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 June 30, 2005 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission file number 0-13507 RURBAN FINANCIAL CORP. (Exact name of registrant as specified in its charter) <TABLE> <S> <C> Ohio 34-1395608 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) </TABLE> 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 4,571,317 on August 1, 2005. 1
RURBAN FINANCIAL CORP. FORM 10-Q TABLE OF CONTENTS <TABLE> <S> <C> PART I - FINANCIAL INFORMATION Item 1. Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures PART II - OTHER INFORMATION Item 1. Legal Proceedings Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits </TABLE> Exhibit 2 - Agreement and Plan of Merger, dated as of April 13, 2005, by and between Rurban Financial Corp. and Exchange Bancshares, Inc. Exhibit 31.1 - Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer) Exhibit 31.2 - Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer) Exhibit 32.1 - Section 1350 Certification (Principal Executive Officer) Exhibit 32.2 - Section 1350 Certification (Principal Executive Officer) Signatures EX-2 Agreement and Plan of Merger, dated as of April 13, 2005, by and between Rurban Financial Corp. and Exchange Bancshares, Inc. EX-31.1 302 Certification EX-31.2 302 Certification EX-32.1 906 Certification EX-32.2 906 Certification 2
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The interim condensed consolidated financial statements of Rurban Financial Corp. ("Rurban" or the "Company") are unaudited; however, the information contained herein reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of financial condition and results of operations for the interim periods presented. All adjustments reflected in these financial statements are of a normal recurring nature in accordance with Rule 10-01(b)(8) of Regulation S-X. Results of operations for the three and six months ended June 30, 2005 are not necessarily indicative of results for the complete year. 3
RURBAN FINANCIAL CORP. CONDENSED CONSOLIDATED BALANCE SHEETS JUNE 30, 2005, DECEMBER 31, 2004 AND JUNE 30, 2004 <TABLE> <CAPTION> (UNAUDITED) (UNAUDITED) JUNE 30, DECEMBER 31, JUNE 30, 2005 2004 2004 ------------ ------------ ------------ <S> <C> <C> <C> ASSETS Cash and due from banks $ 7,893,845 $ 10,617,766 $ 13,171,717 Federal funds sold 23,200,000 -- 3,000,000 ------------ ------------ ------------ Cash and cash equivalents 31,093,845 10,617,766 16,171,717 Interest-bearing deposits 150,000 150,000 250,000 Available-for-sale securities 108,719,426 108,720,491 98,097,284 Loans held for sale 350,800 112,900 -- Loans, net of unearned income 271,827,036 264,480,789 270,692,050 Allowance for loan losses (5,210,464) (4,899,063) (6,922,995) Premises and equipment 9,405,152 7,740,442 6,884,088 Purchased software 4,378,941 4,564,474 3,960,466 Federal Reserve and Federal Home Loan Bank stock 2,846,600 2,793,000 2,789,700 Foreclosed assets held for sale, net 2,287,981 720,000 405,000 Interest receivable 2,094,732 1,984,452 1,881,886 Deferred income taxes -- -- 3,114,552 Goodwill 6,506,320 2,144,304 2,144,304 Core deposits and other intangibles 1,068,890 542,978 593,005 Cash value of life insurance 9,287,891 9,146,816 10,005,213 Other 6,240,743 6,529,397 4,959,292 ------------ ------------ ------------ Total assets $451,047,893 $415,348,746 $415,025,562 ============ ============ ============ </TABLE> See notes to condensed consolidated financial statements (unaudited) Note: The balance sheet at December 31, 2004 has been derived from the audited consolidated financial statements at that date. 4
RURBAN FINANCIAL CORP. CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED) JUNE 30, 2005, DECEMBER 31, 2004 AND JUNE 30, 2004 <TABLE> <CAPTION> (UNAUDITED) (UNAUDITED) JUNE 30, DECEMBER 31, JUNE 30, 2005 2004 2004 ------------ ------------ ------------ <S> <C> <C> <C> LIABILITIES Deposits Demand $ 41,422,203 $ 37,831,810 $ 33,300,989 Savings, interest checking and money market 108,232,569 87,795,630 94,934,794 Time 190,750,003 153,996,874 162,755,279 ------------ ------------ ------------ Total deposits 340,404,775 279,624,314 290,991,062 Notes payable 2,405,527 3,079,656 3,050,037 Federal Home Loan Bank advances 38,000,000 56,000,000 54,000,000 Federal funds purchased -- 7,500,000 -- Retail repurchase agreements 4,623,964 4,059,151 3,115,032 Trust preferred securities 10,310,000 10,310,000 10,310,000 Interest payable 1,115,358 994,114 2,708,568 Deferred income taxes 274,597 523,111 -- Other liabilities 3,314,136 2,952,605 2,623,647 ------------ ------------ ------------ Total liabilities 400,448,357 365,042,951 366,798,346 ------------ ------------ ------------ COMMITMENTS AND CONTINGENT LIABILITIES STOCKHOLDERS' EQUITY Common stock, $2.50 stated value; authorized 10,000,000 shares; issued 4,575,702; outstanding June 30, 2005 - 4,571,317, December 31, 2004 - 4,568,388 and June 30, 2004 - 4,567,296 shares 11,439,255 11,439,255 11,439,255 Additional paid-in capital 10,999,484 11,003,642 11,007,086 Retained earnings 29,011,619 28,943,736 27,530,508 Unearned employee stock ownership plan (ESOP) shares -- -- (84,857) Accumulated other comprehensive income (613,926) (803,189) (1,371,828) Treasury stock, at cost Common; June 30, 2005 - 7,214, December 31, 2004 - 7,314 and June 30, 2004 - 8,406 shares (236,896) (277,649) (292,948) ------------ ------------ ------------ Total stockholders' equity 50,599,536 50,305,795 48,227,216 ------------ ------------ ------------ Total liabilities and stockholders' equity $451,047,893 $415,348,746 $415,025,562 ============ ============ ============ </TABLE> See notes to condensed consolidated financial statements (unaudited) Note: The balance sheet at December 31, 2004 has been derived from the audited consolidated financial statements at that date. 5
RURBAN FINANCIAL CORP. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) THREE MONTHS ENDED <TABLE> <CAPTION> JUNE 30, JUNE 30, 2005 2004 ---------- ---------- <S> <C> <C> INTEREST INCOME Loans Taxable $3,997,200 $3,920,218 Tax-exempt 14,823 16,580 Securities Taxable 984,949 862,159 Tax-exempt 52,173 39,171 Other 83,959 10,990 ---------- ---------- Total interest income 5,133,104 4,849,118 ---------- ---------- INTEREST EXPENSE Deposits 1,293,323 1,151,545 Other borrowings 66,929 74,846 Retail repurchase agreements 18,806 6,600 Federal Home Loan Bank advances 554,324 429,997 Trust preferred securities 272,402 276,251 ---------- ---------- Total interest expense 2,205,784 1,939,239 ---------- ---------- NET INTEREST INCOME 2,927,320 2,909,879 PROVISION (CREDIT) FOR LOAN LOSSES 352,000 (340,000) ---------- ---------- NET INTEREST INCOME AFTER PROVISION (CREDIT) FOR LOAN LOSSES 2,575,320 3,249,879 ---------- ---------- NON-INTEREST INCOME Data service fees 2,872,763 2,425,862 Trust fees 779,047 732,459 Customer service fees 446,286 505,340 Net gains on loan sales 9,278 9,919 Net realized gains on sales of available-for-sale securities -- 62,887 Loan servicing fees 79,297 97,266 Gain on sale of assets 56,034 96,746 Other 175,981 152,405 ---------- ---------- Total non-interest income 4,418,686 4,082,884 ---------- ---------- </TABLE> See notes to condensed financial statements (unaudited) 6
RURBAN FINANCIAL CORP. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (CONTINUED) THREE MONTHS ENDED <TABLE> <CAPTION> JUNE 30, JUNE 30, 2005 2004 ---------- ---------- <S> <C> <C> NON-INTEREST EXPENSE Salaries and employee benefits $3,501,021 $3,295,728 Net occupancy expense 294,243 235,279 Equipment expense 1,283,692 1,020,485 Data processing fees 113,499 68,023 Professional fees 710,539 677,428 Marketing expense 83,254 74,571 Printing and office supplies 130,591 107,863 Telephone and communications 164,134 166,643 Postage and delivery expense 83,975 85,811 State, local and other taxes 88,825 211,502 Employee expense 265,459 231,049 Other 525,708 390,330 ---------- ---------- Total non-interest expense 7,244,940 6,564,712 ---------- ---------- INCOME (LOSS) BEFORE INCOME TAX (250,934) 768,051 PROVISION (BENEFIT) FOR INCOME TAXES (137,232) 59,008 ---------- ---------- NET INCOME (LOSS) $ (113,702) $ 709,043 ========== ========== BASIC EARNINGS (LOSS) PER SHARE $ (0.02) $ 0.16 ========== ========== DILUTED EARNINGS (LOSS) PER SHARE $ (0.02) $ 0.16 ========== ========== DIVIDENDS DECLARED PER SHARE $ 0.05 $ -- ========== ========== </TABLE> See notes to condensed financial statements (unaudited) 7
