XNAS:RBNF Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

 S QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

OR

 

£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _________________to___________________________

 

Commission file number 0-13507

 

RURBAN FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

 

Ohio   34-1395608
(State or other jurisdiction of   (I.R.S. Employer Identification No.)
incorporation or organization)    

 

401 Clinton Street, Defiance, Ohio 43512

(Address of principal executive offices)

(Zip Code)

 

(419) 783-8950
(Registrant’s telephone number, including area code)

 

None
(Former name, former address and former fiscal year, if changed since last report.)

  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the 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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large Accelerate Filer ¨ Accelerated Filer ¨ Non-Accelerated Filer ¨ Smaller Reporting Company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Common Shares, without par value   4,861,779 shares
(class)   (Outstanding at May 9, 2012)

 

 
 

 

RURBAN FINANCIAL CORP.

 

FORM 10-Q

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION  
   
Item 1. Financial Statements 3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 30
Item 3. Quantitative and Qualitative Disclosures About Market Risk 39
Item 4. Controls and Procedures 39
     
PART II – OTHER INFORMATION  
   
Item 1. Legal Proceedings 40
Item 1A. Risk Factors 40
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 40
Item 3. Defaults Upon Senior Securities 40
Item 4. Mine Safety Disclosures 40
Item 5. Other Information 41
Item 6. Exhibits 41
     
Signatures 42

 

2
 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

The interim condensed consolidated financial statements of Rurban Financial Corp. (“Rurban” or the “Company”) are unaudited; however, the information contained herein reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of financial condition and results of operations for the interim periods presented. All adjustments reflected in these financial statements are of a normal recurring nature in accordance with Rule 10-01 of Regulation S-X. Results of operations for the three months ended March 31, 2012 are not necessarily indicative of results for the complete year.

 

3
 

 

Rurban Financial Corp.

Condensed Consolidated Balance Sheets
March 31, 2012 and December 31, 2011

 

   March 31,   December 31, 
  2012   2011 
($'s in Thousands)   (Unaudited)     
ASSETS         
Cash and due from banks  $29,602   $14,846 
           
Investment Securities:          
Securities available for sale, at fair value   110,603    111,978 
Other securities - FRB and FHLB Stock   3,685    3,685 
           
Total investment securities   114,288    115,663 
           
Loans held for sale   11,384    5,238 
           
Loans, net of unearned income   439,721    442,554 
Allowance for loan losses   (6,609)   (6,529)
           
Net loans   433,112    436,025 
           
Premises and equipment, net   13,282    13,773 
Purchased software   386    159 
Cash surrender value of life insurance   12,312    12,224 
Goodwill   16,353    16,353 
Core deposits and other intangibles   1,691    1,849 
Foreclosed assets held for sale, net   1,807    1,830 
Mortgage servicing rights   3,359    2,820 
Accrued interest receivable   1,802    1,635 
Other assets   5,598    6,249 
Total assets  $644,976   $628,664 
           
LIABILITIES AND EQUITY          
Deposits          
Non interest bearing demand  $71,077   $65,963 
Interest bearing demand   118,898    107,446 
Savings   52,599    49,665 
Money market   82,799    74,244 
Time deposits   210,119    221,447 
Total deposits   535,492    518,765 
           
Notes payable   2,519    2,788 
Advances from Federal Home Loan Bank   12,611    12,776 
Repurchase agreements   17,771    18,779 
Trust preferred securities   20,620    20,620 
Accrued interest payable   3,556    2,954 
Other liabilities   3,381    4,050 
Total liabilities   595,950    580,732 
           
Equity          
Preferred stock   -    - 
Common stock   12,569    12,569 
Additional paid-in capital   15,338    15,323 
Retained earnings   21,438    20,466 
Accumulated other comprehensive income   1,450    1,343 
Treasury stock   (1,769)   (1,769)
Total equity   49,026    47,932 
           
Total liabilities and equity  $644,976   $628,664 

 

See notes to condensed consolidated financial statements (unaudited)

 

Note: The balance sheet at December 31, 2011 has been derived from the audited consolidated financial statements at that date

 

4
 

 

Rurban Financial Corp.

Condensed Consolidated Statements Income (Unaudited)

  

   Three Months Ended 
  March 31,   March 31, 
($'s in Thousands)   2012   2011 
Interest income          
Loans          
Taxable  $5,928   $5,852 
Nontaxable   23    11 
Securities          
Taxable   399    611 
Nontaxable   147    336 
Total interest income   6,497    6,810 
           
Interest expense          
Deposits   854    1,049 
Other borrowings   34    25 
Repurchase agreements   68    426 
Federal Home Loan Bank advances   74    133 
Trust preferred securities   592    344 
Total interest expense   1,622    1,977 
           
Net interest income   4,875    4,833 
           
Provision for loan losses   450    499 
           
Net interest income after provision for loan losses   4,425    4,334 
           
Noninterest income          
Data service fees   643    912 
Trust fees   642    695 
Customer service fees   631    581 
Gain on sale of mortgage loans  and OMSR's   1,181    425 
Mortgage loan servicing fees, net   329    139 
Gain on sale of non-mortgage loans   -    43 
Loss on sale or disposal of assets   (56)   (100)
Other income   211    168 
Total non-interest income   3,581    2,863 
           
Noninterest expense          
Salaries and employee benefits   3,499    3,530 
Net occupancy expense   548    584 
Equipment expense   711    711 
FDIC insurance expense   214    318 
Data processing fees   113    144 
Professional fees   385    474 
Marketing expense   90    56 
Printing and office supplies   78    76 
Telephone and communication   144    157 
Postage and delivery expense   229    344 
State, local and other taxes   120    144 
Employee expense   106    96 
Other intangible amortization expense   157    197 
Other expenses   282    229 
Total non-interest expense   6,676    7,060 
           
Income before income tax expense   1,330    137 
Income tax expense   358    126 
           
Net income  $972   $11 
           
Common share data:          
Basic earnings per common share  $0.20   $0.00 
           
Diluted earnings per common share  $0.20   $0.00 
           
Average shares outstanding:          
Basic:   4,862    4,862 
Diluted:   4,862    4,862 

 

See notes to condensed consolidated financial statements (unaudited)

 

5
 

 

Rurban Financial Corp.

Condensed Consolidated Statements of Other Comprehensive Income (Unaudited)

Three Months Ended March 31,

 

($'s in thousands)  2012   2011 
         
Net income  $972   $11 
           
Other comprehensive income          
Investment securities available for sale          
Change in net unrealized gains during the period   162    313 
           
Tax expense   (55)   (106)
Comprehensive income  $1,079   $218 
           
Accumulated other comprehensive income  $1,450   $1,343 

 

See notes to condensed consolidated financial statements (unaudited)

 

6
 

 

 

Rurban Financial Corp.

Condensed Consolidated Statements of Changes in

Stockholders’ Equity (unaudited)

 

   Three Months Ended March 31, 
($'s in thousands)  2012   2011 
         
Balance at beginning of period  $47,932   $46,024 
Net income   972    11 
Unrealized holding gains arising during the year, net of tax   107    207 
Share-based compensation   15    23 
           
Balance at end of period  $49,026   $46,265 

 

See notes to condensed consolidated financial statements (unaudited)

 

7
 

 

Rurban Financial Corp.

Condensed Consolidated Statements of Cash Flows (Unaudited)

Three Months Ended March 31,

 

($'s in thousands)  2012   2011 
Operating Activities          
Net Income  $972   $11 
Items not requiring (providing) cash          
Depreciation and amortization   334    454 
Provision for loan losses   450    499 
Expense of share-based compensation plan   15    23 
Amortization of premiums and discounts on securities   368    432 
Amortization of intangible assets   157    197 
Amortization of originated mortgage servicing rights   349    71 
Deferred income taxes   (55)   (107)
Proceeds from sale of loans held for sale   62,897    31,865 
Originations of loans held for sale   (68,331)   (28,005)
Gain on sale of loans   (1,181)   (425)
Loss on sale of foreclosed assets   15    100 
Recapture of originated mortgage servicing rights impairment   (419)   - 
Income from bank owned life insurance   (88)   (94)
Changes in          
Interest receivable   (167)   (295)
Other assets   665    400 
Interest payable and other liabilities   (68)   (359)
           
Net cash provided by (used in) operating activities   (4,086)   4,768 
           
Investing Activities          
Purchase of available-for-sale securities   (11,295)   (4,039)
Proceeds from maturities of available-for-sale securities   12,463    5,631 
Proceeds from bank owned life insurance   -    1,354 
Net change in loans   2,432    4,357 
Purchase of premises and equipment and software   (771)   (119)
Proceeds from sales or disposal of premises and equipment   701    - 
Proceeds from sale of foreclosed assets   27    923 
           
Net cash from investing activities  $3,557   $8,107 

 

See notes to condensed consolidated financial statements (unaudited)

 

8
 

 

Rurban Financial Corp.

