<PAGE> 1
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
------------------
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________to___________________________
Commission file number 0-13507
-------
RURBAN FINANCIAL CORP.
-------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-1395608
------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
401 Clinton Street, Defiance, Ohio 43512
----------------------------------------
(Address of principal executive offices)
(Zip Code)
(419) 783-8950
----------------------------------------------------
(Registrant's telephone number, including area code)
None
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by sections 13 or 15(d) of the Securities Exchange Act of 1934
during the proceeding 12 months (or for such shorter period the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ ------
The number of common shares of Rurban Financial Corp. outstanding was
4,347,238 on November 1, 2000.
1
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The interim condensed consolidated financial statements of Rurban Financial
Corp. are unaudited; however, the information contained herein reflects all
adjustments which are, in the opinion of management, necessary for a fair
presentation of financial condition and results of operations for the interim
periods presented. All adjustments reflected in these financial statements are
of a normal recurring nature in accordance with Rule 10-01 (b) (8) of Regulation
S-X. Results of operations for the nine months ended September 30, 2000 are not
necessarily indicative of results for the complete year.
2
<PAGE> 3
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31, September 30,
2000 1999 1999
--------------------- ---------------------- -------------------
(Unaudited) (Note) (Unaudited)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 18,307,274 $ 18,571,702 $ 19,192,339
Federal funds sold -- 11,000 800,000
--------------------- ---------------------- -------------------
Total cash and cash equivalents 18,307,274 18,582,702 19,992,339
Interest-bearing deposits in other
financial institutions 110,000 110,000 180,000
Securities available for sale 88,501,019 83,118,908 85,232,692
Loans held for sale, net of valuation
allowance of $0. 2,215,711 7,149,585 9,660,212
Loans, net of allowance for losses of $6,890,492
at September 30, 2000, $6,193,712 at December 31,
1999 and $5,804,781 at September 30, 1999 554,860,349 495,137,666 468,423,145
Accrued interest receivable 5,901,706 4,147,321 4,434,594
Premises and equipment, net 10,326,748 11,140,327 11,902,324
Other assets 8,287,081 8,397,015 8,078,691
--------------------- ---------------------- -------------------
Total assets $ 688,509,888 $ 627,783,524 $ 607,903,997
===================== ====================== ===================
</TABLE>
3
(Continued)
<PAGE> 4
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31, September 30,
2000 1999 1999
-------------------- ------------------ --------------------
(Unaudited) (Note) (Unaudited)
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $ 42,434,782 $ 49,005,311 $ 46,314,411
Interest-bearing 508,582,254 470,290,773 452,161,731
--------------- ------------ --------------
Total deposits 551,017,036 519,296,084 498,476,142
Federal funds purchased 25,600,000 10,900,000 17,951,000
Advances from Federal Home Loan Bank (FHLB) 46,233,355 40,035,303 36,100,547
Other borrowed funds - - 7,000,000 6,800,000
Junior subordinated debentures 9,695,834 - - - -
Accrued interest payable 4,073,468 2,513,798 2,017,135
Other liabilities 3,770,044 4,137,868 3,235,003
--------------- ------------ --------------
Total liabilities 640,389,737 583,883,053 564,579,827
Shareholders' equity
Common stock, stated value $2.50 per share;
shares authorized: 10,000,000;
shares issued: 4,575,702;
shares outstanding: 4,347,238 at September 30,
2000, 4,140,718 at December 31,1999 and
4,140,718 at September 30, 1999 11,439,255 11,439,255 11,439,255
Additional paid-in capital 11,113,340 11,518,469 11,518,727
Retained earnings 30,768,753 30,047,158 29,016,756
Accumulated other comprehensive loss, net of
tax of $(500,076) at September 30, 2000,
$(790,008) at December 31, 1999 and $(517,474) at
September 30, 1999 (970,736) (1,533,547) (1,004,509)
Unearned ESOP shares (unearned shares:
September 30, 2000 - 47,727, December 31, 1999 -
50,334 and September 30, 1999 - 51,752) (760,760) (908,014) (982,951)
Treasury stock; shares at cost September 30, 2000 -
228,464, December 31, 1999 - 434,984 and
September 30, 1999 - 434,984 (3,469,701) (6,662,850) (6,663,108)
--------------- ------------ --------------
Total shareholders' equity 48,120,151 43,900,471 43,324,170
--------------- ------------ --------------
Total liabilities and shareholders' equity $ 688,509,888 $ 627,783,524 $ 607,903,997
============== ============== ==============
</TABLE>
See notes to condensed consolidated financial statements (unaudited)
Note: The balance sheet at December 31, 1999 has been derived from
the audited consolidated financial statements at that date.
