1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 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> <CAPTION> <S> <C> Ohio 34-1395608 - ------------------------------------------- ------------------------- (State or other jurisdiction of I.R.S. Employer incorporation or organization) Identification No.) 401 Clinton Street, Defiance, Ohio 43512 - ------------------------------------------- ------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (419) 783-8950 ------------------------- Securities registered pursuant to Section 12(b) of the Act: None ------------------------- Securities registered pursuant to Section 12(g) of the Act: </TABLE> Common Shares, Without Par Value (4,347,238 outstanding at March 9, 2001) ------------------------------------------------------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Based upon the closing price of the Common Shares of the Registrant on March 9, 2001, the aggregate market value of the Common Shares of the Registrant held by non-affiliates on that date was $48,888,417. Documents Incorporated by Reference: Portions of the Registrant's definitive Proxy Statement for its Annual Meeting of Shareholders to be held on April 23, 2001 are incorporated by reference into Part III of this Annual Report on Form 10-K. Exhibit Index on Page 86 (as numbered sequentially) 1
2 PART I ------ Item 1. Business. - ----------------- General ------- Rurban Financial Corp., an Ohio corporation (the "Corporation"), is a bank holding company under the Bank Holding Company Act of 1956, as amended, and is subject to regulation by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). The executive offices of the Corporation are located at 401 Clinton Street, Defiance, Ohio 43512. Through its subsidiaries, The State Bank and Trust Company, Defiance, Ohio ("State Bank"), The Peoples Banking Company, Findlay, Ohio ("Peoples Bank"), The First National Bank of Ottawa ("First National Bank") and The Citizens Savings Bank Company, Pemberville, Ohio ("Citizens Savings Bank"), the Corporation is engaged in the business of commercial banking. The Corporation's subsidiary, Rurbanc Data Services, Inc. ("RDSI"), is engaged in the related business of providing data processing services, principally to banks. The Corporation's subsidiary, Rurban Life Insurance Company ("Rurban Life"), is engaged in the related business of accepting life and disability reinsurance ceded in part by American General Assurance Company ("AGAC") from the credit life and disability insurance purchased by customers of the Corporation's banking subsidiaries from AGAC in connection with revolving credit loans secured by mortgages and with certain installment loans made to such customers. In August 2000, the Corporation's banks ceased issuing credit life and disability insurance contracts through AGAC. In September 2000, the Corporation's banks entered into agreements with Individual Assurance Corporation ("IAC") and began issuing credit life and disability insurance contract through IAC. State Bank has two wholly-owned subsidiaries: Reliance Financial Services, N.A. ("RFS") and Rurban Mortgage Company ("RMC"). RFS is nationally-chartered trust and financial services company. RMC is an Ohio corporation with its main office located in Defiance, Ohio. RMC ceased originating mortgage loans in the second quarter of 2000. General Description of Holding Company Group -------------------------------------------- State Bank - ---------- State Bank is an Ohio state-chartered bank. State Bank presently operates six branch offices in Defiance County, Ohio (five in the city of Defiance and one in Ney), one branch office in adjacent Paulding County, Ohio, three branch offices in Fulton County, Ohio (one in each of Delta, Lyons and Wauseon), one branch office in Summit County (Westlake) and one in Cuyahoga County (Akron).. At December 31, 2000, State Bank had 106 full-time equivalent employees. State Bank offers a full range of commercial banking services, including checking and NOW accounts; passbook savings and money market accounts; time certificates of deposit, automatic teller machines; commercial, consumer, agricultural and residential mortgage loans (including "Home Value Equity" line of credit loans); personal and corporate trust services; commercial leasing; bank credit card services; safe deposit box rentals; and other personalized banking services. In addition, State Bank serves as a correspondent (federal funds investing and check clearing purposes) for three affiliated financial institutions in the region (Peoples Bank, First National Bank and Citizens Savings Bank). RFS --- RFS is a nationally-chartered trust and financial services company and a wholly-owned subsidiary of State Bank. RFS offers various trust and financial services, including asset management services for 2
3 individuals and corporate employee benefit plans as well as brokerage services through Raymond James Financial, Inc. RFS' main office is located in State Bank's main offices in Defiance, Ohio. RFS opened offices in Westlake and Dayton, Ohio during 2000. At December 31, 2000, RFS had 31 full-time equivalent employees. RMC --- RMC is an Ohio corporation with its main office located in Defiance, Ohio. RMC is a wholly-owned subsidiary of State Bank. RMC ceased originating mortgage loans in the second quarter of 2000. RMC's remaining activities include the servicing of a portfolio of residential loans. At December 31, 2000, RMC had no employees. Peoples Bank - ------------ Peoples Bank is an Ohio state-chartered bank. The main office of Peoples Bank is located in Findlay, Ohio. Peoples Bank provides checking and NOW accounts; passbook savings and money market accounts; time certificates of deposit; automatic teller machines; commercial and consumer loans and real estate mortgage loans; personal and corporate trust services; and safe deposit box rental facilities. Peoples Bank operates one full-service branch in Findlay and one in McComb, Ohio. At December 31, 2000, Peoples Bank had 23 full-time equivalent employees. First National Bank - ------------------- First National Bank is a national banking association. The executive offices of First National Bank are located at 405 East Main Street, Ottawa, Ohio. At its present location, First National Bank operates four drive-in teller lanes and an automatic teller machine with a traditional banking lobby on the first floor. First National Bank presently operates no branch offices. At December 31, 2000, First National Bank had 13 full-time equivalent employees. First National Bank offers a full range of commercial banking services, including checking and NOW accounts; passbook savings and money market accounts; time certificates of deposit; automatic teller machines; commercial, consumer, agricultural and residential mortgage loans; personal and corporate trust services; commercial leasing; bank credit card services; safe deposit box rentals; and other personalized banking services. Citizens Savings Bank - --------------------- Citizens Savings Bank is an Ohio state-chartered bank. The main office of Citizens Savings Bank is located in Pemberville, Ohio. Citizens Savings Bank provides checking and NOW accounts; passbook savings and money market accounts; time certificates of deposit; an automatic teller machine; commercial, consumer, agricultural and residential loans; personal and corporate trust services; commercial leasing; bank credit card services; safe deposit box rentals; and other personalized banking services. Citizens Savings Bank also operates a full-service branch in Gibsonburg, Ohio. At December 31, 2000, Citizens Savings Bank had 23 full-time equivalent employees. RDSI - ---- Substantially all of RDSI's business is comprised of providing data processing services to 51 financial institutions in Ohio, Michigan and Indiana (including State Bank, Peoples Bank, First National Bank and Citizens Savings Bank), including information processing for financial institution customer 3
4 services, loan and deposit account information and data analysis. At December 31, 2000, RDSI had 37 full-time equivalent employees. Rurban Life - ----------- Rurban Life commenced its business of transacting insurance as an Arizona life and disability reinsurer in January, 1988. Rurban Life may accept life and disability reinsurance ceded to Rurban Life by an insurance company authorized to write life and disability insurance, provided that the amount accepted does not exceed certain limitations imposed under Arizona law. Rurban Life is not currently authorized to write life and disability insurance on a direct basis. Rurban Life accepts reinsurance ceded in part by AGAC from the credit life and disability insurance purchased by customers of State Bank, Peoples Bank, First National Bank and Citizens Savings Bank from AGAC in connection with revolving credit loans secured by mortgages and with certain installment loans made to such customers by State Bank, Peoples Bank, First National Bank and Citizens Savings Bank. The operations of Rurban Life do not materially impact the consolidated results of operations of the Corporation. As of December 31, 2000, Rurban Life has not accepted any other reinsurance. In August 2000, the Corporation's banks ceased issuing credit life and disability insurance contracts through AGAC. In September 2000, the Corporation's banks entered into agreements with Individual Assurance Corporation ("IAC") and began issuing credit life and disability insurance contract through IAC. At December 31, 2000, Rurban Life had no employees. Competition ----------- State Bank, Peoples Bank, First National Bank and Citizens Savings Bank experience significant competition in attracting depositors and borrowers. Competition in lending activities comes principally from other commercial banks in the lending areas of State Bank, Peoples Bank, First National Bank and Citizens Savings Bank, and, to a lesser extent, from savings associations, insurance companies, governmental agencies, credit unions, securities brokerage firms and pension funds. The primary factors in competing for loans are interest rates charged and overall banking services. Competition for deposits comes from other commercial banks, savings associations, money market funds and credit unions as well as from insurance companies and securities brokerage firms. The primary factors in competing for deposits are interest rates paid on deposits, account liquidity and convenience of office location. RDSI also operates in a highly competitive field. RDSI competes primarily on the basis of the value and quality of its data processing services, and service and convenience to its customers. Rurban Life operates in the highly competitive industry of credit life and disability insurance. A large number of stock and mutual insurance companies also operating in this industry have been in existence for longer periods of time and have substantially greater financial resources than does Rurban Life. The principal methods of competition in the credit life and disability insurance industry are the availability of coverages, premium rates and quality of service. RFS operates in the highly competitive trust services field and its competition is primarily other Ohio bank trust departments. Supervision and Regulation -------------------------- The following is a summary of certain statutes and regulations affecting the Corporation and its subsidiaries. The summary is qualified in its entirety by reference to such statutes and regulations. The Corporation is a bank holding company under the Bank Holding Company Act of 1956, as amended, which restricts the activities of the Corporation and the acquisition by the Corporation of voting 4
5 shares or assets of any bank, savings association or other company. The Corporation is also subject to the reporting requirements of, and examination and regulation by, the Federal Reserve Board. Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve Act on transactions with affiliates, including any loans or extensions of credit to the bank holding company or any of its subsidiaries, investments in the stock or other securities thereof and the taking of such stock or securities as collateral for loans or extensions of credit to any borrower; the issuance of guarantees, acceptances or letters of credit on behalf of the bank holding company and its subsidiaries; purchases or sales of securities or other assets; and the payment of money or furnishing of services to the bank holding company and other subsidiaries. Bank holding companies are prohibited from acquiring direct or indirect control of more than 5% of any class of voting stock or substantially all of the assets of any bank holding company without the prior approval of the Federal Reserve Board. A bank holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with extensions of credit and/or the provision of other property or services to a customer by the bank holding company or its subsidiaries. As a national bank, First National Bank is supervised and regulated by the OCC. Reliance, as a nationally-chartered bank, is also regulated by the OCC. As Ohio state-chartered banks, State Bank, Peoples Bank and Citizens Savings Bank are supervised and regulated by the Ohio Division of Financial Institutions and the Federal Deposit Insurance Corporation ("FDIC"). The deposits of State Bank, Peoples Bank, First National Bank and Citizens Savings Bank are insured by the FDIC and those entities are subject to the applicable provisions of the Federal Deposit Insurance Act. A subsidiary of a bank holding company can be liable to reimburse the FDIC, if the FDIC incurs or anticipates a loss because of a default of another FDIC-insured subsidiary of the bank holding company or in connection with FDIC assistance provided to such subsidiary in danger of default. In addition, the holding company of any insured financial institution that submits a capital plan under the federal banking agencies' regulations on prompt corrective action guarantees a portion of the institution's capital shortfall, as discussed below. Various requirements and restrictions under the laws of the United States and the State of Ohio affect the operations of State Bank, Peoples Bank, First National Bank and Citizens Savings Bank including requirements to maintain reserves against deposits, restrictions on the nature and amount of loans which may be made and the interest that may be charged thereon, restrictions relating to investments and other activities, limitations on credit exposure to correspondent banks, limitations on activities based on capital and surplus, limitations on payment of dividends, and limitations on branching. The Federal Reserve Board has adopted risk-based capital guidelines for bank holding companies and for state member banks, such as State Bank and Citizens Savings Bank. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk weighted assets by assigning assets and off-balance-sheet items to broad risk categories. The minimum ratio of total capital to risk weighted assets (including certain off-balance-sheet items, such as standby letters of credit) is 8%. At least 4.0 percentage points is to be comprised of common stockholders' equity (including retained earnings but excluding treasury stock), noncumulative perpetual preferred stock, a limited amount of cumulative perpetual preferred stock, and minority interests in equity accounts of consolidated subsidiaries, less goodwill and certain other intangible assets ("Tier 1 capital"). The remainder ("Tier 2 capital") may consist, among other things, of mandatory convertible debt securities, a limited amount of subordinated debt, other preferred stock and a limited amount of allowance for loan and lease losses. The Federal Reserve Board also imposes a minimum leverage ratio (Tier 1 capital to total assets) of 3% for bank holding companies and state member banks that meet certain specified conditions, including no operational, financial or supervisory deficiencies, and including having the highest regulatory rating. The minimum leverage ratio is 1%-2% higher for other bank holding companies and state member banks based on their particular circumstances and risk profiles and those experiencing or anticipating significant growth. National bank subsidiaries, such as First National Bank, are subject to similar capital requirements adopted by the Comptroller of the 5
6 Currency, and state non-member bank subsidiaries, such as Peoples Bank, are subject to similar capital requirements adopted by the FDIC. The Corporation and its subsidiaries currently satisfy all capital requirements. Failure to meet applicable capital guidelines could subject a banking institution to a variety of enforcement remedies available to federal and state regulatory authorities, including the termination of deposit insurance by the FDIC. The federal banking regulators have established regulations governing prompt corrective action to resolve capital deficient banks. Under these regulations, institutions which become undercapitalized become subject to mandatory regulatory scrutiny and limitations, which increase as capital decreases. Such institutions are also required to file capital plans with their primary federal regulator, and their holding companies must guarantee the capital shortfall up to 5% of the assets of the capital deficient institution at the time it becomes undercapitalized. The ability of a bank holding company to obtain funds for the payment of dividends and for other cash requirements is largely dependent on the amount of dividends which may be declared by its subsidiary banks and other subsidiaries. However, the Federal Reserve Board expects the Corporation to serve as a source of strength to its subsidiary banks, which may require it to retain capital for further investment in the subsidiaries, rather than for dividends for shareholders of the Corporation. State Bank, Peoples Bank, First National Bank and Citizens Savings Bank may not pay dividends to the Corporation if, after paying such dividends, they would fail to meet the required minimum levels under the risk-based capital guidelines and the minimum leverage ratio requirements. State Bank, Peoples Bank, First National Bank and Citizens Savings Bank must have the approval of their respective regulatory authorities if a dividend in any year would cause the total dividends for that year to exceed the sum of the current year's net profits and the retained net profits for the preceding two years, less required transfers to surplus. Payment of dividends by the bank subsidiaries may be restricted at any time at the discretion of the regulatory authorities, if they deem such dividends to constitute an unsafe and/or unsound banking practice. These provisions could have the effect of limiting the Corporation's ability to pay dividends on its outstanding common shares. Rurban Life is chartered by the State of Arizona and is subject to regulation, supervision, and examination by the Arizona Department of Insurance. The powers of regulation and supervision of the Arizona Department of Insurance relate generally to such matters as minimum capitalization, the grant and revocation of certificates of authority to transact business, the nature of and limitations on investments, the maintenance of reserves, the form and content of required financial statements, reporting requirements and other matters pertaining to life and disability insurance companies. Deposit Insurance Assessments and Recent Legislation ---------------------------------------------------- The FDIC is authorized to establish separate annual assessment rates for deposit insurance for members of the Bank Insurance Fund ("BIF") and the Savings Association Insurance Fund ("SAIF"). State Bank, Peoples Bank, First National Bank and Citizens Savings Bank are members of BIF. The FDIC may increase assessment rates for either fund if necessary to restore the fund's ratio of reserves to insured deposits to its target level within a reasonable time and may decrease such rates if such target level has been met. The FDIC has established a risk-based assessment system for both BIF and SAIF members. Under this system, assessments vary based on the risk the institution poses to its deposit insurance fund. The risk level is determined based on the institution's capital level and the FDIC's level of supervisory concern about the institution. 6
7 Monetary Policy and Economic Conditions --------------------------------------- The commercial banking business is affected not only by general economic conditions, but also by the policies of various governmental regulatory authorities, including the Federal Reserve Board. The Federal Reserve Board regulates money and credit conditions and interest rates in order to influence general economic conditions primarily through open market operations in U.S. Government securities, changes in the discount rate on bank borrowings and changes in reserve requirements against bank deposits. These policies and regulations significantly affect the overall growth and distribution of bank loans, investments and deposits, and the interest rates charged on loans as well as the interest rates paid on deposits and accounts. The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of commercial banks in the past and are expected to continue to have significant effects in the future. In view of the changing conditions in the economy and the money market and the activities of monetary and fiscal authorities, no definitive predictions can be made as to future changes in interest rates, credit availability or deposit levels. Financial Services Modernization Act of 1999 -------------------------------------------- On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act, or the Financial Services Modernization Act of 1999, which, effective March 11, 2000, permits bank holding companies to become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. A bank holding company may become a financial holding company if each of its subsidiary banks is well capitalized under the Federal Deposit Insurance Corporation Act of 1991 prompt corrective action provisions, is well managed, and has at least a satisfactory rating under the Community Reinvestment Act by filing a declaration that the bank holding company wishes to become a financial holding company. No regulatory approval will be required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board. The Financial Services Modernization Act defines "financial in nature" to include: (i) securities underwriting, dealing and market making; (ii) sponsoring mutual funds and investment companies; (iii) insurance underwriting and agency; (iv) merchant banking activities; and (v) activities that the Federal Reserve Board has determined to be closely related to banking. The specific effects of the enactment of the Financial Services Modernization Act on the banking industry in general and on the Corporation and its subsidiaries have yet to be determined due to the fact that the Financial Services Modernization Act was only recently adopted. Statistical Financial Information Regarding the Corporation ----------------------------------------------------------- The following schedules and tables analyze certain elements of the consolidated balance sheets and statements of income of the Corporation and its subsidiaries, as required under Exchange Act Industry Guide 3 promulgated by the Securities and Exchange Commission, and should be read in conjunction with the narrative analysis presented in ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION and the Consolidated Financial Statements of the Corporation and its subsidiaries included at pages F-1 through F-37 of this Annual Report on Form 10-K. 7
8 I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL A. The following are the average balance sheets for the years ending December 31: <TABLE> <CAPTION> ASSETS 2000 1999 1998 ---- ---- ---- <S> <C> <C> <C> Interest-earning assets Securities available for sale (1) Taxable $ 74,441,630 $ 73,661,147 $ 68,465,434 Non-taxable 11,358,301 9,442,497 6,191,050 Federal funds sold 842,205 1,477,880 17,112,858 Loans, net of unearned income and deferred loan fees (2) 542,411,783 461,342,591 376,126,488 ----------------- ----------------- ----------------- Total interest-earning assets 629,053,919 545,924,115 467,895,830 Allowance for loan losses (6,652,365) (5,698,734) (5,382,901) ----------------- ----------------- ----------------- 622,401,554 540,225,381 462,512,929 Noninterest-earning assets Cash and due from banks 18,474,413 16,953,255 15,152,187 Premises and equipment, net 10,960,222 11,188,449 10,067,321 Accrued interest receivable and other assets 13,686,564 11,833,035 6,224,187 ----------------- ----------------- ----------------- $ 665,522,753 $ 580,200,120 $ 493,956,624 ================= ================= ================= LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities Deposits Savings and interest-bearing demand deposits $ 78,724,650 $ 82,291,784 $ 96,422,897 Time deposits 415,929,264 354,626,156 281,227,689 Short-term borrowings 19,961,260 11,313,555 1,093,099 Advances from Federal Home Loan Bank (FHLB) 43,769,424 32,332,414 24,222,456 Junior subordinated debentures 3,229,999 - - Other borrowed funds 4,314,728 4,100,000 - ----------------- ----------------- ----------------- Total interest-bearing liabilities 565,929,325 484,663,909 402,966,141 Noninterest-bearing liabilities Demand deposits 43,773,329 45,760,449 45,418,691 Accrued interest payable and other liabilities 9,192,932 6,809,194 5,140,844 ----------------- ----------------- ----------------- 618,895,586 537,233,552 453,525,676 Shareholders' equity (3) 46,627,167 42,966,568 40,430,948 ----------------- ----------------- ----------------- $ 665,522,753 $ 580,200,120 $ 493,956,624 ================= ================= ================= </TABLE> - -------------------------------------------------------------------------------- (1) Securities available for sale are carried at fair value. The average balance includes quarterly average balances of the market value adjustments and daily average balances for the amortized cost of securities. (2) Loan balances include principal balances of nonaccrual loans and loans held for sale. (3) Shown net of average net unrealized appreciation (depreciation) on securities available for sale, net of tax. 8