Condensed Consolidated Statements of Cash Flows (Unaudited) (continued)
Three Months Ended March 31,

 

($'s in thousands)  2012   2011 
Financing Activities          
Net  increase (decrease) in demand deposits, money market, interest checking and savings accounts  $28,055   $(2,319)
Net decrease in certificates of deposit   (11,328)   (397)
Net (decrease) increase in securities sold under agreements to repurchase   (1,008)   3,714 
Repayment of Federal Home Loan Bank advances   (165)   (6,127)
Repayment of notes payable   (269)   (72)
           
Net cash provided by (used in) financing activities   15,285    (5,202)
           
Increase in Cash and Cash Equivalents   14,756    7,673 
           
Cash and Cash Equivalents, Beginning of Year   14,846    30,418 
           
Cash and Cash Equivalents, End of Period  $29,602   $38,090 
           
Supplemental Cash Flows Information          
           
Interest Paid  $1,020   $1,753 
           
Transfer of loans to foreclosed assets  $14   $400 

 

See notes to condensed consolidated financial statements (unaudited)

 

9
 

 

RURBAN FINANCIAL CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE A—BASIS OF PRESENTATION

 

Rurban Financial Corp. (the “Company”) is a bank holding company whose principal activity is the ownership and management of its wholly-owned subsidiaries, The State Bank and Trust Company (“State Bank”), RFCBC, Inc. (“RFCBC”), Rurbanc Data Services, Inc. dba RDSI Banking Systems (“RDSI”), Rurban Statutory Trust I (“RST I”), and Rurban Statutory Trust II (“RST II”). State Bank owns all the outstanding stock of Rurban Mortgage Company (“RMC”), Rurban Investments, Inc. (“RII”) and State Bank Insurance, LLC (“SBI”).

 

The consolidated financial statements include the accounts of the Company, State Bank, RFCBC, RDSI, RMC, RII, and SBI. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. The financial statements reflect all adjustments that are, in the opinion of management, necessary to fairly present the financial position, results of operations and cash flows of the Company. Those adjustments consist only of normal recurring adjustments. Results of operations for the three months ended March 31, 2012 are not necessarily indicative of results for the complete year.

 

The condensed consolidated balance sheet of the Company as of December 31, 2011 has been derived from the audited consolidated balance sheet of the Company as of that date.

 

For further information, refer to the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

 

NOTE B—EARNINGS PER SHARE

 

Earnings per share (EPS) have been computed based on the weighted average number of shares outstanding during the periods presented. For the periods ended March 31, 2012 and 2011, share based awards totaling 303,974 and 325,951 common shares, respectively, were not considered in computing diluted EPS as they were anti-dilutive. The number of shares used in the computation of basic and diluted earnings per share were:

 

   Three Months Ended 
   March 31, 
   2012   2011 
Basic earnings per share   4,861,779    4,861,779 
Diluted earnings per share   4,861,779    4,861,779 

 

10
 

 

Note C - Securities

 

The amortized cost and approximate fair value of securities were as follows:

 

       Gross   Gross     
$'s in thousands  Amortized   Unrealized   Unrealized   Approximate 
   Cost   Gains   Losses   Fair Value 
Available-for-Sale Securities:                    
March 31, 2012:                    
U.S. Treasury and                    
Government agencies  $23,412   $176    (58)  $23,530 
Mortgage-backed securities   67,305    891    (49)   68,147 
State and political subdivisions   15,268    1,241    (3)   16,506 
Money Market Mutual Fund   2,397    -    -    2,397 
Equity securities   23    -    -    23 
                     
   $108,405   $2,308   $(110)  $110,603 

 

       Gross   Gross     
$'s in thousands  Amortized   Unrealized   Unrealized   Approximate 
   Cost   Gains   Losses   Fair Value 
December 31, 2011:                    
U.S. Treasury and                    
Government agencies  $25,238   $186   $-   $25,424 
Mortgage-backed securities   67,056    761    (119)   67,698 
State and political subdivisions   15,586    1,210    (3)   16,793 
Money Market Mutual Fund   2,040    -    -    2,040 
Equity securities   23    -    -    23 
                     
   $109,943   $2,157   $(122)  $111,978 

 

The amortized cost and fair value of securities available for sale at March 31, 2012, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

   Available for Sale 
   Amortized   Fair 
$'s in thousands  Cost   Value 
         
Within one year  $384    383 
Due after one year through five years   1,695    1,768 
Due after five years through ten years   10,318    10,554 
Due after ten years   26,283    27,331 
    38,680    40,036 
           
Mortgage-backed securities, money market mutual funds & equity securities   69,725    70,567 
           
Totals  $108,405   $110,603 

 

11
 

 

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $57.2 million at March 31, 2012 and $52.8 million at December 31, 2011. The securities delivered for repurchase agreements were $21.2 million at March 31, 2012 and $21.0 million at December 31, 2011.

 

Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments was $16.3 million at March 31, 2012 and $15.2 million at December 31, 2011, which was approximately 15 and 14 percent, respectively, of the Company’s available-for-sale investment portfolio at such dates. Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.

 

Securities with unrealized losses, aggregated by investment class and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2012 and December 31, 2011 are as follows ($’s in thousands):

 

March 31, 2012  Less than 12 Months   12 Months or Longer   Total 
   Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
 
Available-for-Sale Securities:                              
U.S. Treasury and Government agencies  $6,738   $(58)  $-   $-   $6,738   $(58)
Mortgage-backed securities   8,201    (14)   819    (35)   9,020    (49)
State and political subdivisions   504    (3)   -    -    504    (3)
                               
   $15,443   $(75)  $819   $(35)  $16,262   $(110)

  

December 31, 2011  Less than 12 Months   12 Months or Longer   Total 
   Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
 
Available-for-Sale Securities:                              
Mortgage-backed securities  $11,321    (56)  $844   $(63)  $12,165   $(119)
State and political subdivisions   501    (3)   -    -    501    (3)
                               
   $11,822   $(59)  $844   $(63)  $12,666   $(122)

 

The total unrealized losses on the mortgage-backed securities portfolio, all of which are residential mortgage-backed securities, is derived mainly from three private label senior tranche CMO securities. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concern warrants such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent of the Company to not sell the investment and whether it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost. Management has determined there is no other-than-temporary-impairment on these CMO securities. The total unrealized loss on the municipal security portfolio is due to the holding of several municipal securities, all with individually insignificant losses.

 

12
 

 

NOTE D – LOANS AND ALLOWANCE FOR LOAN LOSSES

 

Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or payoffs, are reported at their outstanding principal balances adjusted for any charge-offs, the allowance for loan losses, any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Generally, loans are placed on non-accrual status not later than 90 days past due, unless the loan is well-secured and in the process of collection. All interest accrued, but not collected for loans that are placed on non-accrual or charged-off, is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the non-collectability of a loan balance is probable. Subsequent recoveries, if any, are credited to the allowance.

 

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as new information becomes available.

 

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-off experience and expected loss given default derived from the Company’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected on the historical loss or risk rating data.

 

A loan is considered impaired when, based on current information and events, it is probable that State Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration each of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial, agricultural, and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

 

When State Bank moves a loan to non-accrual status, total unpaid interest accrued to date is reversed from income. Subsequent payments are applied to the outstanding principal balance with the interest portion of the payment recorded on the balance sheet as a contra-loan. Interest received on impaired loans may be realized once all contractual principal amounts are received or when a borrower establishes a history of six consecutive timely principal and interest payments. It is at the discretion of management to determine when a loan is placed back on accrual status upon receipt of six consecutive timely payments.

 

13
 

 

Large groups of smaller balance homogenous loans are collectively evaluated for impairment. Accordingly, State Bank does not separately identify individual consumer and residential loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

 

Categories of loans at March 31, 2012 and December 31, 2011 include:

 

($'s in thousands)  March 31,   December 31, 
   2012   2011 
Commercial  $78,450   $78,112 
Commercial real estate   188,984    187,829 
Agricultural   37,741    38,361 
Residential real estate   84,771    87,656 
Home Equity & Consumer   49,855    50,681 
Leasing   207    216 
Total loans   440,008    442,855 
Less          
Net deferred loan fees, premiums and discounts   (287)   (301)
Loans, net of unearned income  $439,721   $442,554 
Allowance for loan losses  $(6,609)  $(6,529)

 

The following table presents the Company’s nonperforming loans at March 31, 2012 and December 31, 2011.

 

($'s in thousands)  March 31,   December 31, 
   2012   2011 
Commercial  $2,021   $2,393 
Commercial real estate   1,481    1,456 
Agricultural   113    - 
Residential real estate   1,840    2,471 
Home Equity & Consumer   1,056    580 
Leasing   -    - 
           
Total nonaccruing loans   6,511    6,900 
           
Accruing Troubled Debt Restructures (TDR's)   1,593    1,334 
           
Total Nonperforming Loans  $8,104   $8,234 

 

14
 

 

The following tables present the balance of the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of March 31, 2012, December 31, 2011 and March 31, 2011.