4
<PAGE> 5
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------------------------------
2000 1999
<S> <C> <C>
Interest income
Interest and fees on loans $ 13,158,559 $ 10,070,512
Interest and dividends on securities:
Taxable 1,208,936 1,083,024
Tax-exempt 147,115 135,130
Other 70,422 68,711
------------------- -------------------
Total interest income 14,585,032 11,357,377
Interest expense
Deposits 6,625,221 4,872,465
Borrowings 1,276,628 765,831
------------------- -------------------
Total interest expense 7,901,849 5,638,296
------------------- -------------------
Net interest income 6,683,183 5,719,081
Provision for loan losses 450,000 279,000
------------------- -------------------
Net interest income after provision
for loan losses 6,233,183 5,440,081
Noninterest income
Service charges on deposit accounts 458,353 377,885
Loan servicing fees 172,541 148,397
Trust fees 649,701 574,161
Data service fees 1,238,911 1,109,591
Net gain (loss) on securities (2,520) 13,521
Net gain on sales of loans 22,722 429,659
Net gain on sales of fixed assets 351 209
Other income 184,188 140,249
------------------- -------------------
Total noninterest income 2,724,247 2,793,672
Noninterest expense
Salaries and employee benefits 3,580,325 3,548,925
Net occupancy expense of premises 298,066 289,898
Equipment rentals, depreciation and maintenance 827,263 728,087
Other expenses 1,688,234 1,576,501
------------------- -------------------
Total noninterest expense 6,393,888 6,143,411
------------------- -------------------
Income before income tax expense 2,563,542 2,090,342
Income tax expense 849,685 672,024
------------------- -------------------
Net income $ 1,713,857 $ 1,418,318
=================== ===================
Basic and diluted earnings per common share (Note C) $ 0.40 $ 0.33
=================== ===================
Dividends declared per share $ 0.11 $ 0.10
=================== ===================
</TABLE>
See notes to condensed consolidated financial statements (unaudited)
5
<PAGE> 6
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------------------
2000 1999
<S> <C> <C>
Interest income
Interest and fees on loans $ 36,721,236 $ 28,814,333
Interest and dividends on securities:
Taxable 3,555,090 3,146,891
Tax-exempt 436,396 369,099
Other 188,174 306,435
------------------- -------------------
Total interest income 40,900,896 32,636,758
Interest expense
Deposits 17,918,879 13,845,072
Borrowings 3,396,578 1,931,171
------------------- -------------------
Total interest expense 21,315,457 15,776,243
------------------- -------------------
Net interest income 19,585,439 16,860,515
Provision for loan losses 1,350,000 831,000
------------------- -------------------
Net interest income after provision
for loan losses 18,235,439 16,029,515
Noninterest income
Service charges on deposit accounts 1,271,291 1,065,485
Loan servicing fees 499,360 411,775
Trust fees 2,070,005 1,833,837
Data service fees 3,836,134 3,263,957
Net gain (loss) on securities (80,540) 15,436
Net gain on sales of loans 317,675 1,027,768
Net gain on sales of fixed assets 1,641 225,881
Other income 534,373 494,035
------------------- -------------------
Total noninterest income 8,449,939 8,338,174
Noninterest expense
Salaries and employee benefits 10,794,635 10,794,344
Net occupancy expense of premises 857,626 884,287
Equipment rentals, depreciation and maintenance 2,470,978 2,173,463
Other expenses 5,278,002 5,123,007
------------------- -------------------
Total noninterest expense 19,401,241 18,975,101
------------------- -------------------
Income before income tax expense 7,284,137 5,392,588
Income tax expense 2,401,117 1,647,569
------------------- -------------------
Net income $ 4,883,020 $ 3,745,019
=================== ===================
Basic and diluted earnings per common share (Note C) $ 1.14 $ 0.87
=================== ===================
Dividends declared per share $ 0.32 $ 0.29
=================== ===================
</TABLE>
See notes to condensed consolidated financial statements (unaudited)
6
<PAGE> 7
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
Total Total Total Total
Shareholders' Shareholders' Shareholders' Shareholders'
Equity Equity Equity Equity
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Balance at beginning of period $46,137,455 $42,595,602 $43,900,471 $41,902,950