RURBAN FINANCIAL CORP. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) SIX MONTHS ENDED <TABLE> <CAPTION> JUNE 30, JUNE 30, 2005 2004 ----------- ---------- <S> <C> <C> INTEREST INCOME Loans Taxable $ 7,911,166 $8,161,530 Tax-exempt 30,329 35,226 Securities Taxable 2,039,407 1,644,681 Tax-exempt 94,198 80,493 Other 102,217 41,065 ----------- ---------- Total interest income 10,177,317 9,962,995 ----------- ---------- INTEREST EXPENSE Deposits 2,396,744 2,430,576 Other borrowings 137,204 233,204 Retail repurchase agreements 36,453 15,095 Federal Home Loan Bank advances 1,140,876 837,560 Trust preferred securities 541,810 552,501 ----------- ---------- Total interest expense 4,253,087 4,068,936 ----------- ---------- NET INTEREST INCOME 5,924,230 5,894,059 PROVISION (CREDIT) FOR LOAN LOSSES 352,000 (190,000) ----------- ---------- NET INTEREST INCOME AFTER PROVISION (CREDIT) FOR LOAN LOSSES 5,572,230 6,084,059 ----------- ---------- NON-INTEREST INCOME Data service fees 5,828,468 5,117,100 Trust fees 1,583,540 1,575,989 Customer service fees 883,002 1,019,186 Net gains on loan sales 17,348 20,047 Net realized gains (losses) on sales of available-for-sale securities (8,750) 123,962 Loan servicing fees 146,140 194,031 Gain on sale of assets 17,076 78,331 Other 362,386 289,253 ----------- ---------- Total non-interest income 8,829,210 8,417,899 ----------- ---------- </TABLE> See notes to condensed consolidated financial statements (unaudited) 8
RURBAN FINANCIAL CORP. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (CONTINUED) SIX MONTHS ENDED <TABLE> <CAPTION> JUNE 30, JUNE 30, 2005 2004 ----------- ------------ <S> <C> <C> NON-INTEREST EXPENSE Salaries and employee benefits $ 6,732,345 $ 6,550,896 Net occupancy expense 584,398 486,705 Equipment expense 2,536,791 2,059,578 Data processing fees 204,697 208,547 Professional fees 1,229,070 1,145,947 Marketing expense 163,971 178,781 Printing and office supplies 281,833 253,639 Telephone and communications 313,937 312,469 Postage and delivery expense 158,027 176,400 State, local and other taxes 233,353 414,601 Employee expense 501,530 388,229 Other 824,888 678,119 ----------- ----------- Total non-interest expense 13,764,840 12,853,911 ----------- ----------- INCOME BEFORE INCOME TAX 636,600 1,648,047 PROVISION FOR INCOME TAXES 111,838 326,982 ----------- ----------- NET INCOME $ 524,762 $ 1,321,065 =========== =========== BASIC EARNINGS PER SHARE $ 0.11 $ 0.29 =========== =========== DILUTED EARNINGS PER SHARE $ 0.11 $ 0.29 =========== =========== DIVIDENDS DECLARED PER SHARE $ 0.10 $ -- =========== =========== </TABLE> See notes to condensed consolidated financial statements (unaudited) 9
RURBAN FINANCIAL CORP. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) <TABLE> <CAPTION> Three Months Ended Six Months Ended ------------------------- ------------------------- June 30, June 30, June 30, June 30, 2005 2004 2005 2004 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Balance at beginning of period $49,776,761 $49,273,631 $50,305,795 $48,382,756 Net Income (Loss) (113,702) 709,043 524,762 1,321,065 Other comprehensive income (loss): Net change in unrealized gains (losses) on securities available for sale, net 1,129,671 (1,794,775) 189,266 (1,572,911) ----------- ----------- ----------- ----------- Total comprehensive income (loss) 1,015,969 (1,085,732) 714,028 (251,846) Cash dividend (228,456) -- (456,882) -- Stock options exercised 35,262 -- 36,595 17,670 Paydown of ESOP loan -- 39,318 -- 78,636 ----------- ----------- ----------- ----------- Balance at end of period $50,599,536 $48,227,216 $50,599,536 $48,227,216 =========== =========== =========== =========== </TABLE> See notes to condensed consolidated financial statements (unaudited) 10
RURBAN FINANCIAL CORP. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) SIX MONTHS ENDED <TABLE> <CAPTION> JUNE 30, JUNE 30, 2005 2004 ------------ ------------ <S> <C> <C> OPERATING ACTIVITIES Net income $ 524,762 $ 1,321,065 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 1,496,096 1,135,419 Provision for loan losses 352,000 (190,000) ESOP shares earned -- 78,636 Amortization of premiums and discounts on securities 63,769 408,952 Amortization of intangible assets 43,088 51,982 Deferred income taxes (346,014) -- Proceeds from sale of loans held for sale 1,486,148 2,785,746 Originations of loans held for sale (1,706,700) (2,765,699) Gain from sale of loans (17,348) (20,047) Gain on sales of foreclosed assets (7,296) (96,746) FHLB Stock Dividends (53,600) (44,800) Gain on sales of premises and equipment (9,780) -- Net realized (gains) losses on available-for-sale securities 8,750 (123,962) Changes in Interest receivable (81,318) 118,845 Other assets 234,024 (305,347) Interest payable and other liabilities 374,229 (560,799) ------------ ------------ Net cash provided by operating activities 2,360,810 1,793,245 ------------ ------------ INVESTING ACTIVITIES Net change in interest-bearing deposits -- 10,000 Purchases of available-for-sale securities (11,780,508) (36,213,698) Proceeds from maturities of available-for-sale securities 7,878,122 28,758,870 Proceeds from the sales of available-for-sale securities 4,117,695 14,387,951 Net change in loans (4,381,054) 10,483,761 Purchase of bank owned life insurance -- (8,000,000) Proceeds from assumption of net liabilities in business acquisition 48,645,686 -- Purchase of premises and equipment (1,924,199) (1,026,572) Purchase of Federal Home Loan and Federal Reserve Bank stock -- (383,300) Proceeds from sale of Federal Home Loan and Federal Reserve Bank stock -- 383,300 Proceeds from sales of premises and equipment 197,706 192,098 Proceeds from the sale of foreclosed assets 1,234,417 1,161,411 ------------ ------------ Net cash provided by investing activities 43,987,865 9,753,821 ------------ ------------ </TABLE> See notes to condensed consolidated financial statements (unaudited) 11
RURBAN FINANCIAL CORP. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED) <TABLE> <CAPTION> JUNE 30, JUNE 30, 2005 2004 ------------ ------------ <S> <C> <C> FINANCING ACTIVITIES Net increase (decrease) in demand deposits, money market, interest checking and savings accounts $ 5,051,433 $(14,570,396) Net decrease in certificates of deposit (4,894,426) (11,913,291) Net increase (decrease) in securities sold under agreements to repurchase 564,813 (808,722) Net decrease in federal funds purchased (7,500,000) -- Proceeds from Federal Home Loan Bank advances 12,500,000 15,000,000 Repayment of Federal Home Loan Bank advances (30,500,000) -- Repayment of notes payable (674,129) (7,277,562) Dividends paid (456,882) -- Proceeds from stock options exercised 36,595 17,670 ------------ ------------ Net cash provided by (used in) financing activities (25,872,596) (19,552,301) ------------ ------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 20,476,079 (8,005,235) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 10,617,766 24,176,952 ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 31,093,845 $ 16,171,717 ============ ============ SUPPLEMENTAL CASH FLOWS INFORMATION Interest paid $ 4,131,843 $ 5,792,179 Transfer of loans to foreclosed assets $ 2,881,547 $ 79,113 </TABLE> See notes to condensed consolidated financial statements (unaudited) 12
RURBAN FINANCIAL CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A--BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared 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. Those adjustments consist only of normal recurring adjustments. Results of operations for the three and six months ended June 30, 2005 are not necessarily indicative of results for the complete year. The condensed consolidated balance sheet of the Company as of December 31, 2004 has been derived from the audited consolidated balance sheet of the Company as of that date. 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, 2004. 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 Six Months Ended June 30, June 30, -------------------- ---------------------- 2005 2004 2005 2004 --------- -------- --------- ---------- <S> <C> <C> <C> <C> Net income (loss), as reported $(113,702) $709,043 $ 524,762 $1,321,065 Less: Total stock-based employee compensation cost determined under the fair value based method, net of income taxes (2,970) (49,183) (637,795) (98,365) --------- -------- --------- ---------- Pro forma net income (loss) $(116,672) $659,860 $(113,033) $1,222,700 ========= ======== ========= ========== Earnings (loss) per share: Basic - as reported $ (0.02) $ 0.16 $ 0.11 $ 0.29 Basic - pro forma $ (0.03) $ 0.14 $ (0.02) $ 0.27 Diluted - as reported $ (0.02) $ 0.16 $ 0.11 $ 0.29 Diluted - pro forma $ (0.03) $ 0.14 $ (0.02) $ 0.27 </TABLE> 13
