Form 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________________ to ___________________________ Commission file number 0-13507 RURBAN FINANCIAL CORP. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Ohio 34-1395608 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 401 Clinton Street, Defiance, Ohio 43512 ----------------------------------------- (Address of principal executive offices) (Zip Code) (419) 783-8950 ---------------------------------------------------- (Registrant's telephone number, including area code) None ------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the proceeding 12 months (or for such shorter period the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes [ ] No [X] The number of common shares of Rurban Financial Corp. outstanding was 4,567,968 on November 1, 2004. 1
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The interim condensed consolidated financial statements of Rurban Financial Corp. ("Rurban" or the "Company") and subsidiaries are unaudited; however, the information contained herein reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of financial condition and results of operations for the interim periods presented. All adjustments reflected in these financial statements are of a normal recurring nature in accordance with Rule 10-01(b)(8) of Regulation S-X. Results of operations for the three and nine months ended September 30, 2004 are not necessarily indicative of results for the complete year. 2
RURBAN FINANCIAL CORP. CONDENSED CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2004, DECEMBER 31, 2003 AND SEPTEMBER 30, 2003 ASSETS <TABLE> <CAPTION> (UNAUDITED) (UNAUDITED) -------------- -------------- SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, 2004 2003 2003 -------------- -------------- -------------- <S> <C> <C> <C> Cash and due from banks $ 12,111,512 $ 14,176,952 $ 16,834,072 Federal funds sold 4,500,000 10,000,000 2,000,000 -------------- -------------- -------------- Cash and cash equivalents 16,611,512 24,176,952 18,834,072 Interest-bearing deposits 250,000 260,000 260,000 Available-for-sale securities 95,599,129 107,698,595 99,860,837 Loans held for sale -- 218,753 488,484 Loans, net of unearned income 272,955,578 284,104,311 301,785,352 Allowance for loan losses (5,368,515) (10,181,135) (11,256,083) Premises and equipment 12,277,515 11,145,499 11,394,579 Federal Reserve and Federal Home Loan Bank stock 2,814,100 2,744,900 3,761,400 Foreclosed assets held for sale, net -- 1,390,552 1,167,466 Interest receivable 2,033,254 2,000,732 2,227,737 Deferred income taxes 2,583,235 2,304,264 5,397,313 Goodwill 2,144,304 2,144,304 2,144,304 Core deposits and other intangibles 567,992 644,987 675,864 Other 13,359,092 6,659,158 1,750,375 -------------- -------------- -------------- Total assets $ 415,827,196 $ 435,311,872 $ 438,491,700 ============== ============== ============== </TABLE> See notes to condensed consolidated financial statements (unaudited) Note: The balance sheet at December 31, 2003 has been derived from the audited consolidated financial statements at that date. 3
LIABILITIES AND STOCKHOLDERS' EQUITY <TABLE> <CAPTION> (UNAUDITED) (UNAUDITED) -------------- -------------- SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, 2004 2003 2003 -------------- -------------- -------------- <S> <C> <C> <C> LIABILITIES Deposits Demand $ 36,640,451 $ 46,084,861 $ 33,773,223 Savings, interest checking and money market 94,495,084 96,721,318 106,082,553 Time 158,846,720 174,668,570 187,169,019 -------------- -------------- -------------- Total deposits 289,982,255 317,474,749 327,024,795 Notes payable 3,428,574 10,327,599 11,239,607 Federal Home Loan Bank advances 56,000,000 39,000,000 37,500,000 Trust preferred securities 10,310,000 10,000,000 10,000,000 Interest payable 734,751 2,347,303 2,227,395 Retail repurchase agreements 3,017,151 3,923,754 -- Other liabilities 2,350,706 3,855,711 2,563,997 -------------- -------------- -------------- Total liabilities 365,823,437 386,929,116 390,555,794 -------------- -------------- -------------- COMMITMENTS AND CONTINGENT LIABILITIES STOCKHOLDERS' EQUITY Common stock, $2.50 stated value; authorized 10,000,000 shares; issued 4,575,702; outstanding September 30, 2004 - 4,567,968, December 31, 2003 - 4,565,879 and September 30, 2003 - 4,565,721 shares 11,439,255 11,439,255 11,439,255 Additional paid-in capital 11,004,876 11,009,268 11,009,733 Retained earnings 28,229,151 26,209,444 25,883,039 Unearned employee stock ownership plan (ESOP) shares (45,539) (163,493) (281,447) Accumulated other comprehensive income (340,450) 201,082 200,340 Treasury stock, at cost Common; September 30, 2004 - 7,734, December 31, 2003 - 9,823 and September 30, 2003 - 9,981 shares (283,534) (312,800) (315,014) -------------- -------------- -------------- Total stockholders' equity 50,003,759 48,382,756 47,935,906 -------------- -------------- -------------- Total liabilities and stockholders' equity $ 415,827,196 $ 435,311,872 $ 438,491,700 ============== ============== ============== </TABLE> See notes to condensed consolidated financial statements (unaudited) Note: The balance sheet at December 31, 2003 has been derived from the audited consolidated financial statements at that date. 4
RURBAN FINANCIAL CORP. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) THREE MONTHS ENDED <TABLE> <CAPTION> SEPTEMBER 30, SEPTEMBER 30, 2004 2003 -------------- -------------- <S> <C> <C> INTEREST INCOME Loans $ 4,086,811 $ 4,770,009 Securities Taxable 925,549 583,157 Tax-exempt 39,497 44,351 Other 11,994 85,760 -------------- -------------- Total interest income 5,063,851 5,483,277 -------------- -------------- INTEREST EXPENSE Deposits 1,050,918 1,778,586 Notes payable 72,387 180,270 Federal Home Loan Bank advances 495,192 548,888 Trust preferred securities 290,855 270,889 -------------- -------------- Total interest expense 1,909,352 2,778,633 -------------- -------------- NET INTEREST INCOME 3,154,499 2,704,644 PROVISION FOR LOAN LOSSES 319,517 - -------------- -------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,834,982 2,704,644 -------------- -------------- NON-INTEREST INCOME Data service fees 2,566,485 2,267,758 Trust fees 726,417 559,327 Customer service fees 499,528 454,778 Net gains on loan sales 7,043 88,555 Net realized gains (losses) on sales of available-for-sale securities 112,394 - Loan servicing fees 91,216 81,602 Gain on sale of assets (10,508) 54,969 Other 87,432 76,977 -------------- -------------- Total non-interest income 4,080,007 3,583,966 -------------- -------------- </TABLE> See notes to condensed consolidated financial statements (unaudited) 5
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (CONTINUED) <TABLE> <CAPTION> SEPTEMBER 30, SEPTEMBER 30, 2004 2003 -------------- -------------- <S> <C> <C> NON-INTEREST EXPENSE Salaries and employee benefits $ 3,080,476 $ 2,869,095 Net occupancy expense 235,173 245,853 Equipment expense 1,099,129 1,060,990 Data processing fees 75,702 125,132 Professional fees 512,476 683,673 Marketing expense 84,663 119,580 Printing and office supplies 73,506 100,587 Telephone and communications 171,529 166,048 Postage and delivery expense 85,747 102,069 State, local and other taxes (5,493) 149,584 Other 497,620 388,450 -------------- -------------- Total non-interest expense 5,910,528 6,011,061 -------------- -------------- INCOME BEFORE INCOME TAX 1,004,461 277,549 PROVISION FOR INCOME TAXES 305,819 77,754 -------------- -------------- NET INCOME $ 698,642 $ 199,795 ============== ============== BASIC EARNINGS PER SHARE $ 0.15 $ 0.04 ============== ============== DILUTED EARNINGS PER SHARE $ 0.15 $ 0.04 ============== ============== </TABLE> See notes to condensed consolidated financial statements (unaudited) 6
RURBAN FINANCIAL CORP. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) NINE MONTHS ENDED <TABLE> <CAPTION> SEPTEMBER 30, SEPTEMBER 30, 2004 2003 -------------- -------------- <S> <C> <C> INTEREST INCOME Loans $ 12,283,566 $ 19,922,237 Securities Taxable 2,570,230 2,033,479 Tax-exempt 119,990 128,667 Other 53,059 365,989 -------------- -------------- Total interest income 15,026,845 22,450,372 -------------- -------------- INTEREST EXPENSE Deposits 3,481,494 8,505,206 Notes payable 320,685 424,283 Federal Home Loan Bank advances 1,332,752 1,802,190 Trust preferred securities 843,356 803,833 -------------- -------------- Total interest expense 5,978,287 11,535,512 -------------- -------------- NET INTEREST INCOME 9,048,558 10,914,860 PROVISION FOR LOAN LOSSES 129,517 1,494,000 -------------- -------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 8,919,041 9,420,860 -------------- -------------- NON-INTEREST INCOME Data service fees 7,683,585 6,677,203 Trust fees 2,302,406 1,827,260 Customer service fees 1,518,714 1,650,070 Net gains on loan sales 27,090 390,965 Net realized gains on sales of available-for-sale securities 236,356 23,632 Loan servicing fees 285,247 310,540 Gain on sale of assets 67,823 54,970 Gain on sale of branches -- 19,950,611 Other 376,685 365,514 -------------- -------------- Total non-interest income 12,497,906 31,250,765 -------------- -------------- </TABLE> See notes to condensed consolidated financial statements (unaudited) 7
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (CONTINUED) <TABLE> <CAPTION> SEPTEMBER 30, SEPTEMBER 30, 2004 2003 -------------- -------------- <S> <C> <C> NON-INTEREST EXPENSE Salaries and employee benefits $ 9,631,372 $ 10,394,061 Net occupancy expense 721,878 945,422 Equipment expense 3,158,707 3,177,615 Data processing fees 284,159 344,212 Professional fees 1,658,423 3,492,915 Marketing expense 263,444 313,111 Printing and office supplies 327,145 399,047 Telephone and communications 483,998 550,406 Postage and delivery expense 262,147 434,019 State, local and other taxes 409,108 477,014 Other 1,564,058 2,006,099 -------------- -------------- Total non-interest expense 18,764,439 22,533,921 -------------- -------------- INCOME BEFORE INCOME TAX 2,652,508 18,137,704 PROVISION FOR INCOME TAXES 632,801 6,158,877 -------------- -------------- NET INCOME $ 2,019,707 $ 11,978,827 ============== ============== BASIC EARNINGS PER SHARE $ 0.44 $ 2.64 ============== ============== DILUTED EARNINGS PER SHARE $ 0.44 $ 2.63 ============== ============== </TABLE> See notes to condensed consolidated financial statements (unaudited) 8