Net Income 1,713,857 1,418,318 4,883,020 3,745,019
Other comprehensive income (loss):
Net change in unrealized gains (losses)
on securities available for sale, net 682,239 (314,999) 562,811 (1,207,431)
----------- ----------- ----------- ------------
Total comprehensive income 2,396,096 1,103,319 5,445,831 2,537,588
Cash dividends declared (455,479) (414,069) (1,366,437) (1,237,160)
Cash paid in lieu of fractional shares for 5% stock dividend
(206,520 shares issued from treasury) (6,968) -- (6,968) --
Issuance of 200 treasury shares due to exercise of stock options -- -- -- 2,838
Paydown of ESOP loan 49,047 39,318 147,254 117,954
----------- ----------- ----------- ------------
Balance at end of period $48,120,151 $43,324,170 $48,120,151 $43,324,170
=========== =========== =========== =============
</TABLE>
See notes to condensed consolidated financial statements (unaudited)
7
<PAGE> 8
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------------------------
2000 1999
<S> <C> <C>
Cash Flows From Operations
Cash received from customers' fees and commissions $ 8,211,163 $ 7,069,089
Cash paid to suppliers and employees (18,887,784) (17,678,618)
Loans originated for sale (8,226,696) (83,452,860)
Proceeds from sales of loans held for sale 13,478,245 93,329,691
Interest received 39,146,511 31,398,710
Interest paid (19,755,787) (15,444,545)
Income taxes paid (1,446,000) (1,850,000)
---------------------- ---------------------
Net cash from operating activities 12,519,652 13,371,467
Cash Flows From Investing Activities:
Proceeds from principal repayments, maturities and
calls of securities available for sale 6,753,629 24,986,258
Proceeds from sales of securities available for sale 9,063,569 18,134,400
Purchase of securities available for sale (20,427,106) (48,024,426)
Net change in loans (61,404,644) (81,135,246)
Recoveries on loan charge-offs 331,961 441,800
Premises and equipment expenditures, net (591,475) (1,766,840)
---------------------- ---------------------
Net cash from investing activities (66,274,066) (87,364,054)
Cash Flows From Financing Activities:
Net change in deposits 31,720,952 47,662,919
Net change in federal funds purchased 14,700,000 8,451,000
Proceeds from FHLB advances 13,500,000 9,000,000
Repayments of FHLB advances (7,301,948) (1,789,743)
Net change in other borrowed funds (7,000,000) 6,800,000
Proceeds from exercise of stock options -- 2,838
Net proceeds from issuance of junior subordinated
debentures 9,695,834 --
Cash paid in lieu of fractional share for stock dividend (6,968) --
Cash dividends paid (1,828,884) (1,651,232)
---------------------- ---------------------
Net cash from financing activities 53,478,986 68,475,782
---------------------- ---------------------
Net change in cash and cash equivalents (275,428) (5,516,805)
Cash and cash equivalents at beginning of period 18,582,702 25,509,144
---------------------- ---------------------
Cash and cash equivalents at end of period $ 18,307,274 $ 19,992,339
====================== =====================
</TABLE>
8
(Continued)
<PAGE> 9
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------------------
2000 1999
<S> <C> <C>
Reconciliation Of Net Income To Net
Cash From Operating Activities
Net Income $ 4,883,020 $ 3,745,019
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation 1,406,695 1,490,442
Amortization of intangible assets 165,000 157,500
Provision for loan losses 1,350,000 831,000
Net (gain) loss on securities 80,540 (15,436)
Loans originated for sale (8,226,696) (83,452,860)
Proceeds from sales of loans held for sale 13,478,245 93,329,691
Net gain on sales of loans (317,675) (1,027,768)
Net gain on sales of fixed assets (1,641) (225,881)
Paydown of ESOP loan 147,254 117,954
Change in accrued interest receivable (1,754,385) (1,238,048)
Change in other assets (344,998) 41,960
Change in accrued interest payable 1,559,670 331,698
Change in other liabilities 94,623 (713,804)
-------------------- ---------------------
Net cash from operating activities $ 12,519,652 $ 13,371,467
==================== =====================
</TABLE>
See notes to condensed consolidated financial statements (unaudited)
9
<PAGE> 10
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes included in the Corporation's annual report for the year ended
December 31, 1999.