9 I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (CONTINUED) B. The following tables set forth, for the years indicated, the condensed average balances of interest-earning assets and interest-bearing liabilities, the interest earned or paid on such amounts, and the average interest rates earned or paid thereon. <TABLE> <CAPTION> ------------------------------2000-------------------------- ---- Average Average Balance Interest Rate ---------------- ---------------- ------------ <S> <C> <C> <C> INTEREST-EARNING ASSETS Securities (1) Taxable $ 76,005,166 $ 4,978,266 6.55% Non-taxable 11,906,739 897,333 (2) 7.54 (2) Federal funds sold 842,205 48,035 5.70 Loans, net of unearned income and deferred loan fees 542,411,783 (3) 50,404,396 (4) 9.29 ---------------- ---------------- Total interest-earning assets $ 631,165,893 56,328,030 (2) 8.92% (2) ================ INTEREST-BEARING LIABILITIES Deposits Savings and interest-bearing demand deposits $ 78,724,650 1,723,255 2.19% Time deposits 415,929,264 23,169,115 5.57 Short-term borrowings 19,961,260 1,358,778 6.81 Advances from FHLB 43,769,424 2,707,345 6.19 Junior subordinated debentures 3,229,999 335,667 10.39 Other borrowed funds 4,314,728 340,909 7.90 ---------------- ---------------- Total interest-bearing liabilities $ 565,929,325 29,635,069 5.24% ================ ---------------- Net interest income $ 26,692,961 (2) ================ Net interest income as a percent of average interest-earning assets 4.23% (2) </TABLE> - -------------------------------------------------------------------------------- (1) Securities balances represent daily average balances for the amortized cost of securities. The average rate is calculated based on the amortized cost of securities. (2) Computed on tax equivalent basis for non-taxable securities (34% statutory tax rate in 2000). (3) Loan balances include principal balances of nonaccrual loans and loans held for sale. (4) Includes net fees on loans of $1,836,580 in 2000. 9
10 I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (CONTINUED) <TABLE> <CAPTION> ------------------------------1999-------------------------- ---- Average Average Balance Interest Rate ---------------- ---------------- ----------- <S> <C> <C> <C> INTEREST-EARNING ASSETS Securities (1) Taxable $ 73,801,410 $ 4,553,538 6.17% Non-taxable 10,019,393 754,935 (2) 7.53 (2) Federal funds sold 1,477,880 76,408 5.17 Loans, net of unearned income and deferred loan fees 461,342,591 (3) 39,824,608 (4) 8.63 ---------------- ---------------- Total interest-earning assets $ 546,641,274 45,209,489 (2) 8.27% (2) ================ INTEREST-BEARING LIABILITIES Deposits Savings and interest-bearing demand deposits $ 82,291,784 1,674,222 2.03% Time deposits 354,626,156 17,352,230 4.89 Short-term borrowings 11,313,555 617,027 5.45 Advances from FHLB 32,332,414 1,765,513 5.46 Other borrowed funds 4,100,000 334,921 8.17 ---------------- ---------------- Total interest-bearing liabilities $ 484,663,909 21,743,913 4.49% ================ ---------------- Net interest income $ 23,465,576 (2) ================ Net interest income as a percent of average interest-earning assets 4.29% (2) </TABLE> - -------------------------------------------------------------------------------- (1) Securities balances represent daily average balances for the amortized cost of securities. The average rate is calculated based on the amortized cost of securities. (2) Computed on tax equivalent basis for non-taxable securities (34% statutory tax rate in 1999). (3) Loan balances include principal balances of nonaccrual loans and loans held for sale. (4) Includes net fees on loans of $1,368,444 in 1999. 10
11 I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (CONTINUED) <TABLE> <CAPTION> ------------------------------1998-------------------------- ---- Average Average Balance Interest Rate ---------------- ---------------- ------------- <S> <C> <C> <C> INTEREST-EARNING ASSETS Securities (1) Taxable $ 68,282,845 $ 3,939,667 5.77% Non-taxable 6,090,977 492,812 (2) 8.09 (2) Federal funds sold 17,112,858 896,714 5.24 Loans, net of unearned income and deferred loan fees 376,126,488 (3) 34,131,651 (4) 9.07 ---------------- ---------------- Total interest-earning assets $ 467,613,168 39,460,844 (2) 8.44% (2) ================ INTEREST-BEARING LIABILITIES Deposits Savings and interest-bearing demand deposits $ 96,422,897 2,121,304 2.20% Time deposits 281,227,689 15,221,462 5.41 Short-term borrowings 1,093,099 62,853 5.75 Advances from FHLB 24,222,456 1,337,080 5.52 ---------------- ---------------- Total interest-bearing liabilities $ 402,966,141 18,742,699 4.65% ================ ---------------- Net interest income $ 20,718,145 (2) ================ Net interest income as a percent of average interest-earning assets 4.43% (2) ==== </TABLE> - -------------------------------------------------------------------------------- (1) Securities balances represent daily average balances for the amortized cost of securities. The average rate is calculated based on the amortized cost of securities. (2) Computed on tax equivalent basis for non-taxable securities (34% statutory tax rate in 1998). (3) Loan balances include principal balances of nonaccrual loans and loans held for sale. (4) Includes net fees on loans of $1,041,507 in 1998. 11
12 I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (CONTINUED) C. The following tables set forth the effect of volume and rate changes on interest income and expense for the periods indicated. For purposes of these tables, changes in interest due to volume and rate were determined as follows: Volume Variance - change in volume multiplied by the previous year's rate. Rate Variance - change in rate multiplied by the previous year's volume. Rate/Volume Variance - change in volume multiplied by the change in rate. This variance was allocated to volume variance and rate variance in proportion to the relationship of the absolute dollar amount of the change in each. Interest on non-taxable securities has been adjusted to a fully tax equivalent basis using a statutory tax rate of 34% in 2000, 1999 and 1998. <TABLE> <CAPTION> Total Variance Attributable To Variance ------------------------ 2000/1999 Volume Rate --------- ------ ---- <S> <C> <C> <C> INTEREST INCOME Securities Taxable $ 424,728 $ 138,706 $ 286,022 Non-taxable 142,398 142,237 161 Federal funds sold (28,373) (35,600) 7,227 Loans, net of unearned income and deferred loan fees 10,579,788 7,371,120 3,208,668 -------------- -------------- ---------------- 11,118,541 7,616,463 3,502,078 INTEREST EXPENSE Deposits Savings and interest-bearing demand deposits 49,033 (74,576) 123,609 Time deposits 5,816,885 3,230,210 2,586,675 Short-term borrowings 741,751 559,979 181,772 Advances from FHLB 941,832 684,806 257,026 Junior subordinated debentures 335,667 335,667 - Other borrowed funds 5,988 17,187 (11,199) -------------- -------------- ---------------- 7,891,156 4,753,273 3,137,883 -------------- -------------- ---------------- NET INTEREST INCOME $ 3,227,385 $ 2,863,190 $ 364,195 ============== ============== ================ </TABLE> 12
13 I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (CONTINUED) <TABLE> <CAPTION> Total Variance Attributable To Variance ------------------------ 1999/1998 Volume Rate --------- ------ ---- <S> <C> <C> <C> INTEREST INCOME Securities Taxable $ 613,871 $ 330,288 $ 283,583 Non-taxable 262,123 298,100 (35,977) Federal funds sold (820,306) (808,503) (11,803) Loans, net of unearned income and deferred loan fees 5,692,957 7,422,832 (1,729,875) -------------- -------------- ---------------- 5,748,645 7,242,717 (1,494,072) INTEREST EXPENSE Deposits Savings and interest-bearing demand deposits (447,082) (295,430) (151,652) Time deposits 2,130,768 3,693,953 (1,563,185) Short-term borrowings 554,174 557,577 (3,403) Advances from FHLB 428,433 442,995 (14,562) Other borrowed funds 334,921 334,921 - -------------- -------------- ---------------- 3,001,214 4,734,016 (1,732,802) -------------- -------------- ---------------- NET INTEREST INCOME $ 2,747,431 $ 2,508,701 $ 238,730 ============== ============== ================ </TABLE> 13
14 II. INVESTMENT PORTFOLIO A. The book value of securities available for sale as of December 31 are summarized as follows: <TABLE> <CAPTION> 2000 1999 1998 ---- ---- ---- <S> <C> <C> <C> U.S. Treasury and U.S. Government agency securities $ 22,896,320 $ 19,376,264 $ 20,110,990 Obligations of states and political subdivisions 12,575,609 10,581,971 9,201,982 Mortgage-backed securities 49,930,790 50,565,523 50,608,107 Marketable equity securities 3,502,239 2,595,150 2,221,850 --------------- --------------- ---------------- $ 88,904,958 $ 83,118,908 $ 82,142,929 =============== =============== ================ </TABLE> B. The maturity distribution and weighted average yield of securities available for sale at December 31, 2000 are as follows: <TABLE> <CAPTION> -----------------------------Maturing-------------------------- After One Year After Five Years Within But Within But Within After One Year Five Years Ten Years Ten Years -------- ---------- --------- --------- <S> <C> <C> <C> <C> U.S. Treasury and U.S. Government agency securities $ 2,093,707 $ 16,626,497 $ 4,176,116 $ - Obligations of states and political subdivisions 375,967 2,009,208 3,296,757 6,893,677 Mortgage-backed securities (2) 6,228,326 13,954,295 15,141,075 14,607,094 Marketable equity securities - - - 3,502,239 ------------- --------------- ------------- -------------- $ 8,698,000 $ 32,590,000 $ 22,613,948 $ 25,003,010 ============= =============== ============= ============== Weighted average yield (1) 6.34% 6.43% 6.49% 6.28% </TABLE> (1) Yields are not presented on a tax-equivalent basis. (2) Maturity based upon estimated weighted-average life. The weighted average interest rates are based on coupon rates for securities purchased at par value and on effective interest rates considering amortization or accretion if the securities were purchased at a premium or discount. C. Excluding those holdings of the investment portfolio in U.S. Treasury securities and other agencies of the U.S. Government, there were no securities of any one issuer which exceeded 10% of the shareholders' equity of the Corporation at December 31, 2000. 14
15 III. LOAN PORTFOLIO A. Types of Loans - Total loans on the balance sheet are comprised of the following classifications at December 31 for the years indicated: <TABLE> <CAPTION> 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> Commercial, financial and agricultural $ 362,927,760 $ 326,564,165 $ 248,840,548 $ 217,324,268 $ 185,838,900 Real estate mortgage 107,717,699 80,703,338 72,225,323 75,212,817 72,356,881 Consumer loans to individuals 106,342,607 94,410,123 73,244,850 67,198,876 60,512,850 ---------------- ---------------- ----------------- ----------------- ----------------- $ 576,988,066 $ 501,677,626 $ 394,310,721 $ 359,735,961 $ 318,708,631 ================ ================ ================= ================= ================= Real estate mortgage loans held for resale $ 1,166,716 $ 7,149,585 $ 18,509,275 $ 4,404,327 $ 1,875,636 ================ ================ ================= ================= ================= </TABLE> CONCENTRATIONS OF CREDIT RISK: The Corporation grants commercial, real estate and installment loans to customers mainly in northern Ohio. Commercial loans include loans collateralized by commercial real estate, business assets and agricultural loans collateralized by crops and farm equipment. As of December 31, 2000, commercial, financial and agricultural loans make up approximately 63% of the loan portfolio and the loans are expected to be repaid from cash flow from operations of businesses. As of December 31, 2000, residential first mortgage loans make up approximately 19% of the loan portfolio and are collateralized by first mortgages on residential real estate. As of December 31, 2000, consumer loans to individuals make up approximately 18% of the loan portfolio and are primarily collateralized by consumer assets. B. Maturities and Sensitivities of Loans to Changes in Interest Rates - The following table shows the amounts of commercial, financial and agricultural loans outstanding as of December 31, 2000 which, based on remaining scheduled repayments of principal, are due in the periods indicated. Also, the amounts have been classified according to sensitivity to changes in interest rates for commercial, financial and agricultural loans due after one year. (Variable-rate loans are those loans with floating or adjustable interest rates.) <TABLE> <CAPTION> Commercial, Financial and Maturing Agricultural -------- ------------ <S> <C> Within one year $ 154,184,000 After one year but within five years 114,228,000 After five years 94,516,000 --------------- $ 362,928,000 =============== </TABLE> 15
16 III. LOAN PORTFOLIO (CONTINUED) Commercial, Financial and Agricultural -------------------------------------- <TABLE> <CAPTION> Interest Sensitivity ------------------------- Fixed Variable Rate Rate Total ----- -------- ----- <S> <C> <C> <C> Due after one year but within five years $ 62,552,000 $ 51,676,000 $ 114,228,000 Due after five years 7,174,000 87,342,000 94,516,000 ---------------- --------------- --------------- $ 69,726,000 $ 139,018,000 $ 208,744,000 ================ =============== =============== </TABLE> C. Risk Elements ------------- 1. Nonaccrual, Past Due, Restructured and Impaired Loans - The following schedule summarizes nonaccrual, past due, restructured and impaired loans at December 31. <TABLE> <CAPTION> 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (In thousands) <S> <C> <C> <C> <C> <C> (a) LOANS ACCOUNTED FOR ON A NONACCRUAL BASIS $ 2,950 (1) $ 1,403 (1) $ 1,880 (1) $ 2,303 (1) $ 1,055 (1) (B) ACCRUING LOANS WHICH are contractually past due 90 days or more as to interest or principal payments 1,927 809 (1) 1,742 462 293 (c) Loans not included in (a) which are "Troubled Debt Restructurings" as defined by Statement of Financial Accounting STANDARDS NO. 15 3,911 (1) - - - - (d) Other loans defined as impaired 1,624 1,103 - - 2,490 ---------- ---------- --------- --------- ----------- $ 10,412 $ 3,315 $ 3,622 $ 2,765 $ 3,838 ========== ========== ========= ========= =========== (1) Includes loans defined as "impaired" under SFAS No. 114. </TABLE> 16
17 III. LOAN PORTFOLIO (CONTINUED) Management believes the allowance for loan losses at December 31, 2000 is adequate to absorb any losses on nonperforming loans, as the allowance balance is maintained by management at a level considered adequate to cover losses that are probable based on past loss experience, general economic conditions, information about specific borrower situations including their financial position and collateral values, and other factors and estimates which are subject to change over time. <TABLE> <CAPTION> 2000 ---- (In thousands) <S> <C> Gross interest income that would have been recorded in 2000 on nonaccrual loans outstanding at December 31, 2000 if the loans had been current, in accordance with their original terms and had been outstanding throughout the period or since origination if held for part of the period $ 286 Interest income actually recorded on nonaccrual loans and included in net income for the period (172) --------- Interest income not recognized during the period $ 114 ========= </TABLE> 1. Discussion of the Nonaccrual Policy The accrual of interest income is discontinued when the collection of a loan or interest, in whole or in part, is doubtful. When interest accruals are discontinued, interest income accrued in the current period is reversed. While loans which are past due 90 days or more as to interest or principal payments are considered for nonaccrual status, management may elect to continue the accrual of interest when the estimated net realizable value of collateral, in management's judgment, is sufficient to cover the principal balance and accrued interest. These policies apply to both commercial and consumer loans. 2. Potential Problem Loans As of December 31, 2000, in addition to the $10,412,000 of loans reported under Item III. C. 1., there are approximately $23,137,000 in other outstanding loans where known information about possible credit problems of the borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans pursuant to Item III. C. 1. at some future date. Consideration was given to loans classified for regulatory purposes as loss, doubtful, substandard, or special mention that have not been disclosed in Section 1 above. To the extent that such loans are not included in the $23,137,000 potential problem loans described above, management believes that such loans will not materially impact future operating results, liquidity, or capital resources. 17
18 III. LOAN PORTFOLIO (CONTINUED) 3. Foreign Outstandings None 4. Loan Concentrations At December 31, 2000, loans outstanding related to agricultural operations or collateralized by agricultural real estate aggregated approximately $62,259,000. At December 31, 2000, there were no agriculture loans which were accounted for on a nonaccrual basis; and there are approximately $34,000 of accruing agriculture loans which are contractually past due ninety days or more as to interest or principal payments. D. Other Interest-Bearing Assets ----------------------------- Other than $137,000 in foreclosed real estate, there are no other interest-bearing assets as of December 31, 2000 which would be required to be disclosed under Item III. C. 1 or Item III. C. 2. if such assets were loans. 18
19 IV. SUMMARY OF LOAN LOSS EXPERIENCE A. The following schedule presents an analysis of the allowance for loan losses, average loan data and related ratios for the years ended December 31: <TABLE> <CAPTION> 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> LOANS Loans outstanding at end of period (1) $ 577,802,941 $ 508,480,963 $412,478,828 $363,851,637 $320,321,476 ============= ============= ============ ============ ============ Average loans outstanding during period (1) $ 542,411,783 $ 461,342,591 $376,126,488 $342,480,740 $305,611,881 ============= ============= ============ ============ ============ ALLOWANCE FOR LOAN LOSSES Balance at beginning of period $ 6,193,712 $ 5,408,854 $ 5,239,601 $ 5,066,600 $ 4,270,000 Loans charged-off Commercial, financial and agricultural loans (641,088) (578,228) (885,132) (438,317) (308,143) Real estate mortgage (22,195) (25,181) (59,940) (30,863) (14,470) Consumer loans to individuals (906,211) (489,032) (390,420) (856,426) (555,164) ------------- ------------- ------------ ------------ ------------ (1,569,494) (1,092,441) (1,335,492) (1,325,606) (877,777) Recoveries of loans previously charged-off Commercial, financial and agricultural loans 106,048 327,122 248,054 308,283 380,951 Real estate mortgage 22,780 72,045 3,610 6,877 8,288 Consumer loans to individuals 361,924 263,132 173,081 235,482 324,129 ------------- ------------- ------------ ------------ ------------ 490,752 662,299 424,745 550,642 713,368 ------------- ------------- ------------ ------------ ------------ Net loans charged-off (1,078,742) (430,142) (910,747) (774,964) (164,409) Provision for loan losses 2,100,000 1,215,000 1,080,000 947,965 961,009 ------------- ------------- ------------ ------------ ------------ Balance at end of period $ 7,214,970 $ 6,193,712 $ 5,408,854 $ 5,239,601 $ 5,066,600 ============= ============= ============ ============ ============ Ratio of net charge-offs during the period to average loans outstanding during the period .20% .09% .24% .23% .05% === === === === (1) Net of unearned income and deferred loan fees, including loans held for sale </TABLE> The allowance for loan losses balance and the provision for loan losses are judgmentally determined by management based upon periodic reviews of the loan portfolio. In addition, management considered the level of charge-offs on loans as well as the fluctuations of charge-offs and recoveries on loans including the factors which caused these changes. Estimating the risk of loss and the amount of loss is necessarily subjective. Accordingly, the allowance is maintained by Management at a level considered adequate to cover losses that are currently anticipated based on past loss experience, economic conditions, information about specific borrower situations including their financial position and collateral values and other factors and estimates which are subject to change over time. 19
20 IV. SUMMARY OF LOAN LOSS EXPERIENCE (CONTINUED) B. The following schedule is a breakdown of the allowance for loan losses allocated by type of loan and related ratios. <TABLE> <CAPTION> -----------Allocation of the Allowance for Loan Losses----------- ------------------------------------------- Percentage Percentage of Loans of Loans In Each In Each Category to Category To Allowance Total Allowance Total Amount Loans Amount Loans ------ ----- ------ ----- December 31, 2000 December 31, 1999 ----------------- ----------------- <S> <C> <C> <C> <C> Commercial, financial and agricultural $ 5,365,000 62.9% $ 4,371,000 65.1% residential first mortgage 202,000 18.7 93,000 16.1 Consumer loans to individuals 814,000 18.4 553,000 18.8 Unallocated 833,970 N/A 1,176,712 N/A -------------- --- -------------- ------- $ 7,214,970 100.0% $ 6,193,712 100.0% ============== ====== ============== ======= December 31, 1998 December 31, 1997 ----------------- ----------------- Commercial, financial and agricultural $ 2,704,000 63.1% $ 3,678,000 60.4% Residential first mortgage 144,000 18.3 203,000 20.9 Consumer loans to individuals 1,026,000 18.6 742,000 18.7 Unallocated 1,534,854 N/A 616,601 N/A -------------- --- -------------- ------- $ 5,408,854 100.0% $ 5,239,601 100.0% ============== ===== ============== ======= December 31, 1996 ----------------- Commercial, financial and agricultural $ 3,445,000 58.3% Real estate mortgage 203,000 22.7 Consumer loans to individuals 811,000 19.0 Unallocated 607,600 N/A -------------- --- $ 5,066,600 100.0% ============== ===== </TABLE> Beginning in 1998, management established a new methodology for allocating the allowance for loan losses which includes identifying specific allocations for impaired and problem loans and quantifying general allocations for other loans based on a detailed evaluation of historical loss ratios and individual portfolio risk factors. Additionally, the unallocated allowance is maintained at approximately 12% of the total allowance at December 31, 2000 due to inherent uncertainty in the allocation process. Prior to 1998, allowance allocations were made on a more subjective basis. Management believes the new methodology more appropriately allocates the allowance for known and inherent risks within the individual loan portfolios. While management's periodic analysis of the adequacy of the allowance for loan losses may allocate portions of the allowance for specific problem loan situations, the entire allowance is available for any loan charge-offs that occur. 20
21 V. DEPOSITS The average amount of deposits and average rates paid are summarized as follows for the years ended December 31: <TABLE> <CAPTION> 2 0 0 0 1 9 9 9 1 9 9 8 ------- ------ ------- Average Average Average Average Average Average Amount Rate Amount Rate Amount Rate ------ ---- ------ ---- ------ ---- <S> <C> <C> <C> <C> <C> <C> Savings and interest-bearing demand deposits $ 78,724,650 2.19% $ 82,291,784 2.03% $ 96,422,897 2.20% Time deposits 415,929,264 5.57 354,626,156 4.89 281,227,689 5.41 Demand deposits (noninterest-bearing) 43,773,329 - 45,760,449 - 45,418,691 - -------------- -------------- -------------- $ 538,427,243 $ 482,678,389 $ 423,069,277 ============== ============== ============== </TABLE> Maturities of time certificates of deposit and other time deposits of $100,000 or more outstanding at December 31, 2000 are summarized as follows: <TABLE> <CAPTION> Amount ------ <S> <C> Three months or less $ 28,426,000 Over three months and through six months 46,363,000 Over six months and through twelve months 30,608,000 Over twelve months 41,128,000 -------------- $ 146,525,000 ============== </TABLE> 21
22 VI. RETURN ON EQUITY AND ASSETS The ratio of net income to average shareholders' equity and average total assets and certain other ratios are as follows: <TABLE> <CAPTION> 2000 1999 1998 ---- ---- ---- <S> <C> <C> <C> Average total assets $ 665,522,753 $ 580,200,120 $ 493,956,624 ================= ================== ================== Average shareholders' equity (1) $ 46,627,167 $ 42,966,568 $ 40,430,948 ================= ================== ================== Net income $ 6,086,178 $ 5,230,902 $ 4,277,877 ================= ================== ================== Cash dividends declared $ 1,888,104 $ 1,692,641 $ 1,660,963 ================= ================== ================== Return on average total assets .91% .90% .87% === === === Return on average share- holders' equity 13.05% 12.17% 10.58% ===== ===== ===== Dividend payout percentage (2) 31.02% 32.36% 38.83% ===== ===== ===== Average shareholders' equity to average total assets 7.01% 7.41% 8.19% ==== ==== ==== </TABLE> (1) Net of average unrealized appreciation or depreciation on securities available for sale. (2) Dividends declared divided by net income. VII. SHORT-TERM BORROWINGS The Corporation did not have any category of short-term borrowings for which the average balance outstanding during 1998 was 30 percent or more of shareholders' equity at the end of the reported period. The following information is reported for federal funds purchased for 2000 and 1999: <TABLE> <CAPTION> <S> <C> <C> 2000 1999 Amount outstanding at end of year $ 13,200,000 $ 10,900,000 ================= =================== Weighted average interest rate at end of year 6.44% 5.73% ======== ======== Maximum amount outstanding at any month end $ 31,005,000 $ 18,200,000 ================= =================== Average amount outstanding during the year $ 19,961,260 $ 11,313,555 ================= =================== Weighted average interest rate during the year 6.81% 5.45% ======== ======== </TABLE> 22