RURBAN FINANCIAL CORP. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) <TABLE> <CAPTION> Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended September 30, September 30, September 30, September 30, 2004 2003 2004 2003 Total Total Total Total Stockholders' Stockholders' Stockholders' Stockholders' Equity Equity Equity Equity -------------- -------------- -------------- -------------- <S> <C> <C> <C> <C> Balance at beginning of period $ 48,227,216 $ 48,157,091 $ 48,382,756 $ 36,382,332 Net Income 698,642 199,975 2,019,707 11,978,827 Other comprehensive income (loss): Net change in unrealized gains (losses) on securities available for sale 1,031,379 (421,160) (541,532) (464,571) -------------- -------------- -------------- -------------- Total comprehensive income (loss) 1,730,020 (221,185) 1,478,174 11,514,256 Stock options exercised 7,204 - 24,874 - ESOP shares earned 39,318 - 117,954 39,318 -------------- -------------- -------------- -------------- Balance at end of period $ 50,003,759 $ 47,935,906 $ 50,003,759 $ 47,935,906 ============== ============== ============== ============== </TABLE> See notes to condensed consolidated financial statements (unaudited) 9
RURBAN FINANCIAL CORP. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) NINE MONTHS ENDED <TABLE> <CAPTION> SEPTEMBER 30, SEPTEMBER 30, 2004 2003 -------------- -------------- <S> <C> <C> OPERATING ACTIVITIES Net income $ 2,019,707 $ 11,978,827 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 1,761,071 1,755,265 Provision for loan losses 129,517 1,494,000 ESOP shares earned 117,954 39,318 Amortization of premiums and discounts on securities 465,515 735,074 Amortization of intangible assets 76,995 274,253 Deferred income taxes - 98,499 Proceeds from sale of loans held for sale 3,945,061 36,497,316 Originations of loans held for sale (3,917,971) (36,106,351) Gain on sale of branch - (19,995,365) Gain from sale of loans (27,090) (390,965) Loss on sales of foreclosed assets 10,508 - FHLB Stock Dividends (69,200) - Gain on sales of fixed assets - (17,595) Net realized gains on available-for-sale securities (236,356) (23,632) Changes in Interest receivable (32,522) 1,738,984 Other assets 1,300,066 7,789,651 Interest payable and other liabilities (2,807,557) (1,243,497) -------------- -------------- Net cash provided by operating activities 2,735,698 4,623,782 -------------- -------------- INVESTING ACTIVITIES Net change in interest-bearing deposits 10,000 - Purchases of available-for-sale securities (60,969,199) (114,036,714) Proceeds from maturities of available-for-sale securities 49,605,726 110,473,918 Proceeds from the sales of available-for-sale securities 22,413,277 17,634,708 Net change in loans 6,346,236 102,355,764 Purchase of bank owned life insurance (8,000,000) - Purchase of premises and equipment (2,893,087) (1,046,046) Purchase of Federal Home Loan and Federal Reserve Bank stock (383,300) (95,500) Proceeds from sale of Federal Home Loan and Federal Reserve Bank stock 383,300 - Proceeds from the sale of foreclosed assets 1,459,157 792,810 Payment of assumption of liability from sale of branch - (70,452,850) -------------- -------------- Net cash provided by investing activities 7,972,110 45,626,090 -------------- -------------- </TABLE> 10 (Continued)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) <TABLE> <CAPTION> SEPTEMBER 30, SEPTEMBER 30, 2004 2003 ------------------ ------------------ <S> <C> <C> FINANCING ACTIVITIES Net increase (decrease) in demand deposits, money market, interest checking and savings accounts $ (11,670,644) $ 31,605,311 Net decrease in certificates of deposit (15,821,850) (108,929,055) Net decrease in securities sold under agreements to repurchase (906,603) - Proceeds (repayment) of Federal Home Loan Bank advances 17,000,000 (10,350,000) Proceeds (repayments) of note payable (6,899,025) 5,239,607 Proceeds from stock options exercised 24,874 - ------------------ ------------------ Net cash used in financing activities (18,273,248) (82,434,137) ------------------ ------------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (7,495,440) (32,184,265) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 24,176,952 51,018,337 ------------------ ------------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 16,681,512 $ 18,834,072 ================== ================== SUPPLEMENTAL CASH FLOWS INFORMATION Interest paid $ 7,590,839 $ 12,279,565 Income taxes paid (net of refunds) -- (2,168,512) </TABLE> See notes to condensed consolidated financial statements (unaudited) 11 (Continued)
RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A -- BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The financial statements reflect all adjustments that are, in the opinion of management, necessary to fairly present the financial position, results of operations and cash flows of the Company and its subsidiaries. Those adjustments consist only of normal recurring adjustments. In December 2003, the Financial Accounting Standards Board ("FASB") issued a revision to FIN 46 to clarify certain provisions that affected the accounting for trust preferred securities. As a result of the provisions in FIN 46, Rurban Statutory Trust 1 ("RST") was deconsolidated as of March 31, 2004, with the Company accounting for its investment in RST as assets, its subordinated debentures as debt, and the interest paid thereon as interest expense. The Company had always classified the trust preferred securities as debt, but eliminated its common stock investment. The condensed consolidated balance sheet of the Company as of December 31, 2003 has been derived from the audited consolidated balance sheet of the Company as of that date. For further information, refer to the consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003. During the third quarter of 2004, the Company liquidated its wholly-owned subsidiary RFC Banking Company. The assets and liabilities of RFC Banking Company were dividended up to the Parent Company. Additionally during the third quarter, the Company formed a new wholly-owned Ohio Corporation, RFCBC, Inc., to serve as an asset resolution company. The assets and liabilities that had been distributed to the Parent Company in the liquidation of RFC Banking Company, were down-streamed to the new subsidiary, RFCBC, Inc. NOTE B -- EARNINGS PER SHARE Earnings per share have been computed based on the weighted average number of shares outstanding during the periods presented. For the periods ended September 30, 2004 and 2003, stock options totaling 302,122 and 184,267 shares of common stock were not considered in computing EPS as they were anti-dilutive. The number of shares used in the computation of basic and diluted earnings per share was: <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, ------------------------------- ------------------------------- 2004 2003 2004 2003 --------- --------- --------- --------- <S> <C> <C> <C> <C> Basic earnings per share 4,555,590 4,549,413 4,555,207 4,545,162 Diluted earnings per share 4,557,019 4,555,614 4,570,010 4,547,599 </TABLE> 12 (Continued)
NOTE C - LOANS, RISK ELEMENTS AND ALLOWANCE FOR LOAN LOSSES Total loans on the balance sheet are comprised of the following classifications at: <TABLE> <CAPTION> September 30, December 31, September 30, 2004 2003 2003 --------------- --------------- --------------- <S> <C> <C> <C> Commercial $ 62,788,372 $ 89,470,661 $ 96,565,587 Commercial real estate 63,586,814 62,339,628 67,588,490 Agricultural 43,300,968 36,721,822 39,428,802 Residential real estate 64,009,425 46,717,917 46,157,257 Consumer 32,982,783 37,309,999 38,574,070 Lease financing 6,579,814 11,774,730 13,697,236 --------------- --------------- --------------- Total loans 273,248,176 284,334,757 302,011,442 Less Net deferred loan fees, premiums and discounts (292,598) (230,446) (226,090) --------------- --------------- --------------- Loans, net of unearned income $ 272,955,578 $ 284,104,311 $ 301,785,352 =============== =============== =============== Allowance for loan losses $ (5,368,515) $ (10,181,135) $ (11,256,083) =============== =============== =============== </TABLE> The following is a summary of the activity in the allowance for loan losses account for the nine months ended September 30, 2004 and 2003 and the year ended December 31, 2003. <TABLE> <CAPTION> September 30, December 31, September 30, 2004 2003 2003 ------------------ ------------------ ---------------- <S> <C> <C> <C> Balance, beginning of year $ 10,181,135 $ 17,693,841 $ 17,693,841 Provision charged to expense 129,517 1,202,000 1,494,000 Sale of Citizens Banking Co. - - (232,000) Recoveries 1,279,283 3,139,534 1,926,438 Loans charged off (6,221,420) (11,854,240) (9,626,196) ------------------ ------------------ ---------------- Balance, end of period $ 5,368,515 $ 10,181,135 $ 11,256,083 ================== ================== ================ </TABLE> The following schedule summarizes nonaccrual, past due and impaired loans at: <TABLE> <CAPTION> September 30, December 31, September 30, 2004 2003 2003 ------------------ ------------------ -------------- <S> <C> <C> <C> Non-accrual loans $ 16,524,000 $ 18,352,000 $ 18,857,000 Accruing loans which are contractually past due 90 days or more as to interest or principal payments - - - ------------------ ------------------ -------------- Total non-performing loans $ 16,524,000 $ 18,352,000 $ 18,857,000 ================== ================== ============== </TABLE> 13 (Continued)