NOTE B--STOCK DIVIDENDS
During the third quarter of 2000, the Board of Directors declared and paid a 5%
stock dividend from treasury stock. Dividends issued in stock are reported by
transferring the market value of the stock issued from retained earnings to
common stock or treasury stock and additional paid in capital.
NOTE C--EARNINGS AND DIVIDENDS PER COMMON SHARE
Earnings per common share have been computed based on the weighted average
number of shares outstanding during the periods presented. The number of shares
used in the computation of basic earnings per common share was 4,298,662 and
4,297,465 for the three and nine months ended September 30, 2000 and 4,281,996
and 4,281,989 for the three and nine months ended September 30, 1999. The number
of shares used in the computation of diluted earnings per common share was
4,298,662 and 4,297,465 for the three and nine months ended September 30, 2000
and 4,284,105 and 4,291,176 for the three and nine months ended September 30,
1999. Earnings per share and dividends per share have been restated for the 5%
stock dividend paid during the third quarter of 2000.
NOTE D--ACCOUNTING STANDARDS IMPLEMENTED IN 2000
No new accounting standards have been implemented during the first nine months
of 2000.
NOTE E - RECLASSIFICATIONS
Some items in the 1999 consolidated financial statements have been reclassified
to conform with the 2000 presentation.
10
(Continued)
<PAGE> 11
NOTE F--RISK ELEMENTS AND LOAN LOSS RESERVE
ALLOWANCE FOR LOAN LOSSES
The following is a summary of the activity in the allowance for loan losses
account for the nine months ended September 30, 2000 and 1999 and the year ended
December 31, 1999.
<TABLE>
<CAPTION>
September 30, December 31, September 30,
2000 1999 1999
---- ---- ----
<S> <C> <C> <C>
Beginning balance $6,193,712 $5,408,854 $5,408,854
Provision for loan losses 1,350,000 1,215,000 831,000
Recoveries of previous charge-offs 331,961 662,299 441,800
Losses charged to the allowance (985,181) (1,092,441) (876,873)
--------- ---------- ---------
Ending balance $6,890,492 $6,193,712 $5,804,781
========== ========== ==========
</TABLE>
At September 30, 2000, December 31, 1999 and September 30, 1999 loans past due
more than 90 days and still accruing interest approximated $2,054,000, $809,000
and $1,210,000.
Impaired loans were as follows:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Loans with no allowance for loan losses allocated $3,441,000 $ - -
Loans with allowance for loan losses allocated 1,673,000 1,536,000
--------- ---------
Total impaired loans $5,114,000 $1,536,000
========== ==========
Amount of allowance allocated
$1,049,000 $807,000
========== ========
</TABLE>
There have been no changes in the Risk Elements and Loan Loss Reserve activity
that would materially effect the Corporation's financial position or results of
operations for the three and nine months ended September 30, 2000
11
(Continued)
<PAGE> 12
NOTE G--BENEFIT PLANS
The Corporation's Board of Directors adopted a stock option plan in 1997. Under
the terms of this plan, options for up to 420,000 shares of the Corporation's
common stock may be granted to key employees and directors of the Corporation
and its subsidiaries. Stock option plans are used to reward employees and
provide them with an additional equity interest. Options are issued for 10 year
periods with varying vesting periods. The exercise price of the options is
determined at the time of grant by a committee of the Board of Directors and
cannot be less than the fair market value of the stock on the date of grant.
SFAS No. 123 requires pro forma disclosure for companies that do not adopt a
fair value accounting method for stock-based employee compensation. Accordingly,
the following pro forma information presents net income and earnings per common
share had the fair value method been used to measure compensation cost for stock
option plans. Compensation cost actually recognized for stock options was $-0-
for the three and nine months ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Net income for the nine months ended September 30 $4,883,020 $3,745,019
Pro forma net income for the nine months end September 30 $4,786,990 $3,681,660
Basic and diluted earnings per common share as reported
for the nine months ended September 30 $ 1.14 $ .87
Pro forma basic and diluted earnings per common share
for the nine months ended September 30 $ 1.11 $ .86
</TABLE>
The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of the grant date.