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 June 30, 2005 and 2004, stock options totaling 233,191 and 212,487 shares of common stock, respectively, were not considered in computing EPS as they were anti-dilutive. The number of shares used in the computation of basic and diluted earnings per share was: <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, --------------------- --------------------- 2005 2004 2005 2004 --------- --------- --------- --------- <S> <C> <C> <C> <C> Basic earnings per share 4,569,316 4,555,068 4,568,860 4,555,014 Diluted earnings per share 4,569,316 4,562,104 4,578,981 4,572,345 </TABLE> 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> June 30, December 31, June 30, 2005 2004 2004 ------------ ------------ ------------ <S> <C> <C> <C> Commercial $ 54,954,476 $ 58,498,557 $ 68,380,142 Commercial real estate 69,553,726 64,107,549 61,498,275 Agricultural 44,036,201 41,239,895 40,728,900 Residential real estate 63,786,350 63,828,237 57,683,899 Consumer 36,585,815 31,948,581 34,515,046 Lease financing 3,147,644 5,127,639 8,177,521 ------------ ------------ ------------ Total loans 272,064,212 264,750,458 270,983,783 Less Net deferred loan fees, premiums and discounts (237,176) (269,669) (291,733) ------------ ------------ ------------ Loans, net of unearned income $271,827,036 $264,480,789 $270,692,050 ============ ============ ============ Allowance for loan losses $ (5,210,464) $ (4,899,063) $ (6,922,995) ============ ============ ============ </TABLE> The following is a summary of the activity in the allowance for loan losses account for the three and six months ended June 30, 2005 and June 30, 2004. <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, ------------------------ ------------------------- 2005 2004 2005 2004 ---------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Balance, beginning of year $4,800,293 $ 8,244,713 $ 4,899,063 $10,181,135 Provision charged to expense 352,000 (340,000) 352,000 (190,000) Recoveries 931,882 513,957 1,115,462 1,075,241 Loans charged off (873,711) (1,495,675) (1,156,061) (4,143,381) ---------- ----------- ----------- ----------- Balance, end of period $5,210,464 $ 6,922,995 $ 5,210,464 $ 6,922,995 ========== =========== =========== =========== </TABLE> 14
The following schedule summarizes nonaccrual, past due and impaired loans at: <TABLE> <CAPTION> June 30, December 31, June 30, 2005 2004 2004 ----------- ------------ ----------- <S> <C> <C> <C> Non-accrual loans $13,446,000 $13,384,000 $16,535,000 Accruing loans which are contractually past due 90 days or more as to interest or principal payments 7,000 11,000 6,000 ----------- ----------- ----------- Total non-performing loans $13,453,000 $13,395,000 $16,541,000 =========== =========== =========== </TABLE> Individual loans determined to be impaired, including non-accrual loans, were as follows: <TABLE> <CAPTION> June 30, December 31, June 30, 2005 2004 2004 ----------- ------------ ----------- <S> <C> <C> <C> Loans with no allowance for loan losses allocated $ 340,000 $ 975,000 $ 1,148,000 Loans with allowance for loan losses allocated 9,994,000 10,411,000 16,603,000 ----------- ----------- ----------- Total impaired loans $10,334,000 $11,386,000 $17,751,000 =========== =========== =========== Amount of allowance allocated $ 1,773,000 $ 1,265,000 $ 3,898,000 =========== =========== =========== </TABLE> NOTE D - ACQUISITIONS PURCHASE OF LIMA, OHIO BRANCHES On March 15, 2005, State Bank and Trust Company ("State Bank"), a wholly owned subsidiary of Rurban, entered into a Branch Purchase and Assumption Agreement (the "Purchase Agreement") with Liberty Savings Bank, FSB ("Liberty Savings"), a subsidiary of Liberty Capital, Inc. The Purchase Agreement provided for the sale to State Bank of two of Liberty Savings' bank branches and one non-banking facility located in Lima, Ohio. The transaction, which included the acquisition of approximately $60.6 million in deposits and $5.9 million in loans, closed on June 17, 2005 and the branches opened as State Bank branches on June 20, 2005. 15
The following table summarizes the estimated fair values of the assets and liabilities acquired at the date of acquisition: <TABLE> <S> <C> Loans $ 5,887,339 Core deposits 569,000 Goodwill 4,362,017 Accrued interest receivable 28,962 Premises and equipment 1,239,000 ------------- Total assets acquired 12,086,317 Deposits 60,623,457 Accrued interest payable 62,114 Other liabilities 46,432 Total liabilities acquired 60,732,003 ------------- Net liabilities assumed ($48,645,686) ============= </TABLE> The only significant intangible assets acquired were the core deposits which were estimated to be $569,000 at June 30, 2005. This was calculated by taking 3% of the core deposit balances of approximately $19 million. A core deposit premium review is currently being conducted and will be completed later this year. Goodwill of $4.4 million was assigned entirely to the banking segment by taking the deposit premium paid of $4.9 million and subtracting the estimated core deposit of $569,000. The operating information from the purchased branches was not available from the sellers and therefore, the pro forma information is omitted. ACQUISITION OF EXCHANGE BANCSHARES, INC. On April 13, 2005, Rurban entered into an Agreement and Plan of Merger (the "Merger Agreement") with Exchange Bancshares, Inc., an Ohio corporation ("Exchange") headquartered in Luckey, Ohio. In accordance with the terms and conditions of the Merger Agreement, Exchange will be merged with and into Rurban, with Rurban being the surviving corporation in the merger. Exchange's wholly-owned subsidiary, Exchange Bank, will operate as a separate bank subsidiary of Rurban following the completion of the merger. This transaction is expected to be completed later this year. Pursuant to the terms of the Merger Agreement, approximately one-half of the outstanding common shares of Exchange Bancshares will be exchanged for cash and approximately one-half of the outstanding common shares will be exchanged for common shares of Rurban. Subject to certain adjustments set forth in the Merger Agreement, each outstanding common share of Exchange will be converted into either $22.00 in cash or 1.555 common shares of Rurban. Shareholders of Exchange Bancshares who hold 100 or fewer shares will receive all cash, while shareholders holding more than 100 shares may elect cash, Rurban common shares or a combination of cash and Rurban common shares. The merger is subject to approval by federal and state regulators and the shareholders of Exchange, as well as the satisfaction of other customary conditions set forth in the Merger Agreement. 16
As stated in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, the merger agreement provides for a reduction in the purchase price per share to be paid by the Company in the merger in the event the shareholders' equity of Exchange Bancshares, Inc. (as adjusted in accordance with the merger agreement) falls below $8.1 million prior to the closing. On or about July 13, 2005, Exchange Bancshares, Inc. filed Amendment No. 1 to its FORM 10-KSB for the fiscal year ended December 31, 2004 and Amendment No. 1 to its FORM 10-QSB for the quarterly period ended March 31, 2005 in response to a comment letter received from the Securities and Exchange Commission relating to the accounting and reporting by Exchange of its valuation allowance for deferred tax assets. The impact of the Amendments was to decrease shareholder's equity at December 31, 2004 by $196,000 and to further decrease shareholders' equity at March 31, 2005 by $35,000. The impact of these reductions could result in a reduction in the per share purchase price to be paid by the Company in the merger. NOTE E - NOTE PAYABLE RFCBC, Inc. has a note payable to an unaffiliated bank secured by the common stock of Rurbanc Data Services, Inc. ("RDSI") and substantially all of the assets of RFCBC, Inc. The note requires quarterly principal payments of $300,000 together with interest at the prime rate plus 1% (7.25% at June 30, 2005) and matures on June 6, 2006. The principal note balance was $1,400,000 as of June 30, 2005, $2,000,000 as of December 31, 2004 and $2,600,000 as of June 30, 2004. RDSI has two notes payable to State Bank. The notes were originated in September of 2004 and had a combined principal balance of $2,028,574, of which $1,128,574 was participated to an unaffiliated bank. The first note is secured by equipment and second lien positions on all business assets and requires monthly payments of $15,857, with interest at 6.50%. The participated principal note balance was $702,871 as of June 30, 2005 and $773,654 as of December 31, 2004. The second note is secured by equipment and second lien positions on all business assets and requires monthly payments of $6,272, with interest at 6.50%. The participated principal note balance was $278,006 as of June 30, 2005 and $306,002 as of December 31, 2004. State Bank has a note payable to Ford Motor Credit Company which is secured by a vehicle. The note requires monthly payments of $795 and matures on January 5, 2008. The principal note balance was $24,650 as of June 30, 2005. NOTE F - REGULATORY MATTERS The Company and State Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators. If undertaken, these actions could have a direct material adverse effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and State Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and State Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined in the regulations), and of 17