Individual loans determined to be impaired, including non-accrual loans, were as follows: <TABLE> <CAPTION> September 30, December 31, September 30, 2004 2003 2003 ------------------ ------------------ ------------- <S> <C> <C> <C> Loans with no allowance for loan losses allocated $ 443,000 $ 153,000 $ 280,000 Loans with allowance for loan losses allocated 12,402,000 19,685,000 18,137,000 ------------------ ------------------ -------------- Total impaired loans $ 12,845,000 $ 19,838,000 $ 18,417,000 ================== ================== ============= Amount of allowance allocated $ 2,472,000 $ 5,651,000 $ 5,315,000 ================== ================== ============= </TABLE> NOTE D - TRUST PREFERRED SECURITIES On September 7, 2000, RST, a wholly owned subsidiary of the Company, completed a pooled private offering of 10,000 Capital Securities with a liquidation amount of $1,000 per security. The proceeds of the offering were loaned to the Company in exchange for junior subordinated debentures with terms similar to the Capital Securities. The sole assets of RST are the junior subordinated debentures of the Company and payments thereunder. The junior subordinated debentures and the back-up obligations, in the aggregate, constitute a full and unconditional guarantee by the Company of the obligations of RST under the Capital Securities. Distributions on the Capital Securities are payable semi-annually at the annual rate of 10.6% and are included in interest expense in the consolidated financial statements. These securities are considered Tier 1 capital (with certain limitations applicable) under current regulatory guidelines. As of September 30, 2004, December 31, 2003 and September 30, 2003, the outstanding principal balance of the Capital Securities was $10,000,000. In December 2003, FASB issued a revision to FIN 46 to clarify certain provisions that affected the accounting for trust preferred securities. As a result of the provisions in FIN 46, RST was deconsolidated as of March 31, 2004, with the Company accounting for its investment in RST as assets, its subordinated debentures as debt, and the interest paid thereon as interest expense. The Company had always classified the trust preferred securities as debt, but the Company eliminated its common stock investment as a result of the provisions in FIN 46. The junior subordinated debentures are subject to mandatory redemption, in whole or in part, upon repayment of the Capital Securities at maturity or their earlier redemption at the liquidation amount. Subject to the Company having received prior approval of the Federal Reserve, if then required, the Capital Securities are redeemable prior to the maturity date of September 7, 2030, at the option of the Company; on or after September 7, 2010 at a premium; on or after September 7, 2020 at par; or upon occurrence of specific events defined within the trust indenture. The Company has the option to defer distributions on the Capital Securities from time to time for a period not to exceed 10 consecutive semi-annual periods. On January 28, 2004, the Trustee was notified that the Company elected to defer the semi-annual distributions which would have been due on March 7, 2004, until September 7, 2004. On July 23, 2004, the Trustee was notified that the Company elected to defer the semi-annual distributions which would have been due on September 7, 2004, until March 7, 2005. 14 (Continued)
On September 3, 2004, the Company received permission from the Federal Reserve Bank and the Ohio Department of Financial Institutions to pay the previously accrued and deferred trust preferred interest on the Company's $10 million issue of Trust Preferred Securities to the Trustee, and the Company subsequently paid such accrued and deferred trust preferred interest on September 7, 2004. NOTE E - NOTE PAYABLE RFCBC, Inc. has a note payable to The Union Banking Company secured by the common stock of Rurbanc Data Services, Inc. ("RDSI") and substantially all of the assets of RFCBC, Inc. The note requires quarterly principal payments of $300,000 together with interest at prime plus 1% (5.75% at September 30, 2004) and matures on June 6, 2006. The principal note balance was $2,300,000 as of September 30, 2004, $5,900,000 as of December 31, 2003 and $6,200,000 as of September 30, 2003. RFC Banking Company had a note payable to First Federal Bank of the Midwest secured by certain identified loans held by RFCBC. The note requires principal payments equal to the greater of $100,000 or all payments received by RFC Banking Company on collateralized loans, with interest at the lesser of prime plus 0.5%. This note was paid off on March 5, 2004. RDSI had two notes payable to First Federal Bank of the Midwest. The first note was secured by equipment and requires monthly payments of $13,416, with interest at 7.65%. This note was paid off on September 15, 2004. The second note was secured by equipment and requires monthly payments of $10,902, with interest at 7.65%. This note was paid off on September 15, 2004. RDSI has two notes payable to State Bank and Trust Company for $2,028,574, of which $1,128,574 is participated to F&M Bank. The first note was secured by equipment and second lien positions on all business assets and requires monthly payments of $15,857, with interest at 6.50%. The principal note balance was $808,711 as of September 30, 2004. The second note was secured by equipment and second lien positions on all business assets and requires monthly payments of $6,272, with interest at 6.50%. The principal note balance was $319,863 as of September 30, 2004. NOTE F - REGULATORY MATTERS The Company and the subsidiary banks are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators. If undertaken, these actions could have a direct material adverse effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the subsidiary banks must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the subsidiary banks to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). As of September 30, 2004, the Company and the subsidiary banks exceeded all "well-capitalized" requirements to which they are subject. 15 (Continued)
As of December 31, 2003, the most recent notification to the regulators categorized The State Bank and Trust Company ("State Bank") as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, State Bank must maintain capital ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed State Bank's category. The Company and State Bank's actual capital amounts (in millions) and ratios are also presented in the following table. <TABLE> <CAPTION> TO BE WELL CAPITALIZED UNDER MINIMUM REQUIRED FOR PROMPT CORRECTIVE ACTION ACTUAL CAPITAL ADEQUACY PURPOSES PROVISIONS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ----------- ------ --------------------------- ---------------------------- <S> <C> <C> <C> <C> <C> <C> As of September 30, 2004 Total Capital (to Risk-Weighted Assets) Consolidated $ 61.2 21.2% $ 23.0 8.0% $ -- N/A State Bank 39.0 14.7 21.3 8.0 26.6 10.0 Tier I Capital (to Risk-Weighted Assets) Consolidated 57.6 20.0 11.5 4.0 -- N/A State Bank 35.7 13.4 10.6 4.0 15.9 6.0 Tier I Capital (to Average Assets) Consolidated 57.6 14.0 16.5 4.0 -- N/A State Bank 35.7 9.1 15.7 4.0 19.6 5.0 As of December 31, 2003 Total Capital (to Risk-Weighted Assets) Consolidated $ 59.2 19.7% $ 24.1 8.0% $ -- N/A State Bank 37.5 13.7 21.9 8.0 27.3 10.0 Tier I Capital (to Risk-Weighted Assets) Consolidated 55.4 18.4 12.0 4.0 -- N/A State Bank 34.1 12.5 10.9 4.0 16.4 6.0 Tier I Capital (to Average Assets) Consolidated 55.4 12.8 17.4 4.0 -- N/A State Bank 34.1 8.4 16.3 4.0 20.4 5.0 </TABLE> 16 (Continued)
NOTE G - CONTINGENT LIABILITIES There are various contingent liabilities that are not reflected in the consolidated financial statements, including claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material effect on the Corporation's consolidated financial condition or results of operations. NOTE H - NEW ACCOUNTING PRONOUNCEMENTS In March 2004, FASB issued the proposed EITF Issue 03-01, "The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments", which will require an investor holding a debt security in the Available for Sale (AFS) portfolio whose fair value is below cost (an impaired security) declare the "intent and ability" to hold that security until its value has recovered up to cost. If the investor does declare this intent and ability, the impairment is considered "temporary". Otherwise, the impairment is classified as "other than temporary" and must be recognized immediately as a permanent write-down through the income statement. FASB has postponed any effort to get this completed by year-end. NOTE I - BRANCH SALES On June 6, 2003, the Peoples Banking Company ("Peoples") and First Bank of Ottawa ("Ottawa"), divisions of RFC Banking Company, were sold. As of June 6, 2003, Peoples and Ottawa had total loans of $76.6 million, total fixed assets (net of accumulated depreciation) of $1.4 million and total deposits of $166.2 million. A pre-tax gain of approximately $12.0 million was recorded in June 2003 from the sale. On March 28, 2003, the Citizens Savings Bank ("Citizens"), a division of RFC Banking Company, was sold. As of March 28, 2003, Citizens had total loans of $57.2 million, total fixed assets (net of accumulated depreciation) of $869,000 and total deposits of $70.8 million. A pre-tax gain of approximately $8.0 million was recorded in March 2003 from the sale. The Company does not maintain a separate statement of operations for each division. 17 (Continued)