<TABLE>
<CAPTION>
1999 Grant 1998 Grant 1997 Grant
---------- ---------- ----------
<S> <C> <C> <C>
Risk-free interest rate 4.79% 5.38% 6.50%
Expected option life 10 10 10
Expected stock price volatility 7.14% 5.45% 5.45%
Expected dividend yield 2.67% 2.16% 2.39%
Resulting weighted average grant date
fair value of stock options granted
during the year $2.97 $4.13 $3.77
</TABLE>
There were no options granted during the nine months ended September 30, 2000.
In future years, the pro forma effect of not applying this standard is expected
to increase as additional options are granted.
12
(Continued)
<PAGE> 13
NOTE G - BENEFIT PLAN (Continued)
Information about option grants follows:
<TABLE>
<CAPTION>
Weighted
Number of Average
Outstanding Exercise
Options Price
------- -----
<S> <C> <C>
Outstanding, January 1, 2000 230,055 $ 14.45
Granted during nine months ended September 30, 2000 0 0
Forfeited during nine months ended September 30, 2000 (3,938) 13.65
-------
Outstanding, September 30, 2000 226,117 $ 14.46
=======
</TABLE>
Options exercisable at September 30, 2000 were as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise Exercise
Prices Number Price
------ ------ -----
<S> <C> <C>
$13.51 70,560 $ 13.51
$17.62 18,480 17.62
-------
Exercisable at September 30, 2000 89,040 $ 14.36
======
</TABLE>
NOTE H - OTHER BORROWED FUNDS
At December 31, 1999, the Corporation had a line of credit of $10,000,000 with
Fifth Third Bank of Northwestern Ohio, N.A. The line of credit was unsecured and
required monthly interest payments and full principal payment at maturity on
April 30, 2000. The line of credit had an outstanding balance of $7,000,000 as
of December 31, 1999. During the nine months ended September 30, 2000, the
Corporation refinanced their line of credit with Northern Trust Company for
$15,000,000. The new line of credit is unsecured and requires monthly interest
payments with full principal payment at maturity on April 27, 2001. The interest
rate is variable based on the current federal funds rate and adjusts daily. The
line of credit had an outstanding balance of zero at September 30, 2000. The
line of credit agreement contains various covenants the Corporation must comply
with. As of September 30, 2000 management believes the Corporation is in
compliance with all such covenants.
13
(Continued)
<PAGE> 14
NOTE I - JUNIOR SUBORDINATED DEBENTURES
On September 7, 2000, Rurban Statutory Trust 1 (RST), a wholly owned subsidiary
of the Corporation, 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 Corporation 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 Corporation and payments
thereunder. The junior subordinated debentures and the back-up obligations, in
the aggregate, constitute a full and unconditional guarantee by the Corporation
of the obligations of RST under the 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 I capital (with certain limitations applicable)
under current regulatory guidelines. As of September 30, 2000, the outstanding
principal balance of the Capital Securities was $10,000,000. The principal
balance of the Capital Securities less unamortized issuance costs constitute the
junior subordinated debentures in the financial statements.
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 Corporation 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 Corporation; on or after September 7, 2020 at par; or on or
after September 7, 2010 at a premium, or upon occurrence of specific events
defined within the trust indenture. The Corporation has the option to defer
distributions on the Capital Securities from time to time for a period not to
exceed 10 consecutive semi-annual periods.
NOTE J - COMMITMENTS AND CONTINGENCIES
There are various contingent liabilities that are not reflected in the
consolidated financial statements, including claims and legal actions arising in
the ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these matters is
not expected to have a material effect on the Corporation's consolidated
financial condition or results of operations.
NOTE K - SEGMENT INFORMATION
The reportable segments are determined by the products and services offered,
primarily distinguished between banking, mortgage banking and data processing
operations. Other segments include the accounts of the holding company, Rurban
Financial Corp., which provides management services to its subsidiaries;
Reliance Financial Services, N.A., which provides trust and financial services
to customers nationwide; Rurban Life, which provides insurance products to
customers of the Corporation's subsidiary banks; and Rurban Statutory Trust 1
which issued Capital Securities (see Note I). Information reported internally
for performance assessment follows.