23 Effect of Environmental Regulation ---------------------------------- Compliance with federal, state and local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had a material effect upon the capital expenditures, earnings or competitive position of the Corporation and its subsidiaries. The Corporation believes that the nature of the operations of its subsidiaries has little, if any, environmental impact. The Corporation, therefore, anticipates no material capital expenditures for environmental control facilities for its current fiscal year or for the foreseeable future. The Corporation's subsidiaries may be required to make capital expenditures for environmental control facilities related to properties which they may acquire through foreclosure proceedings in the future; however, the amount of such capital expenditures, if any, is not currently determinable. Item 2. Properties. - --------------------- The following is a listing and brief description of the properties owned or leased by State Bank and used in its business: 1. Its main office is a two-story brick building located at 401 Clinton Street, Defiance, Ohio, which was built in 1971. Including a basement addition built in 1991, it contains 33,400 square feet of floor space. Approximately 4,083 square feet on the second floor and on the lower level presently are leased to RDSI, 7,294 square feet on the second floor are leased to RFS and 2,868 square feet on the lower level are leased to the Corporation. 2. A drive through branch office located in downtown Defiance, Ohio containing 3,200 square feet of floor space was built in 1961. Most of the space is in the basement which is used for storage. It contains a three-bay drive-thru, two inside teller locations, an ATM and a night deposit unit. 3. A full service branch office located on Main Street in Ney, Ohio containing 1,536 square feet of floor space was opened in 1968. 4. A full service branch office located at 1796 North Clinton Street, Defiance, Ohio containing 2,120 square feet of floor space was opened in 1968. It is a free standing structure located in front of a shopping center. The branch was remodeled in 2000. 5. A full service branch office located at 1856 East Second Street, Defiance, Ohio containing 2,160 square feet of floor space was opened in 1972 and remodeled in 1998. It is a free standing structure located in front of a shopping center. 6. A full service branch office located at 220 North Main Street, Paulding, Ohio containing 6,200 square feet of floor space was opened in 1980 and most recently remodeled in 1999. 7. A full service branch office located at 312 Main Street, Delta, Ohio containing 3,470 square feet of floor space was acquired from Society Bank & Trust ("Society") in 1992. 8. A full service branch office located at 133 E. Morenci Street, Lyons, Ohio containing 2,578 square feet of floor space was acquired from Society in 1992. 23
24 9. A full service branch office located at 515 Parkview, Wauseon, Ohio containing 3,850 square feet of floor space was acquired from Society in 1992. This office was remodeled in 1998. 10. A full service branch located in the Chief Market Square supermarket at 705 Deatrick Street, Defiance, Ohio and containing 425 square feet was opened in 1993. State Bank leases the space in which this branch is located pursuant to a 15-year lease. 11. A full service branch office located at 1991 Crocker Road, Suite 204, Westlake, Ohio containing 1,364 square feet was opened in 1998. State Bank leases the space in which this branch is located. 12. A full service branch office located at 137 S. Main St., Suite 302, Akron, Ohio was opened in 2000. State Bank leases the space in which this branch is located. The following is a listing and brief description of the properties owned by Peoples Bank and used in its business: 1. The full service main office located at 301 South Main Street, Findlay, Ohio was opened in 1990. It contains approximately 30,000 square feet of floor space, of which 12,000 is used by an unrelated law firm. 2. A full service branch office located at 124 East Main Street, McComb, Ohio was opened in 1990. It contains approximately 3,600 square feet of floor space. The only real property owned by First National Bank is the location of the Bank at 405 East Main Street, Ottawa, Ohio. First National Bank's facility is a two-story brick and steel building containing approximately 7,100 square feet of space. The first floor is a traditional banking lobby which was remodeled in 1991. The second floor contains bookkeeping, office and storage space. The following is a listing and brief description of the properties owned by Citizens Savings Bank and used in its business: 1. The full service main office is located at 132 East Front Street, Pemberville, Ohio and contains 6,389 square feet. It was built near the turn of the century and was completely remodeled and added on to in 1992. 2. A full service branch office located at 230 West Madison Street, Gibsonburg, Ohio occupies 2,520 square feet and was built in 1988. RMC is the master lessee of Oak Creek Offices. This office space is located at Estancia Boulevard, Suite 201, Clearwater, Florida. This space is leased to various tenants. RDSI leases a 5,616 square foot office space located at 2010 South Jefferson, Defiance, Ohio. This office was first leased on December 21, 1999. RDSI also leases 7,294 square feet on the second floor of the State Bank building located at 401 Clinton Street, Defiance, Ohio. 24
25 Item 3. Legal Proceedings. - ---------------------------- There are no pending legal proceedings to which the Corporation or any of its subsidiaries is a party or to which any of their property is subject, except routine legal proceedings to which the Corporation or any of its subsidiaries is a party incidental to its banking business. None of such proceedings are considered by the Corporation to be material. Item 4. Submission of Matters to a Vote of Security Holders. - -------------------------------------------------------------- Not applicable. 25
26 Executive Officers of the Registrant. - ------------------------------------ The following table lists the names and ages of the executive officers of the Corporation as of the date of this Annual Report on Form 10-K, the positions presently held by each such executive officer and the business experience of each such executive officer during the past five years. Unless otherwise indicated, each person has held his principal occupation(s) for more than five years. All executive officers serve at the pleasure of the Board of Directors of the Corporation. <TABLE> <CAPTION> Position(s) Held with the Corporation and Name Age its Subsidiaries and Principal Occupation(s) ---- --- -------------------------------------------- <S> <C> <C> Steven D. VanDemark 48 Chairman of the Board of Directors of the Corporation; Chairman of the Board of Directors of State Bank; Director of RDSI; General Manager of Defiance Publishing Company, Defiance, Ohio, a newspaper publisher. Thomas C. Williams 52 President and Chief Executive Officer of the Corporation since June 1995; Director of the Corporation, State Bank, Peoples Bank, Rurban Life, RFS, and RDSI. President and Chief Executive Officer of State Bank, June 1995 to August 1996; President of FirstMerit Bank, FSB, Clearwater, Florida, from 1994 to June 1995; Senior Vice President and Managing Officer of the Northern Region of The First National Bank of Ohio, Cleveland, Ohio, from 1990 to 1994. Robert W. Constien 48 Senior Executive Vice President & Chief Operating Officer since November 22, 2000; Executive Vice President of the Corporation from March, 1997 to November 2000; Vice President of the Corporation from 1994 to March, 1997; Chief Executive Officer and a Director of RFS since March 1997; Director of State Bank; Executive Vice President of State Bank from 1994 to 1997, Senior Vice President of State Bank from 1991 to 1993 and Vice President of State Bank from 1987 to 1991. Richard C. Warrener 56 Executive Vice President of the Corporation since December 1997; Chief Financial Officer of the Corporation since December 31, 1996; Senior Vice President of the Corporation from December 31, 1996 to December 1997; Senior Vice President and Chief Financial Officer of FirstMerit Bank, N.A. from March 1994 to December 1996; Senior Vice President and Chief Financial Officer of Life Savings Bank from January 1991 to March 1994; Division Vice President and Chief Financial Officer of Florida Federal Savings Bank from 1988 to November 1990. </TABLE> 26
27 PART II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters. - ------------------------------------------------------------------------------ The common stock of the Corporation is traded on the OTC Bulletin Board, symbol "RBNF." The table below sets forth the high and low closing prices, and the cash dividends declared with respect to, the common stock of the Corporation, for the indicated periods. The Corporation is aware of three securities dealers who make a market in its common stock. The high and low closing prices reflect actual prices for purchases and sales of the Corporation's common stock as reported by NASDAQ and not inter-dealer prices. The per share amounts have been restated for the 5% stock dividend declared in 2000. <TABLE> <CAPTION> Per Share Per Share Closing Prices Dividends 1999 High Low Declared ---- ---- --- -------- <S> <C> <C> <C> First Quarter $ 16.90 $ 14.29 $ .095 Second Quarter 15.24 12.62 .095 Third Quarter 15.48 12.62 .095 Fourth Quarter 13.57 11.90 .105 2000 ---- First Quarter $ 13.57 $ 12.38 $ .105 Second Quarter 13.33 12.14 .105 Third Quarter 13.50 12.26 .105 Fourth Quarter 13.00 11.63 .120 </TABLE> There can be no assurance as to the amount of dividends which will be declared with respect to the common shares of the Corporation in the future, since such dividends are subject to the discretion of the Corporation's Board of Directors, cash needs, general business conditions, dividends from the subsidiaries and applicable governmental regulations and policies. See ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION - CAPITAL RESOURCES and Note 1 of Notes to Consolidated Financial Statements. The approximate number of holders of outstanding common shares of the Corporation, based upon the number of record holders as of December 31, 2000, was 1,418. 27
28 Item 6. Selected Financial Data SUMMARY OF SELECTED FINANCIAL DATA <TABLE> <CAPTION> (Dollars in thousands except per share data) Year Ended December 31, 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> EARNINGS Total interest income $ 56,023 $ 44,953 $ 39,293 $ 36,582 $ 32,924 Total interest expense 29,635 21,744 18,743 16,689 14,657 Net interest income 26,388 23,209 20,550 19,893 18,267 Provision for loan losses 2,100 1,215 1,080 948 961 Total noninterest income 11,273 11,064 10,511 8,294 6,781 Total noninterest expense 26,754 25,466 23,630 19,253 16,876 Income tax expense 2,721 2,361 2,073 2,470 2,362 Net income 6,086 5,231 4,278 5,516 4,849 - ---------------------------------------------------------------------------------------------------------------------- PER SHARE DATA (1) Basic earnings (2) $ 1.42 $ 1.22 $ 1.00 $ 1.18 $ 1.02 Diluted earnings (2) 1.42 1.22 .99 1.18 1.02 Cash dividends declared .44 .39 .38 .35 .27 - ---------------------------------------------------------------------------------------------------------------------- AVERAGE BALANCES Average shareholders' equity $ 46,627 $ 42,967 $ 40,431 $ 42,151 $ 40,749 Average total assets 665,523 580,200 493,957 452,011 416,743 - ---------------------------------------------------------------------------------------------------------------------- RATIOS Return on average Shareholders' equity 13.05% 12.17% 10.58% 13.09% 11.90% Return on average total assets .91 .90 .87 1.22 1.16 Cash dividend payout ratio (cash dividends divided by net income) 31.02 32.36 38.83 29.89 26.99 Average shareholders' equity to average total assets 7.01 7.41 8.19 9.33 9.78 - ---------------------------------------------------------------------------------------------------------------------- PERIOD END TOTALS Total assets $ 700,818 $ 627,784 $ 537,155 $ 471,371 $ 433,273 Total loans and leases 576,988 501,678 394,311 359,736 318,709 Total deposits 566,321 519,296 450,813 415,181 387,766 Advances from FHLB 52,164 40,035 28,890 7,530 - Junior subordinated debentures 9,697 - - - - Shareholders' equity 50,140 43,900 41,903 39,094 41,489 Shareholders' equity per share (1) 11.53 10.10 9.64 8.99 8.64 - ---------------------------------------------------------------------------------------------------------------------- </TABLE> (1) Per share data restated for 5% stock dividend declared in 1996, two-for-one stock split declared in 1998 and, 5% stock dividend declared in 2000. (2) Restated to reflect adoption of SFAS No. 128 on December 31, 1997. 28
29 Item 7. Management's Discussion and Analysis of Financial Condition and Results - ------------------------------------------------------------------------------- of Operation. - ------------- EARNINGS SUMMARY CONSOLIDATED NET INCOME for Rurban Financial Corp. (the "Corporation") for 2000 was $6.1 million, up from $5.2 million in 1999 and $4.3 million in 1998. Basic earnings per share were $1.42 in 2000, an increase of 16.4% from $1.22 in 1999 and a 42.0% increase over the $1.00 in 1998. Cash dividends declared per share increased to $.44 for 2000 compared to $.39 in 1999 and $.38 in 1998, increases of 12.8% and 2.6%, respectively. Per share data has been adjusted to reflect the 5% stock dividend paid in September 2000 and the two-for-one stock split declared in May 1998. RESULTS OF OPERATIONS 2000 COMPARED WITH 1999 - ----------------------- NET INTEREST INCOME for 2000 was $26.4 million an increase of $3.2 million (13.7%) over 1999. The increase was primarily due to a 17.6% increase in the average balance of loans and loans held for sale. The average yield on loans increased 66 basis points to 9.29% for 2000 compared to 8.63% for 1999. The increase in loan yield, partially offset by a 75 basis points increase in the average rate on interest bearing liabilities to 5.24% in 2000 from 4.49% in 1999, along with volume increases in interest earning assets and liabilities, combined to result in a decline of 6 basis points in the tax equivalent net interest margin to 4.23% in 2000 from 4.29% in 1999. AT DECEMBER 31, 2000, loans and loans held for sale, net of deferred loan fees amounted to $577.8 million, an increase of $69.3 million (13.6%) over the December 31, 1999 balance of $508.5 million. This increase was due to the Corporation's loan origination efforts, with the majority of the growth occurring in the Findlay/Hancock county and Cleveland/Akron areas. COMMERCIAL, FINANCIAL AND AGRICULTURAL LOANS increased $36.3 million from $326.6 million at December 31, 1999 to $362.9 million at December 31, 2000. This increase occurred as the result of the Corporation's goal to increase small business loan relationships. AT DECEMBER 31, 2000, approximately $1.2 million of real estate mortgage loans were held for sale in the secondary market. During 2000, approximately $13.1 million of real estate mortgage loans were originated for sale and approximately $13.7 million were sold in the secondary market. This represents a decrease of $89.8 million in loans sold in 2000 as compared to 1999. During 2000, most loans were sold on a servicing released basis. Loans originated for sale are primarily fixed rate mortgage loans. This decline is the result of the sale of certain assets of Rurban Mortgage Company ("RMC") and the discontinuation of the origination of loans through RMC in the second quarter of 2000. SECURITIES AVAILABLE FOR SALE TOTALED $88.9 million at December 31, 2000, an increase of $5.8 million (7.0%) from $83.1 million at December 31, 1999. As of December 31, 2000, all securities of the Corporation were designated available for sale. Available for sale securities represent those securities the Corporation may decide to sell if needed for liquidity, asset/liability management or other reasons. Such securities are reported at fair value with net unrealized appreciation (depreciation) included as a separate component of shareholders' equity, net of tax. This resulted in a net increase in shareholders' equity of $.3 million at December 31, 2000. 29
30 TOTAL DEPOSITS at December 31, 2000 amounted to $566.3 million, an increase of $47.0 million (9.1%) over $519.3 million at December 31, 1999. The increase in deposits is believed to have occurred as a result of increased deposit services and flexibility of products offered. Management believes customers continue to place a value on federal insurance on deposit accounts and to the extent the Corporation continues to pay competitive rates on deposits and continues to provide flexibility of deposit products, the Corporation will be able to maintain and increase its deposit levels. OTHER BORROWINGS at December 31, 2000 were $75.1 million compared to $57.9 at December 31, 1999. These borrowings consisted of $52.2 million of FHLB Advances, $13.2 million of federal funds purchased and $9.7 million of long-term junior subordinated debentures. These borrowings allow the Corporation to fund loan growth. The long-term subordinated debt qualifies as tier 1 regulatory capital. THE PROVISION FOR LOAN LOSSES charged to operations was based on the amount of net losses incurred and management's estimation of inherent losses based on an evaluation of loan portfolio risk and economic factors. The provision for loan losses was $2.1 million in 2000 compared to $1.2 million in 1999. THE ALLOWANCE FOR LOAN LOSSES at December 31, 2000 was $7.2 million or 1.25% of loans and loans held for sale, net of deferred loan fees, compared to $6.2 million or 1.22% at December 31, 1999. LOANS ARE CONSIDERED IMPAIRED if full principal or interest payments are not anticipated in accordance with the contractual loan terms. Impaired loans are carried at the present value of expected future cash flows discounted at the loan's effective interest rate or at the fair value of the collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. SMALLER-BALANCE homogeneous loans are evaluated for impairment in total. Such loans include residential first mortgage loans secured by one-to-four family residences, residential construction loans, and automobile, home equity and second mortgage loans. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment. When analysis of borrower operating results and financial condition indicates that underlying cash flows of the borrower's business are not adequate to meet its debt service requirements, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 30 days or more. Commercial loans are rated on a scale of 1 to 7, with 1-3 being satisfactory, 4 special mention, 5 substandard, 6 doubtful and 7 as a loss which are then charged off. Loans graded a 5 or worse are considered for impairment. Loans are generally moved to nonaccrual status when 90 days or more past due. Such loans are often considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible. This typically occurs when the loan is 120 days or more past due. At December 31, 2000, the Corporation classified sixteen loan relationships as impaired, totaling $8.1 million. Management allocated $2.4 million of the allowance for loan losses to impaired loans at December 31, 2000. MANAGEMENT ALLOCATED approximately 74% of the allowance for loan losses to commercial, financial and agricultural loans; 11% to consumer loans; and 3% to residential first mortgage loans at December 31, 2000, leaving a balance of 12% unallocated. Nonperforming loans increased to $4.9 million at December 31, 2000 from $2.2 million at December 31, 1999. The allowance is maintained by management at a level considered adequate to cover losses currently anticipated based on past loss experience, economic conditions, information about specific borrower situations including their financial position and collateral values, and other factors and estimates which are subject to change over time. Management believes the allowance for loan losses balance at December 31, 2000 is adequate to absorb losses on impaired, nonperforming and other loans. 30
31 TOTAL NONINTEREST INCOME increased $.2 million to $11.3 million in 2000 from $11.1 million in 1999. This growth was driven by data service fees which increased $.7 million (16.9%) to $5.1 million in 2000 compared to $4.4 million in 1999. The primary reasons for this increase were increases in the number of customer accounts processed and in the level of sales of ancillary data processing products. The increase in the number of accounts was a result of customer account growth at client banks and growth in the number of bank clients from 50 at the end of 1999 to 51 at year-end 2000. Trust fee income increased just $38,000 to $2.6 million in 2000 primarily due to changes in the value of assets managed, as those values increased from $326 million at December 31, 1998 to $356 million at December 31, 1999 and declined to $316 million at December 31, 2000. Service charges on deposit accounts increased $.3 million (19.2%) to $1.7 million. Loan servicing fees increased $.1 million (13.9%) to $.7 million. Net gain on sales of loans decreased $.8 million to $.4 million in 2000 as compared to $1.1 million in 1999. This decrease was the result of lower volume of loan sales in 2000 compared to 1999. Other income decreased $.1 million (11.0%) to $.8 million in 2000 from $.9 million in 1999. TOTAL NONINTEREST EXPENSE increased $1.3 million (5.1%) to $26.8 million in 2000, from $25.5 million in 1999, primarily due to the following factors. Salaries and employee benefits increased $.7 million (4.9%) to $15.1 million in 2000 compared to $14.4 million in 1999. This increase was due primarily to increases in ESOP contributions and other employee benefits, as compensation expense from annual merit increases was fully offset by the $.5 million reduction in salaries from the discontinuation of operations at RMC. Equipment rentals, depreciation and maintenance increased $.4 million primarily due to the upgrading of networking and computer equipment and application software licenses. INCOME TAX EXPENSE for the year ended December 31, 2000 was $2.7 million, an increase of $.4 million (15.2%) from 1999. This increase was primarily attributable to a 16.0% increase in income before income tax expense. RESULTS OF OPERATIONS 1999 COMPARED WITH 1998 - ----------------------- NET INTEREST INCOME for 1999 was $23.2 million an increase of $2.7 million (12.9%) over 1998. The increase was primarily due to a 22.7% increase in the average balance of loans and loans held for sale. The average yield on loans declined to 8.63% compared to 9.07% for 1998. The decline in earning asset yield partially offset by the decrease in the average rate on interest bearing liabilities from 4.65% in 1998 to 4.49% in 1999, combined to result in a decline in the tax equivalent net interest margin from 4.43% in 1998 to 4.29% in 1999. AT DECEMBER 31, 1999, loans and loans held for sale, net of deferred loan fees amounted to $508.5 million, an increase of 23.3% over the December 31, 1998 balance of $412.5 million. This increase was due to the Corporation's loan origination efforts, with the majority of the growth occurring in the Findlay/Hancock county and Cleveland/Akron areas. COMMERCIAL, FINANCIAL AND AGRICULTURAL LOANS increased $77.7 million from $248.8 million at December 31, 1998 to $326.6 million at December 31, 1999. This increase occurred as the result of the Corporation's goal to increase small business loan relationships. 31
32 AT DECEMBER 31, 1999, approximately $7.1 million of real estate mortgage loans were held for sale in the secondary market. During 1999, approximately $97.3 million of real estate mortgage loans were originated for sale and approximately $103.6 million were sold in the secondary market. This represents an increase of $5.2 million (5.3%) in loans sold in 1999 as compared to 1998. During 1999, most loans were sold on a servicing released basis. Loans originated for sale are primarily fixed rate mortgage loans. SECURITIES AVAILABLE FOR SALE TOTALED $83.1 million at December 31, 1999 which represented an increase of $1.0 million (1.2%) from $82.1 million at December 31, 1998. As of December 31, 1999, all securities of the Corporation were designated available for sale. Such securities are reported at fair value with net unrealized appreciation (depreciation) included as a separate component of shareholders' equity, net of tax. This resulted in a net decrease in shareholders' equity of $1.5 million at December 31, 1999. TOTAL DEPOSITS at December 31, 1999 amounted to $519.3 million, an increase of $68.5 million (15.2%) over total deposits of $450.8 million at December 31, 1998. The increase in deposits is believed to have occurred as a result of increased deposit services and flexibility of products offered. OTHER BORROWINGS at December 31, 1999 were $57.9 million compared to $38.4 at December 31, 1998. These borrowings consisted of $40.0 million of FHLB Advances and $10.9 million of federal funds purchased and $7.0 million borrowed on a line of credit with another financial institution as the Corporation continued to access alternative sources for funding its loan growth. THE PROVISION FOR LOAN LOSSES charged to operations was based on the amount of net losses incurred and management's estimation of inherent losses based on an evaluation of loan portfolio risk and economic factors. The provision for loan losses was $1.2 million in 1999 compared to $1.1 million in 1998. THE ALLOWANCE FOR LOAN LOSSES at December 31, 1999 was $6.2 million or 1.22% of loans and loans held for sale, net of deferred loan fees, compared to $5.4 million or 1.31% at December 31, 1998. AT DECEMBER 31, 1999, the Corporation classified three loan relationships as impaired, totaling $1.5 million. Management allocated $.8 million of the allowance for loan losses to impaired loans at December 31, 1999. MANAGEMENT ALLOCATED approximately 71% of the allowance for loan losses to commercial, financial and agricultural loans; 9% to consumer loans; and 1% to residential first mortgage loans at December 31, 1999, leaving a balance of 19% unallocated. Nonperforming loans decreased to $2.2 million at December 31, 1999 from $3.6 million at December 31, 1998. The decrease in nonperforming loans relates primarily to a decrease in accruing loans past due 90 days or more at the end of 1999. TOTAL NONINTEREST INCOME increased $.6 million to $11.1 million in 1999 from $10.5 million in 1998. This growth was driven by data service fees which increased $.8 million (23.3%) to $4.4 million in 1999 compared to $3.6 million in 1998. The primary reasons for this increase were increases in the number of customer accounts processed and in the level of sales of ancillary data processing products. The increase in the number of accounts was a result of customer account growth at client banks and growth in the number of bank clients from 39 at the end of 1998 to 50 at year-end 1999. Trust fee income increased $21,000 (0.8%) to $2.6 million in 1999 primarily due to an increase in trust assets managed from $326 million at December 31, 1998 to $356 million at December 31, 1999. Net gain on sales of loans decreased $.8 million to $1.1 million in 1999 as compared to $1.9 million in 1998. This decrease was the result of lower margins in gains on sales in 1999 compared to 1998. Other income increased $.3 million (54.7%) 32