Tier I capital (as defined) to average assets (as defined as in the regulations). As of June 30, 2005, the Company and State Bank exceeded all "well-capitalized" requirements to which they are subject. As of June 30, 2005, the most recent notification to the regulators categorized State Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, State Bank must maintain capital ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed State Bank's category. The Company's consolidated and State Bank's actual capital amounts (in millions) and ratios are also presented in the following table. <TABLE> <CAPTION> TO BE WELL CAPITALIZED MINIMUM REQUIRED FOR UNDER PROMPT CORRECTIVE ACTUAL CAPITAL ADEQUACY PURPOSES ACTION PROVISIONS -------------- ------------------------- ----------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------ ----- ------ ----- ------ ----- <S> <C> <C> <C> <C> <C> <C> As of June 30, 2005 Total Capital (to Risk-Weighted Assets) Consolidated $57.3 19.4% $23.7 8.0% $ -- N/A State Bank 35.3 12.8 22.0 8.0 27.5 10.0 Tier I Capital (to Risk-Weighted Assets) Consolidated 53.6 18.1 11.9 4.0 -- N/A State Bank 32.2 11.7 11.0 4.0 16.5 6.0 Tier I Capital (to Average Assets) Consolidated 53.6 13.0 16.5 4.0 -- N/A State Bank 32.2 8.1 15.9 4.0 19.9 5.0 As of December 31, 2004 Total Capital (to Risk-Weighted Assets) Consolidated $61.9 22.0% $22.5 8.0% $ -- N/A State Bank 39.4 15.3 20.7 8.0 25.8 10.0 Tier I Capital (to Risk-Weighted Assets) Consolidated 58.4 20.7 11.3 4.0 -- N/A State Bank 36.3 14.0 10.3 4.0 15.5 6.0 Tier I Capital (to Average Assets) Consolidated 58.4 14.2 16.5 4.0 -- N/A State Bank 36.3 9.3 15.6 4.0 19.5 5.0 </TABLE> 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 Company's consolidated financial condition or results of operations. 18
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 would require an investor holding a debt security in the Available for Sale (AFS) portfolio whose fair value is below cost (an impaired security) to 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. On June 29, 2005, FASB gave direction that the proposed FASB Staff Position ("FSP") Issue 03-01-a be issued as final thus nullifying paragraphs 10-18 of EITF 03-1. The measurement, disclosure, and subsequent accounting for debt securities guidance, as well as the evaluation of whether a cost method investment (as defined in Issue 03-1) is impaired, would remain in effect. The Company believes that this proposed issue will have little or no material impact. In December 2004, FASB issued a revision to Statement No. 123. Statement No. 123(R), "Share-Based Payment," will provide investors and other users of financial statements with more complete and neutral financial information by requiring that the compensation cost relating to share-based payment transactions be recognized in the financial statements. The effective date for this statement has been established by the SEC to be as of the first annual period that begins after June 15, 2005. The Company is evaluating the impact of this pronouncement and it is not expected to be material. NOTE I - COMMITMENTS AND CREDIT RISK As of June 30, 2005, loan commitments and unused lines of credit totaled $52,454,000 standby letters of credit totaled $412,000 and no commercial letters of credit were outstanding. NOTE J - SEGMENT INFORMATION The reportable segments are determined by the products and services offered, primarily distinguished between banking and data processing operations. Other segments include the accounts of the holding company, Rurban, which provides management and operational services to its subsidiaries; and Reliance Financial Services, N.A., which provides trust and financial services to customers nationwide. Information reported internally for performance assessment follows. 19
As of and for the six months ended June 30, 2005 <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) $ 6,608,055 $ (124,304) $ (559,521) $ 5,924,230 $ 5,924,230 Non-interest income - external customers 1,389,625 5,828,468 1,611,117 8,829,210 8,829,210 Non-interest income - other segments -- 649,367 910,243 1,559,611 (1,559,611) -- ------------ ----------- ---------- ------------ ----------- ------------ Total revenue 7,997,680 6,353,531 1,961,839 16,313,051 (1,559,611) 14,753,440 Non-interest expense 7,821,786 5,070,441 2,432,224 15,324,451 (1,559,611) 13,764,840 Significant non-cash items: Depreciation and amortization 299,611 1,142,852 53,633 1,496,096 -- 1,496,096 Provision for loan losses 352,000 -- -- 352,000 -- 352,000 Income tax expense (benefit) (16,695) 434,208 (305,675) 111,838 -- 111,838 Segment profit (loss) $ 259,617 $ 848,883 $ (583,738) $ 524,762 $ -- $ 524,762 Balance sheet information: Total assets $444,561,492 $10,872,652 $5,470,394 $460,904,538 $(9,856,645) $451,047,893 Goodwill and intangibles 7,575,210 -- -- 7,575,210 -- 7,575,210 Premises and equipment expenditures, Six months ended June 30, 2005 334,005 1,542,925 47,269 1,924,199 -- 1,924,199 </TABLE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Rurban is a bank holding company registered with the Federal Reserve Board. State Bank is engaged in commercial banking. Rurban's subsidiary, Rurbanc Data Services, Inc. ("RDSI"), provides computerized data processing services to community banks and businesses. Rurban Statutory Trust I ("RST") was established in August 2000. In September 2000, RST completed a pooled private offering of 10,000 Capital Securities with a liquidation amount of $1,000 per security. The proceeds of the offering were loaned to the Company in exchange for junior subordinated debentures of the Company with terms substantially similar to the Capital Securities. The sole assets of RST are the junior subordinated debentures, and the back-up obligations, in the aggregate, constitute a full and unconditional guarantee by the Company of the obligations of RST under the Capital Securities. 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 junior subordinated debentures as debt, and the interest paid thereon as interest expense. The Company 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 unanticipated events or circumstances occurring after the date on which the statement is made. All subsequent written and oral forward-looking statements attributable to Rurban or any person acting on our behalf are qualified by these cautionary statements. The following discussion is intended to provide a review of the consolidated financial condition and results of operations of Rurban. This discussion should be read in conjunction with the consolidated financial statements and related footnotes in Rurban's Annual Report on Form 10-K for the fiscal year ended December 31, 2004 filed with the SEC. 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 21
