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, The State Bank and Trust Company, Defiance, Ohio ("State Bank"), The Peoples Banking Company, Findlay, Ohio ("Peoples Bank"), The First National Bank of Ottawa ("First National Bank") 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 purchased by customers of the Corporation's banking subsidiaries from AGAC in connection with revolving credit loans secured by mortgages and with certain installment loans made to such customers.
State Bank has two wholly-owned subsidiaries: Reliance Financial Services, N.A. ("RFS") and Rurban Mortgage Company ("RMC"). RFS is nationally-chartered trust and financial services company. RMC is an Ohio corporation with its main office located in Clearwater, Florida which engages in the retail and wholesale mortgage banking industry.
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), one branch office in adjacent Paulding County, Ohio and three branch offices in Fulton County, Ohio (one in each of Delta, Lyons and Wauseon). At December 31, 1999, State Bank had 96 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 three affiliated financial institutions in the region (Peoples Bank, First National Bank 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' offices are located in State Bank's main offices in Defiance, Ohio. At December 31, 1999, RFS had 29 full-time equivalent employees.
RMC ---
RMC is an Ohio corporation with its main office located in Clearwater, Florida. RMC is a wholly-owned subsidiary of State Bank. RMC engages in the retail and wholesale mortgage banking business. The principal activities engaged in by RMC are originating, underwriting and servicing first and second residential mortgage loans and selling such loans in the secondary market.
At December 31, 1999, RMC had 11 full-time equivalent employees.
Peoples Bank - ------------
Peoples Bank is an Ohio state-chartered bank. The main office of Peoples Bank is located in Findlay, Ohio. Peoples Bank provides checking and NOW accounts; passbook savings and money market accounts; time certificates of deposit; automatic teller machines; commercial and consumer loans and real estate mortgage loans; personal and corporate trust services; and safe deposit box rental facilities. Peoples Bank operates one full-service branch in Findlay and one in McComb, Ohio. At December 31, 1999, Peoples Bank had 27 full-time equivalent employees.
First National Bank - -------------------
First National Bank is a national banking association. The executive offices of First National Bank are located at 405 East Main Street, Ottawa, Ohio. At its present location, First National Bank operates four drive-in teller lanes and an automatic teller machine with a traditional banking lobby on the first floor. First National Bank presently operates no branch offices. At December 31, 1999, First National Bank had 14 full-time equivalent employees.
First National 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; personal and corporate trust services; commercial leasing; bank credit card services; safe deposit box rentals; and other personalized banking services.
Citizens Savings Bank - ---------------------
Citizens Savings Bank is an Ohio state-chartered bank. The main office of Citizens Savings Bank is located in Pemberville, Ohio. Citizens Savings Bank 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. Citizens Savings Bank also operates a full-service branch in Gibsonburg, Ohio. At December 31, 1999, Citizens Savings Bank had 24 full-time equivalent employees.
RDSI - ----
Substantially all of RDSI's business is comprised of providing data processing services to 50 financial institutions in Ohio, Michigan and Indiana (including State Bank, Peoples Bank, First National Bank and Citizens Savings Bank), including information processing for financial institution customer
services, loan and deposit account information and data analysis. At December 31, 1999, RDSI had 35 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 may accept life and disability reinsurance ceded to Rurban Life by an insurance company authorized to write life and disability insurance, provided that the amount accepted does not exceed certain limitations imposed under Arizona law. Rurban Life is not currently authorized to write life and disability insurance on a direct basis. Rurban Life accepts reinsurance ceded in part by AGAC from the credit life and disability insurance purchased by customers of State Bank, Peoples Bank, First National Bank 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, Peoples Bank, First National Bank 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, 1999, Rurban Life has not accepted any other reinsurance. Rurban Life does not currently intend to accept any other reinsurance in the immediate future. At December 31, 1999, Rurban Life had no employees.
Competition -----------
State Bank, Peoples Bank, First National Bank and Citizens Savings Bank 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, Peoples Bank, First National Bank and Citizens Savings Bank, and, to a lesser extent, from savings associations, insurance companies, governmental agencies, credit unions, securities brokerage firms and pension funds. The primary factors in competing for loans are interest rates charged and overall banking services.
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.
RMC operates in the highly competitive mortgage banking environment. In Florida, RMC competes primarily with large national and regional mortgage brokers who originate well over 50% of new loans. RMC also underwrites loans originated by the Corporation's four affiliate banks and other community banks in Ohio and Florida.
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.
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. Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve Act on transactions with affiliates, including any loans or extensions of credit to the bank holding company or any of its subsidiaries, investments in the stock or other securities thereof and the taking of such stock or securities as collateral for loans or extensions of credit to any borrower; the issuance of guarantees, acceptances or letters of credit on behalf of the bank holding company and its subsidiaries; purchases or sales of securities or other assets; and the payment of money or furnishing of services to the bank holding company and other subsidiaries. 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.
As a national bank, First National Bank is supervised and regulated by the OCC. Reliance, as a nationally-chartered bank, is also regulated by the OCC. As Ohio state-chartered banks, State Bank, Peoples Bank and Citizens Savings Bank are supervised and regulated by the Ohio Division of Financial Institutions and the Federal Deposit Insurance Corporation ("FDIC"). The deposits of State Bank, Peoples Bank, First National Bank and Citizens Savings Bank are insured by the FDIC and 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.
Various requirements and restrictions under the laws of the United States and the State of Ohio affect the operations of State Bank, Peoples Bank, First National Bank and Citizens Savings Bank including requirements to maintain reserves against deposits, restrictions on the nature and amount of loans which may be made and the interest that may be charged thereon, restrictions relating to investments and other activities, limitations on credit exposure to correspondent banks, limitations on activities based on capital and surplus, limitations on payment of dividends, and limitations on branching.
The Federal Reserve Board has adopted risk-based capital guidelines for bank holding companies and for state member banks, such as State Bank and Citizens Savings 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 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. National bank subsidiaries, such as First National Bank, are subject to similar capital requirements adopted by the Comptroller of the Currency, and state non-member bank subsidiaries, such as Peoples Bank, are subject to similar capital requirements adopted by the FDIC.
The Corporation and its subsidiaries currently satisfy all capital requirements. Failure to meet applicable capital guidelines could subject a banking institution to a variety of enforcement remedies available to federal and state regulatory authorities, including the termination of deposit insurance by the FDIC.
The federal banking regulators have established regulations governing prompt corrective action to resolve capital deficient banks. Under these regulations, institutions which become undercapitalized become subject to mandatory regulatory scrutiny and limitations, which increase as capital decreases. Such institutions are also required to file capital plans with their primary federal regulator, and their holding companies must guarantee the capital shortfall up to 5% of the assets of the capital deficient institution at the time it becomes undercapitalized.
The ability of a bank holding company 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 for shareholders of the Corporation. State Bank, Peoples Bank, First National Bank and Citizens Savings Bank 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, Peoples Bank, First National Bank and Citizens Savings Bank 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.
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.
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, Peoples Bank, First National Bank and Citizens Savings Bank 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 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.
The specific effects of the enactment of the Financial Services Modernization Act on the banking industry in general and on the Corporation and its subsidiaries have yet to be determined due to the fact that the Financial Services Modernization Act was only recently adopted.
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 Operation and the Consolidated Financial Statements of the Corporation and its subsidiaries included at pages through of this Annual Report on Form 10-K.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL
A. The following are the average balance sheets for the years ending December 31:
- -------------------------------------------------------------------------------- (1) Securities available for sale are carried at fair value. The average balance includes quarterly average balances of the market value adjustments and daily average balances for the amortized cost of securities. (2) Loan balances include principal balances of nonaccrual loans and loans held for sale. (3) Shown net of average net unrealized appreciation (depreciation) on securities available for sale, net of tax.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (CONTINUED)
B. The following tables set forth, for the years indicated, the condensed average balances of interest-earning assets and interest-bearing liabilities, the interest earned or paid on such amounts, and the average interest rates earned or paid thereon.