33 to $.9 million in 1999 from $.6 million in 1998. The primary reason for the increase was a $.2 million gain on sale of a branch site in 1999. TOTAL NONINTEREST EXPENSE increased $1.8 million (7.8%) to $25.5 million in 1999, from $23.6 million in 1998, primarily due to the following factors. Salaries and employee benefits increased $2.0 million (15.7%) to $14.4 million in 1999 compared to $12.4 million in 1998. This increase was due primarily to annual merit increases, and staffing increases in the Corporation's non-interest income generating companies. Equipment rentals, depreciation and maintenance increased $.5 million primarily due to the upgrading of networking and computer equipment. Other expenses decreased $.7 million (8.8%) primarily due to the decrease in operating expenses at Rurban Mortgage Company. INCOME TAX EXPENSE for the year ended December 31, 1999 was $2.4 million, an increase of $.3 million (13.9%) from 1998. This increase was primarily attributable to a increase in income before income tax expense of 19.5%, which was partially offset by higher levels of tax-exempt income in 1999. LIQUIDITY LIQUIDITY RELATES PRIMARILY to the Corporation's ability to fund loan demand, meet deposit customers' withdrawal requirements and provide for operating expenses. Assets used to satisfy these needs consist of cash and due from banks, federal funds sold, securities available-for sale and loans held for sale. These assets are commonly referred to as liquid assets. Liquid assets were $109 million at December 31, 2000 compared to $109 million at December 31, 1999 and $126 million at December 31, 1998. Management recognizes securities may need to be sold in the future to help fund loan demand and, accordingly, as of December 31, 2000, the entire securities portfolio of $88.9 million was classified as available for sale. THE CORPORATION'S RESIDENTIAL FIRST MORTGAGE PORTFOLIO of $107.7 million, which can and has been readily used to collateralize borrowings, is an additional source of liquidity. Management believes its current liquidity level is sufficient to meet anticipated future growth. THE CASH FLOW STATEMENTS for the periods presented provide an indication of the Corporation's sources and uses of cash as well as an indication of the ability of the Corporation to maintain an adequate level of liquidity. A discussion of the cash flow statements for 2000, 1999 and 1998 follows. THE CORPORATION experienced a net increase in cash from operating activities in 2000 and 1999 and a net decrease in 1998. Net cash from operating activities was $13.3 million, $14.6 million and $(6.6 million) for the years ended December 31, 2000, 1999 and 1998, respectively. The increase in net cash from operating activities for 1999 as compared to 1998 was primarily due to decreases in loans held for sale of $6.2 million. NET CASH FLOW FROM INVESTING ACTIVITIES was $(75.7 million), $(107.9 million) and $(50.0 million) for the years ended December 31, 2000, 1999 and 1998, respectively. The changes in net cash from investing activities include loan growth, as well as normal maturities and reinvestments of securities and premises and equipment expenditures. In 2000, 1999 and 1998, the Corporation received $9.1 million, $17.7 million and $24.8 million , respectively, from sales of securities available for sale, while proceeds from repayments and maturities of securities were $8.8 million, $24.2 million and $24.1 million in 2000, 1999 and 1998, respectively. 33
34 NET CASH FLOW FROM FINANCING ACTIVITIES was $62.3 million, $86.4 million and $59.9 million for the years ended December 31, 2000, 1999 and 1998, respectively. The net cash increase was primarily attributable to growth in total deposits of $47.0 million, $68.5 million and $35.6 million in 2000, 1999 and 1998, respectively. Other significant changes in 2000, 1999 and 1998 included $12.1 million, $11.1 million and $21.4 million in net borrowings from the Federal Home Loan Bank. Additionally, in 1999 $7.0 million of funding was received under a line of credit, which was repaid in 2000 using funds provided by $9.7 million in net proceeds from the issuance of junior subordinated debentures. ASSET LIABILITY MANAGEMENT ASSET LIABILITY MANAGEMENT involves developing and monitoring strategies to maintain sufficient liquidity, maximize net interest income and minimize the impact that significant fluctuations in market interest rates would have on earnings. The business of the Corporation and the composition of its balance sheet consists of investments in interest-earning assets (primarily loans, mortgage-backed securities, and securities available for sale) which are primarily funded by interest-bearing liabilities (deposits and borrowings). With the exception of loans which are originated and held for sale, all of the financial instruments of the Corporation are for other than trading purposes. All of the Corporation's transactions are denominated in U.S. dollars with no specific foreign exchange exposure. In addition, the Corporation has limited exposure to commodity prices related to agricultural loans. The impact of changes in foreign exchange rates and commodity prices on interest rates are assumed to be insignificant. The Corporation's financial instruments have varying levels of sensitivity to changes in market interest rates resulting in market risk. Interest rate risk is the Corporation's primary market risk exposure; to a lesser extent, liquidity risk also impacts market risk exposure. INTEREST RATE RISK is the exposure of a banking institution's financial condition to adverse movements in interest rates. Accepting this risk can be an important source of profitability and stockholder value; however, excessive levels of interest rate risk could pose a significant threat to the Corporation's earnings and capital base. Accordingly, effective risk management that maintains interest rate risks at prudent levels is essential to the Corporation's safety and soundness. EVALUATING a financial institution's exposure to changes in interest rates includes assessing both the adequacy of the management process used to control interest rate risk and the organization's quantitative level of exposure. When assessing the interest rate risk management process, the Corporation seeks to ensure that appropriate policies, procedures, management information systems, and internal controls are in place to maintain interest rate risks at prudent levels of consistency and continuity. Evaluating the quantitative level of interest rate risk exposure requires the Corporation to assess the existing and potential future effects of changes in interest rates on its consolidated financial condition, including capital adequacy, earnings, liquidity, and asset quality (when appropriate). THE FEDERAL RESERVE BOARD together with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, adopted a Joint Agency Policy Statement on interest rate risk effective June 26, 1996. The policy statement provides guidance to examiners and bankers on sound practices for managing interest rate risk, which will form the basis for ongoing evaluation of the adequacy of interest rate risk management at supervised institutions. The policy statement also outlines fundamental elements of sound management that have been identified in prior Federal Reserve guidance and discusses the importance of these elements in the context of managing interest rate risk. Specifically, the guidance emphasizes the need for active Board of Director and Senior Management oversight and a comprehensive risk management process that effectively identifies, measures, and controls interest rate risk. 34
35 FINANCIAL INSTITUTIONS derive their income primarily from the excess of interest collected over interest paid. The rates of interest an institution earns on its assets and owes on its liabilities generally are established contractually for a period of time. Since market interest rates change over time, an institution is exposed to lower profit margins (or losses) if it cannot adapt to interest rate changes. For example, assume that an institution's assets carry intermediate or long term fixed rates and that those assets are funded with short-term liabilities. If market interest rates rise by the time the short-term liabilities must be refinanced, the increase in the institution's interest expense on its liabilities may not be sufficiently offset if assets continue to earn at the long-term fixed rates. Accordingly, an institution's profits could decrease on existing assets because the institution will either have lower net interest income or possibly, net interest expense. Similar risks exist when assets are subject to contractual interest rate ceilings, or rate sensitive assets are funded by longer-term, fixed-rate liabilities in a declining rate environment. SEVERAL WAYS an institution can manage interest rate risk include: 1) matching repricing periods for new assets and liabilities, for example, by shortening terms of new loans or investments; 2) selling existing assets or repaying certain liabilities; and 3) hedging existing assets, liabilities, or anticipated transactions. An institution might also invest in more complex financial instruments intended to hedge or otherwise change interest rate risk. Interest rate swaps, futures contacts, options on futures contracts, and other such derivative financial instruments can be used for this purpose. Because these instruments are sensitive to interest rate changes, they require management's expertise to be effective. The Corporation has not purchased derivative financial instruments in the past and does not presently intend to purchase such instruments. QUANTITATIVE MARKET RISK DISCLOSURE. The following table provides information about the Corporation's financial instruments used for purposes other than trading that are sensitive to changes in interest rates as of December 31, 2000. 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 Corporation's historical experience of the impact of interest rate fluctuations on the prepayment of loans and mortgage backed securities. For core deposits (demand deposits, interest-bearing checking, savings, and money market deposits) that have no contractual maturity, the table presents principal cash flows and, as applicable related weighted-average interest rates based upon the Corporation's historical experience, management's judgement and statistical analysis, as applicable, concerning their most likely withdrawal behaviors. The current historical interest rates for core deposits have been assumed to apply for future periods in this table as the actual interest rates that will need to be paid to maintain these deposits are not currently known. Weighted average variable rates are based upon contractual rates existing at the reporting date. 35
36 PRINCIPAL/NOTIONAL AMOUNT MATURING OR ASSUMED TO WITHDRAW IN: (DOLLARS IN THOUSANDS) <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------------------------------------- 2001 2002 2003 2004 2005 Thereafter Total - ---------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> RATE-SENSITIVE ASSISTS: - ---------------------------------------------------------------------------------------------------------------------- Variable rate loans $115,480 $14,155 $14,526 $8,665 $4,768 $13,997 $171,591 - ---------------------------------------------------------------------------------------------------------------------- Average interest rate 10.11% 9.59% 9.57% 8.92% 9.40% 7.66% 9.74% - ---------------------------------------------------------------------------------------------------------------------- Adjustable rate loans $42,259 $28,739 $22,943 $18,985 $14,805 $59,652 $187,383 - ---------------------------------------------------------------------------------------------------------------------- Average interest rate 8.83% 8.78% 8.79% 8.77% 8.83% 8.78% 8.80% - ---------------------------------------------------------------------------------------------------------------------- Fixed rate loans $106,552 $43,305 $29,584 $14,417 $6,900 $17,256 $218,014 - ---------------------------------------------------------------------------------------------------------------------- Average interest rate 8.86% 7.89% 7.96% 8.06% 8.37% 8.47% 8.45% - ---------------------------------------------------------------------------------------------------------------------- Total loans $264,291 $86,199 $67,053 $42,067 $26,473 $90,905 $576,988 - ---------------------------------------------------------------------------------------------------------------------- Average interest rate 9.40% 8.47% 8.59% 8.56% 8.81% 8.55% 8.95% - ---------------------------------------------------------------------------------------------------------------------- Fixed rate investment $8,698 $9,250 $8,021 $12,006 $3,313 $47,617 $88,905 securities - ---------------------------------------------------------------------------------------------------------------------- Average interest rate 6.34% 6.51% 6.57% 6.26% 6.53% 6.38% 6.39% - ---------------------------------------------------------------------------------------------------------------------- Interest bearing deposits $100 $0 $0 $10 $0 $0 $110 - ---------------------------------------------------------------------------------------------------------------------- Average interest rate 6.65% 0.00% 0.00% 5.43% 0.00% 0.00% 6.54% - ---------------------------------------------------------------------------------------------------------------------- Total rate sensitive assets $273,089 $95,449 $75,074 $54,083 $29,786 $138,522 $666,003 - ---------------------------------------------------------------------------------------------------------------------- Average interest rate 9.30% 8.28% 8.38% 8.05% 8.56% 7.80% 8.60% - ---------------------------------------------------------------------------------------------------------------------- RATE SENSITIVE LIABILITIES: - ---------------------------------------------------------------------------------------------------------------------- Demand - non interest-bearing $1,519 $2,899 $4,114 $5,115 $6,736 $27,607 $47,990 - ---------------------------------------------------------------------------------------------------------------------- Demand - interest bearing $1,580 $3,014 $4,276 $5,317 $7,001 $28,691 $49,879 - ---------------------------------------------------------------------------------------------------------------------- Average interest rate 2.46% 2.46% 2.46% 2.46% 2.46% 2.46% 2.46% - ---------------------------------------------------------------------------------------------------------------------- Money market accounts $69,493 $13,570 $144 $134 $124 $1,577 $85,042 - ---------------------------------------------------------------------------------------------------------------------- Average interest rate 5.16% 3.81% 2.08% 2.08% 2.08% 2.08% 4.87% - ---------------------------------------------------------------------------------------------------------------------- Savings $8,605 $1,430 $1,326 $1,229 $1,139 $14,492 $28,221 - ---------------------------------------------------------------------------------------------------------------------- Average interest rate 2.10% 2.10% 2.10% 2.10% 2.10% 2.10% 2.10% - ---------------------------------------------------------------------------------------------------------------------- Certificates of deposit $245,615 $82,436 $21,113 $2,886 $2,265 $874 $355,189 - ---------------------------------------------------------------------------------------------------------------------- Average interest rate 6.03% 6.64% 6.68% 6.07% 6.83% 2.77% 6.21% - ---------------------------------------------------------------------------------------------------------------------- Fixed rate FHLB advances $2,139 $3,425 $12,350 $5,000 $0 $4,000 $26,914 - ---------------------------------------------------------------------------------------------------------------------- Average interest rate 5.79% 5.96% 6.39% 6.70% 0.00% 5.88% 6.27% - ---------------------------------------------------------------------------------------------------------------------- Variable rate FHLB advances $3,500 $750 $0 $0 $0 $21,000 $25,250 - ---------------------------------------------------------------------------------------------------------------------- Average interest rate 6.62% 6.90% 0.00% 0.00% 0.00% 6.29% 6.36% - ---------------------------------------------------------------------------------------------------------------------- Fixed rate debentures $0 $0 $0 $0 $0 $9,697 $9,697 - ---------------------------------------------------------------------------------------------------------------------- Average interest rate 0.00% 0.00% 0.00% 0.00% 0.00% 10.60% 10.60% - ---------------------------------------------------------------------------------------------------------------------- Fed funds purchased $13,200 $0 $0 $0 $0 $0 $13,200 - ---------------------------------------------------------------------------------------------------------------------- Average interest rate 6.44% 0.00% 0.00% 0.00% 0.00% 0.00% 6.44% - ---------------------------------------------------------------------------------------------------------------------- Total rate sensitive $345,651 $107,524 $43,323 $19,681 $17,265 $107,938 $641,382 liabilities - ---------------------------------------------------------------------------------------------------------------------- Average interest rate 5.74% 5.90% 5.39% 3.40% 2.05% 3.38% 5.17% - ---------------------------------------------------------------------------------------------------------------------- </TABLE> 36
37 Principal/Notional Amount Maturing or Assumed to Withdraw In: (Dollars in Thousands) <TABLE> <CAPTION> Comparison of 2000 to 1999: First Years Total rate-sensitive assets: Year 2 - 5 Thereafter Total ---- ----- ---------- ----- <S> <C> <C> <C> <C> At December 31, 2000 $ 273,089 $ 254,392 $138,522 $666,003 At December 31, 1999 293,282 266,263 25,373 584,918 --------- --------- ------- -------- Increase (decrease) $ (20,193) $ (11,871) $113,149 $ 81,085 Total rate-sensitive liabilities: At December 31, 2000 $ 345,651 $ 187,793 $107,938 $641,382 At December 31, 1999 352,800 128,483 95,948 577,231 --------- ------- -------- -------- Increase (decrease) $ (7,149) $ 59,310 $ 11,990 $ 64,151 </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 Corporation's interest rate risk profile. Other important factors include the ratio of rate-sensitive assets to rate sensitive liabilities (which takes into consideration loan repricing frequency 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 maturity. For core deposits, the repricing frequency is assumed to be longer than when such deposits actually may reprice. For variable rate loans receivable, repricing frequency can be daily or monthly and for adjustable rate loans receivable, repricing can be as frequent as annually for loans whose contractual maturities range from one to thirty years. While increasingly aggressive local market competition in lending rates has pushed loan rates lower; the Corporation's increased reliance on non-core funding sources has restricted the Corporation's ability to reduce funding rates in concert with declines in lending rates. Therefore, tax equivalent net interest income as a percentage of average interest earning assets declined from 4.43% in 1998 to 4.29% in 1999 and 4.23% in 2000. THE CORPORATION MANAGES its interest rate risk by the employment of strategies to assure that desired levels of both interest-earning assets and interest-bearing liabilities mature or reprice with similar time frames. Such strategies include; 1) loans receivable which are renewed(and repriced) annually, 2) variable rate loans, 3) certificates of deposit with terms from one month to six years and 4) securities available for sale which mature at various times primarily from one through ten years 5) federal funds borrowings with terms of one day to 90 days, and 6) Federal Home Loan Bank borrowings with terms of one day to ten years. CAPITAL RESOURCES TOTAL SHAREHOLDERS' EQUITY, net of unearned ESOP shares was $50.1 million as of December 31, 2000, an increase of $6.2 million from $43.9 million as of December 31, 1999. The increase was primarily due to 2000 net income of $6.1 million, and a $1.9 million increase in the market value of securities available for sale, net of tax reduced by $1.9 million of cash dividends to shareholders. TOTAL REGULATORY (RISK-BASED) CAPITAL was $66.3 million, net of $.7 million of unearned ESOP shares as of December 31, 2000, an increase of $15.2 million from total regulatory (risk-based) capital of $51.1 million as of December 31, 1999. The $15.2 million increase was primarily due to the issuance of $10.0 37
38 million of junior subordinated debentures (trust preferred securities) which qualify as tier 1 capital, net income of $6.1 million less dividends to shareholders of $1.9 million. THE COMPONENTS of total risk-based capital are Tier 1 capital and Tier 2 capital. Tier 1 capital is total shareholders' equity, plus qualifying trust preferred securities, less intangible assets and net unrealized appreciation (depreciation) on securities available for sale, net of tax. Tier 2 capital is Tier 1 capital plus a portion of the allowance for loan losses. The allowance for loan losses is includable in Tier 2 capital up to a maximum of 1.25% of risk weighted assets. (See Note 17 to consolidated financial statements.) RESTRICTIONS EXIST REGARDING the ability of the subsidiary banks to transfer funds to the Corporation in the form of cash dividends, loans or advances. (See Note 1 to consolidated financial statements.) AS OF DECEMBER 31, 2000, the Corporation met all regulatory capital requirements, and was considered to be "well-capitalized" as defined by banking regulations. Management is not aware of any current recommendations by banking regulatory authorities which, if they were to be implemented, would have, or are reasonably likely to have, a material adverse effect on the Corporation's liquidity, capital resources or operations. PLANNED PURCHASES OF PREMISES AND EQUIPMENT MANAGEMENT PLANS to purchase additional premises and equipment to meet the current and future needs of the Corporation's customers. These purchases, including buildings and improvements and furniture and equipment (which includes computer hardware, software, office and license agreements), are currently expected to total approximately $5 million over the next year. IMPACT OF INFLATION AND CHANGING PRICES THE MAJORITY OF ASSETS AND LIABILITIES of the Corporation are monetary in nature and therefore the Corporation differs greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. However, inflation does have an important impact on the growth of total assets in the banking industry and the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity to assets ratio. Inflation significantly affects noninterest expense, which tends to rise during periods of general inflation. MANAGEMENT BELIEVES the most significant impact on financial results is the Corporation's ability to react to changes in interest rates. Management seeks to maintain an essentially balanced position between interest sensitive assets and liabilities and actively manages the amount of securities available for sale in order to protect against the effects of wide interest rate fluctuations on net income and shareholders' equity. 38
39 FORWARD-LOOKING STATEMENTS WHEN USED IN THIS FILING and in future filings by the Corporation with the Securities and Exchange Commission, in the Corporation's press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phases, "anticipate," "would be," "will allow," "intends to," "will likely result," "are expected to," "will continue," "is anticipated," "estimated," "project," or similar expressions are intended to identify, "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties, including but not limited to changes in economic conditions in the Corporation's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Corporation's market area, and competition, all or some of which could cause actual results to differ materially from historical earnings and those presently anticipated or projected. THE CORPORATION WISHES TO CAUTION readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and advise readers that various factors, including regional and national economic conditions, substantial changes in levels of market interest rates, credit and other risks of lending and investing activities, and competitive and regulatory factors, could affect the Corporation's financial performance and could cause the Corporation's actual results for future periods to differ materially form those anticipated or projected. THE CORPORATION DOES NOT UNDERTAKE, and specifically disclaims any obligation, to update any forward looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. - --------------------------------------------------------------------- The disclosures required by this item appear in this Annual Report on Form 10-K under the caption "Asset Liability Management" contained in the Management's Discussion and Analysis section of this Annual Report on Form 10-K. Item 8. Financial Statements and Supplementary Data. - ------------------------------------------------------ The Consolidated Balance Sheets of the Corporation and its subsidiaries as of December 31, 2000 and December 31, 1999, the related Consolidated Statements of Income, Changes in Shareholders' Equity and Cash Flows for each of the years in the three-year period ended December 31, 2000, the related Notes to Consolidated Financial Statements and the Report of Independent Auditors, appear on pages F-1 through F-37 of this Annual Report on Form 10-K. The Corporation is not required to furnish the supplementary financial information specified by Item 302 of Regulation S-K. Item 9. Changes in and Disagreements With Accountants on Accounting and - -------------------------------------------------------------------------- Financial Disclosure. - --------------------- None. 39