14
(Continued)
<PAGE> 15
NOTE K -- SEGMENT INFORMATION (Continued)
As of and for nine months ended September 30, 2000
<TABLE>
<CAPTION>
Mortgage Data Total Intersegment Consolidated
Banking Banking Processing Other Segments Elimination Totals
--------------------------------------------------------------------------------------------------
Income statement information:
--------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income (expense) $19,365,035 $164,484 ($42,424) $98,344 $19,585,439 $ -- $19,585,439
Other revenue - external
customers 2,210,876 133,132 3,836,134 2,269,797 8,449,939 -- 8,449,939
Other revenue - other segments -- -- 1,043,218 1,486,131 2,529,349 (2,529,349) --
----------- -------- --------- ---------- --------- ------------- -----------
Net interest income
and other revenue 21,575,911 297,616 4,836,928 3,854,272 30,564,727 (2,529,349) 28,035,378
Noninterest expense 12,027,792 284,171 4,033,189 5,585,438 21,930,590 (2,529,349) 19,401,241
Significant non-cash items:
Depreciation and
amortization 699,139 52,649 690,789 129,118 1,571,695 -- 1,571,695
Provision for loan losses 1,350,000 -- -- -- 1,350,000 -- 1,350,000
Income tax expense (benefit) 2,712,044 5,000 273,272 (589,199) 2,401,117 -- 2,401,117
Segment profit (loss) 5,486,075 8,445 530,467 (1,141,967) 4,883,020 -- 4,883,020
Balance sheet information:
--------------------------------
Total assets 686,984,748 13,171,839 4,283,802 8,230,603 712,670,992 (24,161,104) 688,509,888
Goodwill and intangibles 345,000 -- -- -- 345,000 -- 345,000
Premises and equipment
expenditures, net 254,081 18,078 210,625 108,691 591,475 -- 591,475
</TABLE>
15
(Continued)
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Rurban Financial Corp. ("Rurban") was incorporated on February 23, 1983, under
the laws of the State of Ohio. Rurban is a bank holding company registered with
the Federal Reserve Board under the Bank Holding Company Act of 1956, as
amended. Rurban's subsidiaries, The State Bank and Trust Company ("State Bank"),
The Peoples Banking Company ("Peoples Bank"), The First National Bank of Ottawa
("First National Bank"), and The Citizens Savings Bank Company ("Citizens Bank")
are engaged only in the industry segment of commercial banking. Rurban's
subsidiary, Rurbanc Data Services, Inc. ("RDSI"), provides computerized data
processing services to community banks and businesses and the Corporation's
subsidiary banks. Rurban's subsidiary, Rurban Life Insurance Company ("Rurban
Life") has a certificate of authority from the State of Arizona to transact
insurance as a domestic life and disability insurer. Rurban's subsidiary, Rurban
Statutory Trust I ("RST") was established in September 2000 for the purpose of
managing the Corporation's junior subordinated debentures.
Reliance Financial Services, N.A. ("Reliance"), a wholly owned subsidiary of
State Bank, provides trust and financial services to customers nationwide.
LIQUIDITY
Liquidity relates primarily to the Corporation's ability to fund loan demand,
meet deposit customers' withdrawal requirements and provide for operating
expenses. Assets used to satisfy these needs consist of cash, federal funds
sold, securities available for sale and loans held for sale. These assets are
commonly referred to as liquid assets. Liquid assets were $109 million at
September, 30, 2000, compared to $109 million at December 31, 1999. Management
recognizes securities may need to be sold in the future to help fund loan demand
and, accordingly, as of September 30, 2000, the entire securities portfolio of
$89 million was classified as available for sale.
The Gramm-Leach-Bliley Act, commonly referred to as The Financial Services
Modernization Act (FSMA), provides the opportunity for a bank to enter into new
lines of business. One significant benefit of the FSMA for community banks
(under $500 million in assets) is the requirement that the Federal Home Loan
Banks expand the type of collateral permissible to be pledged for FHLB advances.