- -------------------------------------------------------------------------------- (1) Securities balances represent daily average balances for the amortized cost of securities. The average rate is calculated based on the amortized cost of securities. (2) Computed on tax equivalent basis for non-taxable securities (34% statutory tax rate in 1999). (3) Loan balances include principal balances of nonaccrual loans and loans held for sale. (4) Includes net fees on loans of $1,368,444 in 1999.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (CONTINUED)
- -------------------------------------------------------------------------------- (1) Securities balances represent daily average balances for the amortized cost of securities. The average rate is calculated based on the amortized cost of securities. (2) Computed on tax equivalent basis for non-taxable securities (34% statutory tax rate in 1998). (3) Loan balances include principal balances of nonaccrual loans and loans held for sale. (4) Includes net fees on loans of $1,041,507 in 1998.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (CONTINUED)
- --------------------------------------------------------------------------------
(1) Securities balances represent daily average balances for the amortized cost of securities. The average rate is calculated based on the amortized cost of securities. (2) Computed on tax equivalent basis for non-taxable securities (34% statutory tax rate in 1997). (3) Loan balances include principal balances of nonaccrual loans and loans held for sale. (4) Includes net fees on loans of $891,330 in 1997.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (CONTINUED)
C. 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 1999, 1998 and 1997.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (CONTINUED)
II. INVESTMENT PORTFOLIO
A. The book value of securities available for sale as of December 31 are summarized as follows:
B. The maturity distribution and weighted average yield of securities available for sale at December 31, 1999 are as follows:
(1) Yields are not presented on a tax-equivalent basis. (2) Maturity based upon estimated weighted-average life.
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 securities of any one issuer which exceeded 10% of the shareholders' equity of the Corporation at December 31, 1999.
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:
(1) Beginning in 1996, commercial real estate loans are classified as commercial, financial and agricultural. Prior to 1996, commercial real estate loans are classified as real estate mortgage.
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, 1999, commercial, financial and agricultural loans make up approximately 65% of the loan portfolio and the loans are expected to be repaid from cash flow from operations of businesses. As of December 31, 1999, residential first mortgage loans make up approximately 16% of the loan portfolio and are collateralized by first mortgages on residential real estate. As of December 31, 1999, consumer loans to individuals make up approximately 19% 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, financial and agricultural loans outstanding as of December 31, 1999 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, financial and agricultural loans due after one year. (Variable-rate loans are those loans with floating or adjustable interest rates.)
III. LOAN PORTFOLIO (CONTINUED)
Commercial, Financial and Agricultural --------------------------------------
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.
(1) Includes loans defined as "impaired" under SFAS No. 114.
III. LOAN PORTFOLIO (CONTINUED)
Management believes the allowance for loan losses at December 31, 1999 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 currently anticipated 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.
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, 1999, in addition to the $3,315,000 of loans reported under Item III, C.1., there are approximately $10,142,000 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 and which may result in disclosure of such loans pursuant to Item III. C.1 at some future date. Consideration was given to loans classified for regulatory purposes as loss, doubtful, substandard, or special mention that have not been disclosed in Section 1 above. To the extent that such loans are not included in the $10,142,000 potential problem loans described above, management believes that such loans will not materially impact future operating results, liquidity, or capital resources.
III. LOAN PORTFOLIO (CONTINUED)
3. Foreign Outstandings
None
4. Loan Concentrations
At December 31, 1999, loans outstanding related to agricultural operations or collateralized by agricultural real estate aggregated approximately $61,099,000. At December 31, 1999, there were no agriculture loans which were accounted for on a nonaccrual basis; and there are approximately $75,000 of accruing agriculture loans which are contractually past due ninety days or more as to interest or principal payments.
D. Other Interest-Bearing Assets -----------------------------
Other than $285,000 in foreclosed real estate, there are no other interest-bearing assets as of December 31, 1999 which would be required to be disclosed under Item III. C.1 or 2 if such assets were loans.
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:
(1) Net of unearned income and deferred loan fees, including loans held for sale
(2) Beginning in 1996, commercial real estate loans are classified as commercial, financial and agricultural. Prior to 1996, commercial real estate loans are classified as real estate mortgage.
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 including 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, 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. The increase in loans charged-off in 1995 as compared to the other periods presented is due largely to the charge-off of certain credits which were previously reported on a nonaccrual basis.
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.
Beginning in 1998, management established a new 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 and individual portfolio risk factors. Additionally, the unallocated allowance is maintained at approximately 19% of the total allowance due to inherent uncertainty in the allocation process. Prior to 1998, allowance allocations were made on a more subjective basis. Management believes the new methodology more appropriately allocates the allowance for known 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.
V. DEPOSITS
The average amount of deposits and average rates paid are summarized as follows for the years ended December 31:
Maturities of time certificates of deposit and other time deposits of $100,000 or more outstanding at December 31, 1999 are summarized as follows:
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:
(1) Net of average unrealized appreciation or depreciation on securities available for sale. (2) 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 1998 and 1997 was 30 percent or more of shareholders' equity at the end of the reported periods.
The following information is reported for federal funds purchased for 1999:
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.
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 4,403 square feet on the second floor and on the lower level presently are leased to RDSI, 7,064 square feet on the second floor are leased to RFS and 2,868 square feet on the lower level are leased to the Corporation.
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.
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 recently 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 and most recently remodeled in 1999.
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.
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.
The following is a listing and brief description of the properties owned by Peoples Bank and used in its business:
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.
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.
The only real property owned by First National Bank is the location of the Bank at 405 East Main Street, Ottawa, Ohio. First National Bank'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.
The following is a listing and brief description of the properties owned by Citizens Savings Bank and used in its business:
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 leases 2,213 square foot office space located at Estancia Boulevard, Suite 201, Clearwater, Florida. This office was first leased on January 22, 1997.
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.
Item 3.
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.
Item 4. Submission of Matters to a Vote of Security Holders. - --------------------------------------------------------------
Not applicable.
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.
(1) For purposes of this Form 10-K, even though Mr. Soukup, Mr. Joyce and Mr. Yoder are not employed as officers of the Corporation and their salaries are not paid by the Corporation, they are included in the list of Executive Officers of the Corporation because they perform policy making functions for the Corporation.
PART II -------
Item 5.
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters. - ------------------------------------------------------------------------------
The common shares of the Corporation are traded on the OTC Bulletin Board under the symbol "RBNF". The table below sets forth the high and low bid quotations for, and the cash dividends declared with respect to, the common shares of the Corporation, for the indicated periods. The Corporation is aware of two securities dealers who make a market in its common shares. The bid quotations reflect the prices at which purchases and sales of the Corporation's common shares could be made during each period and not inter-dealer prices. The bid quotations reflect retail mark-ups, but not commissions or retail mark-downs. The bid quotations represent actual transactions in the Corporation's common shares. The per share amounts have been restated for the two-for-one stock split declared in 1998.
There can be no assurance as to the amount of dividends which will be declared with respect to the common shares of the Corporation in the future, since such dividends are subject to the discretion of the Corporation's Board of Directors, cash needs, general business conditions, dividends from the subsidiaries and applicable governmental regulations and policies. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation - Capital Resources and Note 1 of Notes to Consolidated Financial Statements.
The approximate number of holders of outstanding common shares of the Corporation, based upon the number of record holders as of December 31, 1999, was 1,650.
Item 6.
Item 6. Selected Financial Data - ----------------------------------
SUMMARY OF SELECTED FINANCIAL DATA
(1) Per share data restated for 5% stock dividend declared in 1996 and two-for-one stock split declared in 1998. (2) Restated to reflect adoption of SFAS No. 128 on December 31, 1997.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation. - --------------------------------------------------------------------------------
EARNINGS SUMMARY
CONSOLIDATED NET INCOME for Rurban Financial Corp. (the "Corporation") for 1999 was $5.2 million, up from $4.3 million in 1998 and down from $5.5 million in 1997. Basic earnings per share were $1.28 in 1999, an increase of 22% from $1.05 in 1998 and a 3% increase over the 1.24% in 1997. Cash dividends declared per share increased to $.41 for 1999 compared to $.40 in 1998 and $.37 in 1997, increases of 2.5% and 8%, respectively. Per share data has been adjusted to reflect the two-for-one stock split declared in May 1998.
RESULTS OF OPERATIONS
1999 COMPARED WITH 1998 - -----------------------
NET INTEREST INCOME for 1999 was $23.2 million an increase of $2.7 million (12.9%) over 1998. The increase was primarily due to a 22.7% increase in the average balance of loans and loans held for sale. The average yield on loans declined to 8.63% compared to 9.07% for 1998. The decline in earning asset yield partially offset by the decrease in the average rate on interest bearing liabilities from 4.65% in 1998 to 4.49% in 1999, combined to result in a decline in the tax equivalent net interest margin from 4.43% in 1998 to 4.29% in 1999.