consolidated financial statements for the year ended December 31, 2004. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The Company's financial position and results of operations can be affected by these estimates and assumptions and are integral to the understanding of reported results. Critical accounting policies are those policies that management believes are the most important to the portrayal of the Company's financial condition and results, and they require management to make estimates that are difficult, subjective, or complex. ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses provides coverage for probable losses inherent in the Company's loan portfolio. Management evaluates the adequacy of the allowance for loan losses each quarter based on changes, if any, in underwriting activities, loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance, regulatory guidance and economic factors. This evaluation is inherently subjective, as it requires the use of significant management estimates. Many factors can affect management's estimates of specific and expected losses, including volatility of default probabilities, rating migrations, loss severity and economic and political conditions. The allowance is increased through provisions charged to operating earnings and reduced by net charge-offs. The Company determines the amount of the allowance based on relative risk characteristics of the loan portfolio. The allowance recorded for commercial loans is based on reviews of individual credit relationships and an analysis of the migration of commercial loans and actual loss experience. The allowance recorded for homogeneous consumer loans is based on an analysis of loan mix, risk characteristics of the portfolio, fraud loss and bankruptcy experiences, and historical losses, adjusted for current trends, for each homogeneous category or group of loans. The allowance for credit losses relating to impaired loans is based on the loan's observable market price, the collateral for certain collateral-dependent loans, or the discounted cash flows using the loan's effective interest rate. Regardless of the extent of the Company's analysis of customer performance, portfolio trends or risk management processes, certain inherent but undetected losses are probable within the loan portfolio. This is due to several factors, including inherent delays in obtaining information regarding a customer's financial condition or changes in their unique business conditions, the subjective nature of individual loan evaluations, collateral assessments and the interpretation of economic trends. Volatility of economic or customer-specific conditions affecting the identification and estimation of losses for larger non-homogeneous credits and the sensitivity of assumptions utilized to establish allowances for homogenous groups of loans are also factors. The Company estimates a range of inherent losses related to the existence of these exposures. The estimates are based upon the Company's evaluation of imprecise risk associated with the commercial and consumer allowance levels and the estimated impact of the current economic environment. GOODWILL AND OTHER INTANGIBLES - The Company records all assets and liabilities acquired in purchase acquisitions, including goodwill and other intangibles, at fair value as required by SFAS 141. Goodwill is subject, at a minimum, to annual tests for impairment. Other intangible assets are amortized over their estimated useful lives using straight-line or accelerated methods, and are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount. The initial goodwill and 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. 22
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 would 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. On June 29, 2005, FASB gave direction that the proposed FASB Staff Position ("FSP") Issue 03-01-a be issued as final thus nullifying paragraphs 10-18 of EITF 03-1. The measurement, disclosure, and subsequent accounting for debt securities guidance, as well as the evaluation of whether a cost method investment (as defined in Issue 03-1) is impaired, would remain in effect. The Company believes that this proposed issue will have little or no material impact. In December 2004, FASB issued a revision to Statement No. 123. Statement No. 123(R), "Share-Based Payment," will provide investors and other users of financial statements with more complete and neutral financial information by requiring that the compensation cost relating to share-based payment transactions be recognized in the financial statements. The effective date for this statement has been established by the SEC to be as of the first annual period that begins after June 15, 2005. The Company is evaluating the impact of this pronouncement and it is not expected to be material. PURCHASE OF LIMA, OHIO BRANCHES On June 17, 2005, State Bank acquired two bank branches and one non-banking facility located in Lima, Ohio from Liberty Savings Bank, FSB, a subsidiary of Liberty Capital, Inc. The acquisition included approximately $60.6 million in deposits and $5.9 million in loans. The branches opened as State Bank branches on June 20, 2005. ACQUISITION OF EXCHANGE BANCSHARES, INC. On April 13, 2005, Rurban entered into an Agreement and Plan of Merger (the "Merger Agreement") with Exchange Bancshares, Inc., an Ohio corporation ("Exchange") headquartered in Luckey, Ohio. In accordance with the terms and conditions of the Merger Agreement, Exchange will be merged with and into Rurban, with Rurban being the surviving corporation in the merger. Exchange's wholly-owned subsidiary, Exchange Bank, will operate as a separate bank subsidiary of Rurban following the completion of the merger. This transaction is expected to be completed later this year. Pursuant to the terms of the Merger Agreement, approximately one-half of the outstanding common shares of Exchange Bancshares will be exchanged for cash and approximately one-half of the outstanding common shares will be exchanged for common shares of Rurban. Subject to certain adjustments set forth in the Merger Agreement, each outstanding common share of Exchange will be converted into either $22.00 in cash or 1.555 common shares of Rurban. Shareholders of Exchange Bancshares who hold 100 or fewer shares will receive all cash, while shareholders holding more than 100 shares may elect cash, Rurban common shares or a combination of cash and Rurban common shares. The merger is subject to approval by federal and state regulators and the shareholders of Exchange, as well as the satisfaction of other customary conditions set forth in the Merger Agreement. 23
The merger is subject to approval by federal and state regulators and the shareholders of Exchange, as well as the satisfaction of other customary conditions set forth in the Merger Agreement. As stated in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, the merger agreement provides for a reduction in the purchase price per share to be paid by the Company in the merger in the event the shareholders' equity of Exchange Bancshares, Inc. (as adjusted in accordance with the merger agreement) falls below $8.1 million prior to the closing. On or about July 13, 2005, Exchange Bancshares, Inc. filed Amendment No. 1 to its FORM 10-KSB for the fiscal year ended December 31, 2004 and Amendment No. 1 to its FORM 10-QSB for the quarterly period ended March 31, 2005 in response to a comment letter received from the Securities and Exchange Commission relating to the accounting and reporting by Exchange of its valuation allowance for deferred tax assets. The impact of the Amendments was to decrease shareholder's equity at December 31, 2004 by $196,000 and to further decrease shareholders' equity at March 31, 2005 by $35,000. The impact of these reductions could result in a reduction in the per share purchase price to be paid by the Company in the merger. QUARTERLY EARNINGS SUMMARY The net loss for the second quarter of 2005 was $114,000, or $0.02 per diluted share, versus net income of $709,000, or $0.16 per diluted share, for the second quarter of 2004. Net income for the six months was $525,000, or $0.11 per diluted share, versus net income of $1.3 million, or $0.29 per diluted share, for the same period in 2004. The second quarter loss was mainly driven by the integration and assimilation costs incurred in the acquisition of the two Liberty Savings branches and the pending acquisition of Exchange. In addition, a higher loan loss provision was deemed appropriate to address changing collateral values in the auto lease portfolio in response to recent automakers' discount programs. Net interest income increased $17,000, virtually unchanged for the second quarter of 2005 versus the second quarter of 2004. The net interest margin remained the same at 3.10% for the second quarter of 2005 and the second quarter of 2004. The Company has begun utilizing the excess liquidity from its recently acquired