 

March 31, 2012      Commercial       Residential   Home Equity             
($'s in thousands)  Commercial   Real Estate   Agricultural   First Mortgage   & Consumer   Other   Unallocated   Total 
                                 
ALLOWANCE FOR LOAN AND LEASE LOSSES                              
                                         
Beginning balance  $1,914   $2,880   $51   $956   $599   $139   $(10)  $6,529 
Charge Offs   (205)   (42)   -    (51)   (160)   (16)   -    (474)
Recoveries   2    23    1    71    2    3    1    104 
Provision   144    52    -    24    212    9    9    450 
Ending Balance  $1,855   $2,913   $53   $1,000   $653   $135   $-   $6,609 
                                         
Ending balance:                                        
individually evaluated for  impairment  $517   $231   $3   $403   $178   $-   $-   $1,332 
Ending balance:                                        
collectively evaluated for  impairment  $1,338   $2,682   $50   $597   $475   $135   $-   $5,277 
                                         
Loans:                                        
Ending balance:                                        
individually evaluated for  impairment  $1,945   $2,035   $115   $2,375   $518   $-   $-   $6,988 
Ending balance:                                        
collectively evaluated for  impairment  $76,505   $186,949   $37,626   $82,396   $49,337   $207   $-   $433,020 

 

 

December 31, 2011      Commercial       Residential   Home Equity             
($'s in thousands)  Commercial   Real Estate   Agricultural   First Mortgage   & Consumer   Other   Unallocated   Total 
                                 
ALLOWANCE FOR LOAN AND LEASE LOSSES                              
                                         
Beginning balance  $1,723   $3,774   $16   $643   $401   $128   $30   $6,715 
Charge Offs   (642)   (2,057)   -    (248)   (460)   -    -    (3,407)
Recoveries   465    32    3    700    21    6    -    1,227 
Provision   368    1,131    32    (139)   637    5    (40)   1,994 
Ending Balance  $1,914   $2,880   $51   $956   $599   $139   $(10)  $6,529 
                                         
Ending balance:                                        
individually evaluated for  impairment  $1,017   $19   $5   $280   $212   $-   $-   $1,533 
Ending balance:                                        
collectively evaluated for  impairment  $897   $2,861   $46   $676   $387   $139   $(10)  $4,996 
                                         
Loans:                                        
Ending balance:                                        
individually evaluated for  impairment  $3,283   $2,473   $5   $2,074   $543   $-   $-   $8,378 
Ending balance:                                        
collectively evaluated for  impairment  $74,829   $185,356   $38,356   $85,582   $50,138   $216   $-   $434,477 

 

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March 31, 2011      Commercial       Residential   Home Equity             
($'s in thousands)  Commercial   Real Estate   Agricultural   First Mortgage   & Consumer   Other   Unallocated   Total 
                                 
ALLOWANCE FOR LOAN AND LEASE LOSSES                               
                                         
Beginning balance  $1,723   $3,774   $16   $643   $401   $128   $30   $6,715 
Charge Offs   (209)   (100)   -    (103)   (200)   (27)   -    (639)
Recoveries   5    3    1    -    7    2    -    18 
Provision   247    (354)   1    386    243    5    (29)   499 
Ending Balance  $1,766   $3,322   $18   $926   $451   $108   $1   $6,593 
                                         
Ending balance:                                        
individually evaluated for impairment  $901   $935   $-   $219   $32   $-   $-   $2,087 
Ending balance:                                        
collectively evaluated for impairment  $865   $2,387   $18   $707   $419   $108   $1   $4,506 
                                         
Loans:                                        
Ending balance:                                        
individually evaluated for impairment  $2,842   $6,174   $-   $1,409   $175   $-   $-   $10,600 
Ending balance:                                        
collectively evaluated for impairment  $67,777   $175,576   $37,206   $81,026   $50,077   $182   $-   $411,845 

 

Credit Risk Profile

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes loans with an outstanding balance greater than $100 thousand and non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:

 

Special Mention (5): Assets have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Special mention assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification. Ordinarily, special mention credits have characteristics which corrective management action would remedy.

 

Substandard (6): Loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardized the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

 

Doubtful (7): Loans classified as doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of current known facts, conditions and values, highly questionable and improbable.

 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass (1-4) rated loans.

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The following tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of March 31, 2012 and December 31, 2011 ($’s in thousands).

 

March 31, 2012       Commercial RE       Residential   Home Equity         
    Commercial   & Construction   Agricultural   Real Estate   & Consumer   Leases   Total 
1-2   $825   $123   $122   $-   $2   $-   $1,072 
3    24,185    60,257    10,836    72,933    44,732    24    212,967 
4    49,534    113,642    26,617    7,601    3,562    183    201,139 
Total Pass    74,544    174,022    37,575    80,534    48,296    207    415,178 
                                      
5    74    10,075    115    1,569    441    -    12,274 
6    1,924    3,310    51    949    42    -    6,276 
7    1,908    1,577    -    1,719    1,076    -    6,280 
8    -    -    -    -    -    -    - 
Total   $78,450   $188,984   $37,741   $84,771   $49,855   $207   $440,008 

  

December 31, 2011       Commercial RE       Residential   Home Equity         
    Commercial   & Construction   Agricultural   Real Estate   & Consumer   Leases   Total 
1-2   $909   $188   $152   $1,548   $127   $140   $3,064 
3    24,375    62,506    13,203    78,122    43,814    -    222,020 
4    48,004    110,633    24,950    1,576    6,095    76    191,334 
Total Pass    73,288    173,327    38,305    81,246    50,036    216    416,418 
                                      
5    610    9,703    5    1,666    72    -    12,056 
6    2,037    3,358    51    1,834    92    -    7,372 
7    2,177    1,441    -    2,910    481    -    7,009 
8    -    -    -    -    -    -    - 
Total   $78,112   $187,829   $38,361   $87,656   $50,681   $216   $442,855 

 

The following tables present the Company’s loan portfolio aging analysis as of March 31, 2012 and December 31, 2011 ($’s in thousands).

 

   30-59 Days   60-89 Days   Greater Than   Total Past       Total Loans 
March 31, 2012  Past Due   Past Due   90 Days   Due   Current   Receivable 
                         
Commercial  $11   $-   $2,021   $2,032   $76,418   $78,450 
Commercial RE   -    -    1,481    1,481    187,503    188,984 
Agricultural   -    -    113    113    37,628    37,741 
Residential Real Estate   149    276    806    1,231    83,540    84,771 
Home Equity & Consumer   111    18    505    634    49,221    49,855 
Leases   -    -    -    -    207    207 
Loans & Lease   271    294    4,926    5,491    434,517    440,008 
Loans held for Sale   -    -    -    -    11,384    11,384 
                               
Total  $271   $294   $4,926   $5,491   $445,901   $451,392 

 

   30-59 Days   60-89 Days   Greater Than   Total Past       Total Loans 
December 31, 2011  Past Due   Past Due   90 Days   Due   Current   Receivable 
                         
Commercial  $58   $-   $2,334   $2,392   $75,720   $78,112 
Commercial RE   67    -    1,656    1,723    186,106    187,829 
Agricultural   -    -    -    -    38,361    38,361 
Residential Real Estate   412    784    569    1,765    85,891    87,656 
Home Equity & Consumer   465    194    505    1,164    49,517    50,681 
Leases   -    -    -    -    216    216 
Loans & Lease   1,002    978    5,064    7,044    435,811    442,855 
                               
Loans held for Sale   -    -    -    -    5,238    5,238 
                               
Total  $1,002   $978   $5,064   $7,044   $441,049   $448,093 

 

All loans past due 90 days are systematically placed on nonaccrual status.

 

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The following tables present impaired loan activity for the three months ended March 31, 2012 and 2011, and for the twelve months ended December 31, 2011:

 

Three Months Ended      Unpaid       Average   Interest 
March 31, 2012  Recorded   Principal   Related   Recorded   Income 
($'s in thousands)  Investment   Balance   Allowance   Investment   Recognized 
With no related allowance recorded:                         
Commercial  $118   $468   $-   $127   $- 
Commercial Real Estate   1,032    1,992    -    2,037    6 
Agricultural   112    112    -    113    - 
Residential   675    675    -    772    14 
Home Equity Consumer & Other   211    244    -    315    4 
All Impaired Loans < $100,000   1,157    1,157    -    1,157    - 
With a specific allowance recorded:                         
Commercial   1,827    3,887    517    1,896    - 
Commercial Real Estate   1,003    2,192    231    1,145    - 
Agricultural   3    3    3    113    - 
Residential   1,700    1,710    403    1,768    21 
Home Equity Consumer & Other   307    307    178    251    2 
All Impaired Loans < $100,000   -    -    -    -    - 
Totals:                         
Commercial  $1,945   $4,355   $517   $2,023   $- 
Commercial Real Estate  $2,035   $4,184   $231   $3,182   $6 
Agricultural  $115   $115   $3   $226   $- 
Residential  $2,375   $2,385   $403   $2,540   $35 
Home Equity Consumer & Other  $518   $551   $178   $566   $6 
All Impaired Loans < $100,000  $1,157   $1,157   $-   $1,157   $- 

  

Twelve Months Ended      Unpaid     
December 31, 2011  Recorded   Principal   Related 
($'s in thousands)  Investment   Balance   Allowance 
With no related allowance recorded:               
Commercial  $1,206   $1,856   $- 
Commercial Real Estate   1,061    2,149    - 
Agricultural   -    -    - 
Residential   581    581    - 
Home Equity Consumer & Other   189    217    - 
All Impaired Loans < $100,000   1,065    1,065    - 
With a specific allowance recorded:               
Commercial   2,077    3,787    1,017 
Commercial Real Estate   1,412    2,827    19 
Agricultural   5    5    5 
Residential   1,493    1,596    280 
Home Equity Consumer & Other   354    354    212 
All Impaired Loans < $100,000   -    -    - 
Totals:               
Commercial  $3,283   $5,643   $1,017 
Commercial Real Estate  $2,473   $4,976   $19 
Agricultural  $5   $5   $5 
Residential  $2,074   $2,177   $280 
Home Equity Consumer & Other  $543   $571   $212 
All Impaired Loans < $100,000  $1,065   $1,065   $- 

 

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Three Months Ended      Unpaid       Average   Interest 
March 31, 2011  Recorded   Principal   Related   Recorded   Income 
($'s in thousands)  Investment   Balance   Allowance   Investment   Recognized 
With no related allowance recorded:                         
Commercial  $349   $698   $-   $360   $(2)
Commercial Real Estate   2,058    2,920    -    2,917    (3)
Agricultural   -    -    -    -    - 
Residential   410    460    -    462    3 
Home Equity Consumer & Other   91    91    -    93    1 
With a specific allowance recorded:                         
Commercial   2,493    4,142    901    2,877    (5)
Commercial Real Estate   4,116    4,215    935    5,144    (1)
Agricultural   -    -    -    -    - 
Residential   999    1,237    219    1,231    8 
Home Equity Consumer & Other   84    84    32    32    1 
Totals:                         
Commercial  $2,842   $4,841   $901   $3,238   $(7)
Commercial Real Estate  $6,174   $7,136   $935   $8,061   $(4)
Agricultural  $-   $-   $-   $-   $- 
Residential  $1,409   $1,698   $219   $1,693   $11 
Home Equity Consumer & Other  $175   $175   $32   $126   $2 

 

Impaired loans less than $100,000 are included in groups of homogenous loans. These loans are evaluated based on delinquency status.