NOTE J - STOCK OPTIONS The Company accounts for its stock option plan under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees", and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the grant date. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation", to stock-based employee compensation. <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, 2004 2003 2004 2003 -------- -------- ---------- ----------- <S> <C> <C> <C> <C> Net income (loss), as reported $698,642 $199,795 $2,019,707 $11,978,827 Less: Total stock-based employee compensation cost determined under the fair value based method, net of income taxes (49,183) (15,777) (147,548) (47,331) -------- -------- ---------- ----------- Pro forma net income $649,459 $184,018 $1,872,159 $11,931,496 ======== ======== ========== =========== Earnings per share: Basic - as reported $ 0.15 $ 0.04 $ 0.44 $ 2.64 Basic - pro forma $ 0.14 $ 0.03 $ 0.41 $ 2.63 Diluted - as reported $ 0.15 $ 0.04 $ 0.44 $ 2.63 Diluted - pro forma $ 0.14 $ 0.03 $ 0.41 $ 2.63 </TABLE> NOTE K - COMMITMENTS AND CREDIT RISK As of September 30, 2004, loan commitments and unused lines of credit totaled $48,931,000 standby letters of credit totaled $392,000 and no commercial letters of credit were outstanding. NOTE L - SEGMENT INFORMATION The reportable segments are determined by the products and services offered, primarily distinguished between banking and data processing operations. Other segments include the accounts of the holding company, Rurban Financial Corp., which provides management and operational services to its subsidiaries; Reliance Financial Services, N.A., which provides trust and financial services to customers nationwide; and Rurban Life, which provides insurance products to customers of the Company's subsidiary bank. Information reported internally for performance assessment follows. 18 (Continued)
NOTE L -- SEGMENT INFORMATION (Continued) As of and for the nine months ended September 30, 2004 <TABLE> <CAPTION> Data Total Intersegment Consolidated Banking Processing Other Segments Elimination Totals ------------ ------------ ----------- ------------ ----------- ------------ <S> <C> <C> <C> <C> <C> <C> Income statement information: Net interest income (expense) $ 10,053,664 $ (153,259) $ (863,787) $ 9,036,618 $ 11,940 $ 9,048,558 Non-interest income - external customers 2,522,846 7,683,585 2,279,535 12,485,966 11,940 12,497,906 Non-interest income - other segments - 1,008,100 1,489,189 2,497,289 (2,497,289) - ------------ ----------- ---------- ------------ ----------- ------------ Total revenue 12,576,510 8,538,426 2,904,937 24,019,873 (2,473,409) 21,546,464 Non-interest expense 11,417,513 6,545,231 3,298,984 21,261,728 (2,497,289) 18,764,439 Significant non-cash items: Depreciation and amortization 382,589 1,305,094 73,388 1,761,071 - 1,761,071 Provision for loan losses 129,517 - - 129,517 - 129,517 - Income tax expense (benefit) 475,105 497,693 (339,997) 632,801 - 632,801 - Segment profit (loss) $ 1,250,801 $ 1,495,501 $ (726,595) $ 2,019,707 $ - $ 2,019,707 Balance sheet information: Total assets $409,349,031 $10,093,050 $3,848,062 $423,290,143 $(7,462,947) $415,827,196 Goodwill and intangibles 2,712,296 - - 2,712,296 - 2,712,296 Premises and equipment expenditures, Nine months ended September 30, 2004 322,570 2,532,098 38,419 2,893,087 - 2,893,087 </TABLE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Rurban Financial Corp. ("Rurban" or "the Company") was incorporated on February 23, 1983, under the laws of the State of Ohio. Rurban is a bank holding company registered with the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended. Rurban's subsidiary, The State Bank and Trust Company ("State Bank"), is engaged in the industry segment of commercial banking. RFC Banking Company was created June 30, 2001 through the merger of The Peoples Banking Company, The First National Bank of Ottawa and The Citizens Savings Bank Company. As of June 6, 2003, RFC Banking Company completed the sale of all its active banking locations, retaining only selected loans. Following the sale, RFC Banking Company ceased doing business as a bank and operated as a loan subsidiary of Rurban in servicing and working out the retained loans. During the third quarter of 2004, the Company liquidated RFC Banking Company, and the assets and liabilities of RFC Banking Company were distributed to the Company. Additionally during the third quarter, the Company formed a new wholly-owned Ohio Corporation, RFCBC, Inc., to serve as an asset resolution company. The assets and liabilities that had been distributed to the Company in the liquidation of RFC Banking Company, were down-streamed to the new subsidiary, RFCBC, Inc. Rurban's subsidiary, Rurbanc Data Services, Inc. ("RDSI"), provides computerized data processing services to community banks and businesses including Rurban's subsidiary bank. Rurban's subsidiary, Rurban Life Insurance Company ("Rurban Life") has a certificate of authority from the State of Arizona to transact insurance as a domestic life and disability insurer. Rurban Statutory Trust I ("RST") was established in August 2000. In September 2000, RST completed a pooled private offering of 10,000 Capital Securities with a liquidation amount of $1,000 per security. The proceeds of the offering were loaned to the Company in exchange for junior subordinated debentures with terms similar to the Capital Securities. The sole assets of RST are the junior subordinated debentures and the back-up obligations, in the aggregate, constitute a full and unconditional guarantee by the Company of the obligations of RST under the Capital Securities. In December 2003, FASB issued a revision to FIN 46 to clarify certain provisions that affected the accounting for trust preferred securities. As a result of the provisions in FIN 46, RST was deconsolidated as of March 31, 2004, with the Company accounting for its investment in RST as assets, its subordinated debentures as debt, and the interest paid thereon as interest expense. The Company had always classified the trust preferred securities as debt, but the Company eliminated its common stock investment as a result of the provisions in FIN 46. Reliance Financial Services, N.A. ("Reliance"), a wholly owned subsidiary of State Bank, provides trust and financial services to customers nationwide. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION Certain statements within this document which are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties and actual results may differ materially from those predicted by the forward-looking statements. These risks and uncertainties include, but are not limited to, risks and uncertainties inherent in the national and regional banking, insurance and mortgage industries, competitive factors specific to markets in which Rurban and its subsidiaries operate, future interest rate levels, legislative and regulatory actions, capital market conditions, general economic conditions, geopolitical events, the loss of key personnel and other factors. Forward-looking statements speak only as of the date on which they are made, and Rurban undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date 20
on which the statement is made. All subsequent written and oral forward-looking statements attributable to Rurban or any person acting on our behalf are qualified by these cautionary statements. The following discussion is intended to provide a review of the consolidated financial condition and results of operations of Rurban. This discussion should be read in conjunction with the consolidated financial statements and related footnotes in Rurban's 2003 Form 10-K filed with the Securities and Exchange Commission. CRITICAL ACCOUNTING POLICIES The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The Company's significant accounting policies are described in detail in the notes to the Company's consolidated financial statements for the year ended December 31, 2003. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The Company's financial position and results of operations can be affected by these estimates and assumptions and are integral to the understanding of reported results. Critical accounting policies are those policies that management believes are the most important to the portrayal of the Company's financial condition and results, and they require management to make estimates that are difficult, subjective, or complex. ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses provides coverage for probable losses inherent in the Company's loan portfolio. Management evaluates the adequacy of the allowance for loan losses each quarter based on changes, if any, in underwriting activities, loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance, regulatory guidance and economic factors. This evaluation is inherently subjective, as it requires the use of significant management estimates. Many factors can affect management's estimates of specific and expected losses, including volatility of default probabilities, rating migrations, loss severity and economic and political conditions. The allowance is increased through provisions charged to operating earnings and reduced by net charge-offs. The Company determines the amount of the allowance based on relative risk characteristics of the loan portfolio. The allowance recorded for commercial loans is based on reviews of individual credit relationships and an analysis of the migration of commercial loans and actual loss experience. The allowance recorded for homogeneous consumer loans is based on an analysis of loan mix, risk characteristics of the portfolio, fraud loss and bankruptcy experiences, and historical losses, adjusted for current trends, for each homogeneous category or group of loans. The allowance for credit losses relating to impaired loans is based on the loan's observable market price, the collateral for certain collateral-dependent loans, or the discounted cash flows using the loan's effective interest rate. Regardless of the extent of the Company's analysis of customer performance, portfolio trends or risk management processes, certain inherent but undetected losses are probable within the loan portfolio. This is due to several factors, including inherent delays in obtaining information regarding a customer's financial condition or changes in their unique business conditions, the subjective nature of individual loan evaluations, collateral assessments and the interpretation of economic trends. Volatility of economic or customer-specific conditions affecting the identification and estimation of losses for larger non-homogeneous credits and the sensitivity of assumptions utilized to establish allowances for homogenous groups of loans are also factors. The Company estimates a range of inherent losses related to the existence of these exposures. The estimates are based upon the Company's evaluation of 21