AT DECEMBER 31, 1999, loans and loans held for sale, net of deferred loan fees amounted to $508.5 million, an increase of 23.3% over the December 31, 1998 balance of $412.5 million. This increase was due to the Corporation's loan origination efforts, with the majority of the growth occurring in the Findlay/Hancock county and Cleveland/Akron areas.
COMMERCIAL, FINANCIAL AND AGRICULTURAL LOANS increased $77.7 million from $248.8 million at December 31, 1998 to $326.6 million at December 31, 1999. This increase occurred as the result of the Corporation's goal to increase small business loan relationships.
AT DECEMBER 31, 1999, approximately $7.1 million of real estate mortgage loans were held for sale in the secondary market. During 1999, approximately $97.3 million of real estate mortgage loans were originated for sale and approximately $103.6 million were sold in the secondary market. This represents an increase of $5.2 million (5.3%) in loans sold in 1999 as compared to 1998. During 1999, most loans were sold on a servicing released basis. Loans originated for sale are primarily fixed rate mortgage loans.
SECURITIES AVAILABLE FOR SALE TOTALED $83.1 million at December 31, 1999 which represented an increase of $1 million (1.2%) from $82.1 million at December 31, 1998. As of December 31, 1999, all securities of the Corporation were designated available for sale. Available for sale securities represent those securities which the Corporation may decide to sell if needed for liquidity, asset/liability management or other reasons. Such securities are reported at fair value with net unrealized appreciation (depreciation) included as a separate component of shareholders' equity, net of tax. This resulted in a net decrease in shareholders' equity of $1.5 million at December 31, 1999.
TOTAL DEPOSITS at December 31, 1999 amounted to $519.3 million, an increase of $68.5 million (15.2%) over total deposits of $450.8 million at December 31, 1998. The increase in deposits is believed to have
occurred as a result of increased deposit services and flexibility of products offered. Management believes that customers continue to place a value on federal insurance on deposit accounts and that, to the extent the Corporation continues to pay competitive rates on deposits and continues to provide flexibility of deposit products, the Corporation will be able to maintain and increase its deposit levels.
OTHER BORROWINGS at December 31, 1999 were $57.9 million compared to $38.4 at December 31, 1998. These borrowings consisted of $40.0 million of FHLB Advances and $10.9 million of federal funds purchased and $7.0 million borrowed on a line of credit with another financial institution as the Corporation continued to access alternative sources for funding its loan growth.
THE PROVISION FOR LOAN LOSSES charged to operations was based on the amount of net losses incurred and management's estimation of inherent losses based on an evaluation of loan portfolio risk and economic factors. The provision for loan losses was $1,215,000 in 1999 compared to $1,080,000 in 1998.
THE ALLOWANCE for loan losses at December 31, 1999 was $6.2 million or 1.22% of loans and loans held for sale, net of deferred loan fees, compared to $5.4 million or 1.31% at December 31, 1998.
LOANS ARE CONSIDERED IMPAIRED if full principal or interest payments are not anticipated in accordance with the contractual loan terms. Impaired loans are carried at the present value of expected future cash flows discounted at the loan's effective interest rate or at the fair value of the collateral if the loan is collateral dependent. Under this guidance, the carrying value of impaired loans is periodically adjusted to reflect cash payments, revised estimates of future cash flows and increases in the present value of expected cash flows due to the passage of time. A portion of the allowance for loan losses is allocated to impaired loans.
SMALLER-BALANCE homogeneous loans are evaluated for impairment in total. Such loans include residential first mortgage loans secured by one-to-four family residences, residential construction loans, and automobile, home equity and second mortgage loans. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment. When analysis of borrower operating results and financial condition indicates that underlying cash flows of the borrower's business are not adequate to meet its debt service requirements, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 30 days or more. Commercial loans are rated on a scale of 1 to 8, with 1-3 being satisfactory, 4 watch, 5 special mention, 6 substandard, 7 doubtful, and 8 as loss which are then charged off. Loans graded a 6 or worse are considered for impairment. Loans are generally moved to nonaccrual status when 90 days or more past due. Such loans are often considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible. This typically occurs when the loan is 120 days or more past due. At December 31, 1999, the Corporation classified three loan relationships as impaired, totaling $1.5 million. Management allocated $807,000 of the allowance for loan losses to impaired loans at December 31, 1999.
MANAGEMENT ALLOCATED approximately 71% of the allowance for loan losses to commercial, financial and agricultural loans; 9% to consumer loans; and 1% to residential first mortgage loans at December 31, 1999, leaving a balance of 19% unallocated. Nonperforming loans decreased to $2.2 million at December 31, 1999 from $3.6 million at December 31, 1998. The decrease in nonperforming loans relates primarily to a decrease in accruing loans past due 90 days or more at the end of 1999. 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. Management believes the allowance for loan losses balance at December 31, 1999 is adequate to absorb losses on impaired, nonperforming and other loans.
TOTAL NONINTEREST INCOME increased $553,000 to $11.1 million in 1999 from $10.5 million in 1998. This growth was driven by data service fees which increased $828,000 (23.3%) to $4,382,000 in 1999 compared to $3,554,000 in 1998. The primary reasons for the $828,000 increase were increases in the number of customer accounts processed and in the level of sales of ancillary data processing products. The increase in number of accounts was a result of customer account growth at client banks and growth in the number of bank clients from 39 at the end of 1998 to 50 at year-end 1999. Trust fee income increased $20,000 (0.8%) to $2,597,000 in 1999 from $2,577,000 in 1998 primarily due to an increase in trust assets managed from $326 million at December 31, 1998 to $356 million at December 31, 1999. Net gain on sales of loans decreased $787,000 to $1,147,000 in 1999 as compared to $1,934,000 in 1998. This decrease was the result of lower margins in gains on sale in 1999 compared to 1998. Other income increased $318,000 (54.7%) to $899,000 in 1999 from $581,000 in 1998. The primary reason for the increase was a $226,000 gain on sale of a branch site in 1999.
TOTAL NONINTEREST EXPENSE increased $1.8 million (7.8%) to $25.5 million in 1999, from $23.6 million in 1998, primarily due to the following factors. Salaries and employee benefits increased $2.0 million (15.7%) to $14.4 million in 1999 compared to $12.4 million in 1998. This increase was due primarily to annual merit increases, and staffing increases in the Corporation's non-interest income generating companies. Equipment rentals, depreciation and maintenance increased $466,000 primarily due to the upgrading of networking and computer equipment. Other expenses decreased $674,000 (8.8%) primarily due to the decrease in operating expenses at Rurban Mortgage Company.
INCOME TAX EXPENSE for the year ended December 31, 1999 was $2.4 million, an increase of $288,000 (13.9%) from 1998. This increase was primarily attributable to a increase in income before income tax expense.
RESULTS OF OPERATIONS
1998 COMPARED WITH 1997 - -----------------------
NET INTEREST INCOME for 1998 was $20.6 million an increase of $0.7 million (3.3%) over 1997. The increase was primarily due to a 9.8% increase in the average balance of loans and loans held for sale. The average yield on loans declined to 9.07% compared to 9.23% for 1997. The decline in earning asset yield, the increase in the average rate on interest bearing liabilities from 4.61% in 1997 to 4.65% in 1998 and the funding cost of the November 1997 $6.7 million stock repurchase program combined to result in a decline in the tax equivalent net interest margin from 4.72% in 1997 to 4.43% in 1998.
AT DECEMBER 31, 1998, loans and loans held for sale, net of deferred loan fees amounted to $412.5 million, an increase of 13.4% over the December 31, 1997 balance of $363.9 million. This increase was due to the Corporation's loan origination efforts.
COMMERCIAL, FINANCIAL AND AGRICULTURAL LOANS increased $31.5 million from $217.3 million at December 31, 1997 to $248.8 million at December 31, 1998. This increase occurred as the result of the Corporation's goal to increase small business loan relationships.
AT DECEMBER 31, 1998, approximately $18.5 million of real estate mortgage loans were held for sale in the secondary market. During 1998, approximately $112.4 million of real estate mortgage loans were originated for sale and approximately $98.3 million were sold in the secondary market. This represents an increase of $70.1 million (248%) in loans sold in 1998 as compared to 1997. Real estate mortgage loans originated for sale increased $81.6 million in 1998, as compared to 1997, primarily due to the loan
origination efforts of Rurban Mortgage Company. Net gains on loan sales for 1998 totaled $1,934,000, an increase of $1,382,000 as compared to $552,000 in 1997. During 1998, most loans were sold on a servicing released basis. Loans originated for sale are primarily fixed rate mortgage loans.