 

Interest income recognized on a cash basis does not materially differ from interest income recognized on an accrual basis.

 

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable State Bank will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include non-performing commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

 

Troubled Debt Restructured (TDR) Loans

TDRs are modified loans where a concession was provided to a borrower experiencing financial difficulties. Loan modifications are considered TDRs when the concessions provided are not available to the borrower through either normal channels or other sources. However, not all loan modifications are TDRs.

 

TDR Concession Types

 

The Company’s standards relating to loan modifications consider, among other factors, minimum verified income requirements, cash flow analysis, and collateral valuations. Each potential loan modification is reviewed individually and the terms of the loan are modified to meet a borrower’s specific circumstances at a point in time. All loan modifications, including those classified as TDRs, are reviewed and approved. The types of concessions provided to borrowers include:

 

·Interest rate reduction: A reduction of the stated interest rate to a nonmarket rate for the remaining original life of the debt. The Company also may grant interest rate concessions for a limited timeframe on a case by case basis.
·Amortization or maturity date change beyond what the collateral supports, including any of the following:

 

19
 

 

(1)Lengthens the amortization period of the amortized principal beyond market terms. This concession reduces the minimum monthly payment and increases the amount of the balloon payment at the end of the term of the loan. Principal is generally not forgiven.

 

(2)Reduces the amount of loan principal to be amortized. This concession also reduces the minimum monthly payment and increases the amount of the balloon payment at the end of the term of the loan. Principal is generally not forgiven.

 

(3)Extends the maturity date or dates of the debt beyond what the collateral supports. This concession generally applies to loans without a balloon payment at the end of the term of the loan. In addition, there may be instances where renewing loans potentially require non-market terms and would then be reclassified as TDRs.

 

·Other: A concession that is not categorized as one of the concessions described above. These concessions include, but are not limited to: principal forgiveness, collateral concessions, covenant concessions, and reduction of accrued interest. Principal forgiveness may result from any TDR modification of any concession type.

 

The table below presents the activity of TDRs during the three months ended March 31, 2012 and the twelve months ended December 31, 2011.

 

   Three Months Ended March 31, 2012 
($'s in thousands)            
       Pre-Modification   Post-Modification 
   Number of   Recorded   Recorded 
   Contracts   Investment   Investment 
                
Residential Real Estate   4   $116   $116 

 

   Twelve Months Ended December 31, 2011 
             
       Pre-Modification   Post-Modification 
   Number of   Recorded   Recorded 
   Contracts   Investment   Investment 
                
Residential Real Estate   14   $1,011   $1,011 

 

Of the TDRs entered into during 2012, none had subsequently defaulted as of March 31, 2012. Redefaults are defined as loans that were performing TDRs that became 90 days or more past due post restructuring. The Company has specifically allocated $0.8 million of the $6.6 million in loan loss allowance to all TDR loans. All TDRs resulted from a reduction to a borrowers rate or change in amortization. No principal reductions have been granted.

 

20
 

 

NOTE E - NEW ACCOUNTING PRONOUNCEMENTS

 

ASU No. 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements (April 2011).

 

In April 2011, FASB issued ASU No. 2011-03 in order to improve the accounting for repurchase agreements (repos) and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The transferor is deemed to have maintained effective control over the financial assets transferred (and thus must account for the transaction as a secured borrowing), for agreements that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity, if all of the following conditions are met:

 

1)The financial assets to be repurchased or redeemed are the same or substantially the same as those transferred.

2)The agreement is to repurchase or redeem them before maturity, at a fixed or determinable price.

3)The agreement is entered into contemporaneously with, or in contemplation of, the transfer.

 

The amendments in this update are effective for the first interim or annual period beginning on or after December 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. Management adopted ASU 2011-03 effective January 1, 2012, as required, without a material impact on Rurban’s Condensed Consolidated Financial Statements.

 

ASU 2011-04, Fair Value Measurements and Disclosures (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.

 

This ASU amends Topic 820 to add both additional clarifications to existing fair value measurement and disclosure requirements and changes to existing principles and disclosure guidance. Clarifications were made to the relevancy of the highest and best use valuation concept, measurement of an instrument classified in an entity’s shareholder’s equity and disclosure of quantitative information about the unobservable inputs for Level 3 fair value measurements. Changes to existing principles and disclosures included measurement of financial instruments managed within a portfolio, the application of premiums and discounts in fair value measurement, and additional disclosures related to fair value measurements. The updated guidance and requirements are effective for financial statements issued for the first interim or annual period beginning after December 15, 2011, and should be applied prospectively. Early adoption is permitted. Management adopted ASU 2011-04 effective January 1, 2012, as required, without a material impact on Rurban’s Condensed Consolidated Financial Statements.

 

ASU 2011-05, Other Comprehensive Income (Topic 220): Presentation of Comprehensive Income.

 

This ASU amends Topic 220 to give an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. An entity is also required to present on the face of the financial statement reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. The amendments do not change items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income, only the format for presentation. The updated guidance and requirements are effective for financial statements issued for the fiscal years, and the interim periods within those years, beginning after December 15, 2011. The amendments should be applied retrospectively. On October 21, 2011, the FASB issued a proposed deferral of the requirement that companies present reclassification adjustments for each component of OCI in both net income and OCI on the face of the financial statements. Early adoption is permitted. Management adopted ASU 2011-05 effective January 1, 2012, as required. The statements of comprehensive income have been included within this Form 10-Q.

 

21
 

 

ASC 2011-08 – Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment.

 

The ASU amends Topic 350 to permit an entity the option to first assess qualitative factors to determine whether it is more likely than not (50% threshold) that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. Management anticipates no material effect to Rurban’s Condensed Consolidated Financial Statements.

 

NOTE F – SEGMENT INFORMATION

 

The reportable segments are determined by the products and services offered, primarily distinguished between banking and data processing operations. “Other” segment information includes the accounts of the holding company, Rurban, which provides management and operational services to its subsidiaries. Information reported internally for performance assessment follows.

 

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NOTE F — SEGMENT INFORMATION

 

As of and for the three months ended March 31, 2012

 

       Data       Total   Intersegment   Consolidated 
Income statement information ($'s in thousands)  Banking   Processing   Other   Segments   Elimination   Totals 
                         
Net interest income (expense)  $5,501   $(13)  $(613)  $4,875        $4,875 
                               
Non-interest income - external customers   2,963    620    17    3,600         3,600 
                               
Non-interest income - other segments   80    814    54    948    (967)   (19)
                               
Total revenue   8,544    1,421    (542)   9,423    (967)   8,456 
                               
Non-interest expense   6,447    883    295    7,625    (949)   6,676 
                               
Significant non-cash items:                              
Depreciation and amortization   225    106    3    334    -    334 
Provision for loan losses   450    -    -    450    -    450 
                               
Income tax expense (benefit)   465    183    (290)   358    -    358 
                               
Segment profit (loss)  $1,182   $355   $(547)  $990   $(19)  $972 
                        
Balance sheet information                       
                        
Total assets  $639,389   $2,856   $6,216   $648,461   $(3,485)  $644,976 
                               
Goodwill and intangibles  $18,044   $-   $-   $18,044   $-   $18,044 
                               
Premises and equipment expenditures  $769   $2   $-   $771   $-   $771 

 

23
 

 

NOTE F — SEGMENT INFORMATION

 

As of and for the three months ended March 31, 2011

 

       Data       Total   Intersegment   Consolidated 
Income statement information ($'s in thousands)  Banking   Processing   Other   Segments   Elimination   Totals 
                         
Net interest income (expense)  $5,227   $(79)  $(315)  $4,833        $4,833 
                               
Non-interest income - external                              
 customers   1,940    912    11    2,863         2,863 
                               
Non-interest income - other segments   50    381    38    469    (469)   - 
                               
Total revenue   7,217    1,214    (266)   8,165    (469)   7,696 
                               
Non-interest expense   5,661    1,507    361    7,529    (469)   7,060 
                               
Significant non-cash items:                              
                               
Depreciation and amortization   226    226    2    454    -    454 
                               
Provision for loan losses   499    -    -    499    -    499 
                               
Income tax expense (benefit)   226    (100)   -    126    -    126 
                               
Segment profit (loss)  $831  $(193)  $(627)  $11   $-   $11 
                               
Balance sheet information                              
                               
Total assets  $648,875   $6,085   $5,228   $660,188   $(5,220)  $654,968 
                               
Goodwill and intangibles  $18,674   $448   $-   $19,122   $-   $19,122 
                               
Premises and equipment expenditures  $119   $-   $-   $119   $-   $119 

 

24
 

 

NOTE G – FAIR VALUE OF ASSETS AND LIABILITIES

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:

 

Level 1 Quoted prices in active markets for identical assets or liabilities

 

Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

 

Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

 

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis, recognized in the accompanying balance sheets, as well as the general classifications of such assets pursuant to the valuation hierarchy.