branches by paying down higher-cost time deposits and borrowings as they mature. The Company continues to maintain its conservative posture on asset quality and adheres to its disciplined approach to loan growth. As a result, the Company has managed its balance sheet to benefit from rising interest rates. The provision for loan losses was $352,000 for the second quarter of 2005 compared to a reduction in the provision of $340,000 for the second quarter of 2004. Loan loss reserves were 1.91% of total loans in the second quarter of 2005 compared to 2.56% in the second quarter of 2004. The $352,000 addition to the Company's reserve was specifically the result of the changing values in the used car market driven by recent discount programs offered by domestic auto makers. Non-interest income increased $336,000 to $4.4 million in the second quarter of 2005 compared to $4.1 million for the second quarter of 2004. The increase in non-interest income was mainly the result of the increase in data processing fees of $447,000 associated with the expansion of RDSI's customer base and a higher level of termination fees from several banks that merged and left the system. The quarterly increase was partially offset by declining customer service fees and mortgage banking income due to lower average volume levels of transaction accounts and lower mortgage originations. 24
Non-interest expense increased $680,000 to $7.2 million for the second quarter of 2005 compared to $6.6 million for the second quarter of 2004. Included in the $680,000 increase were internal costs of approximately $326,000 related to the Company's growth initiatives, namely the acquisition, integration, and staffing of the two Lima branches and the branch market optimization study. CHANGES IN FINANCIAL CONDITION JUNE 30, 2005 VS. DECEMBER 31, 2004 At June 30, 2005, total assets were $451.0 million, an increase of $35.7 million from December 31, 2004 and was mainly attributable to the branch acquisitions in Lima that added approximately $59.0 million in deposits and increased the Company's assets approximately $44.0 million after the Company prepaid some higher-cost FHLB advances and allowed its Brokered Deposit portfolio to run-down. JUNE 30, 2005 VS. JUNE 30, 2004 As of June 30, 2005, total assets increased $36.0 million from June 30, 2004. The increase was mainly due to the aforementioned Lima branch acquisition. The branch acquisition added significant asset liquidity to the June 30, 2005 Balance Sheet compared to the same period a year ago most notably in increases in Federal Funds Sold of $20 million and available for sale securities of almost $11 million. Liability liquidity was also favorably impacted through the purchase of lower cost deposit liabilities which allowed the Company the ability to reduce its reliance on higher cost borrowings and brokered deposits. LINKED QUARTER COMPARISON The Company reported a net loss for the second quarter of 2005 of $114,000, or $0.02 per diluted share, versus a net profit of $638,000, or $0.14 per diluted share, for the first quarter of 2005. The second quarter loss was mainly driven by the acquisition and integration of the two Lima branches and the pending acquisition of Exchange, as well as a higher loan loss provision to address changing collateral values in the auto lease portfolio in response to recent automakers' discount programs. The first quarter profit was mainly due to an improvement in the net interest margin coupled with an increase in data processing fee income from RDSI. Net interest income decreased $70,000 or 2% to $2.9 million for the second quarter of 2005 when compared to the first quarter of 2005. This decrease was driven by an increase in funding costs as the average balance of deposits increased $13.9 million in the second quarter as a result of the Lima branch acquisition. 25
A comparison of financial results for the quarter ended June 30, 2005 to the previous quarter ended March 31, 2005 is as follows: <TABLE> <CAPTION> Three Months Ended Linked ------------------- Quarter 06/30/05 03/31/05 % Change -------- -------- -------- (dollars in millions, except per share data) <S> <C> <C> <C> Total Assets $ 451 $ 414 +9% Loans Held for Sale 0.4 0.3 -- Loans (net of unearned income) 272 266 +2% Allowance for Loan Losses 5.2 4.8 +8% Total Deposits 340 285 +19% Borrowed Funds 38.0 63.5 -40% Net interest Income 2.9 3.0 -- Loan Loss Provision 0.4 -- -- Non-interest Income 4.4 4.4 -- Non-interest Expense 7.2 6.5 +11% Net Income (Loss) (0.1) 0.6 -- Basic Earnings (Loss) Per Share $(0.02) $0.14 -- Diluted Earnings (Loss) Per Share $(0.02) $0.14 -- </TABLE> On a linked quarter basis, total loans increased $6 million and total assets increased $37 million. These increases are mainly attributable to the Lima branch acquisition. The Company continues to promote the exiting of out-of-market loans. Borrowed funds, which is the made up of FHLB advances and federal funds purchased, decreased $25.5 million or 40%, as a result of purchasing lower cost deposit liabilities in the Lima branch acquisition, which allowed the Company to reduce its reliance on higher cost borrowings and brokered deposits. TOTAL REVENUE <TABLE> <CAPTION> Three Months Ended --------------------------------------- 06/30/05 03/31/05 $Change %Change -------- -------- ------- ------- (dollars in thousands) <S> <C> <C> <C> <C> Total Revenue $7,346 $7,407 $-61 -1% </TABLE> Total revenue (net interest income plus noninterest income) was $7.3 million for the second quarter of 2005 compared to $7.4 million for the first quarter of 2005, down $61,000 or 1%. NET INTEREST INCOME <TABLE> <CAPTION> Three Months Ended --------------------------------------- 06/30/05 03/31/05 $Change %Change -------- -------- ------- ------- (dollars in thousands) <S> <C> <C> <C> <C> Net Interest Income $2,927 $2,997 $-70 -2% </TABLE> 26
Net interest income decreased $70,000 in the second quarter of 2005 when compared to the first quarter of 2005. The tax equivalent net interest margin for the second quarter of 2005 was 3.10% compared to 3.28% for the previous quarter. This decrease was driven by an increase in funding costs as the average balance of deposits increased $13.9 million in the second quarter as a result of the Lima branch acquisition. LOAN LOSS PROVISION The provision for loan losses was $352,000 for the second quarter of 2005 compared to $0 in the first quarter of 2005. The $352,000 addition to the Company's reserve was the result of the changing values in the used car market driven by recent discount programs offered by domestic auto makers. The results of the second quarter are discussed in the "Allowance for Loan Losses" section. NON-INTEREST INCOME <TABLE> <CAPTION> Three Months Ended --------------------------------------- 06/30/05 03/31/05 $Change %Change -------- -------- ------- ------- (dollars in thousands) <S> <C> <C> <C> <C> Total Non-interest Income $4,419 $4,411 $ +8 +0.2% - - Data Service Fees 2,873 2,956 -83 -3% - - Trust Fees 779 804 -25 -3% - - Deposit Service Fees 446 437 +9 +2% - - Gains on Sale of Loans 9 8 +1 +13% - - Gains on Sale of Securities -- (9) +9 -- - - Gain (Loss) on Assets 56 (39) +95 -- - - Other 256 254 +2 +1% </TABLE> Non-interest income increased by $8,000 to $4.4 million in the second quarter of 2005 compared to $4.4 million in the first quarter of 2005. The second quarter slight increase is mainly due to the Company liquidating various repossessed/other real estate owned assets resulting in a gain of $56,000 in the second quarter of 2005 versus a loss of $39,000 in the first quarter of 2005. The second quarter increase was mostly offset by seasonality factors in the first quarter relating to data processing fees and trust fees. These accounts generally experience seasonally higher activity levels during the first quarter. NON-INTEREST EXPENSE <TABLE> <CAPTION> Three Months Ended --------------------------------------- 06/30/05 03/31/05 $Change %Change -------- -------- ------- ------- (dollars in thousands) <S> <C> <C> <C> <C> Total Non-interest Expense $7,244 $6,520 $+724 +11% - - Salaries & Employee Benefits 3,501 3,231 +270 +8% - - Equipment Expense 1,283 1,253 +30 +2% - - Professional Fees 711 519 +192 +37% - - All Other 1,749 1,517 +232 +15% </TABLE> Non-interest expense for the second quarter of 2005 was $7.2 million compared to $6.5 million for the first quarter of 2005, an increase of $724,000 or 11%. The quarterly increase was mainly due to internal costs of approximately $326,000 related to the Company's growth initiatives, namely the 27