imprecise risk associated with the commercial and consumer allowance levels and the estimated impact of the current economic environment. GOODWILL AND OTHER INTANGIBLES - The Company records all assets and liabilities acquired in purchase acquisitions, including goodwill and other intangibles, at fair value as required by SFAS 141. Goodwill is subject, at a minimum, to annual tests for impairment. Other intangible assets are amortized over their estimated useful lives using straight-line or accelerated methods, and are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount. The initial goodwill and other intangibles recorded and subsequent impairment analysis requires management to make subjective judgments concerning estimates of how the acquired asset will perform in the future. Events and factors that may significantly effect the estimates include, among others, customer attrition, changes in revenue growth trends, specific industry conditions and changes in competition. IMPACT OF ACCOUNTING CHANGES In March 2004, FASB issued the proposed EITF Issue 03-01, "The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments", which will require an investor holding a debt security in the Available for Sale (AFS) portfolio whose fair value is below cost (an impaired security) declare the "intent and ability" to hold that security until its value has recovered up to cost. If the investor does declare this intent and ability, the impairment is considered "temporary". Otherwise, the impairment is classified as "other than temporary" and must be recognized immediately as a permanent write-down through the income statement. FASB has postponed any effort to get this completed by year-end. In December 2003, FASB issued a revision to FIN 46 to clarify certain provisions that affected the accounting for trust preferred securities. As a result of the provisions in FIN 46, RST was deconsolidated as of March 31, 2004, with the Company accounting for its investment in RST as assets, its subordinated debentures as debt, and the interest paid thereon as interest expense. The Company had always classified the trust preferred securities as debt, but the Company eliminated its common stock investment as a result of the provisions in FIN 46. QUARTERLY AND YTD EARNINGS SUMMARY Net income for the third quarter of 2004 was $699,000, or $0.15 per diluted share, versus $200,000, or $0.04 per diluted share, for the third quarter of 2003. Net income for the nine months ended September 30, 2004 was $2.0 million, or $0.44 per diluted share, versus net income of $12.0 million, or $2.63 per diluted share for the same period in 2003. The quarterly increase in net income is mainly driven by data processing and trust servicing fees being $299,000 and $167,000, respectively, more than the third quarter of 2003. The quarterly increase in net income is also attributed to operating expenses being down $101,000 from the third quarter of 2003. The decrease in operating expenses is mainly the result of reductions in professional fees of $171,000, which include legal costs associated with loan collections and a reduction in state and other taxes of $155,000 from the third quarter of 2003, relating to the recovery of certain non-income related taxes made in prior years. The decrease in operating expenses is partially offset by salary and employee benefits being $211,000 higher than the third quarter of 2003, as the Company absorbed higher benefit costs associated with employee medical benefit plans rather than passing these costs on to the individual employees and normal merit increases to non-executive employees. The year-to-date decrease in net income was primarily driven by the sale of the branches of RFC Banking Company resulting in a pre-tax gain of approximately $20.0 million in 2003. 22
Net interest income increased $450,000 to $3.2 million for the three months ended September 30, 2004 compared to $2.7 million for the third quarter 2003. The increase in net interest income is largely attributed to the 85 basis point improvement in the net interest margin compared to the third quarter of 2003, a higher level of investment portfolio earnings and the elimination and repricing of higher cost interest-bearing liabilities. Net interest income decreased $1.9 million to $9.0 million for the nine months ended September 30, 2004 compared to $10.9 million for the nine months ended September 30, 2003. The year-to-date decrease is due primarily to loans decreasing $29.0 million to $273.0 million, as of September 30, 2004. The provision for loan losses was $320,000 for the third quarter of 2004 compared to $0 for the third quarter of 2003. Loan loss reserves were 1.97% of total loans in the third quarter of 2004 compared to 3.73% in the third quarter of 2003. The provision for loan losses was $130,000 for the nine months ended September 30, 2004, compared to $1.5 million for the nine months ended September 30, 2003. Non-interest income increased $496,000 to $4.1 million in the third quarter of 2004 compared to $3.6 million for the third quarter of 2003. The increase in non-interest income was mainly the result of the increase in data processing fees of 13.2% associated with new data service clients and the increase in trust servicing fees of 29.9%. Non-interest income decreased $18.8 million to $12.5 million for the nine months ended September 30, 2004 compared to $31.3 million for the nine months ended September 30, 2003. The decrease is due mainly to the sale of the RFC Banking Company branches of $20.0 million that occurred in 2003. Non-interest expense decreased $101,000 to $5.9 million for the third quarter of 2004 compared to $6.0 million for the third quarter of 2003. This decrease is the result of the aforementioned reductions in professional fees and state and other taxes partially offset by an increase in salary and employee benefits. Non-interest expense decreased $3.7 million to $18.8 million for the nine months ended September 30, 2004, compared to $22.5 million for the nine months ended September 30, 2003. The decrease is due mainly to the sale of the RFC Banking Company branches that occurred in 2003. CHANGES IN FINANCIAL CONDITION SEPTEMBER 30, 2004 VS. DECEMBER 31, 2003 At September 30, 2004, total assets were $415.8 million, a decrease of $19.5 million from December 31, 2003. The decrease was primarily attributable to decreases in loans of $11.1 million and available for sale securities of $12.1 million partially offset by an increase in other assets of $6.7 million as a result of an $8.0 million bank owned life insurance policy purchased in the first quarter of 2004. At September 30, 2004, the decrease in total liabilities and shareholders' equity of $19.5 million from December 31, 2003 was mainly attributable to decreases in deposits of $27.5 million principally resulting from planned reductions in higher cost broker deposits of $9.1 million, the decrease in notes payable of $6.9 million resulting from accelerated collection of payments on loans supporting this obligation, partially offset by an increase in FHLB advances of $17.0 million. 23
SEPTEMBER 30, 2004 VS. SEPTEMBER 30, 2003 As of September 30, 2004, total assets decreased $22.7 million from September 30, 2003. The decrease was mainly due to a reduction in loans of $28.8 million relating to the planned exit of out-of-market loans partially offset by an increase in other assets mainly due to the aforementioned BOLI purchase. As of September 30, 2004, total liabilities and shareholders' equity decreased $22.7 million. The decrease was mainly attributed to a decrease in total deposits of $37.0 million partially offset by an increase of $18.5 million in FHLB advances. LINKED QUARTER COMPARISON The Company reported a net profit for the third quarter of 2004 of $699,000, or $0.15 per diluted share, versus a net profit of $709,000, or $0.16 per diluted share, for the second quarter of 2004. The third quarter profit was mainly due to improvements in net interest income coupled with a reduction in state and other taxes of $155,000 relating to the recovery of certain non-income related taxes made in prior years. The second quarter profit was mainly due to a reduction in the provision for loan losses as a result of continued improvements in credit quality. Net interest income increased $245,000 or 8% to $3.2 million for the third quarter of 2004 compared to $2.9 million for the second quarter of 2004. This increase was largely driven by a higher level of investment portfolio earnings, the repricing of higher cost interest-bearing liabilities, and the slight increase in outstanding loans. A comparison of financial results for the quarter ended September 30, 2004 to the previous quarter ended June 30, 2004 is as follows: <TABLE> <CAPTION> Linked Three Months Ended Quarter 09/30/04 06/30/04 % Change -------- -------- -------- (dollars in millions, except per share data) <S> <C> <C> <C> Total Assets $ 416 $ 415 -- Loans Held for Sale -- -- -- Loans (net of unearned income) 273 271 -- Allowance for Loan Losses 5.4 6.9 -22% Total Deposits 290 291 -- Net interest Income 3.2 2.9 +8% Loan Loss Provision 0.3 (0.3) -- Non-interest Income 4.1 4.1 -- Non-interest Expense 5.9 6.6 -10% Net Income 0.7 0.7 -- Basic Earnings Per Share $ 0.15 $ 0.16 -- Diluted Earnings Per Share $ 0.15 $ 0.16 -- </TABLE> On a linked quarter basis, total loans increased $2.2 million and total assets remained relatively flat. Although there was an increase in total loans for the linked quarter, commercial loans decreased primarily due to negotiated settlements and payoffs in the third quarter of 2004. The Company continues to promote the exiting of out-of-market loans. 24