SECURITIES AVAILABLE FOR SALE TOTALED $82.1 million at December 31, 1998 which represented an increase of $10.4 million (14.5%) from $71.7 million at December 31, 1997. As of December 31, 1998, all securities of the Corporation were designated available for sale. Available for sale securities represent those securities which the Corporation may decide to sell if needed for liquidity, asset/liability management or other reasons. Such securities are reported at fair value with net unrealized appreciation (depreciation) included as a separate component of shareholders' equity, net of tax. This resulted in a net increase in shareholders' equity of $203,000 at December 31, 1998.
TOTAL DEPOSITS AT December 31, 1998 amounted to $450.8 million, an increase of $35.6 million (8.6%) over total deposits of $415.2 million at December 31, 1997. The increase in deposits is believed to have occurred as a result of increased deposit services and flexibility of products offered.
OTHER BORROWINGS at December 31, 1998 were $38.4 million compared to $12.5 at December 31, 1997. These borrowings consisted of $28.9 million of FHLB Advances and $9.5 million of federal funds purchased as the Corporation continued to access alternative sources for funding its loan growth.
THE PROVISION FOR LOAN LOSSES charged to operations was based on the amount of net losses incurred and management's estimation of inherent losses based on an evaluation of loan portfolio risk and economic factors. The provision for loan losses was $1,080,000 in 1998 compared to $948,000 in 1997.
THE ALLOWANCE FOR LOAN LOSSES at December 31, 1998 was $5.4 million or 1.31% of total loans and loans held for sale, net of deferred loan fees, compared to $5.2 million or 1.44% at December 31, 1997.
MANAGEMENT ALLOCATED approximately 50% of the allowance for loan losses to commercial, financial and agricultural loans; 19% to consumer loans; and 3% to residential first mortgage loans at December 31, 1998, leaving a balance of 28% unallocated. Nonperforming loans increased to $3.6 million at December 31, 1998 from $2.8 million at December 31, 1997. The increase in nonperforming loans relates primarily to an increase in accruing loans past due 90 days or more at the end of 1998.
TOTAL NONINTEREST INCOME increased $2,216,000 to $10.5 million in 1998 from $8.3 million in 1997. Net gain on sales of loans increased $1,382,000 to $1,934,000 in 1998 as compared to $552,000 in 1997. Trust fee income increased $250,000 (10.7%) to $2,577,000 in 1998 from $2,327,000 in 1997 primarily due to an increase in trust assets managed from $294 million at December 31, 1997 to $326 million at December 31, 1998. Data service fees increased $726,000 (25.7%) to $3,554,000 in 1998 compared to $2,828,000 in 1997. RDSI purchased a second mainframe computer and doubled its bank data processing capacity during the third quarter of 1998. The $726,000 increase would have been a $964,000 increase excluding the inflation of 1997's data processing fees for a $238,000 cash to accrual change made in 1997. The primary reasons for the $964,000 increase were increases in the number of customer accounts processed and in the level of sales of ancillary data processing products. The increase in number of accounts was a result of customer account growth at client banks and growth in the number of bank clients from 36 at the end of 1997 to 39 at year-end 1998.
TOTAL NONINTEREST EXPENSE increased $4.4 million (22.7%) to $23.6 million in 1998, from $19.3 million in 1997, primarily due to the following factors. Salaries and employee benefits increased $2.2 million (22.0%) to $12.4 million in 1998 compared to $10.2 million in 1997. This increase was due primarily to annual merit increases, and staffing increases in the Corporation's three non-interest income generating
companies (RDSI, Reliance Financial Services and Rurban Mortgage Company) and in the Holding Company's administrative staff. Equipment rentals, depreciation and maintenance increased $505,000 primarily due to the purchase of a second mainframe computer and associated software licensing to double RDSI's data processing capacity. Other expenses increased $1,526,000 (25.1%) primarily due to inflation and additional expenses attributed to the growth in loan origination volume at Rurban Mortgage Company.
INCOME TAX EXPENSE for the year ended December 31, 1998 was $2.1 million, a decrease of $397,000 (16.1%) from 1997. This decrease was primarily attributable to a decrease in income before income tax expense.
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 and due from banks, 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 December 31, 1999 compared to $126 million at December 31, 1998 and $98 million at December 31, 1997. Liquidity levels decreased $17 million from 1998 to 1999 primarily due to strong loan demand which exceeded the growth in deposits and short-term borrowings. Management recognizes that securities may need to be sold in the future to help fund loan demand and, accordingly, as of December 31, 1999, the entire securities portfolio of $83.1 million was classified as available for sale.
THE CORPORATION'S RESIDENTIAL FIRST MORTGAGE PORTFOLIO of $80.7 million, 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 anticipated future growth.
THE CASH FLOW statements for the periods presented provide an indication of the Corporation's sources and uses of cash as well as an indication of the ability of the Corporation to maintain an adequate level of liquidity. A discussion of the cash flow statements for 1999, 1998 and 1997 follows.
THE CORPORATION experienced a net increase in cash from operating activities in 1999 and 1997 and a net decrease in 1998. Net cash from operating activities was $14.6 million, $(6.6) million and $4.1 million for the years ended December 31, 1999, 1998 and 1997, respectively. The increase in net cash from operating activities of $14.6 million for 1999 as compared to 1998 was primarily due to decreases in loans held for sale of $6.2 million.
NET CASH FLOW FROM INVESTING ACTIVITIES was $(107.9 million), $(50.0 million) and $(47.8 million) for the years ended December 31, 1999, 1998 and 1997, respectively. The changes in net cash from investing activities include loan growth, as well as normal maturities and reinvestments of securities and premises and equipment expenditures. In 1999, 1998 and 1997, the Corporation received $17.7 million, $24.8 million and $28.6 million , respectively, from sales of securities available for sale, while proceeds from repayments and maturities of securities were $24.2 million, $24.1 million and $8.8 million in 1999, 1998 and 1997, respectively.
NET CASH FLOW FROM FINANCING ACTIVITIES was $86.4 million, $59.9 million and $32.0 million for the years ended December 31, 1999, 1998 and 1997, respectively. The net cash increase was primarily attributable to growth in total deposits of $68.5 million, $35.6 million and $27.4 million in 1999, 1998 and 1997, respectively. Other significant changes in 1999, 1998 and 1997 included $11.1 million, $21.4 million and $7.5 million in net borrowings from the Federal Home Loan Bank. Additionally, In 1999
$7.0 million of funding was received under a line of credit and in 1997, $6.7 million was paid to repurchase common stock.
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 Corporation 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 Corporation are for other than trading purposes. All of the Corporation's transactions are denominated in U.S. dollars with no specific foreign exchange exposure. In addition, the Corporation 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 Corporation's financial instruments have varying levels of sensitivity to changes in market interest rates resulting in market risk. Interest rate risk is the Corporation'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 Corporation's earnings and capital base. Accordingly, effective risk management that maintains interest rate risks at prudent levels is essential to the Corporation'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 Corporation 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 Corporation 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 Corporation, adopted a Joint Agency Policy Statement on interest rate risk effective June 26, 1996. The policy statement provides guidance to examiners and bankers on sound practices for managing interest rate risk, which will form the basis for ongoing evaluation of the adequacy of interest rate risk management at supervised institutions. The policy statement also outlines fundamental elements of sound management that have been identified in prior Federal Reserve guidance and discusses the importance of these elements in the context of managing interest rate risk. Specifically, the guidance emphasizes the need for active Board of Director and Senior Management oversight and a comprehensive risk management process that effectively identifies, measures, and controls interest rate risk.
FINANCIAL INSTITUTIONS derive their income primarily from the excess of interest collected over interest paid. The rates of interest an institution earns on its assets and owes on its liabilities generally are established contractually for a period of time. Since market interest rates change over time, an institution is exposed to lower profit margins (or losses) if it cannot adapt to interest rate changes. For example, assume that an institution's assets carry intermediate or long term fixed rates and that those assets are funded with short-term liabilities. If market interest rates rise by the time the short-term liabilities must
be refinanced, the increase in the institution's interest expense on its liabilities may not be sufficiently offset if assets continue to earn at the long-term fixed rates. Accordingly, an institution's profits could decrease on existing assets because the institution will either have lower net interest income or possible, 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) selling existing assets or repaying certain liabilities; 2) matching repricing periods for new assets and liabilities, for example, by shortening terms of new loans or investments; 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 Corporation 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 Corporation's financial instruments used for purposes other than trading that are sensitive to changes in interest rates. 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 Corporation'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 Corporation's historical experience, management's judgement 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.
