirements of law. 13. GOVERNING LAW The Plan shall be construed in accordance with and governed by the laws of the State of Ohio. 14. EFFECTIVE DATE The Plan shall become effective January 1, 1999. EX-21 6 l99438aexv21.txt EXHIBIT 21 . . . EXHIBIT 21 LIST OF SUBSIDIARIES
Name State of Incorporation ---- ---------------------- The State Bank and Trust Company Ohio RFC Banking Company Ohio Reliance Financial Services, N.A.* Nationally Chartered Trust Company Rurban Mortgage Company* Ohio Rurban Life Insurance Company Arizona Rurbanc Data Services, Inc. Ohio
- ---------- * Reliance Financial Services, N.A. and Rurban Mortgage Company are wholly-owned subsidiaries of The State Bank and Trust Company. EX-23 7 l99438aexv23.txt EXHIBIT 23 EXHIBIT 23 We consent to the incorporation by reference and use of our report dated February 14, 2003, on the consolidated financial statements of Rurban Financial Corp. and Subsidiaries, which appears in Rurban Financial Corp.'s Form 10-K for the year ended December 31, 2002, in Rurban Financial Corp.'s Registration Statement on Form S-8 filed February 27, 1998 pertaining to the Rurban Financial Corp. Stock Option Plan. /s/ BKD LLP -------------------------- BKD LLP Cincinnati, Ohio March 28, 2003 EX-99.A 8 l99438aexv99wa.txt EXHIBIT 99(A) EXHIBIT 99(a) CERTIFICATION PURSUANT TO TITLE 18, UNITED STATES CODE, SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Rurban Financial Corp. (the "Corporation") on Form 10-K for the fiscal year ended December 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned Kenneth A. Joyce, President and Chief Executive Officer of the Corporation, and Richard C. Warrener, Executive Vice President, Chief Financial Officer and Chief Accounting Officer of the Corporation, each certify, pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of their knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation. /s/ Kenneth A. Joyce* /s/ Richard C. Warrener* - -------------------------------------- --------------------------- Kenneth A. Joyce, Richard C. Warrener President and Chief Executive Officer Executive Vice President, Chief Financial Officer and Chief Accounting Officer Dated: March 28, 2003 Dated: March 28, 2003 * A signed original of this written statement required by Section 906 has been provided to Rurban Financial Corp. and will be retained by Rurban Financial Corp. and furnished to the Securities and Exchange Commission or its staff upon request. EX-99.B 9 l99438aexv99wb.txt EXHIBIT 99(B) EXHIBIT 99(b) REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders Rurban Financial Corp. Defiance, Ohio We have audited the accompanying consolidated balance sheets of Rurban Financial Corp. and Subsidiaries as of December 31, 2001 and the related consolidated statements of income, changes in shareholders' equity and cash flows for the years ended December 31, 2001 and 2000. These consolidated financial statements are the responsibility of the Corporation'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 generally accepted in the United States of America. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Rurban Financial Corp. and Subsidiaries as of December 31, 2001, and the results of its operations and its cash flows for the years ended December 31, 2001 and 2000 in conformity with accounting principles generally accepted in the United States of America. /s/ Crowe, Chizek and Company LLP Crowe, Chizek and Company LLP South Bend, Indiana April 8, 2002 -----END PRIVACY-ENHANCED MESSAGE-----