TOTAL REVENUE <TABLE> <CAPTION> Three Months Ended 09/30/04 06/30/04 $Change %Change -------- -------- ------- ------- (dollars in thousands) <S> <C> <C> <C> <C> Total Revenue $7,235 $6,993 $+242 +3% </TABLE> Total revenue (net interest income plus noninterest income) was $7.2 million for the third quarter of 2004 compared to $7.0 million for the second quarter of 2004, up $242,000 or 3%. NET INTEREST INCOME <TABLE> <CAPTION> Three Months Ended 09/30/04 06/30/04 $Change %Change -------- -------- ------- ------- (dollars in thousands) <S> <C> <C> <C> <C> Net Interest Income $3,154 $2,910 $+244 +8% </TABLE> Net interest income for the third quarter of 2004 was $3.2 million compared to $2.9 million for the second quarter of 2004. The improvement was the result of an increase in the net interest margin combined with a slight increase in the loan volume. The tax equivalent net interest margin for the third quarter of 2004 was 3.35% compared to 3.10% for the previous quarter. The increase in net interest margin was principally a result of a higher level of investment portfolio earnings, the repricing of higher cost interest-bearing liabilities, and the slight increase in outstanding loans. LOAN LOSS PROVISION The provision for loan losses of $320,000 for the third quarter of 2004 represented an increase of $660,000 compared to the second quarter of 2004. The reasons for the increase in the third quarter are discussed in the "Allowance for Loan Losses" section. NON-INTEREST INCOME <TABLE> <CAPTION> Three Months Ended 09/30/04 06/30/04 $Change %Change -------- -------- ------- ------- (dollars in thousands) <S> <C> <C> <C> <C> Total Non-interest Income $4,080 $4,083 $ -3 -- - - Data Service Fees 2,566 2,426 +140 +6% - - Trust Fees 726 732 -6 -1% - - Deposit Service Fees 500 505 -5 -1% - - Gains on Sale of Loans 7 10 -3 -30% - - Gains on Sale of Securities 112 63 +49 +78% - - Gain (Loss) on Assets (11) 97 -108 - - - Other 180 250 -70 -28% </TABLE> Non-interest income decreased by $3,000 to $4.1 million in the third quarter of 2004 compared to $4.1 million in the second quarter of 2004. This decrease is mainly due to the liquidation of various repossessed assets that resulted in a loss of $11,000 compared to a $97,000 gain in the second quarter of 2004 and other income decreased $70,000 as the result of recording income from the sale of assets that we previously expensed past the 90 day holding period in the second quarter of 2004. The 25
decreases are mostly offset by data processing being up $140,000 from the second quarter of 2004 that is explained in the RDSI section below. RURBANC DATA SERVICES, INC. ("RDSI") <TABLE> <CAPTION> Three Months Ended 09/30/04 06/30/04 $ Change % Increase -------- -------- -------- ---------- (Dollars in Thousands) <S> <C> <C> <C> <C> Data Processing Fees $2,566 $2,426 $+140 +6% </TABLE> Data processing fees increased $140,000 in the third quarter of 2004 compared to the second quarter of 2004, as a result of benefiting from both new clients and the opportunities arising from Check 21 implementation. NON-INTEREST EXPENSE <TABLE> <CAPTION> Three Months Ended 09/30/04 06/30/04 $Change %Change -------- -------- ------- ------- (dollars in thousands) <S> <C> <C> <C> <C> Total Non-interest Expense $5,911 $6,565 $-654 -10% - - Salaries & Employee Benefits 3,080 3,296 -216 -7% - - Equipment Expense 1,099 1,020 +79 +8% - - Professional Fees 512 677 -165 -24% - - All Other 1,220 1,572 -352 -22% </TABLE> Non-interest expense for the third quarter of 2004 was $5.9 million compared to $6.6 million for the second quarter of 2004, a decrease of $654,000 or 10%. The quarterly decrease is due to reversals in certain compensation and incentive accruals, a reduction in professional fees of $165,000 mainly due to the improvement in credit quality and the reduction in criticized assets, a reduction in state and other taxes due to a recovery of non-income related taxes made in prior years and decreases in OREO expenses. LOANS <TABLE> <CAPTION> % of As Of % of Inc 09/30/04 Total 06/30/04 Total (Dec) -------- ----- -------- ----- ---- (dollars in millions) <S> <C> <C> <C> <C> <C> Commercial $ 63 23% $ 68 25% $ (5) Commercial real estate 63 23% 61 23% 2 Agricultural 43 16% 41 15% 2 Residential 64 24% 58 21% 6 Consumer 33 12% 35 13% (2) Leasing loans 7 2% 8 3% (1) ---- ---- ---- Total $273 $271 $ 2 Loans held for sale - - - ---- ---- ---- Total $273 $271 $ 2 </TABLE> Loans increased $2 million from June 30, 2004 to $273 million at September 30, 2004. Although there was an increase in total loans for the linked quarter, commercial loans decreased primarily due 26
to negotiated settlements and payoffs in the third quarter of 2004. During the third quarter of 2004, the Company completed a program to generate 15-year fixed rate Ohio-based single family residential loans, at prevailing rates. The Company continues to promote the exiting of out-of-market loans. ASSET QUALITY <TABLE> <CAPTION> As Of And For The Quarter Ended ---------------------------- (dollars in millions) 09/30/04 06/30/04 Change -------- -------- ------ <S> <C> <C> <C> Non-performing loans $ 16.5 $ 16.5 $ -- Non-performing assets 16.8 17.2 -0.4 Non-performing assets/ loan plus OREO 6.15% 6.34% -0.19% Non-performing assets/ total assets 4.04% 4.14% -0.10% Net chargeoffs 1.9 1.0 +0.9 Net chargeoffs (annualized)/ total loans 2.8% 1.4% +1.4% Loan loss provision 0.3 (0.3) +0.6 Allowance for loan loss - $ 5.4 6.9 -1.5 Allowance for loan loss - % 1.97% 2.56% -0.59% Allowance/non-performing loans 33% 42% -- Allowance/non-performing assets 32% 40% -- </TABLE> Non-performing assets at September 30, 2004 decreased to $16.8 million or 4.04% of total assets, versus $17.2 million, or 4.14% at June 30, 2004, a decrease of $0.4 million. Net chargeoffs for the third quarter of 2004 were $1.9 million compared to $1.0 million in the second quarter of 2004. ALLOWANCE FOR LOAN LOSSES The Company grades its loans using an eight grade system. Loans with concerns are classified as either: - Grade 5 - Special Mention: Potential weaknesses that deserve management's close attention; - Grade 6 - Substandard: Inadequately protected, with well-defined weakness that jeopardize pay off of debt; - Grade 7 - Doubtful: Inherent weaknesses which are well-defined and a high probability of loss (impaired) (these loans are typically reserved down to collateralized values); or - Grade 8 - Loss: Considered uncollectible. May have recovery or salvage value with future collection efforts (these loans are either fully reserved or charged off). 27
The Company's allowance for loan losses has four components. Those components are shown in the following table. Commercial, commercial real estate and agricultural loans of over $100,000 are individually reviewed and assessed regarding the need for an individual allocation. <TABLE> <CAPTION> ----------09/30/04----------- -----------06/30/04----------- ALLOCATION ALLOCATION LOAN ---------- LOAN ---------- BALANCE $ % BALANCE $ % ------ ------ ----- ------ ------ ----- <S> <C> <C> <C> <C> <C> <C> Allocations for individual commercial loans graded Doubtful (impaired) $ 12.8 $ 2.5 19.53% $ 17.8 $ 3.9 21.91% Allocations for individual commercial loans graded Substandard 17.9 1.0 5.59 19.1 1.0 5.24 Allocation based on Special Mention loan balance 12.8 0.4 -- 12.9 0.4 -- "General" allowance based on chargeoff history of nine categories of loans 229.6 1.5 0.66 221.2 1.6 0.72 ------ ------ ----- ------ ------ ----- TOTAL $273.1 $ 5.4 1.97% $271.0 $ 6.9 2.56% </TABLE> The amount of loans classified as doubtful decreased $5.0 million to $12.8 million for the quarter ended September 30, 2004 and substandard loans decreased $1.2 million to $17.9 million. Allowance allocations on doubtful loans decreased $1.4 million and the allowance allocations on substandard loans remained the same from June 30, 2004. The allowance for loan losses at September 30, 2004 was $5.4 million or 1.97% of loans compared to $6.9 million or 2.56% at June 30, 2004. CAPITAL RESOURCES At September 30, 2004, actual capital levels (in millions) and minimum required levels were: <TABLE> <CAPTION> Minimum Required Minimum Required To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Regulations ------ ----------------- ------------------ Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- <S> <C> <C> <C> <C> <C> <C> Total capital (to risk weighted assets) Consolidated $ 61.2 21.2% $ 23.0 8.0% $ - N/A State Bank 39.0 14.7 21.3 8.0 26.6 10.0 </TABLE> The Company and State Bank were categorized as well capitalized at September 30, 2004. WRITTEN AGREEMENT On July 5, 2002, the Company and State Bank entered into a Written Agreement ("Agreement") with the Federal Reserve Bank of Cleveland and the Ohio Division of Financial Institutions. The Agreement was the result of an examination of State Bank as of December 31, 2001, which was conducted in March and April 2002. A copy of the Agreement was attached as Exhibit 99(b) to the Form 8-K filed by the Company on July 11, 2002. As of September 30, 2004, management believes that the Company and State Bank were in full compliance with the terms of the Agreement. However, the Agreement will continue in place until the Federal Reserve Bank of Cleveland and the Ohio Division of Financial Institutions determine that the Agreement may be terminated. 28