40 PART III -------- Item 10. Directors and Executive Officers of the Registrant. - ------------------------------------------------------------- In accordance with General Instruction G(3), the information called for in this Item 10 is incorporated herein by reference to the Corporation's definitive Proxy Statement, filed with the Securities and Exchange Commission pursuant to Regulation 14A of the General Rules and Regulations under the Securities Exchange Act of 1934, relating to the Corporation's Annual Meeting of Shareholders to be held on April 23, 2001, under the captions "ELECTION OF DIRECTORS" and "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." In addition, certain information concerning the executive officers of the Corporation called for in this Item 10 is set forth in the portion of Part I, Item 4 of this Annual Report on Form 10-K entitled "Executive Officers of the Registrant" in accordance with General Instruction G(3). Item 11. Executive Compensation. - --------------------------------- In accordance with General Instruction G(3), the information called for in this Item 11 is incorporated herein by reference to the Corporation's definitive Proxy Statement, filed with the Securities and Exchange Commission pursuant to Regulation 14A of the General Rules and Regulations under the Securities Exchange Act of 1934, relating to the Corporation's Annual Meeting of Shareholders to be held on April 23, 2001, under the captions "COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS" and "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION." Neither the "REPORT ON EXECUTIVE COMPENSATION" nor the "PERFORMANCE GRAPH" included in the Corporation's definitive Proxy Statement relating to the Corporation's Annual Meeting of Shareholders to be held on April 23, 2001, shall be deemed to be incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. - ------------------------------------------------------------------------- In accordance with General Instruction G(3), the information called for in this Item 12 is incorporated herein by reference to the Corporation's definitive Proxy Statement, filed with the Securities and Exchange Commission pursuant to Regulation 14A of the General Rules and Regulations under the Securities Exchange Act of 1934, relating to the Corporation's Annual Meeting of Shareholders to be held on April 23, 2001, under the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." Item 13. Certain Relationships and Related Transactions. - --------------------------------------------------------- In accordance with General Instruction G(3), the information called for in this Item 13 is incorporated herein by reference to the Corporation's definitive Proxy Statement, filed with the Securities and Exchange Commission pursuant to Regulation 14A of the General Rules and Regulations under the Securities Exchange Act of 1934, relating to the Corporation's Annual Meeting of Shareholders to be held on April 23, 2001, under the caption "TRANSACTIONS INVOLVING MANAGEMENT." 40
41 PART IV ------- Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. - --------------------------------------------------------------------------- (a) (1) Financial Statements. -------------------- For a list of all financial statements included in this Annual Report on Form 10-K, see "Index to Financial Statements" at page 48. (a) (2) Financial Statement Schedules. ----------------------------- All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. (a) (3) Exhibits. -------- Exhibits filed with this Annual Report on Form 10-K are attached hereto. For a list of such exhibits, see "Index to Exhibits" at page 86. The following table provides certain information concerning executive compensation plans and arrangements required to be filed as exhibits to this Annual Report on Form 10-K. 41
42 Executive Compensation Plans and Arrangements --------------------------------------------- <TABLE> <CAPTION> Exhibit No. Description Location - ----------- ----------- -------- <S> <C> <C> 10(a) Employees' Stock Ownership Plan of Rurban Incorporated herein by reference to the Financial Corp. Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 0-13507) [Exhibit 10(a)]. 10(b) First Amendment to Employees' Stock Ownership Incorporated herein by reference to the Plan of Rurban Financial Corp., dated June 14, Corporation's Annual Report on Form 10-K 1993 and made to be effective as of January 1, for the fiscal year ended December 31, 1993 1993 (File No. 0-13507) [Exhibit 10(b)]. 10(c) Second Amendment to Employees' Stock Ownership Incorporated herein by reference to the Plan of Rurban Financial Corp., dated March 14, Corporation's Annual Report on Form 10-K 1994 and made to be effective as of January 1, for the fiscal year ended December 31, 1993 1993 (File No. 0-13507) [Exhibit 10(c)]. 10(d) Third Amendment to Employees' Stock Ownership Incorporated herein by reference to the Plan of Rurban Financial Corp., dated March 13, Corporation's Annual Report on Form 10-K 1995 for the fiscal year ended December 31, 1994 (File No. 0-13507) [Exhibit 10(d)]. 10(e) Fourth Amendment to Employees' Stock Ownership Incorporated herein by reference to the Plan of Rurban Financial Corp., dated June 10, Corporation's Annual Report on Form 10-K 1995 and made to be effective as of January 1, for the fiscal year ended December 31, 1995 1995 (File No. 0-13507) [Exhibit 10(e)]. 10(f) The Rurban Financial Corp. Savings Plan and Incorporated herein by reference to the Trust Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (File No. 0-13507) [Exhibit 10(g)]. 10(g) First Amendment to The Rurban Financial Corp. Incorporated herein by reference to the Savings Plan and Trust, dated December 10, 1990 Corporation's Annual Report on Form 10-K and effective January 1, 1990 for the fiscal year ended December 31, 1990 (File No. 0-13507) [Exhibit 10(g)]. </TABLE> 42
43 <TABLE> <CAPTION> Exhibit No. Description Location - ----------- ----------- -------- <S> <C> <C> 10(h) Second Amendment to The Rurban Financial Corp. Incorporated herein by reference to the Savings Plan and Trust, dated March 11, 1991, Corporation's Annual Report on Form 10-K effective February 1, 1991 for the fiscal year ended December 31, 1992 (File No. 0-13507) [Exhibit 10(d)]. 10(i) Third Amendment to The Rurban Financial Corp. Incorporated herein by reference to the Savings Plan and Trust, dated June 11, 1991 Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (File No. 0-13507) [Exhibit 10(e)]. 10(j) Fourth Amendment to The Rurban Financial Corp. Incorporated herein by reference to the Savings Plan and Trust, dated July 14, 1992, Corporation's Annual Report on Form 10-K effective May 1, 1992 for the fiscal year ended December 31, 1992 (File No. 0-13507) [Exhibit 10(f)]. 10(k) Fifth Amendment to The Rurban Financial Corp. Incorporated herein by reference to the Savings Plan and Trust, dated March 14, 1994 Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 0-13507) [Exhibit 10(i)]. 10(l) Sixth Amendment to The Rurban Financial Corp. Incorporated herein by reference to the Savings Plan and Trust dated May 1, 1995 Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (File No. 0-13507) [Exhibit 10(l)]. 10(m) Summary of Incentive Compensation Plan of State Incorporated herein by reference to the Bank Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 0-13507) [Exhibit 10(j)]. 10(n) Summary of Bonus Program adopted by the Trust Incorporated herein by reference to the Department of State Bank for the benefit of Corporation's Annual Report on Form 10-K Robert W. Constien in his capacity as Manager for the fiscal year ended December 31, of the Trust Department 1991 (File No. 0-13507) [Exhibit 10(e)]. </TABLE> 43
44 <TABLE> <CAPTION> Exhibit No. Description Location - ----------- ----------- -------- <S> <C> <C> 10(o) Summary of Bonus Program for the Trust Incorporated herein by reference to the Department of State Bank Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (File No. 0-13507) [Exhibit 10(i)]. 10(p) Summary of Sales Bonus Program of State Bank Incorporated herein by reference to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (File No. 0-13507) [Exhibit 10(n)]. 10(q) Summary of Rurban Financial Corp. Bonus Plan Incorporated herein by reference to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 0-13507) [Exhibit 10(q)]. 10(r) Executive Salary Continuation Agreement, dated Incorporated herein by reference to the December 15, 1994, between Rurban Financial Corporation's Annual Report on Form 10-K Corp. and Richard C. Burrows for the fiscal year ended December 31, 1994 (File No. 0-13507) [Exhibit 10(p)]. 10(s) Executive Salary Continuation Agreement, dated Incorporated herein by reference to the October 11, 1995, between Rurban Financial Corporation's Annual Reports on Form 10-K Corp. and Thomas C. Williams; and Amended for the fiscal years ended Schedule A to Exhibit 10(s) identifying other December 31, 1995 and December 31, 1997 identical Executive Salary Continuation (File No. 0-13507) [Exhibit 10(s)]. Agreements between executive officers of Rurban Financial Corp. and Rurban Financial Corp. 10(t) Description of Split-Dollar Insurance Policies Incorporated herein by reference to the Maintained for Certain Executive Officers of Corporation's Annual Report on Form 10-K Rurban Financial Corp. for the fiscal year ended December 31, 1995 (File No. 0-13507) [Exhibit 10(t)]. 10(u) Rurban Financial Corp. Stock Option Plan Incorporated herein by reference to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-13507) [Exhibit 10(u)]. </TABLE> 44
45 <TABLE> <CAPTION> Exhibit No. Description Location - ----------- ----------- -------- <S> <C> <C> 10(v) Rurban Financial Corp. Plan to Allow Directors Incorporated herein by reference to the to Elect to Defer Compensation Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-13507) [Exhibit 10(v)]. 10(w) Form of Non-Qualified Stock Option Agreement Incorporated herein by reference to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 0-13507 [Exhibit 10(w)]. 10(x) Form of Incentive Stock Option Agreement Incorporated herein by reference to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 0-13507 [Exhibit 10(x)]. 10(y) Employees' Stock Ownership ad Savings Plan of Incorporated herein by reference to the Rurban Financial Corp. Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 0-13507 [Exhibit 10(y)]. </TABLE> (b) Reports on Form 8-K. -------------------- There were no current reports on Form 8-K filed during the fiscal quarter ended December 31, 2000. (c) Exhibits. -------- Exhibits filed with this Annual Report on Form 10-K are attached hereto. For a list of such exhibits, see "Index to Exhibits" at page 86. (d) Financial Statement Schedules. ----------------------------- None. 45
46 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. <TABLE> <CAPTION> <S> <C> RURBAN FINANCIAL CORP. /s/ Richard C. Warrener ----------------------- Date: March 23, 2001 By: Richard C. Warrener, Executive Vice President, Chief Financial Officer and Chief Accounting Officer </TABLE> POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS, that each undersigned officer and/or director of Rurban Financial Corp., an Ohio corporation which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, the Annual Report on Form 10-K for the fiscal year ended December 31, 2000, hereby constitutes and appoints Thomas C. Williams and Richard Warrener as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign both the Annual Report on Form 10-K and any and all amendments and documents related thereto, and to file the same, and any and all exhibits, financial statements and schedules related thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and substitute or substitutes, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. <TABLE> <CAPTION> Name Date Capacity ---- ---- -------- <S> <C> <C> /s/ Thomas C. Williams March 23, 2001 President, Chief Executive Officer, Principal - ---------------------- Executive Officer and Director Thomas C. Williams /s/ Richard C. Burrows March 23, 2001 Director - ---------------------- Richard C. Burrows /s/ John R. Compo March 23, 2001 Director - ----------------- John R. Compo /s/ John Fahl March 23, 2001 Director - ------------- John Fahl /s/ Robert A. Fawcett, Jr. March 23, 2001 Director - -------------------------- Robert A. Fawcett, Jr. </TABLE> 46
47 <TABLE> <CAPTION> <S> <C> <C> /s/ Eric C. Hench March 23, 2001 Director - ----------------- Eric C. Hench /s/ W. Scott Muir March 23, 2001 Director - ----------------- W. Scott Muir /s/ Steven D. VanDemark March 23, 2001 Director - ----------------------- Steven D. VanDemark /s/ J. Michael Walz, D.D.S March 23, 2001 Director - -------------------------- J. Michael Walz, D.D.S /s/ Richard C. Warrener March 23, 2001 Executive Vice President, Chief Financial - --------------------------- Officer and Chief Accounting Officer Richard C. Warrener Date: March 23, 2001 </TABLE> 47
48 RURBAN FINANCIAL CORP. ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 2000 INDEX TO FINANCIAL STATEMENTS ----------------------------- <TABLE> <CAPTION> Pages in this Annual Report on Description Form 10-K - ----------- --------- <S> <C> Report of Independent Auditors................................................................... F-1 Consolidated Balance Sheets at December 31, 2000 and 1999.................................................................................... F-2 to F-3 Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998 ..................................................... F-4 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2000, 1999 and 1998................................. F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998................................................ F-6 to F-7 Notes to Consolidated Financial Statements....................................................... F-8 to F-37 </TABLE> 48
49 REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders Rurban Financial Corp. Defiance, Ohio We have audited the accompanying consolidated balance sheets of Rurban Financial Corp. and Subsidiaries as of December 31, 2000 and 1999 and the related consolidated statements of income, changes in shareholders' equity and cash flows for the years ended December 31, 2000, 1999 and 1998. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Rurban Financial Corp. and Subsidiaries as of December 31, 2000 and 1999, and the results of its operations and its cash flows for the years ended December 31, 2000, 1999 and 1998 in conformity with generally accepted accounting principles. /s/ Crowe, Chizek and Company LLP --------------------------------- Crowe, Chizek and Company LLP South Bend, Indiana February 2, 2001 F-1.
50 RURBAN FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2000 and 1999 - -------------------------------------------------------------------------------- <TABLE> <CAPTION> 2000 1999 ---- ---- <S> <C> <C> ASSETS Cash and due from banks $ 18,431,717 $ 18,571,702 Federal funds sold - 11,000 ----------------- ----------------- Total cash and cash equivalents 18,431,717 18,582,702 Interest-bearing deposits in other financial institutions 110,000 110,000 Securities available for sale 88,904,958 83,118,908 Loans held for sale, net of valuation allowance ($0) 1,166,716 7,149,585 Loans Commercial, financial and agricultural 362,927,760 326,564,165 Residential first mortgage 107,717,699 80,703,338 Consumer 106,342,607 94,410,123 ----------------- ----------------- Total loans 576,988,066 501,677,626 Deferred loan fees, net (351,841) (346,248) Allowance for loan losses (7,214,970) (6,193,712) ----------------- ----------------- Net loans 569,421,255 495,137,666 Accrued interest receivable 5,716,048 4,147,321 Premises and equipment, net 10,902,749 11,140,327 Other assets 6,164,259 8,397,015 ----------------- ----------------- Total assets $ 700,817,702 $ 627,783,524 ================= ================= </TABLE> - -------------------------------------------------------------------------------- (Continued) F-2.
51 RURBAN FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2000 and 1999 <TABLE> <CAPTION> 2000 1999 ---- ---- <S> <C> <C> LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Deposits Noninterest-bearing $ 47,989,547 $ 49,005,311 Interest-bearing 518,331,214 470,290,773 ----------------- ----------------- Total deposits 566,320,761 519,296,084 Federal funds purchased 13,200,000 10,900,000 Advances from Federal Home Loan Bank ("FHLB") 52,163,914 40,035,303 Junior subordinated debentures 9,697,385 - Other borrowed funds - 7,000,000 Accrued interest payable 4,613,173 2,513,798 Other liabilities 4,682,283 4,137,868 ----------------- ----------------- Total liabilities 650,677,516 583,883,053 Shareholders' Equity Common stock: stated value $2.50 per share; shares authorized: 10,000,000; shares issued: 4,575,702; shares outstanding: 2000 - 4,347,238; 1999 - 4,140,718 11,439,255 11,439,255 Additional paid-in capital 11,113,340 11,518,469 Retained earnings 31,450,244 30,047,158 Accumulated other comprehensive income (loss), net of tax of $169,222 in 2000 and $(790,008) in 1999 328,490 (1,533,547) Unearned ESOP shares (unearned shares: 2000 - 50,115, 1999 - 50,334) (721,442) (908,014) Treasury stock; shares at cost: 2000 - 228,464, 1999 - 434,984 (3,469,701) (6,662,850) ----------------- ----------------- Total shareholders' equity 50,140,186 43,900,471 ----------------- ----------------- Total liabilities and shareholders' equity $ 700,817,702 $ 627,783,524 ================= ================= </TABLE> - -------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. F-3.
52 RURBAN FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- <TABLE> <CAPTION> 2000 1999 1998 ---- ---- ---- <S> <C> <C> <C> Interest income Loans, including fees $ 50,404,396 $ 39,824,608 $ 34,131,651 Taxable securities 4,978,266 4,553,538 3,939,667 Non-taxable securities 592,240 498,257 325,256 Other interest income 48,035 76,408 896,714 --------------- --------------- ---------------- Total interest income 56,022,937 44,952,811 39,293,288 Interest expense Deposits 24,892,370 19,026,452 17,342,766 Short-term borrowings 1,358,778 617,027 62,853 Advances from FHLB 2,707,345 1,765,513 1,337,080 Junior subordinated debentures 335,667 - - Other borrowed funds 340,909 334,921 - --------------- --------------- ---------------- Total interest expense 29,635,069 21,743,913 18,742,699 --------------- --------------- ---------------- NET INTEREST INCOME 26,387,868 23,208,898 20,550,589 Provision for loan losses 2,100,000 1,215,000 1,080,000 --------------- --------------- ---------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 24,287,868 21,993,898 19,470,589 Noninterest income Service charges on deposit accounts 1,744,446 1,462,925 1,252,274 Loan servicing fees 662,665 581,581 540,239 Trust fees 2,635,047 2,597,465 2,576,823 Data service fees 5,123,805 4,381,746 3,553,998 Net gain (loss) on securities (80,540) (5,827) 72,468 Net gain on sales of loans 387,493 1,147,339 1,933,834 Other income 799,945 898,767 580,998 --------------- --------------- ---------------- Total noninterest income 11,272,861 11,063,996 10,510,634 Noninterest expense Salaries and employee benefits 15,094,596 14,389,186 12,434,334 Net occupancy expense of premises 1,137,377 1,183,120 1,093,772 Equipment rentals, depreciation and maintenance 3,347,608 2,952,061 2,486,511 Other expenses 7,174,436 6,941,688 7,615,394 --------------- --------------- ---------------- Total noninterest expense 26,754,017 25,466,055 23,630,011 --------------- --------------- ---------------- INCOME BEFORE INCOME TAX EXPENSE 8,806,712 7,591,839 6,351,212 Income tax expense 2,720,534 2,360,937 2,073,335 --------------- --------------- ---------------- NET INCOME $ 6,086,178 $ 5,230,902 $ 4,277,877 =============== =============== ================ Earnings per common share: Basic $ 1.42 $ 1.22 $ 1.00 =============== =============== =============== Diluted $ 1.42 $ 1.22 $ .99 =============== =============== =============== </TABLE> - -------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. F-4.
53 RURBAN FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Years ended December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- <TABLE> <CAPTION> Accumulated Other Additional Comprehensive Common Paid-In Retained Income (Loss), Stock Capital Earnings Net of Tax ----- ------- -------- ---------- <S> <C> <C> <C> <C> BALANCES AT JANUARY 1, 1998 $ 5,719,628 $ 17,239,088 $ 23,891,983 $ 218,840 Comprehensive Income: Net income for the year - - 4,277,877 - Net change in net unrealized appreciation (depreciation) on securities available for sale, net of reclassification adjustments and tax effects - - - (15,918) Total Comprehensive Income Pay down of ESOP Loan - - - - Declaration of a 2 for 1 stock split and issuance of 2,287,851 common shares 5,719,627 (5,719,627) - - Cash dividends declared ($0.38 per share) - - (1,660,963) - Issuance of 700 treasury shares due to exercise of stock options - (734) - - ------------- -------------- ------------- -------------- BALANCES AT DECEMBER 31, 1998 11,439,255 11,518,727 26,508,897 202,922 Comprehensive Income: Net income for the year - - 5,230,902 - Net change in net unrealized appreciation (depreciation) on securities available for sale, net of reclassification adjustments and tax effects - - - (1,736,469) Total Comprehensive Income Pay down of ESOP Loan - - - - Cash dividends declared ($0.39 per share) - - (1,692,641) - Issuance of 200 treasury shares due to exercise of stock options - (258) - - ------------- -------------- ------------- -------------- BALANCES AT DECEMBER 31, 1999 11,439,255 11,518,469 30,047,158 (1,533,547) Comprehensive Income: Net income for the year - - 6,086,178 - Net change in net unrealized appreciation (depreciation) on securities available for sale, net of reclassification adjustments and tax effects - - - 1,862,037 Total Comprehensive Income Pay down of ESOP Loan Cash dividends declared ($0.44 per share) - - (1,888,104) - Declaration of 5% stock dividend net of cash paid in lieu of fractional shares and issuance of 206,520 treasury shares - (405,129) (2,794,988) - ------------- -------------- ------------- -------------- BALANCES AT DECEMBER 31, 2000 $ 11,439,255 $ 11,113,340 $ 31,450,244 $ 328,490 ============= ============== ============= ============== </TABLE> <TABLE> <CAPTION> Unearned ESOP Treasury Shares Stock Total ------ ----- ----- <S> <C> <C> <C> BALANCES AT JANUARY 1, 1998 $ (1,299,000) $ (6,676,611) $ 39,093,928 Comprehensive Income: Net income for the year - - 4,277,877 Net change in net unrealized appreciation (depreciation) on securities available for sale, net of reclassification adjustments and tax effects - - (15,918) ------------- Total Comprehensive Income 4,261,959 Pay down of ESOP Loan 198,095 - 198,095 Declaration of a 2 for 1 stock split and issuance of 2,287,851 common shares - - - Cash dividends declared ($0.38 per share) - - (1,660,963) Issuance of 700 treasury shares due to exercise of stock options - 10,665 9,931 ------------- ------------- ------------- BALANCES AT DECEMBER 31, 1998 (1,100,905) (6,665,946) 41,902,950 Comprehensive Income: Net income for the year - - 5,230,902 Net change in net unrealized appreciation (depreciation) on securities available for sale, net of reclassification adjustments and tax effects - - (1,736,469) ------------- Total Comprehensive Income 3,494,433 Pay down of ESOP Loan 192,891 - 192,891 Cash dividends declared ($0.39 per share) - - (1,692,641) Issuance of 200 treasury shares due to exercise of stock options - 3,096 2,838 ------------- ------------- ------------- BALANCES AT DECEMBER 31, 1999 (908,014) (6,662,850) 43,900,471 Comprehensive Income: Net income for the year - - 6,086,178 Net change in net unrealized appreciation (depreciation) on securities available for sale, net of reclassification adjustments and tax effects - - 1,862,037 ------------- Total Comprehensive Income 7,948,215 Pay down of ESOP Loan 186,572 186,572 Cash dividends declared ($0.44 per share) - - (1,888,104) Declaration of 5% stock dividend net of cash paid in lieu of fractional shares and issuance of 206,520 treasury shares - 3,193,149 (6,968) ------------- ------------- ------------- BALANCES AT DECEMBER 31, 2000 $ (721,442) $ (3,469,701) $ 50,140,186 ============= ============== ============= </TABLE> - -------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. F-5.
54 RURBAN FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- <TABLE> <CAPTION> 2000 1999 1998 ---- ---- ---- <S> <C> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Cash received from customers - fees and commissions $ 10,965,908 $ 9,922,484 $ 8,504,332 Cash paid to suppliers and employees (23,681,258) (23,415,280) (22,013,138) Loans originated for sale (13,076,583) (97,308,756) (112,427,356) Proceeds from sales of loans held for sale 14,102,762 104,697,491 100,256,242 Interest received 54,459,803 44,007,116 39,682,791 Interest paid (27,535,694) (20,915,552) (18,634,402) Income taxes paid (1,961,537) (2,400,000) (1,955,000) --------------- --------------- ---------------- Net cash from operating activities 13,273,401 14,587,503 (6,586,531) CASH FLOWS FROM INVESTING ACTIVITIES Net change in interest-bearing deposits in other financial institutions - 70,000 349,777 Net change in loans (71,535,751) (103,341,052) (35,910,252) Proceeds from sales of securities available for sale 9,063,566 17,657,888 24,765,342 Principal repayments, maturities, and calls of securities available for sale 8,845,593 24,243,471 24,138,929 Purchase of securities available for sale (20,954,482) (45,514,178) (59,309,982) Net purchases of premises and equipment (1,655,551) (1,666,906) (4,502,632) Recoveries on loan charge-offs 490,752 662,299 424,745 --------------- --------------- ---------------- Net cash from investing activities (75,745,873) (107,888,478) (50,044,073) CASH FLOWS FROM FINANCING ACTIVITIES Net change in deposits 47,024,677 68,482,861 35,631,937 Net change in federal funds purchased 2,300,000 1,400,000 4,571,000 Proceeds from advances from FHLB 20,000,000 15,000,000 26,500,000 Repayments of advances from FHLB (7,871,389) (3,854,987) (5,139,577) Net proceeds from issuance of junior subordinated debentures 9,697,385 - - Net proceeds from (repayment of) advances on line of credit (7,000,000) 7,000,000 - Cash dividends paid (1,822,218) (1,656,179) (1,655,928) Proceeds from exercise of stock options - 2,838 9,931 Cash paid in lieu of fractional shares for 5% stock dividend (6,968) - - --------------- --------------- ---------------- Net cash from financing activities 62,321,487 86,374,533 59,917,363 --------------- --------------- ---------------- Net change in cash and cash equivalents (150,985) (6,926,442) 3,286,759 Cash and cash equivalents at beginning of year 18,582,702 25,509,144 22,222,385 --------------- --------------- ---------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 18,431,717 $ 18,582,702 $ 25,509,144 =============== =============== ================ </TABLE> - -------------------------------------------------------------------------------- (Continued) F-6.