 

Available-for-Sale Securities

 

The fair value of available-for-sale securities are determined by various valuation methodologies. Level 1 securities include money market mutual funds. Level 1 inputs included quoted prices in an active market. Level 2 securities include U.S. government agencies, mortgage-backed securities, and obligations of political and state subdivisions. Level 2 inputs do not include quoted prices for individual securities in active markets; however, they do include inputs that are either directly or indirectly observable for the individual security being valued. Such observable inputs include interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, credit risks and default rates. Also included are inputs derived principally from or corroborated by observable market data by correlation or other means.

 

The following table presents the fair value measurements of assets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2012 and December 31, 2011 ($’s in thousands):

 

Fair Value Measurements Using:
Description  Fair Values at
3/31/2012
   Level 1   Level 2   Level 3 
Available-for-Sale Securities:                    
U.S. Treasury and Government Agencies  $23,530   $-   $23,530   $- 
Mortgage-backed securities   68,147    -    68,147    - 
State and political subdivisions   16,506    -    16,506    - 
Money Market Mutual Fund   2,397    2,397    -    - 
Equity securities   23    -    23    - 

 

25
 

 

Fair Value Measurements Using:
Description  Fair Values at
12/31/2011
   Level 1   Level 2   Level 3 
Available-for-Sale Securities:                    
U.S. Treasury and Government Agencies  $25,424   $-   $25,424   $- 
Mortgage-backed securities   67,698    -    67,698    - 
State and political subdivisions   16,793    -    16,793    - 
Money Market Mutual Funds   2,040    2,040    -    - 
Equity Securities   23    -    23    - 

 

Level 1 – Quoted Prices in Active Markets for Identical Assets

Level 2 – Significant Other Observable Inputs

Level 3 – Significant Unobservable Inputs

 

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.

 

Impaired Loans (Collateral-dependent)

 

Loans for which it is probable the Company will not collect all principal and interest due according to contractual terms are measured for impairment. If the impaired loan is collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining an independent appraisal of the collateral and applying a discount factor to the value based on the Company’s loan review policy. All impaired loans held by the Company were collateral dependent at March 31, 2012 and December 31, 2011.

 

Mortgage Servicing Rights

 

Mortgage servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models associated with the servicing rights and discounting the cash flows using discount market rates. The servicing portfolio has been valued using all relevant positive and negative cash flows including servicing fees, miscellaneous income and float; marginal costs of servicing; the cost of carry of advances; and foreclosure losses; and applying certain prevailing assumptions used in the marketplace. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy.

 

Foreclosed Assets Held For Sale

 

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value (based on current appraised value) at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Management has determined fair value measurements on other real estate owned primarily through evaluations of appraisals performed, and current and past offers for the other real estate under evaluation.

 

26
 

 

Software

 

The Company reviews the carrying value of software for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition, and other economic factors.

 

The following table presents the fair value measurements of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2012 and December 31, 2011 ($’s in thousands):

 

Fair Value Measurements Using:
Description  Fair Values at
03/31/12
   Level 1   Level 2   Level 3 
Impaired loans  $5,253   $-   $-   $5,253 
Mortgage servicing rights   3,359    -    -    3,359 
Foreclosed assets   14    -    -    14 

 

Fair Value Measurements Using:
Description  Fair Values at
12/31/2011
   Level 1   Level 2   Level 3 
Impaired loans  $5,575   $-   $-   $5,575 
Mortgage servicing rights   2,820    -    -    2,820 
Foreclosed assets   877    -    -    877 
Impaired software   159    -    -    159 

 

Unobservable (Level 3) Inputs

 

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements other than goodwill.

 

  Fair Value at  Valuation    Range (Weighted 
  3/31/2012  Technique  Unobservable Inputs  Average) 
                
Other real estate owned  $5,253  Market comparable  Comparability adjustments (%)   Not available 
     properties      
                
Collateral-dependent impaired loans   3,359  Market comparable properties  Marketability discount   10.0%
                
Mortgage servicing rights   14  Discounted cash flow  Discount Rate   8.5%
       Constant prepayment rate   16.6%
       P&I earnings credit   0.24%
       T&I earnings credit   1.2%
       Inflation for cost of servicing   1.5%

 

There were no changes in the inputs or methodologies used to determine fair value at March 31, 2012 as compared to December 31, 2011.

 

27
 

  

The following table presents estimated fair values of the Company’s financial instruments. The fair values of certain of these instruments were calculated by discounting expected cash flows, which involves significant judgments by management and uncertainties. Fair value is the estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Because no market exists for certain of these financial instruments, and because management does not intend to sell these financial instruments, the Company does not know whether the fair values shown below represent values at which the respective financial instruments could be sold individually or in the aggregate.

 

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value.

 

Cash and Cash Equivalents and Federal Reserve and Federal Home Loan Bank Stock and Accrued Interest Payable and Receivable

 

The carrying amount approximates the fair value.

 

Loans

 

The estimated fair value for loans receivable, including loans held for sale, net, is based on estimates of the rate State Bank would charge for similar loans at March 31, 2012 and December 31, 2011, applied for the time period until the loans are assumed to re-price or be paid.

 

Deposits & Other Borrowings

 

Deposits include demand deposits, savings accounts, NOW accounts and certain money market deposits. The carrying amount approximates the fair value. The estimated fair value for fixed-maturity time deposits, as well as borrowings, is based on estimates of the rate State Bank could pay on similar instruments with similar terms and maturities at March 31, 2012 and December 31, 2011.

 

The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. The estimated fair value for other financial instruments and off-balance-sheet loan commitments approximate cost at March 31, 2012 and are not considered significant to this presentation.

 

March 31, 2012  Carrying   Fair Value Measurments Using 
$'s in thousands  Amount   (Level 1)   (Level 2)   (Level 3) 
                 
Financial assets                    
Cash and cash equivalents  $29,602   $29,602   $-   $- 
Loans held for sale   11,384    -    11,587    - 
Loans, net of allowance for loan losses   433,112    -    439,293    - 
Federal Reserve and FHLB Bank stock   3,685    -    3,685    - 
Accrued interest receivable   1,802    -    1,802    - 
                     
Financial liabilities                    
Deposits  $535,492   $-   $538,523   $- 
Short-term borrowings   17,771    -    17,836    - 
Notes payable   2,519    -    2,531    - 
FHLB advances   12,611    -    12,968    - 
Trust preferred securities   20,620    -    8,584    - 
Accrued interest payable   3,556    -    3,556    - 

 

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December 31, 2011  Carrying   Fair Value Measurments Using 
$'s in thousands  Amount   (Level 1)   (Level 2)   (Level 3) 
                 
Financial assets                    
Cash and cash equivalents  $14,846   $14,846   $-   $- 
Loans held for sale   5,238    -    5,334    - 
Loans, net of allowance for loan losses   436,025    -    443,727    - 
Federal Reserve and FHLB Bank stock, at cost   3,685    -    3,685    - 
Interest receivable   1,635    -    1,635    - 
                     
Financial liabilities                    
Deposits  $518,765   $-   $518,765   $- 
Short-term borrowings   18,779    -    18,903    - 
Notes payable   2,788    -    2,815    - 
Federal Home Loan Bank advances   12,776    -    13,149    - 
Trust preferred securities   20,620    -    8,320    - 
Interest payable   2,954    -    2,954    - 

 

NOTE H: DEBT COVENANT

 

Pursuant to a covenant contained in a loan agreement between the Company and First Tennessee Bank, National Association (“FTB”), the Company’s Banking Subsidiary, State Bank, must maintain certain performance ratios, including a minimum Tier 1 Capital to average assets ratio of 7.5 percent, a year-to-date return on assets (ROA) of 50 basis points and a nonperforming asset ratio (calculated as non-performing loans plus OREO divided by total loans plus OREO) of less than 2.25 percent. In addition the issuance of any regulatory order would constitute a covenant violation.

 

At March 31, 2012, State Bank’s compliance with the loan covenants were as follows: Tier 1 capital to average assets was 8.2 percent, year -to-date ROA was 75 basis points and the nonperforming asset ratio was 1.87 percent. On March 9, 2010, a consent order was issued for RDSI which is still in place as of March 31, 2012. FTB agreed to waive this non-financial covenant violation and enter into a new agreement which requires full payout of the obligation by October 31, 2013.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Cautionary Statement Regarding Forward-Looking Information

 

This Quarterly Report on Form 10-Q, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains certain forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. Forward-looking statements provide current expectations or forecasts of future events and are not guarantees of future performance. Examples of forward-looking statements include: (a) projections of income or expense, earnings per share, the payments or non-payments of dividends, capital structure and other financial items; (b) statements of plans and objectives of the Company or our management or Board of Directors, including those relating to products or services; (c) statements of future economic performance; and (d) statements of assumptions underlying such statements. Words such as “anticipates”, “believes”, “plans”, “intends”, “expects”, “projects”, “estimates”, “should”, “may”, “would be”, “will allow”, “will likely result”, “will continue”, “will remain”, or other similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying those statements. Forward-looking statements are based on management’s expectations and are subject to a number of risks and uncertainties. Although management believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements. Risks and uncertainties that could cause actual results to differ materially include, without limitation, changes in interest rates, changes in the competitive environment, and changes in banking regulations or other regulatory or legislative requirements affecting bank holding companies. Additional detailed information concerning a number of important factors which could cause actual results to differ materially from the forward-looking statements contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations is available in the Company’s filings with the Securities and Exchange Commission, including the disclosure under the heading “Item 1A. Risk Factors” of Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, and in “Item 1A. Risk Factors” of Part II of this Quarterly Report on Form 10-Q. Undue reliance should not be placed on the forward-looking statements, which speak only as of the date hereof. Except as may be required by law, the Company undertakes no obligation to update any forward-looking statement to reflect unanticipated events or circumstances after the date on which the statement is made.