It is anticipated that during late 2000 or early 2001 the implementation of new
collateral rules will significantly expand the FHLB borrowing capacity of the
Corporation's four subsidiary banks.
CAPITAL RESOURCES
Total shareholders' equity net of unearned ESOP shares was $48,120,151 as of
September 30, 2000, an increase of $4,219,680 over the $43,900,471 as of
December 31, 1999 and an increase of $4,795,981 over the $43,324,170 as of
September 30, 1999. The increase for the nine months ended September 30, 2000
was a result of net income of $4,883,020, a net $562,811 decrease in net
unrealized depreciation on securities available for sale, net of tax, and a
reduction in unearned ESOP shares of $147,254 offset by dividends declared of
$1,366,437 and $6,968 of cash paid for fractional shares resulting from payment
of a 5% stock dividend.
The Corporation and each of the Corporation's subsidiary banks exceed the
applicable "well capitalized" regulatory capital requirements at September 30,
2000. Despite earnings growth of 30%
16
(Continued)
<PAGE> 17
for the first nine months of 2000, the Corporation's regulatory capital ratios
have declined due to annualized loan growth of 15% and a dividend payout ratio
of 28%. In order to supplement regulatory capital without the shareholder
dilution, in September 2000, the Corporation issued $10,000,000 of junior
subordinated debt securities which qualify as tier 1 capital for regulatory
purposes, subject to certain limitations (see Note I). This additional capital
is intended to position the Corporation to sustain its growth while continuing
to maintain regulatory "well-capitalized" status.
As of September 30, 2000, management is not aware of any current recommendations
by banking regulatory authorities which, if they were to be implemented, would
have, or are reasonably likely to have, a material adverse effect on the
Corporation's liquidity, capital resources or operations.
SUPPLEMENTAL INFORMATION
MATERIAL CHANGES IN FINANCIAL CONDITION
Through the continued efforts of the Corporation's lending staff in maintaining
existing and developing new lending relationships, net loans and loans held for
sale increased $55 million from December 31, 1999 to $557 million at September
30, 2000. Real estate loans (residential and commercial mortgages) increased $13
million, consumer loans and leases increased $15 million while commercial loans
increased $32 million and real estate loans held for sale decreased $5 million.
Liquid assets, premises and equipment and other assets all had insignificant
changes.
Deposits increased $32 million during the first nine months of 2000 as a result
of competitive rate offerings on standard and special certificate of deposit
(CD) products, targeted direct calling programs and periodic entry into the
national CD market. This deposit increase and increases in federal funds
purchased of $15 million and advances from FHLB of $6 million were the primary
sources of funding for the loan growth during the first nine months of 2000.
The net proceeds from the junior subordinated debentures of approximately $10
million, were used to pay off the balance of the Corporation's line of credit,
included in other borrowed funds, and also helped fund the growth of the loan
portfolio.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
The increases in quarterly and nine month net interest income and net income
described below were largely driven by a $79 million (17%) increase in average
loans and loans held for sale over the third quarter of 1999.
Net income for the third quarter was $1,713,857 or $0.40 basic earnings per
share, compared to net income of $1,418,318 and basic earnings per share of
$0.33 in the third quarter of 1999.
Net interest income increased $964,102 (17%) to $6,683,183 million for the three
months ended September 30, 2000 compared to $5,719,081 for the third quarter of
1999. Noninterest income was $2,724,247 for the quarter ended September 30, 2000
compared to $2,793,672 for the same period in 1999. The decrease in noninterest
income was the result of a decline in gains on loan sales as a result of
significantly lower volumes of loan sales due to a decline in the volume of
residential loan originations resulting from increases in interest rates.
17
(Continued)
<PAGE> 18
Noninterest expense was $6,393,888 for the quarter ended September 30, 2000,
$250,477 (4%) more than the same period in 1999.
Income tax expense increased $177,661 (26%) to $849,685 for the quarter ended
September 30, 2000 compared to $672,024 for the same period of 1999. The
increase was primarily due to the improved income before income tax expense for
the three months ended September 30, 2000 compared to the same period for 1999.
Net income for the first nine months of 2000 increased $1,138,000 over the same
period of 1999.
Net interest income for the nine months ended September 30, 2000 was $19.6
million, an increase of $2.7 million (16%) over the same period of 1999.