acquisition, integration, and staffing of the two Lima branches and a branch market optimization study. LOANS <TABLE> <CAPTION> % of As of % of Inc 06/30/05 Total 03/31/05 Total (Dec) -------- ----- -------- ----- ----- (dollars in millions) <S> <C> <C> <C> <C> <C> Commercial $ 55 20% $ 60 23% $ (5) Commercial real estate 70 26% 65 24% 5 Agricultural 44 16% 42 16% 2 Residential 64 24% 63 24% 1 Consumer 36 13% 32 12% 4 Leasing loans 3 1% 4 1% (1) ---- ---- ---- Total $272 $266 $ 6 Loans held for sale 0.4 0.3 0.1 ---- ---- ---- Total $272 $267 $ 6 </TABLE> Loans increased $6 million from March 31, 2005 to June 30, 2005. The increase in the second quarter was mainly attributable to the Lima branch acquisition which resulted in approximately $6 million in loans. During the first quarter of 2005, the Company intensified its marketing efforts in Northwest Ohio and continued its focus on sales resulting in an improvement in loan volume, some of which is seasonally related to agriculture and some of which may be attributed to an improved local economy. These marketing efforts will continue throughout 2005. ASSET QUALITY As of and or the Quarter Ended (dollars in millions) <TABLE> <CAPTION> 06/30/05 03/31/05 Change -------- -------- ------ <S> <C> <C> <C> Non-performing loans $13.5 $15.9 $ -2.4 Non-performing assets 16.1 17.0 -0.9 Non-performing assets/ loan plus OREO 5.87% 6.37% -0.50% Non-performing assets/ total assets 3.57% 4.10% -0.53% Net chargeoffs (0.1) 0.1 -0.2 Net chargeoffs (annualized)/ total loans N/A N/A N/A Loan loss provision 0.4 -- +0.4 Allowance for loan loss - $ 5.2 4.8 +0.4 Allowance for loan loss - % 1.91% 1.81% +0.10% Allowance/non-performing loans 39% 30% -- Allowance/non-performing assets 32% 28% -- </TABLE> Non-performing assets at June 30, 2005 decreased to $16.1 million or 3.57% of total assets, versus $17.0 million, or 4.10% of total assets at March 31, 2005, a decrease of $0.9 million. This decrease is attributable to a $1.4 million decrease in non-accrual loans. The Company had a net recovery of $0.1 28
million for the second quarter of 2005 compared to net chargeoffs of $0.1 million in the first quarter of 2005. ALLOWANCE FOR LOAN LOSSES The Company grades its loans using an eight grade system. Loans with concerns are classified as either: - Grade 5 - Special Mention: Potential weaknesses that deserve management's close attention; - Grade 6 - Substandard: Inadequately protected, with well-defined weakness that jeopardize pay off of debt; - Grade 7 - Doubtful: Inherent weaknesses which are well-defined and a high probability of loss (impaired) (these loans are typically reserved down to collateralized values); or - Grade 8 - Loss: Considered uncollectible. May have recovery or salvage value with future collection efforts (these loans are either fully reserved or charged off). The Company's allowance for loan losses has four components. Those components are shown in the following table. Commercial, commercial real estate and agricultural loans of over $100,000 are individually reviewed and assessed regarding the need for an individual allocation. <TABLE> <CAPTION> 06/30/05 03/31/05 ---------------------- ---------------------- ALLOCATION ALLOCATION LOAN ------------ LOAN ------------ BALANCE $ % BALANCE $ % ------- ---- ----- ------- ---- ----- <S> <C> <C> <C> <C> <C> <C> Allocations for individual commercial loans graded Doubtful (impaired) $ 10.3 $1.8 17.48% $ 14.2 $1.7 11.97% Allocations for individual commercial loans graded Substandard 9.2 0.7 7.61 9.4 0.6 6.38 Allocation based on Special Mention loan balance 12.1 0.4 3.31 13.3 0.4 3.01 "General" allowance based on chargeoff history of nine categories of loans 240.8 2.3 0.96 229.6 2.1 0.91 ------ ---- ----- ------ ---- ----- TOTAL $272.4 $5.2 1.91% $266.5 $4.8 1.81% </TABLE> The amount of loans classified as doubtful decreased $3.9 million to $10.3 million for the quarter ended June 30, 2005 and substandard loans decreased $0.2 million to $9.2 million. Allowance allocations on doubtful loans increased $0.1 million and the allowance allocations on substandard loans increased $0.1 million from March 31, 2005. The allowance for loan losses at June 30, 2005 was $5.2 million or 1.91% of loans compared to $4.8 million or 1.81% at March 31, 2005. CAPITAL RESOURCES At June 30, 2005, actual capital levels (in millions) and minimum required levels were: 29
<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 $57.3 19.4% $23.7 8.0% $ -- N/A State Bank 35.3 12.8 22.0 8.0 27.5 10.0 </TABLE> The Company and State Bank were categorized as well capitalized at June 30, 2005. 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 $140.3 million at June 30, 2005 compared to $119.6 million at December 31, 2004. Management believes its current liquidity level is sufficient to meet its liquidity needs. The Company's residential first mortgage portfolio of $63.8 million at June 30, 2005 and $62.9 million at March 31, 2005, which can and has been used to collateralize borrowings, is an additional source of liquidity. At June 30, 2005, all eligible mortgage loans were pledged under a FHLB blanket lien. The cash flow statements for the periods presented provide an indication of the Company's sources and uses of cash as well as an indication of the ability of the Company to maintain an adequate level of liquidity. A discussion of the cash flow statements at June 30, 2005 and 2004 follows. The Company experienced positive cash flows from operating activities at June 30, 2005 and 2004. Net cash from operating activities was $2.4 million and $1.8 million, respectively, at June 30, 2005 and 2004. Net cash flow from investing activities was $44.0 million and $9.8 million at June 30, 2005 and 2004, respectively. The changes in net cash from investing activities at June 30, 2005 include an increase in loan growth of $4.4 million offset by the proceeds from the Lima branch acquisition. The changes in net cash from investing activities at June 30, 2004 include a increase in securities of $6.9 million, a decrease in loans of $(10.5) million and changes in interest-bearing deposits, purchases of premises and equipment and other investing activities. Net cash flow from financing activities was $(25.9) million and $(19.6) million at June 30, 2005 and 2004, respectively. The net cash variance was primarily due to repayments of FHLB advances of $30.5 million at June 30, 2005 compared to a reduction of total deposits of $(26.5) million at June 30, 2004. OFF-BALANCE-SHEET BORROWING ARRANGEMENTS: Significant additional off-balance-sheet liquidity is available in the form of FHLB advances, unused federal funds lines from correspondent banks, and the national certificate of deposit market. Approximately $54.2 million of the Company's $63.8 million residential first mortgage loan portfolio qualifies to collateralize FHLB borrowings and was pledged to meet FHLB collateralization requirements as of June 30, 2005. In addition to residential first mortgage loans, $15.4 million in investment securities are pledged to meet FHLB collateralization requirements. Based on the current collateralization 30
requirements of the FHLB, approximately $11.9 million of additional borrowing capacity existed at June 30, 2005. As of June 30, 2005 and March 31, 2005, the Company had unused federal funds lines totaling $20.0 million from three correspondent banks. Federal funds borrowed were $0 at June 30, 2005 and $5.0 million at March 31, 2005. <TABLE> <CAPTION> TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS JUNE 30, 2005 PAYMENT DUE BY PERIOD -------------------------------------------------------------------- LESS MORE THAN 1 1 - 3 3 - 5 THAN 5 TOTAL YEAR YEARS YEARS YEARS ------------ ------------ ----------- ---------- ----------- <S> <C> <C> <C> <C> <C> Contractual Obligations Long-Term Debt Obligations $ 38,000,000 $ 9,000,000 $ 8,000,000 $5,000,000 $16,000,000 Other Debt Obligations 12,715,527 1,399,529 667,056 338,942 10,310,000 Capital Lease Obligations 0 0 0 0 0 Operating Lease Obligations 2,165,448 261,600 523,200 523,200 857,448 Purchase Obligations 0 0 0 0 0 Other Long-Term Liabilities Reflected on the Registrant's Balance Sheet under GAAP 190,750,003 115,454,892 71,365,143 2,985,203 944,765 ------------ ------------ ----------- ---------- ----------- Total $243,630,978 $126,116,021 $80,555,399 $8,847,345 $28,112,213 ============ ============ =========== ========== =========== </TABLE> The Company's contractual obligations as of June 30, 2005 were evident in long-term debt obligations, other debt obligations, operating lease obligations and other long-term liabilities. Long-term debt obligations are comprised of FHLB advances of $38.0 million. Other debt obligations are comprised of Trust Preferred Securities of $10.3 million and Notes Payable of $2.4 million. The operating lease obligation is a lease on the State Bank operations building (formerly the RDSI-South building) of $99,600 a year and the RDSI-North building of $162,000 a year. Other long-term liabilities are comprised of time deposits of $190,750,003. 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 31