THE ABOVE TABLE reflects expected maturities, not expected repricing. The contractual maturities adjusted for anticipated prepayments as shown in the preceding table are only part of the Corporation'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) and the general level and direction of market interest rates. 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 Corporation's increased reliance on non-core funding sources has restricted the Corporation'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 4.43% in 1998 to 4.27% in 1999.
THE CORPORATION 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.
CAPITAL RESOURCES
TOTAL SHAREHOLDERS' EQUITY, net of unearned ESOP shares was $43.9 million as of December 31, 1999, an increase of $2 million from $41.9 million as of December 31, 1998. The increase was primarily due to 1999 net income of $5.2 million, reduced by $1.7 million of cash dividends to shareholders and a $1.7 million decrease in the market value of securities available for sale, net of tax.
TOTAL REGULATORY (RISK-BASED) CAPITAL was $51.1 million, net of $908,000 of unearned ESOP shares as of December 31, 1999, an increase of $5.0 million from total regulatory (risk-based) capital of $46.1 million as of December 31, 1998.
THE COMPONENTS of total risk-based capital are Tier 1 capital and Tier 2 capital. Tier 1 capital is total shareholders' equity less intangible assets. Tier 2 capital is Tier 1 capital plus a portion of the allowance
for loan losses. The allowance for loan losses is includable in Tier 2 capital up to a maximum of 1.25% of risk weighted assets. (See Note 16 to the consolidated financial statements.)
RESTRICTIONS EXIST REGARDING the ability of the subsidiary banks to transfer funds to the Corporation in the form of cash dividends, loans or advances. (See Note 1 to consolidated financial statements.)
As of December 31, 1999, 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.
YEAR 2000
During 1999, the corporation completed its comprehensive Year 2000 (Y2K) plan in preparing for the Year 2000 date change. The plan involved identifying and providing a remedy for date recognition problems that might pertain to any facets of the Corporation's business. These included problems in computer hardware and software, physical plant and other equipment, working with third parties to address their Year 2000 issues, assessing major loan an deposit customers for potential risk and developing contingency plans to address potential risks in the event of Year 2000 failures. As testimony to the success of these efforts, the Corporation experienced no disruption in service of any type in the transition to 2000.
In 1999 the Corporation spent $554,000 in out of pocket expenses directly related to year 2000 readiness. Much of this expense was related to assuring that RDSI was fully prepared and that their 50 bank clients were fully aware of their preparation responsibilities as they relate to RDSI's data processing systems. The out of pocket expenses and the significant amount of time devoted to Year 2000 preparation by directors, officers and other personnel combined to have a material impact on the results of operations in 1999. All business processes will continue to be monitored, including interaction with the Corporation's customers, vendors and other third parties, throughout 2000 to address any issues and ensure all processes continue to function properly. Management does not expect the costs of addressing Year 2000 issues to have a material impact on the results of operations in 2000.
PLANNED PURCHASES OF PREMISES AND EQUIPMENT
MANAGEMENT PLANS to purchase additional premises and equipment to meet the current and future needs of the Corporation's customers. These purchases, including land, buildings and improvements and furniture and equipment (which includes computer software and license agreements), are currently expected to total approximately $3 million over the next year.
IMPACT OF INFLATION AND CHANGING PRICES
THE MAJORITY OF ASSETS AND LIABILITIES of the Corporation are monetary in nature and therefore the Corporation 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 Corporation'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.
FORWARD-LOOKING STATEMENTS
WHEN USED IN THIS FILING and in future filings by the Corporation with the Securities and Exchange Commission, in the Corporation'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 Corporation's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Corporation'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 CORPORATION 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 Corporation's financial performance and could cause the Corporation's actual results for future periods to differ materially form those anticipated or projected.
THE CORPORATION 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.
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.
Item 8. Financial Statements and Supplementary Data. - ------------------------------------------------------
The Consolidated Balance Sheets of the Corporation and its subsidiaries as of December 31, 1999 and December 31, 1998, 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, 1999, the related Notes to Consolidated Financial Statements and the Report of Independent Auditors, appear on pages through of this Annual Report on Form 10-K. The Corporation is not required to furnish the supplementary financial information specified by Item 302 of Regulation S-K.
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. - ------------------------------------------------------------------------
None.
PART III --------
Item 10.
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 24, 2000, 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).
During February of 2000, director John R. Compo filed a late Form 4 reporting his purchase of 1,500 of the Corporation's Common Shares which were acquired during September of 1999. This was the only transaction not timely reported.
Item 11.
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 24, 2000, 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 24, 2000, shall be deemed to be incorporated herein by reference.
Item 12.
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 24, 2000, under the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
Item 13.
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 24, 2000, under the caption "TRANSACTIONS INVOLVING MANAGEMENT."
PART IV -------
Item 14.
Item 14. 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 47.
(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 84. 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.
(b) Reports on Form 8-K. -------------------
There were no Current Reports on Form 8-K filed during the fiscal quarter ended December 31, 1999.
(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 84.
(d) Financial Statement Schedules. -----------------------------
None.
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, 2000 By: Richard C. Warrener, Executive Vice President, Chief Financial Officer and Chief Accounting Officer
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.
Date: March 28, 2000
RURBAN FINANCIAL CORP.
ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1999
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, 1999 and 1998 and the related consolidated statements of income, changes in shareholders' equity and cash flows for the years ended December 31, 1999, 1998 and 1997. 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 generally accepted auditing standards. 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, 1999 and 1998, and the results of its operations and its cash flows for the years ended December 31, 1999, 1998 and 1997 in conformity with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP ---------------------------------- Crowe, Chizek and Company LLP
South Bend, Indiana February 4, 2000
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- -------------------------------------------------------------------------------- (Continued)
- -------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements.
- -------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements.
- -------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements.
- -------------------------------------------------------------------------------- (Continued)
- ------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements.
RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The accompanying consolidated financial statements include the accounts of Rurban Financial Corp. and its wholly-owned subsidiaries. Rurban Financial Corp. ("the Corporation") is a bank holding company, organized under Ohio law, that owns all the outstanding stock of The State Bank and Trust Company ("State Bank"), The Peoples Banking Company ("Peoples Bank"), The First National Bank of Ottawa ("First National Bank"), The Citizens Savings Bank Company ("Citizens Savings Bank"), Rurbanc Data Services, Inc. ("RDSI") and Rurban Life Insurance Company ("Rurban Life") (together referred to as "the Corporation"). State Bank owns all of the outstanding stock of Reliance Financial Services, N.A. ("RFS") and Rurban Mortgage Company ("RMC"). RMC was incorporated on November 5, 1997. On December 31, 1997, the operations of the Rurban Mortgage Division of State Bank were merged into RMC along with the acquired operations of S&L Financial Services, Inc. ("S&L"). The S&L acquisition was accounted for as a purchase; income from S&L was not material for the year ended December 31, 1997. All significant intercompany balances and transactions are eliminated in consolidation.
Nature of Business and Industry Segments: Internal financial information is primarily reported and aggregated in three lines of business: banking, mortgage banking, and data processing services. For further discussion, see Note 18. The Corporation's subsidiary banks grant credit and accept deposits from their customers in the normal course of business primarily in northern Ohio. RDSI provides data processing services to financial institutions located in Ohio, Michigan and Indiana. Rurban Life accepts reinsurance ceded in part by American General Assurance Company from the credit life and disability insurance purchased by customers of the Corporation's subsidiary banks. RFS offers a diversified array of trust and financial services to customers nationwide. RMC services residential mortgage customers in Northern Ohio, West and Central Florida.
Use of Estimates: To prepare consolidated financial statements in conformity with generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the consolidated financial statements and the disclosures provided, and future results could differ. The allowance for loan losses, fair values of financial instruments and the carrying value of loans held for sale are particularly subject to change.
Securities: Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with net unrealized appreciation (depreciation), net of tax, reported separately in other comprehensive income (loss) and shareholders' equity. Securities are classified as trading when held for short term periods in anticipation of market gains, and are carried at fair value. Securities are written down to fair value when a decline in fair value is not temporary.