55 RURBAN FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- <TABLE> <CAPTION> 2000 1999 1998 ---- ---- ---- <S> <C> <C> <C> RECONCILIATION OF NET INCOME TO NET CASH FROM OPERATING ACTIVITIES Net income $ 6,086,178 $ 5,230,902 $ 4,277,877 Adjustments to reconcile net income to net cash from operating activities Depreciation 1,893,129 1,926,624 1,686,548 Amortization of intangible assets 210,000 210,000 385,000 Provision for loan losses 2,100,000 1,215,000 1,080,000 Net (gain) loss on securities 80,540 5,827 (72,468) Loans originated for sale (13,076,583) (97,308,756) (112,427,356) Proceeds from sales of loans held for sale 14,102,762 104,697,491 100,256,242 Net gain on sales of loans (387,493) (1,147,339) (1,933,834) Paydown of ESOP loan 186,572 192,891 198,095 Change in assets and liabilities Deferred loan fees, net 5,593 5,080 52,517 Accrued interest receivable (1,568,727) (950,775) 336,986 Other assets 1,063,526 (56,330) (1,834,862) Accrued interest payable 2,099,375 828,361 108,297 Other liabilities 478,529 (261,473) 1,300,427 --------------- --------------- ---------------- Net cash from operating activities $ 13,273,401 $ 14,587,503 $ (6,586,531) =============== =============== ================ Supplemental disclosure of noncash transactions: Transfer from loans held for sale to loans receivable $ 5,344,183 $ 5,118,294 $ - </TABLE> - -------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. F-7.
56 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial statements include the accounts of Rurban Financial Corp. and its wholly-owned subsidiaries. Rurban Financial Corp. ("the Corporation") is a bank holding company, organized under Ohio law, that owns all the outstanding stock of The State Bank and Trust Company ("State Bank"), The Peoples Banking Company ("Peoples Bank"), The First National Bank of Ottawa ("First National Bank"), The Citizens Savings Bank Company ("Citizens Savings Bank"), Rurbanc Data Services, Inc. ("RDSI"), Rurban Life Insurance Company ("Rurban Life") and Rurban Statutory Trust 1 ("RST") (together referred to as "the Corporation"). State Bank owns all of the outstanding stock of Reliance Financial Services, N.A. ("RFS") and Rurban Mortgage Company ("RMC"). All significant intercompany balances and transactions are eliminated in consolidation. NATURE OF BUSINESS AND INDUSTRY SEGMENTS: Internal financial information is primarily reported and aggregated in three lines of business: banking, mortgage banking, and data processing services. For further discussion, see Note 19. The Corporation's subsidiary banks grant credit and accept deposits from their customers in the normal course of business primarily in northern Ohio. RDSI provides data processing services to financial institutions located in Ohio, Michigan and Indiana. Rurban Life accepts reinsurance ceded in part by American General Assurance Company from the credit life and disability insurance purchased by customers of the Corporation's subsidiary banks. RFS offers a diversified array of trust and financial services to customers nationwide. RMC services residential mortgage customers in Nothern Ohio, West and Central Florida. RST is at trust which was organized in 2000 to manage the Corporation's junior subordinated debentures. USE OF ESTIMATES: To prepare consolidated financial statements in conformity with generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the consolidated financial statements and the disclosures provided, and future results could differ. The allowance for loan losses, fair values of securities and other financial instruments and the carrying value of loans held for sale are particularly subject to change. SECURITIES: Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with net unrealized appreciation (depreciation), net of tax, reported separately in other comprehensive income (loss) and shareholders' equity. Securities are classified as trading when held for short term periods in anticipation of market gains, and are carried at fair value. Securities are written down to fair value when a decline in fair value is not temporary. Realized gains and losses resulting from the sale of securities are computed by the specific identification method. Interest and dividend income, adjusted by amortization of purchase premium or discount, is included in earnings. Premiums and discounts on securities are - -------------------------------------------------------------------------------- (Continued) F-8.
57 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) recognized using the level yield method over the estimated life of the security. Also, see Note 3. LOANS HELD FOR SALE: Mortgage loans intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized in a valuation allowance by charges to income. INTEREST INCOME ON LOANS: Interest on loans is accrued over the term of the loans based upon the principal outstanding. Management reviews loans delinquent 90 days or more to determine if the interest accrual should be discontinued. When serious doubt exists as to the collectibility of a loan, the accrual of interest is discontinued. Under Statement of Financial Accounting Standards ("SFAS") No. 114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118, the carrying value of impaired loans is periodically adjusted to reflect cash payments, revised estimates of future cash flows, and increases in the present value of expected cash flows due to the passage of time. Cash payments representing interest income are reported as such and other cash payments are reported as reductions in carrying value. Increases or decreases in carrying value due to changes in estimates of future payments or the passage of time are reported as a component of the provision for loan losses. LOAN FEES AND COSTS: Loan fees, net of direct origination costs, are deferred. The net amount deferred is reported in the consolidated balance sheets as part of loans and is recognized in interest income over the term of the loan using the level yield method. ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is a valuation allowance for probable, incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Estimating the risk of loss and the amount of loss on any loan is necessarily subjective. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations including their financial position and estimated collateral values, economic conditions and other factors and estimates which are subject to change over time. While management may periodically allocate portions of the allowance for specific problem loan situations, the entire allowance is available for any loan charge-offs that may occur. A loan is charged off by management as a loss when deemed uncollectible, although collection efforts continue and future recoveries may occur. Loans are considered impaired if full principal or interest payments are not anticipated in accordance with the contractual loan terms. Impaired loans are carried at the present value of expected future cash flows discounted at the loan's effective interest rate or at the fair value of the collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. If these allocations cause the allowance for loan losses to require increase, such increase is reported as a component of the provision for loan losses. - -------------------------------------------------------------------------------- (Continued) F-9.
58 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Smaller-balance homogeneous loans are evaluated for impairment in total. Such loans include residential first mortgage loans secured by one-to-four family residences, residential construction loans, and automobile, home equity and second mortgage loans. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment. When analysis of borrower operating results and financial condition indicates that underlying cash flows of the borrower's business are not adequate to meet its debt service requirements, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 30 days or more. Commercial loans are rated on a scale of 1 to 7, with 1 to 3 being satisfactory, 4 special mention, 5 substandard, 6 doubtful, and 7 as loss which are then charged off. Loans graded a 5 or worse are considered for impairment. Loans are generally moved to nonaccrual status when 90 days or more past due. These loans are often considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible. This typically occurs when the loan is 120 days or more past due. Also, see Note 4 PREMISES AND EQUIPMENT: Land is carried at cost. Buildings and improvements are depreciated using primarily the straight-line method with useful lives ranging from 10 to 50 years. Furniture and equipment are depreciated using the straight-line and declining-balance methods with useful lives ranging predominantly from 5 to 20 years. These assets are reviewed for impairment under SFAS No. 121 when events indicate the carrying amount may not be recoverable. Maintenance and repairs are expensed and major improvements are capitalized. Also, see Note 5. SERVICING RIGHTS: Servicing rights are recognized as assets for purchased rights and for the allocated value of retained servicing rights on loans sold. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates and then, secondarily, as to geographic and prepayment characteristics. Any impairment of a grouping is reported as a valuation allowance. Excess servicing receivable is reported when a loan sale results in servicing in excess of normal amounts, and is expensed over the life of the servicing on the interest method. INTANGIBLE ASSETS: Goodwill arising from the acquisition of subsidiary banks and RMC is amortized over 5 to 25 years using the straight-line method. Core deposit intangibles are amortized on an accelerated basis over 10 years, the estimated life of the deposits acquired. Goodwill and identified intangibles are assessed for impairment based on estimated undiscounted cash flows, and written down if necessary. As of December 31, 2000, 1999 and 1998, unamortized goodwill totaled approximately $277,000, $404,000 and $532,000, and unamortized core deposit intangibles totaled approximately $23,000, $106,000 and $188,000. - -------------------------------------------------------------------------------- (Continued) F-10.
59 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) FORECLOSED REAL ESTATE: Real estate properties acquired through, or in lieu of, loan foreclosure are initially recorded at fair value at the date of acquisition establishing a new cost basis. Any reduction to fair value from the carrying value of the related loan at the time of acquisition is accounted for as a loan loss and charged against the allowance for loan losses. After acquisition, a valuation allowance is recorded through a charge to income for the amount of estimated selling costs. Valuations are periodically performed by management, and valuation allowances are adjusted through a charge to income for changes in fair value or estimated selling costs. Other real estate owned amounted to approximately $137,000 and $285,000 at December 31, 2000 and 1999, respectively, and is included in other assets in the consolidated balance sheets. INCOME TAXES: Income tax expense is the sum of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. Also, see Note 12. EMPLOYEE BENEFITS: The Corporation sponsors an employee stock ownership plan (ESOP) and 401(k) profit sharing plan for which contributions are made and expensed annually. The Corporation also provides split-dollar life insurance plans for certain executive officers of the Corporation. Also, the Corporation sponsors a supplemental retirement plan for certain executive officers of the Corporation. Employee benefits are discussed further in Note 10. STOCK OPTION PLAN: The Corporation sponsors a stock option plan for directors, officers and key employees. Expense for employee compensation under the stock option plan is based on Accounting Principles Board ("APB") Opinion 25 with expense reported only if options are granted below market price at grant date. Pro forma disclosures of net income and earnings per common share are provided as if the fair value method of SFAS No. 123 were used to measure expense for stock-based compensation. The stock option plan is discussed further in Note 10. POSTRETIREMENT HEALTH CARE BENEFITS: The Corporation sponsors a postretirement health care plan that covers both salaried and nonsalaried employees. The Corporation accrues, during the years that employees render the necessary service, the expected cost of providing postretirement health care benefits to employees and their beneficiaries and covered dependents. The Corporation's postretirement health care plan provides that retired employees may remain on the Corporation's health care plan with each retiree's out-of-pocket contribution to the Corporation equal to their premium expense determined exclusively on the loss experience of the retirees in the plan. - -------------------------------------------------------------------------------- (Continued) F-11.
60 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) STOCK DIVIDENDS AND STOCK SPLITS: Dividends issued in stock are reported by transferring the market value of the stock issued from retained earnings to common stock or treasury stock and additional paid-in capital. Stock splits are recorded by adjusting common stock and additional paid in capital by the par value of the additional shares. On May 27, 1998, the Board of Directors declared a two-for-one stock split, paid on June 30, 1998, increasing shares outstanding by 2,287,851 shares. On August 16, 2000 the Board of Directors declared a 5% stock dividend, paid on September 29, 2000, increasing shares outstanding by 206,520 shares. EARNINGS AND DIVIDENDS PER COMMON SHARE: Basic earnings per common share is net income divided by the weighted average number of common shares considered to be outstanding during the period. ESOP shares are considered outstanding for this calculation unless unearned. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options. Earnings and dividends per common share are restated for all stock splits and dividends. Also, see Note 2. COMPREHENSIVE INCOME (LOSS): Comprehensive income (loss) consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes the net change in net unrealized appreciation (depreciation) on securities available for sale, net of tax, which is also recognized as a separate component of shareholders' equity. Also, see Note 18. DIVIDEND RESTRICTION: Certain restrictions exist regarding the ability of the subsidiaries to transfer funds to Rurban Financial Corp. in the form of cash dividends, loans or advances. Approximately $5,400,000 of undistributed earnings of the subsidiaries, included in consolidated retained earnings, plus current 2001 net profits is available for distribution to Rurban Financial Corp. as dividends in 2001 without prior regulatory approval. FAIR VALUES OF FINANCIAL INSTRUMENTS: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 16. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect such estimates. CONCENTRATIONS OF CREDIT RISK: The Corporation grants commercial, financial and agricultural, residential first mortgage and consumer loans to customers mainly in northern Ohio. Commercial loans include loans collateralized by commercial real estate, business assets and agricultural loans collateralized by crops and farm equipment. Commercial, financial and agricultural loans make up approximately 63% of the loan portfolio and the loans are expected to be repaid from cash flow from operations of businesses. Residential first mortgage loans make up approximately 19% of the loan portfolio and are collateralized by first mortgages on residential real estate. Consumer loans make up approximately 18% of the loan portfolio and are primarily collateralized by consumer assets. - -------------------------------------------------------------------------------- (Continued) F-12.
61 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK: The Corporation, in the normal course of business, makes commitments to extend credit which are not reflected in the consolidated financial statements. A summary of these commitments is disclosed in Note 14. STATEMENTS OF CASH FLOWS: For purposes of reporting cash flows, cash and cash equivalents is defined to include cash on hand, due from financial institutions and federal funds sold with original maturities under 90 days. The Corporation reports net cash flows for customer loan transactions, deposit transactions, short-term borrowings with original maturities of 90 days or less and interest-bearing deposits in other financial institutions. NEW ACCOUNTING PRONOUNCEMENTS: Beginning January 1, 2001, a new accounting standard will require all derivatives to be recorded at fair value. Unless designated as hedges, changes in the fair values will be recorded in the income statement. Fair value changes involving hedges will generally be recorded by offsetting gains and losses on the hedge and on the hedged item, even if the fair value of the hedged item is not otherwise recorded. Adoption of this standard on January 1, 2001 did not have a material effect on the Corporation's financial condition or results of operations. NOTE 2 - BASIC AND DILUTED EARNINGS PER COMMON SHARE A reconciliation of the numerators and denominators of the computations of basic earnings per common share and diluted earnings per common share for the years ended December 31, 2000, 1999 and 1998 is presented below: <TABLE> <CAPTION> Year Ended December 31, ----------------------- 2000 1999 1998 ---- ---- ---- <S> <C> <C> <C> BASIC EARNINGS PER COMMON SHARE Net income $ 6,086,178 $ 5,230,902 $ 4,277,877 ============== ============== ================ Weighted average common shares outstanding 4,347,238 4,347,750 4,347,508 Less: Unallocated ESOP shares (51,482) (59,926) (73,899) -------------- -------------- ---------------- Weighted average common shares outstanding for basic earnings per common share 4,295,756 4,287,824 4,273,609 ============== ============== ================ Basic earnings per common share $ 1.42 $ 1.22 $ 1.00 ============== ============== ================ DILUTED EARNINGS PER COMMON SHARE Net income $ 6,086,178 $ 5,230,902 $ 4,277,877 ============== ============== ================ Weighted average common shares outstanding for basic earnings per common share 4,295,756 4,287,824 4,273,609 Add: Dilutive effects of assumed conversions and exercise of stock options 198 8,740 31,931 -------------- -------------- ---------------- Weighted average common and dilutive potential common shares outstanding 4,295,954 4,296,564 4,305,540 ============== ============== ================ Diluted earnings per common share $ 1.42 $ 1.22 $ .99 ============== ============== ================ </TABLE> - -------------------------------------------------------------------------------- (Continued) F-13.
62 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 2 - BASIC AND DILUTED EARNINGS PER COMMON SHARE (Continued) Incentive stock options for 225,855 shares of common stock were not considered in computing earnings per common share for 2000, and incentive stock options for 54,862 and 48,037 shares of common stock were not considered in computing earnings per common share for 1999 and 1998 because these options were not dilutive. Common share numbers have been restated for all stock splits and stock dividends. NOTE 3 - SECURITIES AVAILABLE FOR SALE Year end securities available for sale were as follows. <TABLE> <CAPTION> Gross Gross Amortized Unrealized Unrealized 2000 Cost Gains Losses Fair Value - ---- ---- ----- ------ ---------- <S> <C> <C> <C> <C> U.S. Treasury and U.S. Government agency securities $ 22,832,078 $ 132,514 $ (68,272) $ 22,896,320 Obligations of states and political subdivisions 12,496,066 241,579 (162,036) 12,575,609 Mortgage-backed securities 49,576,863 585,638 (231,711) 49,930,790 Marketable equity securities 3,502,239 - - 3,502,239 ---------------- ------------ ------------- ---------------- $ 88,407,246 $ 959,731 $ (462,019) $ 88,904,958 ================ ============ ============= ================ 1999 - ---- U.S. Treasury and U.S. Government agency securities $ 19,794,342 $ 618 $ (418,696) $ 19,376,264 Obligations of states and political subdivisions 11,235,056 19,984 (673,069) 10,581,971 Mortgage-backed securities 51,817,915 387 (1,252,779) 50,565,523 Marketable equity securities 2,595,150 - - 2,595,150 ---------------- ------------ ------------- ---------------- $ 85,442,463 $ 20,989 $ (2,344,544) $ 83,118,908 ================ ============ ============= ================ </TABLE> - -------------------------------------------------------------------------------- (Continued) F-14.
63 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 3 - SECURITIES AVAILABLE FOR SALE (Continued) Contractual maturities of debt securities available for sale at December 31, 2000 were as follows. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately. <TABLE> <CAPTION> Available for Sale ------------------ Amortized Cost Fair Value ---- ---------- <S> <C> <C> Due in one year or less $ 2,475,556 $ 2,469,674 Due after one year through five years 18,649,047 18,635,705 Due after five years through ten years 7,251,574 7,472,873 Due after ten years 6,951,967 6,893,677 Mortgage-backed securities 49,576,863 49,930,790 ---------------- --------------- Total debt securities available for sale $ 84,905,007 $ 85,402,719 ================ =============== </TABLE> Proceeds, gross gains and gross losses realized from sales of securities available for sale for the years ended December 31, 2000, 1999 and 1998 are as follows: <TABLE> <CAPTION> 2000 1999 1998 ---- ---- ---- <S> <C> <C> <C> Proceeds from sales of debt securities available for sale $ 9,063,566 $ 17,657,888 $ 24,765,342 ============== ================ ============== Gross gains from sales of debt securities available for sale $ 6,080 $ 25,648 $ 73,245 Gross losses from sales of debt securities available for sale (86,620) (31,475) (777) -------------- ---------------- -------------- Net gain (loss) on securities $ (80,540) $ (5,827) $ 72,468 ============== ================ ============== </TABLE> At December 31, 2000, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies and corporations, in an amount greater than 10% of shareholders' equity. Securities with an amortized cost of approximately $77,708,000 and $70,991,000 as of December 31, 2000 and 1999, were pledged to secure public and trust deposits and FHLB advances. - -------------------------------------------------------------------------------- (Continued) F-15.
64 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 4 - ALLOWANCE FOR LOAN LOSSES The following is a summary of the activity in the allowance for loan losses account for the years ended December 31, 2000, 1999 and 1998: <TABLE> <CAPTION> 2000 1999 1998 ---- ---- ---- <S> <C> <C> <C> Beginning balance $ 6,193,712 $ 5,408,854 $ 5,239,601 Provision for loan losses 2,100,000 1,215,000 1,080,000 Recoveries of previous charge-offs 490,752 662,299 424,745 Losses charged to the allowance (1,569,494) (1,092,441) (1,335,492) -------------- -------------- -------------- Ending balance $ 7,214,970 $ 6,193,712 $ 5,408,854 ============== ============== ============== </TABLE> At December 31, 2000 and 1999, loans past due more than 90 days and still accruing interest approximated $1,927,000 and $809,000. Impaired loans were as follows. <TABLE> <CAPTION> 2000 1999 1998 ---- ---- ---- <S> <C> <C> <C> Year end loans with no allowance for loan losses allocated $ 4,189,000 $ - $ 567,000 Year end loans with allowance for loan losses allocated 3,923,000 1,536,000 689,000 --------------- --------------- ------------- Total impaired loans $ 8,112,000 $ 1,536,000 $ 1,256,000 =============== =============== ============= Amount of allowance allocated $ 2,410,000 $ 807,000 $ 225,000 Average of impaired loans during the year 6,020,000 1,461,000 1,462,000 Interest income recognized during impairment 416,000 40,000 11,000 Cash-basis interest income recognized 89,000 17,000 11,000 </TABLE> NOTE 5 - PREMISES AND EQUIPMENT, NET Premises and equipment, net at December 31, are summarized as follows: <TABLE> <CAPTION> 2000 1999 ---- ---- <S> <C> <C> Land $ 1,056,691 $ 984,216 Buildings and improvements 7,880,696 7,716,803 Furniture and equipment 10,709,599 9,944,385 --------------- -------------- Total cost 19,646,986 18,645,404 Accumulated depreciation and amortization (8,744,237) (7,505,077) --------------- -------------- $ 10,902,749 $ 11,140,327 =============== ============== </TABLE> - -------------------------------------------------------------------------------- (Continued) F-16.
65 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 5 - PREMISES AND EQUIPMENT, NET (Continued) The Corporation is obligated under non-cancelable leases for office space and equipment. Rent expense was $253,000, $229,000 and $266,000 for 2000, 1999 and 1998. At December 31, 2000, minimum future lease payments are as follows for the years ended December 31: <TABLE> <CAPTION> <S> <C> 2001 $ 99,600 2002 99,600 2003 99,600 2004 99,600 2005 99,600 Thereafter 597,600 ---------------- $ 1,095,600 ================ </TABLE> NOTE 6 - INTEREST-BEARING DEPOSITS Included in interest-bearing deposits are certificates of deposit in denominations of $100,000 or more of approximately $146,525,000 and $106,786,000 as of December 31, 2000 and 1999, respectively. Certificates of deposit obtained from brokers totaled approximately $55,507,000 and $29,000,000 as of December 31, 2000 and 1999, respectively. At December 31, 2000, the scheduled maturities of certificates of deposit are as follows for the years ended December 31: <TABLE> <CAPTION> <S> <C> 2001 $ 245,615,475 2002 82,435,660 2003 21,112,651 2004 2,885,600 2005 2,265,557 Thereafter 873,576 ---------------- $ 355,188,519 ================ </TABLE> - -------------------------------------------------------------------------------- (Continued) F-17.
66 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 7 - ADVANCES FROM FHLB Advances from the FHLB of Cincinnati with fixed and variable interest rates ranging from 4.52% to 6.90% at December 31, 2000 and from 4.52% to 6.25% at December 31, 1999 mature as follows for the years ending December 31: <TABLE> <CAPTION> 2000 1999 ---- ---- <S> <C> <C> 2000 $ - $ 4,121,389 2001 5,638,845 5,638,845 2002 4,175,069 1,925,069 2003 12,350,000 1,850,000 2004 5,000,000 - 2005 - - Thereafter 25,000,000 22,500,000 -------------- -------------- 52,163,914 36,035,303 Line of credit (LIBOR) - 4,000,000 -------------- -------------- $ 52,163,914 $ 40,035,303 ============== ============== </TABLE> At December 31, 2000 and 1999, in addition to FHLB stock, the Corporation pledged mortgage loans with a minimum carrying value of approximately $71,203,000 and $60,086,000 to the FHLB to secure advances outstanding. NOTE 8 - JUNIOR SUBORDINATED DEBENTURES On September 7, 2000, Rurban Statutory Trust 1 ("RST"), a wholly owned subsidiary of the Corporation, closed a pooled private offering of 10,000 Capital Securities with a liquidation amount of $1,000 per security. The proceeds of the offering were loaned to the Corporation in exchange for junior subordinated debentures with terms similar to the Capital Securities. The sole assets of RST are the junior subordinated debentures of the Corporation and payments thereunder. The junior subordinated debentures and the back-up obligations, in the aggregate, constitute a full and unconditional guarantee by the Corporation of the obligations of RST under the Capital Securities. Distributions on the Capital Securities are payable semi-annually at the annual rate of 10.6% and are included in interest expense in the consolidated financial statements. These securities are considered Tier 1 capital (with certain limitations applicable) under current regulatory guidelines. As of December 31, 2000, the outstanding principal balance of the Capital Securities was $10,000,000. The principal balance of the Capital Securities less unamortized issuance costs constitute the junior subordinated debentures in the financial statements. - -------------------------------------------------------------------------------- (Continued) F-18.