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). Financial institutions derive their income primarily from the excess of interest collected over interest paid. The rates of interest an institution earns on its assets and owes on its liabilities generally are established contractually for a period of time. Since market interest rates change over time, an institution is exposed to lower profit margins (or losses) if it cannot adapt to interest rate changes. For example, assume that an institution's assets carry intermediate or long term fixed rates and that those assets are funded with short-term liabilities. If market interest rates rise by the time the short-term liabilities must be refinanced, the increase in the institution's interest expense on its liabilities may not be sufficiently offset if assets continue to earn at the long-term fixed rates. Accordingly, an institution's profits could decrease on existing assets because the institution will either have lower net interest income or possibly, net interest expense. Similar risks exist when assets are subject to contractual interest rate ceilings, or rate sensitive assets are funded by longer-term, fixed-rate liabilities in a declining rate environment. There are several ways an institution can manage interest rate risk including: 1) matching repricing periods for new assets and liabilities, for example, by shortening terms of new loans or investments; 2) selling existing assets or repaying certain liabilities; and 3) hedging existing assets, liabilities, or anticipated transactions. An institution might also invest in more complex financial instruments intended to hedge or otherwise change interest rate risk. Interest rate swaps, futures contacts, options on futures contracts, and other such derivative financial instruments can be used for this purpose. Because these instruments are sensitive to interest rate changes, they require management's expertise to be effective. The Company has not purchased derivative financial instruments in the past. GOALS FOR 2005 AND 2006 The Company's near term goals include: - Continued focus on the quality of the loan underwriting process - Continued efforts to reduce the level of problem loans - Continued focus on Customer Relationship Management (CRM) - Continued efforts to improve operational efficiencies - Continue to build shareholder value and franchise value. 32
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 June 30, 2005. It does not present when these items may actually reprice. For loans receivable, securities, and liabilities with contractual maturities, the table presents principal cash flows and related weighted-average interest rates by contractual maturities as well as the Company's historical experience regarding interest rate fluctuations on the prepayment of loans and mortgage backed securities. For core deposits (demand deposits, interest-bearing checking, savings, and money market deposits) that have no contractual maturity, the table presents principal cash flows and, as applicable, related weighted-average interest rates based upon the Company's historical experience, management's judgment and statistical analysis, as applicable, concerning their most likely withdrawal behaviors. The current interest rates for core deposits have been assumed to apply for future periods in this table as the actual interest rates that will need to be paid to maintain these deposits are not currently known. Weighted average variable rates are based upon contractual rates existing at the reporting date. PRINCIPAL/NOTIONAL AMOUNT MATURING OR ASSUMED TO WITHDRAW IN: (DOLLARS IN THOUSANDS) <TABLE> <CAPTION> First Years Year 2 - 5 Thereafter Total -------- -------- ---------- -------- <S> <C> <C> <C> <C> Comparison of 2005 to 2004: Total rate-sensitive assets: At June 30, 2005 $164,765 $158,095 $84,471 $407,331 At December 31, 2004 131,266 151,944 93,317 376,527 -------- -------- ------- -------- Increase (decrease) $ 33,499 $ 6,151 $(8,846) $ 30,804 Total rate-sensitive liabilities: At June 30, 2005 $155,237 $210,187 $30,320 $395,744 At December 31, 2004 152,986 174,129 33,459 360,574 -------- -------- ------- -------- Increase (decrease) $ 2,251 $ 36,058 $(3,139) $ 35,170 </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 core deposits, the repricing frequency is assumed to be longer than when such deposits actually reprice. For some rate sensitive liabilities, their repricing frequency is the same as their contractual maturity. For variable rate loans receivable, repricing frequency can be daily or monthly. For adjustable rate loans receivable, repricing can be as frequent as annually for loans whose contractual maturities range from one to thirty years. While increasingly aggressive local market competition in lending rates has pushed loan rates lower, the Company's increased reliance on non-core funding sources has restricted the Company's ability to reduce funding rates in concert with declines in lending rates. 33
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) FHLB borrowings with terms of one day to ten years. 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, 2005, 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 The Company is not party to any pending legal proceedings other than routine litigation which management does not believe will have a material adverse effect on the Company. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS a. Not applicable b. Not applicable c. The following table provides information regarding repurchases of the Company's common shares during the three months ended June 30, 2005: <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 Average Price Announced Plans or Purchased Under the Period Shares Purchased (1) Paid per Share Programs Plans or Programs ------ -------------------- -------------- ------------------- ------------------- <S> <C> <C> <C> <C> April 1 thru April 30, 2005 231 $13.53 -- -- May 1 thru May 31, 2005 850 $13.51 -- -- June 1 thru June 30, 2005 3,225 $12.68 -- -- </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 Rurban held its Annual Meeting of Shareholders on April 21, 2005. At the close of business on the February 22, 2005 record date, 4,568,085 Rurban Financial Corp. common shares were outstanding and entitled to vote. At the Annual Meeting, 3,624,742 or 79.3% of the outstanding common shares entitle to vote were represented by proxy or in person. At the Annual Meeting, the following directors were re-elected for a three-year term: John R. Compo John Fahl 35
Robert A. Fawcett, Jr. Rita A. Kissner A summary of the voting at the Annual Meeting follows: <TABLE> <CAPTION> Nominee Votes For Votes Withheld ------- --------- -------------- <S> <C> <C> John R. Compo 3,437,740 187,002 John Fahl 3,481,883 142,859 Robert A. Fawcett, Jr. 3,464,594 160,148 Rita A. Kissner 3,448,320 176,422 </TABLE> ITEM 5. OTHER INFORMATION Not applicable ITEM 6. EXHIBITS a. Exhibits 2 - Agreement and Plan of Merger, dated as of April 13, 2005, by and between Rurban Financial Corp., and Exchange Bancshares, Inc. - Incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K dated April 14, 2005 (File No. 0-13507) 31.1 - Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer) - Filed herewith 31.2 - Rule 13a-14(a)/15d-14(a) Certification (Principal Financial Officer) - Filed herewith 32.1 - Section 1350 Certification (Principal Executive Officer) - Filed herewith 32.2 - Section 1350 Certification (Principal Financial Officer) - Filed herewith 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: August 15, 2005 By /S/ Kenneth A. Joyce ------------------------------------- Kenneth A. Joyce President & Chief Executive Officer By /S/ James E. Adams ------------------------------------- James E. Adams Executive Vice President & Chief Financial Officer 37