- -------------------------------------------------------------------------------- (Continued)
RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Realized gains and losses resulting from the sale of securities are computed by the specific identification method. Interest and dividend income, adjusted by amortization of purchase premium or discount, is included in earnings. Premiums and discounts on securities are recognized using the level yield method over the estimated life of the security.
Loans Held for Sale: Mortgage loans intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized in a valuation allowance by charges to income.
Interest Income on Loans: Interest on loans is accrued over the term of the loans based upon the principal outstanding. Management reviews loans delinquent 90 days or more to determine if the interest accrual should be discontinued. When serious doubt exists as to the collectibility of a loan, the accrual of interest is discontinued. Under Statement of Financial Accounting Standards ("SFAS") No. 114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118, the carrying value of impaired loans is periodically adjusted to reflect cash payments, revised estimates of future cash flows, and increases in the present value of expected cash flows due to the passage of time. Cash payments representing interest income are reported as such and other cash payments are reported as reductions in carrying value. Increases or decreases in carrying value due to changes in estimates of future payments or the passage of time are reported as a component of the provision for loan losses.
Loan Fees and Costs: Loan fees, net of direct origination costs, are deferred. The net amount deferred is reported in the consolidated balance sheets as part of loans and is recognized in interest income over the term of the loan using the level yield method.
Allowance For Loan Losses: An allowance for loan losses is established and maintained because some loans may not be repaid in full. Increases to the allowance are recorded by a provision for loan losses charged to expense. Estimating the risk of loss and the amount of loss on any loan 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, 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. While management may periodically allocate portions of the allowance for specific problem loan situations, the entire allowance is available for any loan charge-offs that may occur. A loan is charged off by management as a loss when deemed uncollectible, although collection efforts continue and future recoveries may occur.
Loans are considered impaired if full principal or interest payments are not anticipated in accordance with the contractual loan terms. Impaired loans are carried at the present value of expected future cash flows discounted at the loan's effective interest rate or at the fair value of the collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. If these allocations cause the allowance for loan losses to require increase, such increase is reported as a component of the provision for loan losses.
- -------------------------------------------------------------------------------- (Continued)
RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Smaller-balance homogeneous loans are evaluated for impairment in total. Such loans include residential first mortgage loans secured by one-to-four family residences, residential construction loans, and automobile, home equity and second mortgage loans. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment. When analysis of borrower operating results and financial condition indicates that underlying cash flows of the borrower's business are not adequate to meet its debt service requirements, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 30 days or more. Commercial loans are rated on a scale of 1 to 8, with 1 to 3 being satisfactory, 4 watch, 5 special mention, 6 substandard, 7 doubtful, and 8 as loss which are then charged off. Loans graded a 6 or worse are considered for impairment. Loans are generally moved to nonaccrual status when 90 days or more past due. These loans are often considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible. This typically occurs when the loan is 120 days or more past due.
Premises and Equipment: Land is carried at cost. Buildings and improvements are depreciated using primarily the straight-line method with useful lives ranging from 10 to 50 years. Furniture and equipment are depreciated using the straight-line and declining-balance methods with useful lives ranging predominantly from 5 to 20 years. These assets are reviewed for impairment under SFAS No. 121 when events indicate the carrying amount may not be recoverable. Maintenance and repairs are expensed and major improvements are capitalized.
Servicing Rights: Servicing rights are recognized as assets for purchased rights and for the allocated value of retained servicing rights on loans sold. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates and then, secondarily, as to geographic and prepayment characteristics. Any impairment of a grouping is reported as a valuation allowance.
Excess servicing receivable is reported when a loan sale results in servicing in excess of normal amounts, and is expensed over the life of the servicing on the interest method.
Intangible Assets: Goodwill arising from the acquisition of subsidiary banks and RMC is amortized over 5 to 25 years using the straight-line method. Core deposit intangibles are amortized on an accelerated basis over 10 years, the estimated life of the deposits acquired. Goodwill and identified intangibles are assessed for impairment based on estimated undiscounted cash flows, and written down if necessary. As of December 31, 1999, 1998 and 1997, unamortized goodwill totaled approximately $404,000, $532,000 and $834,000, and unamortized core deposit intangibles totaled approximately $106,000, $188,000 and $271,000.
- -------------------------------------------------------------------------------- (Continued)
RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Foreclosed Real Estate: Real estate properties acquired through, or in lieu of, loan foreclosure are initially recorded at fair value at the date of acquisition establishing a new cost basis. Any reduction to fair value from the carrying value of the related loan at the time of acquisition is accounted for as a loan loss and charged against the allowance for loan losses. After acquisition, a valuation allowance is recorded through a charge to income for the amount of estimated selling costs. Valuations are periodically performed by management, and valuation allowances are adjusted through a charge to income for changes in fair value or estimated selling costs. Other real estate owned amounted to approximately $285,000 and $456,000 at December 31, 1999 and 1998, respectively, and is included in other assets in the consolidated balance sheets.
Income Taxes: Income tax expense is the sum of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
Employee Benefits: The Corporation sponsors an employee stock ownership plan (ESOP) and 401(k) profit sharing plan for which contributions are made and expensed annually. The Corporation also provides split-dollar life insurance plans for certain executive officers of the Corporation. Also, the Corporation sponsors a supplemental retirement plan for certain executive officers of the Corporation. Employee benefits are discussed further in Note 9.
Stock Option Plan: The Corporation sponsors a stock option plan for directors, officers and key employees. Expense for employee compensation under the stock option plan is based on Accounting Principles Board ("APB") Opinion 25 with expense reported only if options are granted below market price at grant date. Pro forma disclosures of net income and earnings per common share are provided as if the fair value method of SFAS No. 123 were used to measure expense for stock-based compensation. For further discussion see Note 9.
Postretirement Health Care Benefits: The Corporation sponsors a postretirement health care plan that covers both salaried and nonsalaried employees. The Corporation accrues, during the years that employees render the necessary service, the expected cost of providing postretirement health care benefits to employees and their beneficiaries and covered dependents. The Corporation's postretirement health care plan provides that retired employees may remain on the Corporation's health care plan with each retiree's out-of-pocket contribution to the Corporation equal to their premium expense determined exclusively on the loss experience of the retirees in the plan.
- -------------------------------------------------------------------------------- (Continued)
RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Dividends and Stock Splits: Dividends issued in stock are reported by transferring the market value of the stock issued from retained earnings to common stock and additional paid-in capital. Stock splits are recorded by adjusting common stock and additional paid in capital by the par value of the additional shares. On May 27, 1998, the Board of Directors declared a two-for-one stock split, paid on June 30, 1998, increasing shares outstanding by 2,287,851 shares.
Earnings and Dividends Per Common Share: Basic earnings per common share is net income divided by the weighted average number of common shares considered to be outstanding during the period. ESOP shares are considered outstanding for this calculation unless unearned. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options. Earnings and dividends per common share are restated for all stock splits and dividends.
Comprehensive Income (Loss): Comprehensive income (loss) consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes the net change in net unrealized appreciation (depreciation) on securities available for sale, net of tax, which is also recognized as a separate component of shareholders' equity.
Dividend Restriction: Certain restrictions exist regarding the ability of the subsidiaries to transfer funds to Rurban Financial Corp. in the form of cash dividends, loans or advances. Approximately $10,900,000 of undistributed earnings of the subsidiaries, included in consolidated retained earnings, plus current 2000 net profits is available for distribution to Rurban Financial Corp. as dividends in 2000 without prior regulatory approval.
Fair Values of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 15. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect such estimates.
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. Commercial, financial and agricultural loans make up approximately 65% of the loan portfolio and the loans are expected to be repaid from cash flow from operations of businesses. Residential first mortgage loans make up approximately 16% of the loan portfolio and are collateralized by first mortgages on residential real estate. Consumer loans make up approximately 19% of the loan portfolio and are primarily collateralized by consumer assets.
- -------------------------------------------------------------------------------- (Continued)
RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Financial Instruments With Off-Balance-Sheet Risk: The Corporation, in the normal course of business, makes commitments to extend credit which are not reflected in the consolidated financial statements. A summary of these commitments is disclosed in Note 13.
Statements of Cash Flows: For purposes of reporting cash flows, cash and cash equivalents is defined to include cash on hand, due from financial institutions and federal funds sold with original maturities under 90 days. The Corporation reports net cash flows for customer loan transactions, deposit transactions, short-term borrowings with original maturities of 90 days or less and interest-bearing deposits in other financial institutions.
Reclassifications: Some items in the prior consolidated financial statements have been reclassified to conform with the current presentation.