Under the terms of the Agreement, State Bank and RFCBC, Inc. are prohibited from paying dividends to the Company without prior regulatory approval. The Agreement also prohibits the Company from paying trust preferred "dividends" and common stock dividends without prior regulatory approval. GOALS FOR 2004 AND 2005 The Company's near term goals include: - Continued focus on the quality of the loan underwriting process - Continued efforts to reduce the level of problem loans - Continued focus on Customer Relationship Management (CRM) - Continued efforts to improve operational efficiencies - Continue improvement efforts necessary to achieve the release from the Agreement - Restoring earnings to a level sufficient to resume the payment of a dividend LIQUIDITY Liquidity relates primarily to the Company's ability to fund loan demand, meet deposit customers' withdrawal requirements and provide for operating expenses. Assets used to satisfy these needs consist of cash and due from banks, federal funds sold, interest earning deposits in other financial institutions, securities available-for sale and loans held for sale. These assets are commonly referred to as liquid assets. Liquid assets were $112.5 million at September 30, 2004 compared to $114.5 million at June 30, 2004. The Company's residential first mortgage portfolio of $64.0 million at September 30, 2004 and $57.7 million at June 30, 2004, which can and has been used to collateralize borrowings, is an additional source of liquidity. Management believes its current liquidity level is sufficient to meet its liquidity needs. At September 30, 2004, all eligible mortgage loans were pledged under a Federal Home Loan Bank ("FHLB") blanket lien. The cash flow statements for the periods presented provide an indication of the Company's sources and uses of cash as well as an indication of the ability of the Company to maintain an adequate level of liquidity. A discussion of the cash flow statements at September 30, 2004 and 2003 follows. The Company experienced positive cash flows from operating activities at September 30, 2004 and 2003. Net cash from operating activities was $2.7 million and $4.6 million, respectively, at September 30, 2004 and 2003. Net cash flow from investing activities was $8.0 million and $45.6 million at September 30, 2004 and 2003 respectively. The changes in net cash from investing activities at September 30, 2004 include an increase in securities of $11.0 million, a decrease in loans of $(6.3) million and changes in interest-bearing deposits, purchases of premises and equipment and other investing activities. The changes in net cash from investing activities at September 30, 2003 include a increase in securities of $14.1 million, a decrease in loans of $(102.4) million, a decrease from the sale of the RFC Banking Company branches of $(70.5) million as well as changes in interest-bearing deposits, purchases of premises and equipment and other investing activities. 29
Net cash flow from financing activities was $(18.3) million and $(82.4) million at September 30, 2004 and 2003, respectively. The net cash decrease was primarily due to a reduction in total deposits of $(27.5) million at September 30, 2004 compared to $(77.3) at September 30, 2003. OFF-BALANCE-SHEET BORROWING ARRANGEMENTS: Significant additional off-balance-sheet liquidity is available in the form of FHLB advances, unused federal funds lines from correspondent banks, and the national certificate of deposit market. While such additional off-balance-sheet liquidity is available, the Agreement between Rurban, State Bank, the Federal Reserve Bank of Cleveland and the Ohio Division of Financial Institutions requires Rurban and State Bank to obtain written approval of the Federal Reserve Bank of Cleveland and the Ohio Division of Financial Institutions prior to directly or indirectly incurring any debt. Approximately $55.4 million of the Company's $64.0 million residential first mortgage loan portfolio qualifies to collateralize FHLB borrowings and was pledged to meet FHLB collateralization requirements as of September 30, 2004. In addition to residential first mortgage loans, $38.2 million in investment securities are pledged to meet FHLB collateralization requirements. Based on the current collateralization requirements of the FHLB, approximately $1.4 million of additional borrowing capacity existed at September 30, 2004. As of September 30, 2004, the Company had unused federal funds lines totaling $13.0 million from two correspondent banks. At June 30, 2004, the Company had unused federal funds lines totaling $13.0 million from two correspondent banks. Federal funds borrowed were $0 at September 30, 2004 and June 30, 2004. Approximately $8.1 million of performing commercial loans are pledged to the Federal Reserve Discount Window to establish additional borrowing capacity of $5.7 million. Such loans are pledged for contingency funding purposes and to date this borrowing capacity has not been used. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS <TABLE> <CAPTION> PAYMENT DUE BY PERIOD ------------------------------------------------------------------------------ LESS MORE THAN 1 1 - 3 3 - 5 THAN 5 Contractual Obligations TOTAL YEAR YEARS YEARS YEARS - ----------------------- ------------ ------------ ----------- ----------- ----------- <S> <C> <C> <C> <C> <C> Long-Term Debt Obligations $ 56,000,000 $ 22,000,000 $ 5,000,000 $ 6,000,000 $23,000,000 Other Debt Obligations 13,738,574 1,200,000 1,100,000 1,128,574 10,310,000 Capital Lease Obligations 0 0 0 0 0 Operating Lease Obligations 722,100 99,600 199,200 199,200 224,100 Purchase Obligations 0 0 0 0 0 Other Long-Term Liabilities Reflected on the Registrant's Balance Sheet under GAAP 158,846,720 103,655,231 51,381,158 3,511,505 298,826 ------------ ------------ ----------- ----------- ----------- Total $229,307,394 $126,954,831 $57,680,358 $10,839,279 $33,832,926 ============ ============ =========== =========== =========== </TABLE> 30
The Company's contractual obligations as of September 30, 2004 were evident in long-term debt obligations, other debt obligations, operating lease obligations and other long-term liabilities. The long-term debt obligations are comprised of FHLB advances of $56,000,000. The other debt obligations are comprised of Trust Preferred Securities of $10,310,000 and Notes Payable of $3,428,574. The operating lease obligation is a lease on the RDSI building of $99,600 a year. The other long-term liabilities are comprised of time deposits of $158,846,720. ASSET LIABILITY MANAGEMENT Asset liability management involves developing and monitoring strategies to maintain sufficient liquidity, maximize net interest income and minimize the impact that significant fluctuations in market interest rates would have on earnings. The business of the Company and the composition of its balance sheet consists of investments in interest-earning assets (primarily loans, mortgage-backed securities, and securities available for sale) which are primarily funded by interest-bearing liabilities (deposits and borrowings). With the exception of loans which are originated and held for sale, all of the financial instruments of the Company are for other than trading purposes. All of the Company's transactions are denominated in U.S. dollars with no specific foreign exchange exposure. In addition, the Company has limited exposure to commodity prices related to agricultural loans. The impact of changes in foreign exchange rates and commodity prices on interest rates are assumed to be insignificant. The Company's financial instruments have varying levels of sensitivity to changes in market interest rates resulting in market risk. Interest rate risk is the Company's primary market risk exposure; to a lesser extent, liquidity risk also impacts market risk exposure. Interest rate risk is the exposure of a banking institution's financial condition to adverse movements in interest rates. Accepting this risk can be an important source of profitability and stockholder value; however, excessive levels of interest rate risk could pose a significant threat to the Company's earnings and capital base. Accordingly, effective risk management that maintains interest rate risks at prudent levels is essential to the Company's safety and soundness. Evaluating a financial institution's exposure to changes in interest rates includes assessing both the adequacy of the management process used to control interest rate risk and the organization's quantitative level of exposure. When assessing the interest rate risk management process, the Company seeks to ensure that appropriate policies, procedures, management information systems, and internal controls are in place to maintain interest rate risks at prudent levels of consistency and continuity. Evaluating the quantitative level of interest rate risk exposure requires the Company to assess the existing and potential future effects of changes in interest rates on its consolidated financial condition, including capital adequacy, earnings, liquidity, and asset quality (when appropriate). The Federal Reserve Board, together with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Company, adopted a Joint Agency Policy Statement on interest rate risk effective June 26, 1996. The policy statement provides guidance to examiners and bankers on sound practices for managing interest rate risk, and serves as 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 31