 

Overview of Rurban

 

Rurban Financial Corp. (“Rurban” or the “Company”) is a bank holding company registered with the Federal Reserve Board. Rurban’s wholly-owned subsidiary, The State Bank and Trust Company (“State Bank”), is engaged in commercial banking. Rurban’s technology subsidiary, Rurbanc Data Services, Inc. (“RDSI”), provides item processing services to community banks and businesses.

 

Rurban Statutory Trust I (“RST”) was established in August 2000. In September 2000, RST completed a pooled private offering of 10,000 Trust Preferred Securities with a liquidation amount of $1,000 per security. The proceeds of the offering were loaned to Rurban in exchange for junior subordinated debentures of Rurban with terms substantially similar to the Trust Preferred Securities. The sole assets of RST are the junior subordinated debentures, and the back-up obligations, in the aggregate, constitute a full and unconditional guarantee by Rurban of the obligations of RST.

 

Rurban Statutory Trust II (“RST II”) was established in August 2005. In September 2005, RST II completed a pooled private offering of 10,000 Trust Preferred Securities with a liquidation amount of $1,000 per security. The proceeds of the offering were loaned to Rurban in exchange for junior subordinated debentures of Rurban with terms substantially similar to the Trust Preferred Securities. The sole assets of RST II are the junior subordinated debentures, and the back-up obligations, in the aggregate, constitute a full and unconditional guarantee by Rurban of the obligations of RST II.

 

30
 

 

On August 5, 2010, the Company notified the trustees of the Capital Securities of the Company’s election to defer (a) the quarterly interest payments on the RST II Capital Securities, beginning on September 15, 2010 and extending through September 15, 2012, and (b) the semi-annual interest payments on the RST I Capital Securities, beginning on September 7, 2010 and extending through September 7, 2012. During any interest deferral period, the trust preferred indentures prohibit the Company from paying common stock dividends or repurchasing shares of common stock. As of March 31, 2012, the accumulative deferred interest totaled $2.9 million.

 

RFCBC, Inc. (“RFCBC”) is an Ohio corporation and wholly-owned subsidiary of Rurban that was incorporated in August 2004. RFCBC operates as a loan subsidiary in servicing and working out problem loans.

 

Rurban Investments, Inc. (“RII”) is a Delaware corporation and a wholly-owned subsidiary of State Bank that was incorporated in January 2009. RII holds agency, mortgage backed and municipal securities.

 

Unless the context indicates otherwise, all references herein to “Rurban”, “we”, “us”, “our”, or the “Company” refer to Rurban Financial Corp. and its consolidated subsidiaries.

 

Recent Regulatory Developments

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) was enacted into law on July 21, 2010. The Dodd-Frank Act is significantly changing the regulation of financial institutions and the financial services industry. Because the Dodd-Frank Act requires various federal agencies to adopt a broad range of regulations with significant discretion, many of the details of the new law and the effects they will have on the Company will not be known for months and even years.

 

Among the provisions already implemented pursuant to the Dodd-Frank Act, the following provisions have or may have an effect on the business of the Corporation and its subsidiaries:

 

·a new Consumer Financial Protection Bureau has been formed with broad powers to adopt and enforce consumer protection regulations;

 

·the federal law prohibiting the payment of interest on commercial demand deposit accounts was eliminated effective in July 2011;

 

·the standard maximum amount of deposit insurance per customer was permanently increased to $250,000 and non-interest-bearing transaction accounts have unlimited insurance through December 31, 2012;

 

·the assessment base for determining deposit insurance premiums has been expanded from domestic deposits to average assets minus average tangible equity; and

 

·public companies in all industries are or will be required to provide shareholders the opportunity to cast a non-binding advisory vote on executive compensation.

 

Additional provisions not yet implemented that may have an effect on the Company and its subsidiaries include the following:

 

·new capital regulations for bank holding companies will be adopted, which may impose stricter requirements, and any new trust preferred securities issued after May 19, 2010 will no longer constitute Tier I capital; and

 

·new corporate governance requirements applicable generally to all public companies in all industries will require new compensation practices and disclosure requirements, including requiring companies to “claw back” incentive compensation under certain circumstances, to consider the independence of compensation advisors and to make additional disclosures in proxy statements with respect to compensation matters.

 

31
 

 

Many provisions of the Dodd-Frank Act have not yet been implemented and will require interpretation and rule making by federal regulators. As a result, the ultimate effect of the Dodd-Frank Act on the Company cannot yet be determined. However, it is likely that the implementation of these provisions will increase compliance costs and fees paid to regulators, along with possibly restricting the operations of the Company and its subsidiaries.

 

Recent Developments regarding RDSI

 

On March 9, 2011, Rurban Financial Corp. (“Rurban”) and its wholly-owned nonbank data services subsidiary, Rurbanc Data Services, Inc., dba RDSI Banking Systems (“RDSI”), entered into a Consent Order (the “Consent Order”) with the Board of Governors of the Federal Reserve System (the “FRB”) that directs RDSI to take certain actions to strengthen its financial condition and operations. Rurban’s banking subsidiary, The State Bank and Trust Company, is not a party to the Consent Order.

 

The Consent Order specifies, among other conditions, that RDSI must strengthen board oversight of critical areas of operations, maintain appropriate capital levels, strengthen working capital management, and modify its strategic plan to improve earnings. While the Consent Order remains in effect, RDSI is prohibited from declaring or paying any dividends to Rurban without the prior approval of the FRB, and Rurban is prohibited from making any capital investments in or loans to RDSI without the prior approval of the FRB.

 

The existence of this Consent Order may limit the ability of RDSI to secure new clients as well as to retain existing clients.

 

Critical Accounting Policies

 

Note 1 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011 describes the significant accounting policies used in the development and presentation of the Company’s financial statements. The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The Company’s financial position and results of operations can be affected by these estimates and assumptions and are integral to the understanding of reported results. Critical accounting policies are those policies that management believes are the most important to the portrayal of the Company’s financial condition and results, and they require management to make estimates that are difficult, subjective, or complex.

 

Allowance for Loan Losses - The allowance for loan losses provides coverage for probable losses inherent in the Company’s loan portfolio. Management evaluates the adequacy of the allowance for loan losses each quarter based on changes, if any, in underwriting activities, loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance, regulatory guidance and economic factors. This evaluation is inherently subjective, as it requires the use of significant management estimates. Many factors can affect management’s estimates of specific and expected losses, including volatility of default probabilities, rating migrations, loss severity and economic and political conditions. The allowance is increased through provisions charged to operating earnings and reduced by net charge-offs.

 

32
 

 

The Company determines the amount of the allowance based on relative risk characteristics of the loan portfolio. The allowance recorded for commercial loans is based on reviews of individual credit relationships and an analysis of the migration of commercial loans and actual loss experience. The allowance recorded for homogeneous consumer loans is based on an analysis of loan mix, risk characteristics of the portfolio, fraud loss and bankruptcy experiences, and historical losses, adjusted for current trends, for each homogeneous category or group of loans. The allowance for credit losses relating to impaired loans is based on the loan’s observable market price, the collateral for certain collateral-dependent loans, or the discounted cash flows using the loan’s effective interest rate.

 

Regardless of the extent of the Company’s analysis of customer performance, portfolio trends or risk management processes, certain inherent but undetected losses are probable within the loan portfolio. This is due to several factors, including inherent delays in obtaining information regarding a customer’s financial condition or changes in their unique business conditions, the subjective nature of individual loan evaluations, collateral assessments and the interpretation of economic trends. Volatility of economic or customer-specific conditions affecting the identification and estimation of losses for larger non-homogeneous credits and the sensitivity of assumptions utilized to establish allowances for homogenous groups of loans are also factors. The Company estimates a range of inherent losses related to the existence of these exposures. The estimates are based upon the Company’s evaluation of imprecise risk associated with the commercial and consumer allowance levels and the estimated impact of the current economic environment. To the extent that actual results differ from management’s estimates, additional loan loss provisions may be required that could adversely impact earnings for future periods.

 

Goodwill and Other Intangibles - The Company records all assets and liabilities acquired in purchase acquisitions, including goodwill and other intangibles, at fair value as required. Goodwill is subject, at a minimum, to annual tests for impairment. Other intangible assets are amortized over their estimated useful lives using straight-line or accelerated methods, and are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount. The initial goodwill and other intangibles recorded and subsequent impairment analysis requires management to make subjective judgments concerning estimates of how the acquired asset will perform in the future. Events and factors that may significantly affect the estimates include, among others, customer attrition, changes in revenue growth trends, specific industry conditions and changes in competition. A decrease in earnings resulting from these or other factors could lead to an impairment of goodwill that could adversely impact earnings for future periods.