67 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 8 - JUNIOR SUBORDINATED DEBENTURES (Continued) The junior subordinated debentures are subject to mandatory redemption, in whole or in part, upon repayment of the Capital Securities at maturity or their earlier redemption at the liquidation amount. Subject to the Corporation having received prior approval of the Federal Reserve, if then required, the Capital Securities are redeemable prior to the maturity date of September 7, 2030, at the option of the Corporation; on or after September 7, 2020 at par; or on or after September 7, 2010 at a premium, or upon occurrence of specific events defined within the trust indenture. The Corporation has the option to defer distributions on the Capital Securities from time to time for a period not to exceed 10 consecutive semi-annual periods. NOTE 9 - OTHER BORROWED FUNDS At December 31, 1999, the Corporation had a line of credit of up to $10,000,000 with Fifth Third Bank of Northwestern Ohio, N.A. The line of credit was unsecured and required monthly variable rate interest payments and full principal payment at maturity on April 30, 2000. The line of credit had an outstanding balance of $7,000,000 as of December 31, 1999. During 2000, the Corporation replaced that line of credit with a line of credit from The Northern Trust Company of up to $15,000,000. The new line of credit is unsecured and requires monthly interest payments with full principal payment at maturity on April 27, 2001. The interest rate is variable based on the current federal funds rate and adjusts daily. The line of credit had an outstanding balance of zero at December 31, 2000. The line of credit agreement contains various covenants with which the Corporation must comply. As of December 31, 2000, management believes the Corporation is in compliance with all such covenants. NOTE 10 - EMPLOYEE BENEFITS EMPLOYEE STOCK OWNERSHIP PLAN: The Corporation has a noncontributory employee stock ownership plan ("ESOP") covering substantially all employees of the Corporation and its subsidiaries. Voluntary contributions are made by the Corporation to the plan. Each eligible employee is vested based upon years of service, including prior years of service. Contributions to the ESOP were $519,000, $260,000 and $715,000, and related expense attributable to the plan included in salaries and employee benefits were approximately $967,000, $572,000 and $568,000 in 2000, 1999 and 1998, respectively. The Corporation's contributions to the account of each employee become fully vested after three years of service. Distributions to plan participants may be paid in cash or stock upon their termination of employment. During 2000 and 1999, 20,535 and 10,995 shares were withdrawn from the ESOP by participants who terminated their employment with the Company. - -------------------------------------------------------------------------------- (Continued) F-19.
68 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 10 - EMPLOYEE BENEFITS (Continued) During 1996, the ESOP borrowed $1,505,527 from the Corporation to purchase 98,446 shares of common stock at a weighted average cost of $15.30 per share. Collateral for the loan is the unearned shares of common stock purchased by the ESOP with the loan proceeds. The loan will be repaid principally from the Corporation's discretionary contributions to the ESOP. The interest rate for the loan is 7.75%. Shares purchased by the ESOP are held in suspense until allocated among ESOP participants as the loan is repaid. During 2000, 1999 and 1998, the ESOP allocated 49,352 shares, 14,150 shares and 13,797 shares. Allocations of shares during 2000 included 46,616 shares purchased on the open market and 2,736 shares from unearned shares. The ESOP shares as of December 31 were as follows: <TABLE> <CAPTION> 2000 1999 ---- ---- <S> <C> <C> Allocated shares 640,566 611,749 Unearned shares 50,115 52,851 -------------- -------------- Total ESOP shares 690,681 664,600 ============== ============== Fair value of unearned ESOP shares at December 31 $ 582,587 $ 679,509 ============== ============== </TABLE> The Corporation accounts for its ESOP under AICPA Statement of Position ("SOP") 93-6. Compensation expense is recorded based on the average market price of the shares committed to be released for allocation to participant accounts and cash allocated to participant accounts. The difference between the market price and the cost of shares committed to be released is recorded as an adjustment to additional paid-in capital. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings; dividends on unearned ESOP shares are reflected as a reduction of debt and accrued interest or as a contribution to participant accounts. STOCK OPTION PLAN: On March 12, 1997, the Board of Directors of the Corporation adopted the Rurban Financial Corp. Stock Option Plan ("Option Plan"). The purpose of the Option Plan is to advance the interests of the Corporation and its shareholders by granting directors, officers, and key employees of the Corporation options to increase their propriety interest in the Corporation. 420,000 shares of the Corporation's authorized unissued common stock were reserved for issuance under the Option Plan. The option exercise price shall not be less than the fair market value (as defined in the Option Plan) of the common stock on the date the option is granted, and the option term cannot exceed 10 years. - -------------------------------------------------------------------------------- (Continued) F-20.
69 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 10 - EMPLOYEE BENEFITS (Continued) At December 31, 2000, 85,938 additional options were available to be granted. Eligible directors, officers and key employees are able to exercise options awarded to them at a rate of 20% per year. Options outstanding at December 31, 2000 had a range of exercise prices of $11.63 - $17.62 and a weighted average remaining contractual life of 8 years. A summary of the activity in the Option Plan is as follows. <TABLE> <CAPTION> 2 0 0 0 1 9 9 9 1 9 9 8 ------- ------- ------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ ----- ------ ----- ------ ----- <S> <C> <C> <C> <C> <C> <C> Outstanding at beginning of year 230,055 $ 14.45 228,690 $ 14.37 187,950 $ 13.51 Granted 91,250 11.63 6,825 17.62 48,037 17.62 Exercised - - (210) 13.51 (735) 13.51 Forfeited (4,200) 14.54 (5,250) 15.15 (6,562) 13.68 ----------- ----------- ----------- Outstanding at end of year 317,105 $ 13.64 230,055 $ 14.45 228,690 $ 14.37 =========== =========== =========== </TABLE> Options exercisable at December 31, 2000, 1999 and 1998 were as follows. <TABLE> <CAPTION> 2 0 0 0 1 9 9 9 1 9 9 8 ------- ------- ------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Exercise Prices Number Price Number Price Number Price - ------ ------ ----- ------ ----- ------ ----- <S> <C> <C> <C> <C> <C> <C> $13.51 99,225 $ 13.51 64,785 $ 13.51 30,555 $ 13.51 $17.62 17,166 17.62 7,245 17.62 - - ----------- ----------- ----------- Exercisable at year end 116,391 $ 14.12 72,030 $ 13.92 30,555 $ 13.51 =========== =========== =========== </TABLE> The Corporation applies APB Opinion 25, Accounting For Stock Issued to Employees and related interpretations in accounting for its Option Plan. Accordingly, no compensation expense has been recognized for the Option Plan. SFAS No. 123, Accounting For Stock-Based Compensation requires pro forma disclosures for entities that do not adopt its fair value accounting method for stock-based compensation. Had compensation cost for stock options been measured using SFAS No. 123, net income and earnings per share would have been the pro forma amounts indicated below. The pro forma effect may increase in the future if more options are granted. - -------------------------------------------------------------------------------- (Continued) F-21.
70 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- <TABLE> <CAPTION> NOTE 10 - EMPLOYEE BENEFITS (Continued) 2000 1999 1998 ---- ---- ---- <S> <C> <C> <C> Net income as reported $ 6,086,178 $ 5,230,902 $ 4,277,877 Pro forma net income $ 5,943,434 $ 5,083,603 $ 4,143,146 Basic earnings per common share as reported $ 1.42 $ 1.22 $ 1.00 Pro forma basic earnings per common share $ 1.38 $ 1.19 $ .97 Diluted earnings per common share as reported $ 1.42 $ 1.22 $ .99 Pro forma diluted earnings per common share $ 1.38 $ 1.18 $ .96 </TABLE> The pro forma effects are computed using option pricing models, using the following weighted-average assumptions as of grant date. <TABLE> <CAPTION> 2000 1999 1998 ---- ---- ---- <S> <C> <C> <C> Risk-free interest rate 5.68% 4.79% 5.38% Expected option life 10 10 10 Expected stock price volatility 17.35% 7.14% 5.45% Expected dividend yield 3.54% 2.67% 2.16% Resulting weighted average grant date fair value of stock options granted during the year $ 2.49 $ 2.83 $ 3.93 </TABLE> 401(K) PROFIT SHARING PLAN: The Corporation has 401(k) profit sharing plans. The annual expense of the plans is based on 50% matching of voluntary employee contributions of up to 6% of individual compensation. Employee contributions are vested immediately and the Corporation's matching contributions are fully vested after three years. The plans cover substantially all employees of the Corporation. Contributions to the plans were approximately $278,000, $221,000 and $196,000 and related expense attributable to the plans, included in salaries and employee benefits, were approximately $278,000, $220,000 and $186,000 in 2000, 1999 and 1998. LIFE INSURANCE PLANS: Life insurance plans are provided for certain executive officers on a split-dollar basis. The Corporation is the owner of the split-dollar policies. The officers are entitled to a sum equal to two times either the employee's annual salary at death, if actively employed, or final annual salary, if retired, less $50,000. The Corporation is entitled to the remainder of the death proceeds less any loans on the policy and unpaid interest or cash withdrawals previously incurred by the Corporation. The employees have the right to designate a beneficiary(s) to receive their share of the proceeds payable upon death. The cash surrender value of these life insurance policies and life insurance policies related to the Corporation's - -------------------------------------------------------------------------------- (Continued) F-22.
71 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 10 - EMPLOYEE BENEFITS (Continued) supplemental retirement plan totaled approximately $2,503,000 and $2,403,000 at December 31, 2000 and 1999, and is included in other assets in the consolidated balance sheets. SUPPLEMENTAL RETIREMENT PLAN: The Corporation established a supplemental retirement plan for selected officers. The Corporation has purchased insurance contracts on the lives of certain participants in the supplemental retirement plan and has named the Corporation as beneficiary. While no direct contract exists between the supplemental retirement plan and the life insurance contracts, it is management's current intent that the proceeds from the insurance contracts will be used to help offset earlier payments made under the supplemental retirement plan. The Corporation is recording an expense equal to the projected present value of the payments due at retirement based on the projected remaining years of service using the straight line method. The obligations under the plans, net of payments already made, was approximately $1,015,000 and $820,000 at December 31, 2000 and 1999 and is included in other liabilities in the consolidated balance sheets. The expense attributable to the plans, included in salaries and employee benefits, was approximately $236,000, $165,000 and $210,000 in 2000, 1999 and 1998. NOTE 11 - OTHER EXPENSES The following is an analysis of other expenses for the years ended December 31, 2000, 1999 and 1998: <TABLE> <CAPTION> 2000 1999 1998 ---- ---- ---- <S> <C> <C> <C> Amortization of intangible assets $ 210,000 $ 210,000 $ 385,000 Advertising expense 513,411 448,971 434,353 Professional fees 1,263,095 1,244,190 1,327,552 Insurance expense 230,399 211,101 166,376 Data processing fees 551,200 439,365 334,392 Printing, stationery and supplies 615,660 620,853 754,446 Telephone and communications 590,345 665,747 638,901 Postage and delivery expense 545,648 542,536 547,934 State, local and other taxes 611,481 470,742 635,845 Other operating expenses 2,043,197 2,088,183 2,390,595 --------------- -------------- -------------- $ 7,174,436 $ 6,941,688 $ 7,615,394 =============== ============== ============== </TABLE> - -------------------------------------------------------------------------------- (Continued) F-23.
72 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 12 - INCOME TAX EXPENSE Income tax expense consists of the following for the years ended December 31, 2000, 1999 and 1998: <TABLE> <CAPTION> 2000 1999 1998 ---- ---- ---- <S> <C> <C> <C> Current expense $ 4,200,359 $ 1,612,264 $ 2,151,100 Deferred expense (benefit) (1,479,825) 748,673 (77,765) --------------- -------------- -------------- $ 2,720,534 $ 2,360,937 $ 2,073,335 =============== ============== ============== </TABLE> Income tax expense (benefit) on net gain (loss) on securities was $(27,384), $(1,981) and $24,639 in 2000, 1999 and 1998. The difference between the financial statement income tax expense and amounts computed by applying the statutory federal income tax rate to income before income tax expense is as follows for the years ended December 31, 2000, 1999 and 1998: <TABLE> <CAPTION> 2000 1999 1998 ---- ---- ---- <S> <C> <C> <C> Statutory tax rate 34% 34% 34% Income taxes computed at the statutory federal income tax rate $ 2,994,282 $ 2,581,225 $ 2,159,412 Add (subtract) tax effect of Tax-exempt income (268,587) (243,884) (204,756) Non-deductible expenses and other (5,161) 23,596 118,679 --------------- -------------- -------------- $ 2,720,534 $ 2,360,937 $ 2,073,335 =============== ============== ============== </TABLE> The components of the net deferred tax asset recorded in the consolidated balance sheets as of December 31, 2000 and 1999 are as follows: <TABLE> <CAPTION> 2000 1999 ---- ---- <S> <C> <C> Deferred tax assets Provision for loan losses $ 2,082,361 $ 1,629,197 Mark to market adjustment 169,222 - Net deferred loan fees 91,733 81,581 Accrued compensation and benefits 345,038 278,901 Net unrealized depreciation on securities available for sale - 790,008 Other 5,704 5,897 -------------- -------------- 2,694,058 2,785,584 </TABLE> - -------------------------------------------------------------------------------- (Continued) F-24.
73 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 12 - INCOME TAX EXPENSE (Continued) <TABLE> <CAPTION> 2000 1999 ---- ---- <S> <C> <C> Deferred tax liabilities Net unrealized appreciation on securities available for sale $ (169,222) $ - Originated mortgage servicing rights (393,788) (163,454) Mark to market adjustment - (790,008) ESOP contributions - (227,769) Depreciation (147,250) (119,747) Purchase accounting adjustments (60,145) (96,143) Other (15,185) (1,220) -------------- -------------- (786,220) (1,398,341) Valuation allowance - - -------------- -------------- $ 1,907,838 $ 1,387,243 ============== ============== </TABLE> NOTE 13 - RELATED PARTY TRANSACTIONS Certain directors, executive officers and principal shareholders of the Corporation, including associates of such persons, are loan customers. A summary of the related party loan activity, for loans aggregating $60,000 or more to any one related party, follows for the years ended December 31, 2000 and 1999: <TABLE> <CAPTION> 2000 1999 ---- ---- <S> <C> <C> Balance, January 1 $ 3,777,000 $ 4,394,000 New loans 1,272,000 3,018,000 Repayments (1,528,000) (3,639,000) Other changes (43,000) 4,000 -------------- -------------- Balance, December 31 $ 3,478,000 $ 3,777,000 ============== ============== </TABLE> Other changes include adjustments for loans applicable to one reporting period that are excludable from the other reporting period. - -------------------------------------------------------------------------------- (Continued) F-25.
74 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 14 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES The Corporation is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet financing needs of its customers. These financial instruments include commitments to make loans, unused lines of credit and standby letters of credit. The Corporation's exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to make loans, unused lines of credit and standby letters of credit is represented by the contractual amount of those instruments. The Corporation follows the same credit policy to make such commitments as it uses for on-balance-sheet items. The Corporation has the following commitments for terms of up to two years outstanding at December 31: <TABLE> <CAPTION> 2000 1999 ---- ---- <S> <C> <C> Loan commitments and unused lines of credit $ 139,705,000 $ 121,415,000 Standby letters of credit 2,394,000 1,935,000 Commercial letters of credit 60,000 956,000 --------------- ---------------- $ 142,159,000 $ 124,306,000 =============== ================ </TABLE> Since many commitments to make loans expire without being used, the amount does not necessarily represent future cash commitments. In addition, commitments to extend credit are arrangements to lend to customers as long as there is no violation of any condition established in the contract. No losses are anticipated as a result of these transactions. Collateral obtained upon exercise of the commitment is determined using management's credit evaluation of the borrower and may include real estate, business assets, consumer assets, deposits and other items. There are various contingent liabilities that are not reflected in the consolidated financial statements, including claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material effect on the Corporation's consolidated financial condition or results of operations. Salary continuation agreements with certain executive officers contain provisions regarding certain events leading to separation from the Corporation, before the executive officer's normal retirement date, which could result in cash payments in excess of amounts already accrued. The Corporation was required to have approximately $4,777,000 and $4,493,000 of cash on hand or on deposit with the Federal Reserve Bank to meet regulatory reserve and clearing requirements at December 31, 2000 and 1999. These balances do not earn interest. Additionally, the Corporation was required to have approximately $1,250,000 of cash on deposit to meet other clearing requirements at December 31, 2000. This balance does earn interest. - -------------------------------------------------------------------------------- (Continued) F-26.
75 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS Presented below are condensed financial statements for the parent company, Rurban Financial Corp.: CONDENSED BALANCE SHEETS December 31, 2000 and 1999 <TABLE> <CAPTION> 2000 1999 ---- ---- <S> <C> <C> ASSETS Cash and cash equivalents $ 5,418,276 $ 248,292 Investment in and advances to subsidiaries Banking subsidiaries 44,421,456 44,357,990 Non-banking subsidiaries 3,981,655 3,307,475 --------------- ---------------- Total investment in subsidiaries 48,403,111 47,665,465 Accounts receivable from subsidiaries 194,558 2,312,160 Loans to banking subsidiaries 7,600,000 - Other assets 1,539,283 1,812,969 --------------- ---------------- Total assets $ 63,155,228 $ 52,038,886 =============== ================ LIABILITIES Cash dividends payable $ 521,365 $ 455,479 Junior subordinated debentures 9,697,385 - Borrowings from non-banking subsidiaries 310,000 - Other borrowed funds - 7,000,000 Other liabilities 2,486,292 682,936 --------------- ---------------- Total liabilities 13,015,042 8,138,415 SHAREHOLDERS' EQUITY 50,140,186 43,900,471 --------------- ---------------- Total liabilities and shareholders' equity $ 63,155,228 $ 52,038,886 =============== ================ </TABLE> - -------------------------------------------------------------------------------- (Continued) F-27.
76 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS (Continued) CONDENSED STATEMENTS OF INCOME Years ended December 31, 2000, 1999 and 1998 <TABLE> <CAPTION> 2000 1999 1998 ---- ---- ---- <S> <C> <C> <C> INCOME Interest $ 89,644 $ - $ - Dividends from subsidiaries Banking subsidiaries 11,680,000 - 3,900,000 Non-banking subsidiaries 240,000 1,150,000 - -------------- -------------- --------------- Total 11,920,000 1,150,000 3,900,000 Noninterest income 2,726,073 2,115,732 2,331,577 -------------- -------------- --------------- Total income 14,735,717 3,265,732 6,231,577 EXPENSE Interest expense on other borrowed funds 710,711 334,921 - Noninterest expense 5,181,941 4,013,677 4,737,137 -------------- -------------- --------------- Total expense 5,892,652 4,348,598 4,737,137 -------------- -------------- --------------- INCOME (LOSS) BEFORE INCOME TAX BENEFIT AND EQUITY IN UNDISTRIBUTED NET INCOME OF SUBSIDIARIES 8,843,065 (1,082,866) 1,494,440 Income tax benefit 1,214,076 767,517 818,231 -------------- -------------- --------------- INCOME (LOSS) BEFORE EQUITY IN UNDISTRIBUTED NET INCOME OF SUBSIDIARIES 10,057,141 (315,349) 2,312,671 Equity in undistributed (excess distributed) net income of subsidiaries Banking subsidiaries (4,335,143) 6,301,416 1,469,830 Non-banking subsidiaries 364,180 (755,165) 495,376 -------------- -------------- --------------- Total (3,970,963) 5,546,251 1,965,206 -------------- -------------- --------------- NET INCOME $ 6,086,178 $ 5,230,902 $ 4,277,877 ============== ============== =============== </TABLE> - -------------------------------------------------------------------------------- (Continued) F-28.
77 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS (Continued) CONDENSED STATEMENTS OF CASH FLOWS Years ended December 31, 2000, 1999 and 1998 <TABLE> <CAPTION> 2000 1999 1998 ---- ---- ---- <S> <C> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Dividends received from subsidiaries Banking subsidiaries $ 11,680,000 $ - $ 3,900,000 Non-banking subsidiaries 240,000 1,150,000 - -------------- -------------- --------------- Total 11,920,000 1,150,000 3,900,000 Cash received from subsidiaries-fees and commissions 4,843,675 (196,428) 2,331,577 Cash paid to suppliers and employees (3,931,781) (3,773,369) (6,005,881) Interest received 89,644 - - Interest paid (710,711) (334,921) - Income tax refunds 2,040,958 974,543 1,010,903 -------------- -------------- --------------- Net cash from operating activities 14,251,785 (2,180,175) 1,236,599 CASH FLOWS FROM INVESTING ACTIVITIES Investment in banking subsidiaries (2,350,000) (3,500,000) - Investment in non-banking subsidiaries (310,000) - - Proceeds from loans to banking subsidiaries (7,600,000) - - -------------- -------------- --------------- Net cash from investing activities (10,260,000) (3,500,000) - CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from issuance of junior subordinated debentures 9,697,385 - - Proceeds from borrowings from non-banking subsidiaries 310,000 - - Net proceeds from (repayment of) advances on line of credit (7,000,000) 7,000,000 - Cash dividends paid (1,822,218) (1,656,179) (1,655,928) Proceeds from exercise of stock options - 2,838 9,931 Cash paid in lieu of fractional shares for 5% stock dividend (6,968) - - -------------- -------------- --------------- Net cash from financing activities 1,178,199 5,346,659 (1,645,997) -------------- -------------- --------------- Net change in cash and cash equivalents 5,169,984 (333,516) (409,398) Cash and cash equivalents at beginning of year 248,292 581,808 991,206 -------------- -------------- --------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,418,276 $ 248,292 $ 581,808 ============== ============== =============== </TABLE> - -------------------------------------------------------------------------------- (Continued) F-29.
78 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS (Continued) CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED) Years ended December 31, 2000, 1999 and 1998 <TABLE> <CAPTION> 2000 1999 1998 ---- ---- ---- <S> <C> <C> <C> RECONCILIATION OF NET INCOME TO NET CASH FROM OPERATING ACTIVITIES Net income $ 6,086,178 $ 5,230,902 $ 4,277,877 Adjustments to reconcile net income to net cash from operating activities Equity in (undistributed) excess distributed net income of subsidiaries Banking subsidiaries 4,335,143 (6,301,416) (1,469,830) Non-banking subsidiaries (364,180) 755,165 (495,376) Change in accounts receivable 2,117,602 (2,312,160) - Change in other assets 273,686 262,417 (1,189,224) Change in other liabilities 1,803,356 184,917 113,152 -------------- -------------- ---------------- Net cash from operating activities $ 14,251,785 $ (2,180,175) $ 1,236,599 ============== ============== ================ </TABLE> NOTE 16 - FAIR VALUES OF FINANCIAL INSTRUMENTS The following table shows the estimated fair values and the related carrying values of the Corporation's financial instruments at December 31, 2000 and 1999. Items which are not financial instruments are not included. <TABLE> <CAPTION> 2 0 0 0 1 9 9 9 ------------------------------------ ------------------------------------- Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value ----- ---------- ----- ---------- <S> <C> <C> <C> <C> Financial assets - ---------------- Cash and cash equivalents $ 18,431,717 $ 18,432,000 $ 18,582,702 $ 18,583,000 Interest-bearing deposits in other financial institutions 110,000 110,000 110,000 110,000 Securities available for sale 88,904,958 88,905,000 83,118,908 83,119,000 Loans, net of allowance for loan losses (including loans held for sale) 570,587,971 568,326,000 502,287,251 500,424,000 Accrued interest receivable 5,716,048 5,716,000 4,147,321 4,147,000 Cash surrender value of life insurance 2,503,000 2,503,000 2,403,000 2,403,000 Financial liabilities - --------------------- Demand and savings deposits (211,132,242) (210,734,000) (220,399,705) (220,400,000) Time deposits (355,188,519) (356,930,000) (298,896,379) (298,311,000) Federal funds purchased (13,200,000) (13,200,000) (10,900,000) (10,900,000) Advances from FHLB (52,163,914) (52,418,000) (40,035,303) (38,066,000) Junior subordinated debentures (9,697,385) (9,714,000) - - Other borrowed funds - - (7,000,000) (7,000,000) Accrued interest payable (4,613,173) (4,613,000) (2,513,798) (2,514,000) </TABLE> - -------------------------------------------------------------------------------- (Continued) F-30.