is exposed to lower profit margins (or losses) if it cannot adapt to interest rate changes. For example, assume that an institution's assets carry intermediate or long term fixed rates and that those assets are funded with short-term liabilities. If market interest rates rise by the time the short-term liabilities must be refinanced, the increase in the institution's interest expense on its liabilities may not be sufficiently offset if assets continue to earn at the long-term fixed rates. Accordingly, an institution's profits could decrease on existing assets because the institution will either have lower net interest income or possibly, net interest expense. Similar risks exist when assets are subject to contractual interest rate ceilings, or rate sensitive assets are funded by longer-term, fixed-rate liabilities in a declining rate environment. There are several ways an institution can manage interest rate risk including: 1) matching repricing periods for new assets and liabilities, for example, by shortening terms of new loans or investments; 2) selling existing assets or repaying certain liabilities; and 3) hedging existing assets, liabilities, or anticipated transactions. An institution might also invest in more complex financial instruments intended to hedge or otherwise change interest rate risk. Interest rate swaps, futures contacts, options on futures contracts, and other such derivative financial instruments can be used for this purpose. Because these instruments are sensitive to interest rate changes, they require management's expertise to be effective. The Company has not purchased derivative financial instruments in the past. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The following table provides information about the Company's financial instruments used for purposes other than trading that are sensitive to changes in interest rates as of September 30, 2004. It does not present when these items may actually reprice. For loans receivable, securities, and liabilities with contractual maturities, the table presents principal cash flows and related weighted-average interest rates by contractual maturities as well as the Company's historical experience of the impact of interest rate fluctuations on the prepayment of loans and mortgage backed securities. For core deposits (demand deposits, interest-bearing checking, savings, and money market deposits) that have no contractual maturity, the table presents principal cash flows and, as applicable, related weighted-average interest rates based upon the Company's historical experience, management's judgment and statistical analysis, as applicable, concerning their most likely withdrawal behaviors. The current historical interest rates for core deposits have been assumed to apply for future periods in this table as the actual interest rates that will need to be paid to maintain these deposits are not currently known. Weighted average variable rates are based upon contractual rates existing at the reporting date. PRINCIPAL/NOTIONAL AMOUNT MATURING OR ASSUMED TO WITHDRAW IN: (DOLLARS IN THOUSANDS) <TABLE> <CAPTION> First Years Comparison of 2004 to 2003: Year 2 - 5 Thereafter Total - --------------------------- ---- ----- ---------- ----- <S> <C> <C> <C> <C> Total rate-sensitive assets: At September 30, 2004 $ 137,201 $ 146,496 $ 92,129 $ 375,826 At December 31, 2003 152,522 160,505 92,230 405,257 --------- --------- --------- --------- Increase (decrease) $ (15,321) $ (14,009) $ (101) $ (29,431) Total rate-sensitive liabilities: At September 30, 2004 $ 155,258 $ 173,462 $ 34,018 $ 362,738 At December 31, 2003 168,024 177,733 34,970 380,727 --------- --------- --------- --------- Increase (decrease) $ (12,766) $ (4,271) $ (952) $ (17,989) </TABLE> The above table reflects expected maturities, not expected repricing. The contractual maturities adjusted for anticipated prepayments and anticipated renewals at current interest rates, as shown in the preceding table, are only part of the Company's interest rate risk profile. Other important factors include the ratio of rate-sensitive assets to rate sensitive liabilities (which takes into consideration loan repricing frequency but not when deposits may be repriced) and the general level and direction of market interest rates. For some rate sensitive liabilities, their repricing frequency is the same as their contractual 32
maturity. For variable rate loans receivable, repricing frequency can be daily or monthly. For adjustable rate loans receivable, repricing can be as frequent as annually for loans whose contractual maturities range from one to thirty years. While increasingly aggressive local market competition in lending rates has pushed loan rates lower, the Company's increased reliance on non-core funding sources has restricted the Company's ability to reduce funding rates in concert with declines in lending rates. The Company manages its interest rate risk by the employment of strategies to assure that desired levels of both interest-earning assets and interest-bearing liabilities mature or reprice with similar time frames. Such strategies include: 1) loans receivable which are renewed (and repriced) annually, 2) variable rate loans, 3) certificates of deposit with terms from one month to six years and 4) securities available for sale which mature at various times primarily from one through ten years, 5) federal funds borrowings with terms of one day to 90 days, and 6) Federal Home Loan Bank borrowings with terms of one day to ten years. 33
ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures With the participation of the President and Chief Executive Officer (the principal executive officer) and the Executive Vice President and Chief Financial Officer (the principal financial officer) of the Company, the Company's management has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Company's President and Chief Executive Officer and Executive Vice President and Chief Financial Officer have concluded that: - information required to be disclosed by the Company in this Quarterly Report on Form 10-Q and other reports which the Company files or submits under the Exchange Act would be accumulated and communicated to the Company's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure; - information required to be disclosed by the Company in this Quarterly Report on Form 10-Q and other reports which the Company files or submits under the Exchange Act would be recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms; and - the Company's disclosure controls and procedures are effective as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q to ensure that material information relating to the Company and its consolidated subsidiaries is made known to them, particularly during the period in which this Quarterly Report on Form 10-Q is being prepared. Changes in Internal Control Over Financial Reporting There were no changes in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the Company's fiscal quarter ended June 30, 2004, that have materially affected or are reasonably likely to materially affect, the Company's internal control over financial reporting. 34
PART II - OTHER INFORMATION Item 1. Legal Proceedings Not applicable Item 2. Unregistered Sales of Equity Securities Use of Proceeds a. Not applicable b. Not applicable c. The following table provides information regarding repurchases of the Company's common shares during the three months ended September 30, 2004: <TABLE> <CAPTION> Maximum Number (or Total Number of Approximate Dollar Shares Purchased as Value) of Shares Part of Publicly that May Yet Be Total Number of Shares Average Price Paid Announced Plans or Purchased Under the Period Purchased (1) per Share Programs Plans or Programs ------ ------------- --------- -------- ----------------- <S> <C> <C> <C> <C> July 1 thru July 31, 2004 993 $12.39 -- -- August 1 thru August 31, 2004 43 $12.52 -- -- September 1 thru September 30, 2004 1,945 $12.73 -- -- </TABLE> (1) All of the repurchased shares were purchased by Reliance Financial Services, N.A., an indirect subsidiary of the Company, in its capacity as the administrator of the Company's Employee Stock Ownership and Savings Plan. Item 3. Defaults Upon Senior Securities Not applicable Item 4. Submission of Matters to a Vote of Security Holders I. Annual Meeting of Shareholders - April 26, 2004 a. On April 26, 2004, Rurban Financial Corp. held its Annual Meeting of Shareholders. At the close of business on the February 27, 2004 record date, 4,566,991 Rurban Financial Corp. common shares were outstanding and entitled to vote. At the Annual Meeting, 3,669,143 or 80.3% of the outstanding common shares entitle to vote were represented by proxy or in person. b. Directors elected at the Annual Meeting for a three year term: Thomas M. Callan Richard L. Hardgrove Eric C. Hench Steven D. VanDemark 35
Directors whose term of office continued after the Annual Meeting: Thomas A. Buis John R. Compo John Fahl Robert A. Fawcett, Jr. Kenneth A. Joyce J. Michael Walz, D.D.S. c. Results of Matters voted upon at the Annual Meeting: Election of Directors: <TABLE> <CAPTION> Nominee Votes For Votes Withheld ------- --------- -------------- <S> <C> <C> Thomas M. Callan 3,484,774 184,369 Richard L. Hardgrove 3,484,583 184,560 Eric C. Hench 3,473,661 195,482 Steven D. VanDemark 3,456,080 213,063 </TABLE> d. Not applicable Item 5. Other Information Not applicable Item 6. Exhibits a. Exhibits 31.1 - Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer) 31.2 - Rule 13a-14(a)/15d-14(a) Certification (Principal Financial Officer) 32.1 - Section 1350 Certification (Principal Executive Officer) 32.2 - Section 1350 Certification (Principal Financial Officer) 36
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned hereunto duly authorized. RURBAN FINANCIAL CORP. Date: November 12, 2004 By /S/ Kenneth A. Joyce -------------------- Kenneth A. Joyce President & Chief Executive Officer By /S/ James E. Adams -------------------- James E. Adams Executive Vice President & Chief Financial Officer 37