 

Impact of Accounting Changes

 

None

 

33
 

 

Three Months Ended March 31, 2012 compared to Three Months Ended March 31, 2011

 

Net Income: Net income for the first quarter of 2012 was $0.97 million or $0.20 per diluted share, compared to a net income of $0.01 million, or $0.00 per diluted share, for the first quarter of 2011. For the quarter, the Banking Group (consisting primarily of The State Bank and Trust Company), had net income of $1.2 million which is up 42 percent from the net income of $0.83 million from the year ago first quarter. RDSI reported net income of $355 thousand compared to a net loss of $193 thousand from the year ago first quarter.

 

Provision for Loan Losses: The first quarter provision for loan losses was $0.45 million compared to $0.30 million and $0.50 million, respectively, for the linked and year-ago quarters. The lower provision reflects the improving quality of State Bank’s loan portfolio and slower migration of problem credits to non-performing status, as well as a recovering economy. As of March 31, 2012, the allowance for loan losses stood at $6.6 million, or 1.50 percent of total loans (excluding loans held-for-sale), compared to 1.56 percent for the year-ago first quarter. The Company’s non-performing assets (“NPAs”) at March 31, 2012 were $9.9 million, down $4.4 million, or 30.6 percent, since March 31, 2011. At the 2012 first quarter-end, non-performing assets were 1.54 percent of total assets compared to 2.18 percent at March 31, 2011.

 

Asset Quality Review

($’s in Thousands)

  March 31,
2012
   December 31,
2011
   March 31,
2011
 
Net charge-offs  $371   $6   $621 
Non-accruing loans  $6,511   $6,900   $12,121 
Trouble Debt Restructures  $1,593   $1,334   $1,229 
Non-performing loans  $8,104   $8,234   $13,350 
OREO / OAO  $1,807   $1,830   $924 
Non-performing assets  $9,911   $10,064   $14,274 
Non-performing assets / Total assets   1.54%   1.60%   2.18%
Allowance for loan losses / Total loans   1.50%   1.48%   1.56%
Allowance for loan losses / Non-performing loans   81.6%   79.3%   49.4%

 

Consolidated Revenue: Total revenue, consisting of net interest income and noninterest income, was $8.5 million for the first quarter of 2012, an increase of $0.76 million, or 9.9 percent, from the $7.7 million generated during the 2011 first quarter.

 

Net interest income was $4.9 million, which is up $0.42 million from the prior year first quarter. The Company had a $3.0 million reduction in earning assets, which was offset by a 18 basis point reduction in the rate paid on interest bearing liabilities. The net interest margin was 3.60 percent, which was flat compared to the prior year first quarter.

 

Noninterest income was $3.6 million for the 2012 first quarter compared to $2.9 million for the prior year period. Excluding data service fees, which are contributed by Rurban’s data services subsidiary, the remaining noninterest income is generated by the Banking Group.

 

Mortgage refinancing has provided Rurban with a sizable opportunity for diversification and growth of fee income. Following a record 2011 fourth quarter, origination activity continued at a high level in the first quarter of 2012. State Bank originated $68.3 million of mortgage loans in the first quarter of 2012. These first quarter 2012 originations and subsequent sales resulted in $1.2 million of gains, which compares to gains of $0.43 million for the first quarter of 2011. The 177 percent increase in gains from mortgage sales in 2012 reflect the combined impact of a 114 percent increase in mortgages sold and a 42 basis point, or 29.6 percent, increase in the first quarter 2012 spread to 1.84 percent, compared to the year-earlier quarter.

 

34
 

 

Consolidated Noninterest Expense: Noninterest expense for the first quarter of 2012 was $6.7 million compared to $7.1 million in the prior-year first quarter. The 24 FTE employee decline represents a workforce reduction of 11 percent during the course of the year, from 227 employees at December 31, 2011 to 203 at March 31, 2012. Significant contributing factors outside of compensation expenses were reductions in FDIC premiums, professional fees and postage and delivery expenses from RDSI.

 

Income Taxes: Income taxes for the first quarter of 2012 were $358 thousand compared to $126 thousand for the first quarter of 2011. The increase was due primarily to the increase in pre-tax income from the prior year.

 

Changes in Financial Condition

 

Total assets at March 31, 2012 were $645.0 million, down $10.0 million, or 1.5 percent, since the 2011 March quarter-end, and an increase of $16.3 million since 2011 year-end. Rurban ended the first quarter 2012 with securities lower by $20.5 million and loans higher by $17.6 million compared to the first quarter of 2011.

 

Total loans, net of unearned income, were $439.7 million as of March 31, 2012, up $17.6 million from the year ago first quarter, an increase of 4.2 percent.

 

Capital Resources

 

At March 31, 2012, actual capital levels and minimum required levels were as follows ($’s in thousands):

 

   Actual  

Minimum Required
For Capital
Adequacy Purposes

  

Minimum Required
To Be Well Capitalized
Under Prompt Corrective
Action Regulations

 
   Amount   Ratio   Amount   Ratio   Amount   Ratio 
                         
Total capital (to risk weighted assets)                              
Consolidated  $53,041    11.7%  $36,340    8.0%  $ -    N/A 
State Bank  $55,804    12.4%  $36,039   8.0  $45,049    10.0%

 

Both the Company and State Bank were categorized as well capitalized at March 31, 2012.

 

LIQUIDITY

 

Liquidity relates primarily to the Company’s ability to fund loan demand, meet deposit customers’ withdrawal requirements and provide for operating expenses. Assets used to satisfy these needs consist of cash and due from banks, federal funds sold, interest-earning deposits in other financial institutions, securities available-for-sale and loans held for sale. These assets are commonly referred to as liquid assets. Liquid assets were $151.6 million at March 31, 2012 compared to $132.1 million at December 31, 2011.

 

Liquidity risk arises from the possibility that the Company may not be able to meet the Company’s financial obligations and operating cash needs or may become overly reliant upon external funding sources. In order to manage this risk, the Board of Directors of the Company has established a Liquidity Policy that identifies primary sources of liquidity, establishes procedures for monitoring and measuring liquidity and quantifies minimum liquidity requirements. This policy designates the Asset/Liability Committee (“ALCO”) as the body responsible for meeting these objectives. The ALCO reviews liquidity regularly and evaluates significant changes in strategies that affect balance sheet or cash flow positions. Liquidity is centrally managed on a daily basis by the Company’s Chief Financial Officer and Asset Liability Manager.

 

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The Company’s commercial real estate, first mortgage residential and multi-family mortgage portfolio of $268.9 million at March 31, 2012 and $264.7 million at December 31, 2011, which can and has been used to collateralize borrowings, is an additional source of liquidity. Management believes the Company’s current liquidity level, without these borrowings, is sufficient to meet its liquidity needs. At March 31, 2012, all eligible commercial real estate, first mortgage residential and multi-family mortgage loans were pledged under an FHLB blanket lien.

 

The cash flow statements for the periods presented provide an indication of the Company’s sources and uses of cash, as well as an indication of the ability of the Company to maintain an adequate level of liquidity. A discussion of the cash flow statements for the three months ended March 31, 2012 and 2011 follows.

 

The Company experienced negative cash flows from operating activities for the three months ended March 31, 2012 and positive cash flows for the three months ended March 31, 2011. Net cash used in operating activities was $4.1 million for the three months ended March 31, 2012 and net cash provided was $4.8 million for the three months ended March 31, 2011. Highlights for the current quarter include $62.9 million in proceeds from the sale of loans, which is up $33.3 million from the prior year. Originations of loans held for sale was a use of cash of $68.3 million, which is also up from the prior year, by $42.8 million. During the current quarter, there was a recapture of OMSR impairment of $0.42 million.

 

The Company experienced positive cash flows from investing activities for the three months ended March 31, 2012 and for the three months ended March 31, 2011. Net cash flow from investing activities was $3.6 million for the three months ended March 31, 2012 and $8.1 million for the three months ended March 31, 2011. Highlights for the current quarter include $11.3 million in purchases of available-for-sale securities, which is up $7.3 million from the prior year. These cash payments were offset by $12.5 million in proceeds from maturities and sales of securities, which is also up $6.8 million from the prior year. During the first quarter of 2011, the Company terminated several life insurance policies on retired executives and realized a cash inflow of $1.3 million. The Company experienced a $2.4 million positive change in loans, which is down from the $4.4 million during the prior year. Sales of foreclosed assets provided cash of $0.92 million for the prior year first quarter.

 

The Company experienced positive cash flows from financing activities for the three months ended March 31, 2012 and negative cash flows from financing activities for the three months ended March 31, 2011. Net cash flow provided by financing activities was $15.3 million for the three months ended March 31, 2012 and a use of cash of $5.2 million for the three months ended March 31, 2011. Highlights for the current quarter include a $28.1 million increase in non time deposits for the three months ended March 31, 2012, which compares favorably with a $2.3 million decrease in non time deposits for the three months ended March 31, 2011.

 

Also, as of March 31, 2012, the Company had commitments to sell mortgage loans totaling $29.2 million. The Company believes that it has adequate resources to fund commitments as they arise and that it can adjust the rate on savings certificates to retain deposits in changing interest rate environments. If the Company requires funds beyond its internal funding capabilities, advances from the FHLB of Cincinnati and other financial institutions are available.