Interest and fees on loans increased $7.9 million (27%) due to the increase in
volume and rising interest rates. Interest expense on deposits and borrowed
funds increased $5.5 million (35%) due to the increase in volume and rising
interest rates. The rates for earning assets have increased 0.59%, while the
rates on deposits and borrowed funds have increased 0.63%.
The provision for loan losses of $1,350,000 increased $519,000 (62%) compared to
the first nine months of 1999 due to increases in loan balances and increases in
the level of past due, nonperforming and impaired loans.
Income tax expense increased $753,000 (46%) to $2,401,000 for the nine months
ended September 30, 2000 compared to $1,648,000 for the same period of 1999. The
increase was primarily due to the improved income before income tax expense for
the nine months ended September 30, 2000 compared to the same period of 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended by SFAS No. 137 and
138, requires derivative instruments be carried at fair value on the balance
sheet. The statement continues to allow derivative instruments to be used to
hedge various risks and sets fourth specific criteria to be used to determine
when hedge accounting can be used. The statement also provides for offsetting
changes in fair value or cash flows of both the derivative and the hedged asset
or liability to be recognized in earnings in the same period; however, any
changes in fair value or cash flow that represent the ineffective portion of a
hedge are required to be recognized in earnings and cannot be deferred. For
derivative instruments not accounted for as hedges, changes in fair value are
required to be recognized in earnings. The adoption of this statement on January
1, 2001, is not expected to have a material effect on the consolidated financial
statements.
18
(Continued)
<PAGE> 19
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Corporation's quantitative and
qualitative market risks since December 31, 1999. The following table compares
rate sensitive assets and liabilities as of September 30, 2000 to December 31,
1999.
<TABLE>
<CAPTION>
Principal/notational amount maturing in:
(Dollars in thousands)
First Years
Year 2 to 5 Thereafter Total
---- ------ ---------- -----
<S> <C> <C> <C> <C>
Total rate sensitive assets:
At September 30, 2000 $278,405 $246,794 $120,488 $645,687
At December 31, 1999 293,282 266,263 25,373 584,918
--------- ------- ------ -------
Increase (decrease) $(14,877) $(19,469) $ 95,115 $ 60,769
========= ========= ========= =========
Total rate sensitive liabilities:
At September 30, 2000 $370,052 $154,097 $108,397 $632,546
At December 31, 1999 352,800 128,483 95,948 577,231
------- ------- -------- --------
Increase $ 17,252 $ 25,614 $ 12,449 $ 55,315
========= ========= ========= ========
</TABLE>
Total rate sensitive assets increased approximately $61 million for the nine
months ended September 30, 2000 due to a $55 million increase in net loans
during the period. During the first quarter of 2000, the Corporation reviewed
its methodology for calculating prepayments. Consequently, estimated loan
prepayment speeds were decreased. This refinement in prepayment assumptions was
the primary factor in the shift of approximately $86 million of assets from the
"first year" and "years 2 to 5" categories to the "thereafter" category. The
majority of the $55 million increase in net loans occurred in the "first year"
category and partially offset the decline in that category caused by the
reduction in loan prepayment assumptions.
Total rate sensitive liabilities increased approximately $55 million during the
nine months ended September 30, 2000. During the period, the continued increase
in rates caused many customers to shorten the maturity of their certificates of
deposit. The primary factor in the approximately $17 million increase in rate
sensitive liabilities with maturities within one year was a $10 million increase
in certificates of deposit with maturities of one year or less.
19
(Continued)
<PAGE> 20
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of shareholders held in April, 2000, shareholders
voted on the re-election of certain directors and the ratification of
independent public accountants.
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibit
See exhibit 27, Financial Data Schedule
(B) Reports on Form 8-K
A Form 8-K was filed on September 6, 2000 to report the August 16,
2000 declaration of a 5% share dividend payable on September 29, 2000
to shareholders of record as of September 15, 2000
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
RURBAN FINANCIAL CORP.
Date November 14, 2000 By /s/ Thomas C. Williams
-------------------- -----------------------------
Thomas C. Williams
President &
Chief Executive Officer
By /s/ Richard C. Warrener
-----------------------------
Richard C. Warrener
Executive Vice President &
Chief Financial Officer
20
(Continued)