NOTE 2 - BASIC AND DILUTED EARNINGS PER COMMON SHARE
A reconciliation of the numerators and denominators of the computations of basic earnings per common share and diluted earnings per common share for the years ended December 31, 1999, 1998 and 1997 is presented below:
- -------------------------------------------------------------------------------- (Continued)
RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - --------------------------------------------------------------------------------
NOTE 2 - BASIC AND DILUTED EARNINGS PER COMMON SHARE (Continued)
Incentive stock options for 6,500 shares of common stock granted during 1999 and 45,750 shares of common stock granted during 1998 were not considered in computing earnings per common share for 1999 and 1998 because they were antidilutive. Common share numbers have been restated for all stock splits and dividends.
NOTE 3 - SECURITIES AVAILABLE FOR SALE
Year end securities available for sale were as follows.
- -------------------------------------------------------------------------------- (Continued)
RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - --------------------------------------------------------------------------------
NOTE 3 - SECURITIES AVAILABLE FOR SALE (Continued)
Contractual maturities of debt securities available for sale at December 31, 1999 were as follows. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.
Proceeds, gross gains and gross losses realized from sales of securities available for sale for the years ended December 31, 1999, 1998 and 1997 are as follows:
At December 31, 1999 there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies and corporations, in an amount greater than 10% of shareholders' equity.
Securities with an amortized cost of approximately $70,991,000 and $58,444,000 as of December 31, 1999 and 1998, were pledged to secure public and trust deposits and FHLB advances.
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RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - --------------------------------------------------------------------------------
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
The following is a summary of the activity in the allowance for loan losses account for the years ended December 31, 1999, 1998 and 1997:
At December 31, 1999 and 1998, loans past due more than 90 days and still accruing interest approximated $809,000 and $1,742,000.
Impaired loans were as follows.
NOTE 5 - PREMISES AND EQUIPMENT, NET
Premises and equipment, net at December 31, are summarized as follows:
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RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - --------------------------------------------------------------------------------
NOTE 5 - PREMISES AND EQUIPMENT, NET (Continued)
The Corporation is obligated under non-cancelable leases for office space and equipment. Rent expense was $229,000, $266,000 and $79,000 for 1999, 1998 and 1997.
At December 31, 1999, minimum future lease payments are as follows for the years ended December 31:
NOTE 6 - INTEREST-BEARING DEPOSITS
Included in interest-bearing deposits are certificates of deposit in denominations of $100,000 or more of approximately $106,786,000 and $64,888,000 as of December 31, 1999 and 1998, respectively. Certificates of deposit obtained from brokers totaled approximately $29,000,000 and $2,000,000 as of December 31, 1999 and 1998, respectively.
At December 31, 1999, the scheduled maturities of certificates of deposit are as follows for the years ended December 31:
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RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - --------------------------------------------------------------------------------
NOTE 7 - ADVANCES FROM FHLB
Advances from the FHLB of Cincinnati with fixed and variable interest rates ranging from 4.52% to 6.25% at December 31, 1999 and from 5.27% to 6.25% at December 31, 1998 mature as follows for the years ending December 31:
At December 31, 1999 and 1998, in addition to FHLB stock, the Corporation pledged mortgage loans with a minimum carrying value of approximately $60,086,000 and $43,366,000 to the FHLB to secure advances outstanding.
NOTE 8 - OTHER BORROWED FUNDS
The Corporation has a line of credit with the Fifth Third Bank of Northwestern Ohio, N.A. in the amount of $10,000,000. At December 31, 1999 and 1998, the Corporation had $7,000,000 and $-0- advances outstanding on this line of credit. The note is unsecured and requires interest to be paid monthly with the principal amount due at maturity on April 30, 2000. The interest rate is variable based on the current prime rate and adjusts immediately.
NOTE 9 - EMPLOYEE BENEFITS
Employee Stock Ownership Plan: The Corporation has a noncontributory employee stock ownership plan ("ESOP") covering substantially all employees of the Corporation and its subsidiaries. Voluntary contributions are made by the Corporation to the plan. Each eligible employee is vested based upon years of service, including prior years of service. Contributions to the ESOP were $260,000, $715,000 and $212,000, and related expense attributable to the plan included in salaries and employee benefits were approximately $572,000, $568,000 and $391,000 in 1999, 1998 and 1997, respectively.
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RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - --------------------------------------------------------------------------------
NOTE 9 - EMPLOYEE BENEFITS (Continued)
Distributions to plan participants may be paid in cash or stock upon their termination of employment. During 1999, 10,471 shares were withdrawn from the ESOP by participants who terminated their employment with the Company.
During 1996, the ESOP borrowed $1,505,527 from the Corporation to purchase 93,758 shares of common stock at a weighted average cost of $16.06 per share. Collateral for the loan is the unearned shares of common stock purchased by the ESOP with the loan proceeds. The loan will be repaid principally from the Corporation's discretionary contributions to the ESOP. The interest rate for the loan is 7.75%. Shares purchased by the ESOP are held in suspense until allocated among ESOP participants as the loan is repaid. During 1999, 1998 and 1997, the ESOP allocated 13,476 shares, 13,140 shares and 13,518 shares.
The ESOP shares as of December 31 were as follows:
The Corporation accounts for its ESOP under AICPA Statement of Position ("SOP") 93-6. Compensation expense is recorded based on the average market price of the shares committed to be released for allocation to participant accounts and cash allocated to participant accounts. The difference between the market price and the cost of shares committed to be released is recorded as an adjustment to additional paid-in capital. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings; dividends on unearned ESOP shares are reflected as a reduction of debt and accrued interest.
Stock Option Plan: On March 12, 1997, the Board of Directors of the Corporation adopted the Rurban Financial Corp. Stock Option Plan ("Option Plan"). The purpose of the Option Plan is to advance the interests of the Corporation and its shareholders by granting directors, officers, and key employees of the Corporation options to increase their propriety interest in the Corporation. 400,000 shares of the Corporation's authorized unissued common stock were reserved for issuance under the Option Plan. The option exercise price shall not be less than the fair market value (as defined in the Option Plan) of the common stock on the date the option is granted, and the option term cannot exceed 10 years.
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RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - --------------------------------------------------------------------------------
NOTE 9 - EMPLOYEE BENEFITS (Continued)
On October 22, 1997, 179,000 options with a 10 year term were granted at an exercise price of $14.19 per share. On June 15, 1998, 45,750 options with a ten year term were granted at an exercise price of $18.50. During 1999, 6,500 options with a ten year term were granted at an exercise price of $18.50 per share. At December 31, 1999, 1998 and 1997, 219,100, 217,800 and 179,000 options were granted and outstanding and 168,750, 175,250 and 221,000 options were available to be granted. Eligible directors, officers and key employees are able to exercise options awarded to them at a rate of 20% per year, October 22, 1998, being the first possible exercise date, accordingly no options were exercisable at December 31, 1997. Options outstanding at December 31, 1999 had a range of exercise prices of $14.19 - $18.50 and a weighted average remaining contractual life of 8 years.
A summary of the activity in the Option Plan is as follows.
Options exercisable at December 31, 1999, 1998 and 1997 were as follows.
The Corporation applies APB Opinion 25, Accounting For Stock Issued to Employees and related interpretations in accounting for its Option Plan. Accordingly, no compensation expense has been recognized for the Option Plan. SFAS No. 123, Accounting For Stock-Based Compensation requires pro forma disclosures for entities that do not adopt its fair value accounting method for stock-based compensation. Had compensation cost for stock options been measured using SFAS No. 123, net income and earnings per share would have been the pro forma amounts indicated below. The pro forma effect may increase in the future if more options are granted.
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RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - --------------------------------------------------------------------------------
NOTE 9 - EMPLOYEE BENEFITS (Continued)
The pro forma effects are computed using option pricing models, using the following weighted-average assumptions as of grant date.
401(k) Profit Sharing Plan: The Corporation has 401(k) profit sharing plans. The annual expense of the plans is based on 50% matching of voluntary employee contributions of up to 6% of individual compensation. Employee contributions are vested immediately and the Corporation's matching contributions are fully vested after six years. The plans cover substantially all employees of the Corporation. Contributions to the plans were $221,000, $196,000 and $145,000 and related expense attributable to the plans, included in salaries and employee benefits, were approximately $220,000, $186,000 and $117,000 in 1999, 1998 and 1997.