 

ALCO uses an economic value of equity (“EVE”) analysis to measure risk in the balance sheet incorporating all cash flows over the estimated remaining life of all balance sheet positions. The EVE analysis calculates the net present value of the Company’s assets and liabilities in rate shock environments that range from -400 basis points to +400 basis points. The likelihood of a decrease in rates as of March 31, 2012 was considered to be remote given the current interest rate environment and therefore, was not included in this analysis. The results of this analysis are reflected in the following tables for March 31, 2012 and December 31, 2011.

 

36
 

 

March 31, 2012
Economic Value of Equity
($’s in thousands)
Change in Rates  $ Amount   $ Change   % Change 
+400 basis points   119,815    21,921    22.39%
+300 basis points   116,758    18,864    19.27%
+200 basis points   112,808    14,913    15.23%
+100 basis points   106,860    8,965    9.16%
Base Case   97,895    -    - 

 

December 31, 2011
Economic Value of Equity
($’s in thousands)
Change in Rates  $ Amount   $ Change   % Change 
+400 basis points   112,424    19,890    21.49%
+300 basis points   110,164    17,630    19.05%
+200 basis points   106,833    14,299    15.45%
+100 basis points   101,331    8,796    9.51%
Base Case   92,534    -    - 

 

Off-Balance-Sheet Borrowing Arrangements:

 

Significant additional off-balance-sheet liquidity is available in the form of FHLB advances and unused federal funds lines from correspondent banks. Management expects the risk of changes in off-balance-sheet arrangements to be immaterial to earnings.

 

The Company’s commercial real estate, first mortgage residential and multi-family mortgage portfolios of $268.9 million have been pledged to meet FHLB collateralization requirements as of March 31, 2012. Based on the current collateralization requirements of the FHLB, the Company had approximately $24.1 million of additional borrowing capacity at March 31, 2012. The Company also had $29.6 million in unpledged securities that may be used to pledge for additional borrowings.

 

At March 31, 2012, the Company had unused federal funds lines totaling $11.5 million, with a zero balance outstanding.

 

The Company’s contractual obligations as of March 31, 2012 were comprised of long-term debt obligations, other debt obligations, operating lease obligations and other long-term liabilities. Long-term debt obligations are comprised of FHLB Advances of $12.6 million. Other debt obligations are comprised of Trust Preferred securities of $20.6 million and Notes Payable of $2.5 million. The operating lease obligation is a lease on the RDSI-North building of $162 thousand per year and the DCM-Lansing facility of $105 thousand per year. Total time deposits at March 31, 2012 were $210.1 million, of which $106.4 million matures beyond one year.

 

37
 

 

ASSET LIABILITY MANAGEMENT

 

Asset liability management involves developing, executing and monitoring strategies to maintain appropriate liquidity, maximize net interest income and minimize the impact that significant fluctuations in market interest rates would have on current and future earnings. The business of the Company and the composition of its balance sheet consist 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 specific loans which are originated and held for sale, all of the financial instruments of the Company are for other than trading purposes. All of the Company’s transactions are denominated in U.S. dollars with no specific foreign exchange exposure. In addition, the Company has limited exposure to commodity prices related to agricultural loans. The impact of changes in foreign exchange rates and commodity prices on interest rates are assumed to be insignificant. The Company’s financial instruments have varying levels of sensitivity to changes in market interest rates resulting in market risk. Interest rate risk is the Company’s primary market risk exposure; to a lesser extent, liquidity risk also impacts market risk exposure.

 

Interest rate risk is the exposure of a banking institution’s financial condition to adverse movements in interest rates. Accepting this risk can be an important source of profitability and shareholder value; however, excessive levels of interest rate risk could pose a significant threat to the Company’s earnings and capital base. Accordingly, effective risk management that maintains interest rate risks at prudent levels is essential to the Company’s safety and soundness.

 

Evaluating a financial institution’s exposure to changes in interest rates includes assessing both the adequacy of the management process used to control interest rate risk and the organization’s quantitative level of exposure. When assessing the interest rate risk management process, the Company seeks to ensure that appropriate policies, procedures, management information systems and internal controls are in place to maintain interest rate risks at prudent levels of consistency and continuity. Evaluating the quantitative level of interest rate risk exposure requires the Company to assess the existing and potential future effects of changes in interest rates on its consolidated financial condition, including capital adequacy, earnings, liquidity and asset quality (when appropriate).

 

The Federal Reserve Board together with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Company adopted a Joint Agency Policy Statement on interest rate risk effective June 26, 1996. The policy statement provides guidance to examiners and bankers on sound practices for managing interest rate risk, which will form the basis for ongoing evaluation of the adequacy of interest rate risk management at supervised institutions. The policy statement also outlines fundamental elements of sound management that have been identified in prior Federal Reserve guidance and discusses the importance of these elements in the context of managing interest rate risk. Specifically, the guidance emphasizes the need for active board of director and senior management oversight and a comprehensive risk management process that effectively identifies, measures and controls interest rate risk.

 

Financial institutions derive their income primarily from the excess of interest collected over interest paid. The rates of interest an institution earns on its assets and owes on its liabilities generally are established contractually for a period of time. Since market interest rates change over time, an institution is exposed to lower profit margins (or losses) if it cannot adapt to interest rate changes. For example, assume that an institution’s assets carry intermediate or long-term fixed rates and that those assets are funded with short-term liabilities. If market interest rates rise by the time the short-term liabilities must be refinanced, the increase in the institution’s interest expense on its liabilities may not be sufficiently offset if assets continue to earn at the long-term fixed rates. Accordingly, an institution’s profits could decrease on existing assets because the institution will either have lower net interest income or 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.

 

38
 

 

There are several ways an institution can manage interest rate risk including: 1) matching repricing periods for new assets and liabilities, for example, by shortening or lengthening terms of new loans, investments, or liabilities; 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 contracts, options on futures contracts, and other such derivative financial instruments can be used for this purpose. Because these instruments are sensitive to interest rate changes, they require management’s expertise to be effective. The Company has not purchased derivative financial instruments in the past but may purchase such instruments in the future if market conditions are favorable.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Management believes there has been no material change in the Company’s market risk from the information contained in the Company’s Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2011.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

With the participation of the President and Chief Executive Officer (the principal executive officer) and the Executive Vice President and Chief Financial Officer (the principal financial officer) of the Company, the Company’s management has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Company’s President and Chief Executive Officer and the Company’s Executive Vice President and Chief Financial Officer have concluded that:

 

·information required to be disclosed by the Company in this Quarterly Report on Form 10-Q and other reports which the Company files or submits under the Exchange Act would be accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure;

 

·information required to be disclosed by the Company in this Quarterly Report on Form 10-Q and other reports which the Company files or submits under the Exchange Act would be recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and

 

·the Company’s disclosure controls and procedures were effective as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the Company’s fiscal quarter ended March 31, 2012, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

39
 

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

On January 18, 2011, the Company’s subsidiary, RDSI, filed a lawsuit against New Core Holdings, Inc. (“New Core”) in the Court of Common Pleas, Defiance County, Ohio (Case No. 11-CV-41125). RDSI’s complaint alleges, among other things, that New Core breached its loan agreement, promissory notes, merger agreement and certain other agreements entered into between RDSI and New Core in connection with the previously planned merger of RDSI with New Core. RDSI’s complaint seeks, among other things, recovery of an amount in excess of $3,260,000, plus costs and expenses, including attorneys’ fees, an order directing the release of certain software collateral, and a declaration that RDSI has no obligation to advance any additional loans or pay any additional funds to New Core. New Core subsequently removed this lawsuit to the United States District Court for the Northern District of Ohio (Case No. 3:11cv366). New Core filed an answer to the complaint on October 14, 2011. On December 30, 2011, New Core filed an amended answer and counterclaims alleging that RDSI breached the merger agreement and certain other agreements and also breached its fiduciary duties to New Core. At this time, the Company is unable to predict the likelihood of RDSI’s success on its claims, or the amount of any damages that may be awarded to RDSI or New Core in this lawsuit.

 

In the ordinary course of our business, the Company and its subsidiaries are also parties to various legal actions which we believe are incidental to the operation of our business. Although the ultimate outcome and amount of liability, if any, with respect to these legal actions cannot presently be ascertained with certainty, in the opinion of management, based upon information currently available to us, any resulting liability is not likely to have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows.

 

Item 1A. Risk Factors

 

There are certain risks and uncertainties in our business that could cause our actual results to differ materially from those anticipated. A detailed discussion of our risk factors is included in “Item 1A. Risk Factors” of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. There have been no material changes to the risk factors as presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Repurchases of Common Shares

 

The Company did not have any repurchases of common shares during the three months ended March 31, 2012.

 

Item 3. Defaults Upon Senior Securities

 

Not applicable

 

Item 4. Mine Safety Disclosures

 

Not applicable

 

40
 

 

Item 5. Other Information

 

Not applicable

 

Item 6. Exhibits

 

Exhibits

31.1 – Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer)

31.2 – Rule 13a-14(a)/15d-14(a) Certification (Principal Financial Officer)

32.1 – Section 1350 Certification (Principal Executive Officer)

32.2 – Section 1350 Certification (Principal Financial Officer)

 

41
 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

  RURBAN FINANCIAL CORP.
   
Date: May 9, 2012 By  
    Mark A. Klein
    President & Chief Executive Officer
   
  By  
    Anthony V. Cosentino
    Executive Vice President &
    Chief Financial Officer

  

42

XNAS:RBNF Quarterly Report 10-Q Filling

XNAS:RBNF Stock - Get Quarterly Report SEC Filing of XNAS:RBNF stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

XNAS:RBNF Quarterly Report 10-Q Filing - 3/31/2012
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