79 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 16 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued) For purposes of the above disclosures of estimated fair values, the following assumptions were used as of December 31, 2000 and 1999. The estimated fair value for cash and cash equivalents, accrued interest receivable, cash surrender value of life insurance and accrued interest payable are considered to approximate cost. The estimated fair value for interest-bearing deposits in other financial institutions and securities available for sale is based on quoted market values for the individual deposits or securities or for equivalent deposits or securities. The estimated fair value for loans is based on estimates of the difference in interest rates the Corporation would charge the borrowers for similar such loans with similar maturities made at December 31, 2000 and 1999, applied for an estimated time period until the loan is assumed to reprice or be paid and the allowance for loan losses is considered to be a reasonable estimate of discount for credit quality concerns. The estimated fair value for demand deposits, savings deposits, federal funds purchased, other borrowed funds with variable interest rates and the variable rate line of credit from the FHLB is based on their carrying value. The estimated fair value for time deposits, fixed rate advances from the FHLB and the junior subordinated debentures is based on estimates of the rate the Corporation would pay on such deposits or borrowings at December 31, 2000 and 1999, applied for the time period until maturity. The estimated fair value for other financial instruments and off-balance-sheet loan commitments approximate cost at December 31, 2000 and 1999 and are not considered significant to this presentation. While these estimates of fair value are based on management's judgment of the most appropriate factors, there is no assurance that were the Corporation to have disposed of such items at December 31, 2000 and 1999, the estimated fair values would necessarily have been realized at that date, since market values may differ depending on various circumstances. The estimated fair values at December 31, 2000 and 1999 should not necessarily be considered to apply at subsequent dates. In addition, other assets and liabilities of the Corporation that are not defined as financial instruments are not included in the above disclosures, such as premises and equipment. Also, non-financial instruments typically not recognized in the financial statements nevertheless may have value but are not included in the above disclosures. These include, among other items, the estimated earnings power of core deposit accounts, the earnings potential of trust assets, the trained work force, customer goodwill and similar items. NOTE 17 - REGULATORY MATTERS The Corporation and its subsidiary banks are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the consolidated financial statements. - -------------------------------------------------------------------------------- (Continued) F-31.
80 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 17 - REGULATORY MATTERS (Continued) The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If less than well capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required. The minimum requirements are: <TABLE> <CAPTION> Capital to Risk- Weighted Assets ---------------- Tier 1 Capital Total Tier 1 To Average Assets ----- ------ ----------------- <S> <C> <C> <C> Well capitalized 10% 6% 5% Adequately capitalized 8% 4% 4% Undercapitalized 6% 3% 3% </TABLE> At year end, State Bank and consolidated 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> 2000 - ---- Total capital (to risk weighted assets) Consolidated $ 66.3 11.6% $ 45.7 8.0% $ 57.2 10.0% State Bank 34.6 10.3 27.0 8.0 33.8 10.0 Tier 1 capital (to risk weighted assets) Consolidated 59.1 10.3 22.9 4.0 34.3 6.0 State Bank 24.9 7.4 13.5 4.0 20.3 6.0 Tier 1 capital (to averaged assets) Consolidated 59.1 8.5 27.8 4.0 34.7 5.0 State Bank 24.9 6.1 16.5 4.0 20.6 5.0 1999 Total capital (to risk weighted assets) Consolidated $ 51.1 10.1% $ 40.6 8.0% $ 50.7 10.0% State Bank 31.2 10.3 24.6 8.0 30.7 10.0 Tier 1 capital (to risk weighted assets) Consolidated 44.9 8.5 20.3 4.0 30.4 6.0 State Bank 28.0 9.1 12.3 4.0 18.4 6.0 Tier 1 capital (to averaged assets) Consolidated 44.9 7.2 24.8 4.0 31.0 5.0 State Bank 28.0 7.6 14.8 4.0 18.5 5.0 </TABLE> The Corporation and State Bank at year end 2000 and 1999 were categorized as well capitalized. All other subsidiary banks are not considered significant for this presentation. - -------------------------------------------------------------------------------- (Continued) F-32.
81 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 18 - OTHER COMPREHENSIVE INCOME (LOSS) Other comprehensive income (loss) components and related taxes were as follows: <TABLE> <CAPTION> 2000 1999 1998 ---- ---- ---- <S> <C> <C> <C> Net change in net unrealized appreciation (depreciation) on securities available for sale Net unrealized appreciation (depreciation) arising during the year $ 2,740,727 $ (2,636,840) $ 54,098 Reclassification adjustments for (gains) losses included in net income 80,540 5,827 (72,468) -------------- -------------- ---------------- Net change in net unrealized appreciation (depreciation) on securities available for sale 2,821,267 (2,631,013) (18,370) Tax expense (benefit) 959,230 (894,544) (2,452) -------------- -------------- ---------------- Total other comprehensive income (loss) $ 1,862,037 $ (1,736,469) $ (15,918) ============== ============== ================ </TABLE> NOTE 19 - SEGMENT INFORMATION The reportable segments are determined by the products and services offered, primarily distinguished between banking, mortgage banking and data processing operations. Loans, investments, deposits, and financial services provide the revenues in the banking operation, including the accounts of State Bank, Peoples Bank, First National Bank and Citizens Savings Bank. Loan originations and net gains on sales of loans provide the revenues in the mortgage banking operation, including the accounts of RMC. Service fees provide the revenues in the data processing operation, including the accounts of RDSI. Other segments include the accounts of the holding company, Rurban Financial Corp., which provides management services to its subsidiaries and RFS, which provides trust and financial services to customer's nationwide and Rurban Life, which provides insurance products to customers of the Corporation's subsidiary banks. The accounting policies used are the same as those described in the summary of significant accounting policies. Segment performance is evaluated using net interest income, other revenue, operating expense, and net income. Goodwill is allocated. Income taxes and indirect expenses are allocated on revenue. Transactions among segments are made at fair value. The holding company allocates certain expenses to other segments, except no expenses are allocated to mortgage banking or to Rurban Life. Information reported internally for performance assessment follows. - -------------------------------------------------------------------------------- (Continued) F-33.
82 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 19 - SEGMENT INFORMATION (Continued) <TABLE> <CAPTION> 2000 - ---- Mortgage Data Banking Banking Processing Other ------- ------- ---------- ----- <S> <C> <C> <C> <C> Income statement information: - ----------------------------- Net interest income (expense) $ 26,156,349 $ 197,934 $ (47,415) $ 81,000 Other revenue - external customers 3,061,748 144,057 5,123,805 2,943,251 Other revenue - other segments - - 1,389,863 2,929,625 --------------- --------------- ---------------- --------------- Net interest income and other revenue 29,218,097 341,991 6,466,253 5,953,876 Noninterest expense 16,372,598 303,701 5,681,075 8,716,131 Significant non-cash items: Depreciation and amortization 959,416 31,190 938,102 174,421 Provision for loan losses 2,100,000 - - - Income tax expense (benefit) 3,549,622 14,000 266,961 (1,110,049) Segment profit (loss) 7,195,877 24,290 518,217 (1,652,206) Balance sheet information: - -------------------------- Total assets 691,764,552 12,726,998 4,763,318 14,987,580 Goodwill and intangibles 300,000 - - - Premises and equipment expenditures, net 555,021 18,078 916,141 166,311 </TABLE> <TABLE> <CAPTION> 2000 - ---- Total Intersegment Consolidated Segments Elimination Totals -------- ----------- ------ <S> <C> <C> <C> Income statement information: - ----------------------------- Net interest income (expense) $ 26,387,868 $ - $ 26,387,868 Other revenue - external customers 11,272,861 - 11,272,861 Other revenue - other segments 4,319,488 (4,319,488) - --------------- ---------------- --------------- Net interest income and other revenue 41,980,217 (4,319,488) 37,660,729 Noninterest expense 31,073,505 (4,319,488) 26,754,017 Significant non-cash items: Depreciation and amortization 2,103,129 - 2,103,129 Provision for loan losses 2,100,000 - 2,100,000 Income tax expense (benefit) 2,720,534 - 2,720,534 Segment profit (loss) 6,086,178 - 6,086,178 Balance sheet information: - -------------------------- Total assets 724,242,448 (23,424,746) 700,817,702 Goodwill and intangibles 300,000 - 300,000 Premises and equipment expenditures, net 1,655,551 - 1,655,551 </TABLE> - -------------------------------------------------------------------------------- (Continued) F-34.
83 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 19 - SEGMENT INFORMATION (Continued) <TABLE> <CAPTION> 1999 - ---- Mortgage Data Banking Banking Processing Other ------- ------- ---------- ----- <S> <C> <C> <C> <C> Income statement information: - ----------------------------- Net interest income (expense) $ 22,764,187 $ 511,462 $ (134,811) $ 68,060 Other revenue - external customers 3,070,510 760,049 4,381,746 2,851,691 Other revenue - other segments - - 1,368,622 2,206,550 --------------- --------------- ---------------- --------------- Net interest income and other revenue 25,834,697 1,271,511 5,615,557 5,126,301 Noninterest expense 15,403,697 1,346,149 5,112,291 7,179,090 Significant non-cash items: Depreciation and amortization 774,668 120,696 1,061,980 179,280 Provision for loan losses 1,215,000 - - - Income tax expense (benefit) 2,940,249 (43,000) 171,111 (707,423) Segment profit (loss) 6,275,751 (31,638) 332,155 (1,345,366) Balance sheet information: - -------------------------- Total assets 621,665,973 13,342,963 4,792,283 6,091,461 Goodwill and intangibles 480,000 30,000 - - Premises and equipment expenditures, net 726,403 10,358 803,911 126,234 </TABLE> <TABLE> <CAPTION> 1999 - ---- Total Intersegment Consolidated Segments Elimination Totals -------- ----------- ------ <S> <C> <C> <C> Income statement information: - ----------------------------- Net interest income (expense) $ 23,208,898 $ - $ 23,208,898 Other revenue - external customers 11,063,996 - 11,063,996 Other revenue - other segments 3,575,172 (3,575,172) - --------------- ---------------- --------------- Net interest income and other revenue 37,848,066 (3,575,172) 34,272,894 Noninterest expense 29,041,227 (3,575,172) 25,466,055 Significant non-cash items: Depreciation and amortization 2,136,624 - 2,136,624 Provision for loan losses 1,215,000 - 1,215,000 Income tax expense (benefit) 2,360,937 - 2,360,937 Segment profit (loss) 5,230,902 - 5,230,902 Balance sheet information: - -------------------------- Total assets 645,892,680 (18,109,156) 627,783,524 Goodwill and intangibles 510,000 - 510,000 Premises and equipment expenditures, net 1,666,906 - 1,666,906 </TABLE> - -------------------------------------------------------------------------------- (Continued) F-35.
84 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 19 - SEGMENT INFORMATION (Continued) <TABLE> <CAPTION> 1998 - ---- Mortgage Data Banking Banking Processing Other ------- ------- ---------- ----- <S> <C> <C> <C> <C> Income statement information: - ----------------------------- Net interest income (expense) $ 19,972,335 $ 506,359 $ (20,201) $ 92,096 Other revenue - external customers 2,396,019 1,719,589 3,553,998 2,841,028 Other revenue - other segments 5,164 - 1,314,752 2,407,715 --------------- --------------- ---------------- --------------- Net interest income and other revenue 22,373,518 2,225,948 4,848,549 5,340,839 Noninterest expense 14,425,520 3,059,817 4,237,517 5,634,788 Significant non-cash items: Depreciation and amortization 688,156 320,037 929,038 134,317 Provision for loan losses 1,080,000 - - - Income tax expense (benefit) 2,240,587 (248,498) 208,177 (126,931) Segment profit (loss) 4,627,411 (585,371) 402,855 (167,018) Balance sheet information: - -------------------------- Total assets 532,744,285 19,771,508 4,747,584 5,081,398 Goodwill and intangibles 660,000 60,000 - - Premises and equipment expenditures, net 1,287,941 225,505 2,639,115 350,071 </TABLE> <TABLE> <CAPTION> 1998 - ---- Total Intersegment Consolidated Segments Elimination Totals -------- ----------- ------ <S> <C> <C> <C> Income statement information: - ----------------------------- Net interest income (expense) $ 20,550,589 $ - $ 20,550,589 Other revenue - external customers 10,510,634 - 10,510,634 Other revenue - other segments 3,727,631 (3,727,631) - --------------- ---------------- --------------- Net interest income and other revenue 34,788,854 (3,727,631) 31,061,223 Noninterest expense 27,357,642 (3,727,631) 23,630,011 Significant non-cash items: Depreciation and amortization 2,071,548 - 2,071,548 Provision for loan losses 1,080,000 - 1,080,000 Income tax expense (benefit) 2,073,335 - 2,073,335 Segment profit (loss) 4,277,877 - 4,277,877 Balance sheet information: - -------------------------- Total assets 562,344,775 (25,189,996) 537,154,779 Goodwill and intangibles 720,000 - 720,000 Premises and equipment expenditures, net 4,502,632 - 4,502,632 </TABLE> - -------------------------------------------------------------------------------- (Continued) F-36.
85 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 20 - QUARTERLY FINANCIAL DATA (UNAUDITED) <TABLE> <CAPTION> Earnings per Share Interest Net Interest Net ------------------ Income Income Income Basic and Diluted ------ ------ ------ ----------------- <S> <C> <C> <C> <C> 1999 - ---- First quarter $ 10,174,563 $ 5,336,635 $ 1,052,050 $ .25 Second quarter 11,104,818 5,804,799 1,274,651 .30 Third quarter 11,357,377 5,719,081 1,418,318 .33 Fourth quarter 12,316,053 6,348,383 1,485,883 .34 ------------- ------------ ------------ -------- Total $ 44,952,811 $ 23,208,898 $ 5,230,902 $ 1.22 ============= ============ ============ ======== 2000 - ---- First quarter $ 12,659,590 $ 6,316,677 $ 1,518,661 $ .35 Second quarter 13,656,274 6,585,579 1,650,502 .38 Third quarter 14,585,032 6,683,183 1,713,857 .40 Fourth quarter 15,122,041 6,802,429 1,203,158 .29 ------------- ------------ ------------ -------- Total $ 56,022,937 $ 26,387,868 $ 6,086,178 $ 1.42 ============= ============ ============ ======== </TABLE> During the fourth quarter of 2000, an additional provision for loan losses of $300,000 was recorded due to the levels of impaired loans and charges-offs. - -------------------------------------------------------------------------------- F-37.
86 RURBAN FINANCIAL CORP. ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 2000 --------------------------------------- INDEX TO EXHIBITS <TABLE> <CAPTION> Exhibit No. Description Reference No. - ----------- ----------- ------------- <S> <C> <C> 3(a) Amended Articles of Registrant, as amended Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 (File No. 0-13507) [Exhibit 3(a)(i)]. 3(b) Certificate of Amendment to the Amended Incorporated herein by reference to Articles of Rurban Financial Corp. Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 0-13507) [Exhibit 3(b)]. 3(c) Certificate of Amendment to the Amended Incorporated herein by reference to Articles of Rurban Financial Corp. Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 0-13507) [Exhibit 3(c)]. 3(d) Amended and Restated Articles of Rurban Incorporated herein by reference to Financial Corp. Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 0-13507) [Exhibit 3(d)]. 3(e) Regulations of Registrant, as amended Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1986 (File No. 0-13507) [Exhibit 3(b)]. 10(a) Employees' Stock Ownership Plan of Rurban Incorporated herein by reference to Financial Corp. Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 0-13507) [Exhibit 10(a)]. 10(b) First Amendment to Employees' Stock Incorporated herein by reference to Ownership Plan of Rurban Financial Corp., Registrant's Annual Report on Form 10-K dated June 14, 1993 and made to be for the fiscal year ended effective as of January 1, 1993 December 31, 1993 (File No. 0-13507) [Exhibit 10(b)]. </TABLE> 86
87 <TABLE> <CAPTION> Exhibit No. Description Reference No. - ----------- ----------- ------------- <S> <C> <C> 10(c) Second Amendment to Employees' Stock Incorporated herein by reference to Ownership Plan of Rurban Financial Corp., Registrant's Annual Report on Form 10-K dated March 14, 1994 and made to be for the fiscal year ended effective as of January 1, 1993 December 31, 1993 (File No. 0-13507) [Exhibit 10(c)]. 10(d) Third Amendment to Employees' Stock Incorporated herein by reference to Ownership Plan of Rurban Financial Corp., Registrant's Annual Report on Form 10-K dated March 13, 1995 for the fiscal year ended December 31, 1994 (File No. 0-13507) [Exhibit 10(d)]. 10(e) Fourth Amendment to Employees' Stock Incorporated herein by reference to Ownership Plan of Rurban Financial Corp., Registrant's Annual Report on Form 10-K dated June 10, 1995 and made to be for the fiscal year ended December 31, effective as of January 1, 1995 1995 (File No. 0-13507) [Exhibit 10(e)]. 10(f) The Rurban Financial Corp. Savings Plan and Incorporated herein by reference to Trust Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (File No. 0-13507) [Exhibit 10(g)]. 10(g) First Amendment to The Rurban Financial Incorporated herein by reference to Corp. Savings Plan and Trust, dated Registrant's Annual Report on Form 10-K December 10, 1990 and effective January 1, for the fiscal year ended December 1990 31, 1990 (File No. 0-13507) [Exhibit 10(g)]. 10(h) Second Amendment to The Rurban Financial Incorporated herein by reference to Corp. Savings Plan and Trust, dated Registrant's Annual Report on Form 10-K March 11, 1991, effective February 1, 1991 for the fiscal year ended December 31, 1992 (File No. 0-13507) [Exhibit 10(d)]. 10(i) Third Amendment to The Rurban Financial Incorporated herein by reference to Corp. Savings Plan and Trust, dated Registrant's Annual Report on Form 10-K June 11, 1991 for the fiscal year ended December 31, 1992 (File No. 0-13507) [Exhibit 10(e)]. 10(j) Fourth Amendment to The Rurban Financial Incorporated herein by reference to Corp. Savings Plan and Trust, dated Registrant's Annual Report on Form 10-K July 14, 1992, effective May 1, 1992 for the fiscal year ended December 31, 1992 (File No. 0-13507) [Exhibit 10(f)]. </TABLE> 87
88 <TABLE> <CAPTION> Exhibit No. Description Reference No. - ----------- ----------- ------------- <S> <C> <C> 10(k) Fifth Amendment to The Rurban Financial Incorporated herein by reference to Corp. Savings Plan and Trust, dated March Registrant's Annual Report on Form 10-K 14, 1994 for the fiscal year ended December 31, 1993 (File No. 0-13507) [Exhibit 10(i)]. 10(l) Sixth Amendment to The Rurban Financial Incorporated herein by reference to Corp. Savings Plan and Trust dated May 1, Registrant's Annual Report on Form 10-K 1995 for the fiscal year ended December 31, 1995 (File No. 0-13507) [Exhibit 10(l)]. 10(m) Summary of Incentive Compensation Plan of Incorporated herein by reference to State Bank Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 0-13507) [Exhibit 10(j)]. 10(n) Summary of Bonus Program adopted by the Incorporated herein by reference to Trust Department of State Bank for the Registrant's Annual Report on Form 10-K benefit of Robert W. Constien in his for the fiscal year ended December 31, capacity as Manager of the Trust Department 1991 (File No. 0-13507) [Exhibit 10(e)]. 10(o) Summary of Bonus Program for the Trust Incorporated herein by reference to Department of State Bank Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (File No. 0-13507 [Exhibit 10(i)]. 10(p) Summary of Sales Bonus Program of State Bank Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (File No. 0-13507) [Exhibit 10(n)]. 10(q) Summary of Rurban Financial Corp. Bonus Plan Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 0-13507) [Exhibit 10(q)]. 10(r) Executive Salary Continuation Agreement, Incorporated herein by reference to dated December 15, 1994, between Rurban Registrant's Annual Report on Form 10-K Financial Corp. and Richard C. Burrows for the fiscal year ended December 31, 1994 (File No. 0-13507) [Exhibit 10(p)]. </TABLE> 88
89 <TABLE> <CAPTION> Exhibit No. Description Reference No. - ----------- ----------- ------------- <S> <C> <C> 10(s) Executive Salary Continuation Agreement, Incorporated herein by reference to dated October 11, 1995, between Rurban Registrant's Annual Reports on Form 10-K Financial Corp. and Thomas C. Williams; and for the fiscal years ended December 31, Amended Schedule A to Exhibit 10(s) 1995 and December 31, 1997 (File No. identifying other identical Executive 0-13507) [Exhibit 10(s)]. Salary Continuation Agreements between executive officers of Rurban Financial Corp. and Rurban Financial Corp. 10(t) Description of Split-Dollar Insurance Incorporated herein by reference to Policies Maintained for Certain Executive Registrant's Annual Report on Form 10-K Officers of Rurban Financial Corp. for the fiscal year ended December 31, 1995 (File No. 0-13507) [Exhibit 10(t)]. 10(u) Rurban Financial Corp. Stock Option Plan Incorporated herein by reference to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-13507) [Exhibit 10(u)]. 10(v) Rurban Financial Corp. Plan to Allow Incorporated herein by reference to the Directors to Elect to Defer Compensation Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-13507) [Exhibit 10(v)]. 10(w) Form of Non-Qualified Stock Option Incorporated herein by reference to Agreement Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 0-13507) [Exhibit 10(w)]. 10(x) Form of Incentive Stock Option Agreement Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 0-13507) [Exhibit 10(x)]. 10(y) Employees' Stock Ownership and Savings Plan Incorporated herein by reference to of Rurban Financial Corp. Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 0-13507) [Exhibit 10(y)]. 11 Statement re Computation of Per Share [Included in Notes 1 and 2 of the Notes Earnings to Consolidated Financial Statements of Registrant in the financial statements portion of this Annual Report on Form 10-K]. </TABLE> 89
90 <TABLE> <CAPTION> Exhibit No. Description Reference No. - ----------- ----------- ------------- <S> <C> <C> 21 Subsidiaries of Registrant Included in this Annual Report on Form 10-K as Exhibit 21. 23 Consent of Independent Auditor Included in this Annual Report on Form 10-K as Exhibit 23. </TABLE> 90