Life Insurance Plans: Life insurance plans are provided for certain executive officers on a split-dollar basis and the Corporation 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. The Corporation is entitled to the remainder of the death proceeds less any loans on the policy and unpaid interest or cash withdrawals previously incurred by the Corporation. 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 was approximately $650,000 and $627,000 at December 31, 1999 and 1998, and is included in other assets in the consolidated balance sheets.
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RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - --------------------------------------------------------------------------------
NOTE 9 - EMPLOYEE BENEFITS (Continued)
Supplemental Retirement Plan: The Corporation established a supplemental retirement plan for selected officers. The Corporation has purchased insurance contracts on the lives of certain participants in the supplemental retirement plan and has named the Corporation as beneficiary. While no direct contract exists between the supplemental retirement plan and the life insurance contracts, it is management's current intent that the proceeds from the insurance contracts will be used to help offset earlier payments made under the supplemental retirement plan. The Corporation is recording an expense equal to the projected present value of the payments due at retirement based on the projected remaining years of service using the projected unit credit method. The obligations under the plans, net of payments already made, was approximately $823,000 and $723,000 at December 31, 1999 and 1998 and is included in other liabilities in the consolidated balance sheets. The expense attributable to the plans, included in salaries and employee benefits, was approximately $165,000, $210,000 and $127,000 in 1999, 1998 and 1997. The cash surrender value of the life insurance was approximately $1,753,000 and $1,675,000 at December 31, 1999 and 1998, and is included in other assets in the consolidated balance sheets.
NOTE 10 - OTHER EXPENSES
The following is an analysis of other expenses for the years ended December 31, 1999, 1998 and 1997:
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NOTE 11 - INCOME TAX EXPENSE
Income tax expense consists of the following for the years ended December 31, 1999, 1998 and 1997:
Income tax expense (benefit) on net gain (loss) on securities was $(1,981), $24,639 and $65,923 in 1999, 1998 and 1997.
The difference between the financial statement income tax expense and amounts computed by applying the statutory federal income tax rate to income before income tax expense is as follows for the years ended December 31, 1999, 1998 and 1997:
The components of the net deferred tax asset recorded in the consolidated balance sheets as of December 31, 1999 and 1998 are as follows:
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RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - --------------------------------------------------------------------------------
NOTE 11 - INCOME TAX EXPENSE (Continued)
NOTE 12 - RELATED PARTY TRANSACTIONS
Certain directors, executive officers and principal shareholders of the Corporation, 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 year ended December 31, 1999 and 1998:
Other changes include adjustments for loans applicable to one reporting period that are excludable from the other reporting period.
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RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - --------------------------------------------------------------------------------
NOTE 13 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES
The Corporation is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet financing needs of its customers. These financial instruments include commitments to make loans, unused lines of credit and standby letters of credit. The Corporation's exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to make loans, unused lines of credit and standby letters of credit is represented by the contractual amount of those instruments. The Corporation follows the same credit policy to make such commitments as it uses for on-balance-sheet items.
The Corporation has the following commitments for terms of up to two years outstanding at December 31:
Since many commitments to make loans expire without being used, the amount does not necessarily represent future cash commitments. In addition, commitments to extend credit are arrangements to lend to customers as long as there is no violation of any condition established in the contract. No losses are anticipated as a result of these transactions. Collateral obtained upon exercise of the commitment is determined using management's credit evaluation of the borrower and may include real estate, business assets, consumer assets, deposits and other items.
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.
Salary continuation agreements with certain executive officers contain provisions regarding certain events leading to separation from the Corporation, before the executive officer's normal retirement date, which could result in cash payments totaling approximately $2,446,000 for which $543,000 has been accrued as a liability at December 31, 1999.
The Corporation was required to have approximately $4,493,000 and $4,730,000 of cash on hand or on deposit with the Federal Reserve Bank to meet regulatory reserve and clearing requirements at December 31, 1999 and 1998. These balances do not earn interest. Additionally, the Corporation was required to have approximately $1,250,000 of cash on deposit to meet other clearing requirements at December 31, 1999. This balance does earn interest.
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NOTE 13 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES (Continued)
During 1999, the Corporation entered into an agreement whereby borrowings can be made from the Federal Reserve Bank's discount window. The terms of the program allow the Corporation to borrow up to a certain specified percentage of collateral pledged. At December 31, 1999, the Corporation was able to borrow up to $44,000,000 using the percentages then in place. The Corporation has pledged commercial loans against this borrowing capacity with a carrying value of $68,000,000. The outstanding balance as of December 31, 1999 was $-0-.
NOTE 14 - PARENT COMPANY FINANCIAL STATEMENTS
Presented below are condensed financial statements for the parent company, Rurban Financial Corp.:
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RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - --------------------------------------------------------------------------------
NOTE 14 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
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NOTE 14 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
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NOTE 14 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table shows the estimated fair values and the related carrying values of the Corporation's financial instruments at December 31, 1999 and 1998. Items which are not financial instruments are not included.
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NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
For purposes of the above disclosures of estimated fair values, the following assumptions were used as of December 31, 1999 and 1998. The estimated fair value for cash and cash equivalents, accrued interest receivable, cash surrender value of life insurance and accrued interest payable are considered to approximate cost. The estimated fair value for interest-bearing deposits in other financial institutions and securities available for sale is based on quoted market values for the individual deposits or securities or for equivalent deposits or securities. The estimated fair value for loans is based on estimates of the difference in interest rates the Corporation would charge the borrowers for similar such loans with similar maturities made at December 31, 1999 and 1998, applied for an estimated time period until the loan is assumed to reprice or be paid and the allowance for loan losses is considered to be a reasonable estimate of discount for credit quality concerns. The estimated fair value for demand deposits, savings deposits, federal funds purchased, other borrowed funds with variable interest rates and the variable rate line of credit from the FHLB is based on their carrying value. The estimated fair value for time deposits and fixed rate advances from the FHLB is based on estimates of the rate the Corporation would pay on such deposits or borrowings at December 31, 1999 and 1998, applied for the time period until maturity. The estimated fair value for other financial instruments and off-balance-sheet loan commitments approximate cost at December 31, 1999 and 1998 and are not considered significant to this presentation.
While these estimates of fair value are based on management's judgment of the most appropriate factors, there is no assurance that were the Corporation to have disposed of such items at December 31, 1999 and 1998, the estimated fair values would necessarily have been realized at that date, since market values may differ depending on various circumstances. The estimated fair values at December 31, 1999 and 1998 should not necessarily be considered to apply at subsequent dates.
In addition, other assets and liabilities of the Corporation that are not defined as financial instruments are not included in the above disclosures, such as premises and equipment. Also, non-financial instruments typically not recognized in the financial statements nevertheless may have value but are not included in the above disclosures. These include, among other items, the estimated earnings power of core deposit accounts, the earnings potential of trust assets, the trained work force, customer goodwill and similar items.
NOTE 16 - REGULATORY MATTERS
The Corporation and its subsidiary banks are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the consolidated financial statements.
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NOTE 16 - REGULATORY MATTERS (Continued)
The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If less than well capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required. The minimum requirements are:
At year end, consolidated actual capital levels (in millions) and minimum required levels were:
The Corporation at year end 1999 and 1998 was categorized as well capitalized. State Bank at year end 1999 and 1998 was categorized as well and adequately capitalized, respectively. All other subsidiary banks are not considered significant for this presentation.
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RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - --------------------------------------------------------------------------------
NOTE 17 - OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) components and related taxes were as follows:
NOTE 18 - SEGMENT INFORMATION
The reportable segments are determined by the products and services offered, primarily distinguished between banking, mortgage banking and data processing operations. Loans, investments, deposits, and financial services provide the revenues in the banking operation, including the accounts of State Bank, Peoples Bank, First National Bank and Citizens Savings Bank. Loan originations and net gains on sales of loans provide the revenues in the mortgage banking operation, including the accounts of RMC. Service fees provide the revenues in the data processing operation, including 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 customer's nationwide and Rurban Life, which provides insurance products to customers of the Corporation's subsidiary banks.
The accounting policies used are the same as those described in the summary 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, except no expenses are allocated to mortgage banking or to Rurban Life. Information reported internally for performance assessment follows.
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NOTE 18 - SEGMENT INFORMATION (Continued)
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RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - --------------------------------------------------------------------------------
NOTE 18 - SEGMENT INFORMATION (Continued)
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RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - --------------------------------------------------------------------------------
NOTE 18 - SEGMENT INFORMATION (Continued)
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