-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CK8zwN6NsGgDaeddJRXN5LiwLzECGGFm0t9gZtBDXizbiaOsQR6joPKDiuHVpl1o On76+EPaADnZJDBWzUF4jQ== 0000950152-00-002438.txt : 20000331 0000950152-00-002438.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950152-00-002438 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RURBAN FINANCIAL CORP CENTRAL INDEX KEY: 0000767405 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 341395608 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-13507 FILM NUMBER: 584476 BUSINESS ADDRESS: STREET 1: 401 CLINTON ST CITY: DEFIANCE STATE: OH ZIP: 43512 BUSINESS PHONE: 4197838950 10-K 1 RURBAN FINANCIAL CORPORATION 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 For the fiscal year ended December 31, 1999 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 incorporation or organization) Identification No.) 401 Clinton Street, Defiance, Ohio 43512 - ---------------------------------------- ------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (419) 783-8950 ------------------- Securities registered pursuant to Section 12(b) of the Act: None ------------------- Securities registered pursuant to Section 12(g) of the Act: Common Shares, Without Par Value (4,140,718 outstanding at March 10, 2000) -------------------------------------------------------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Based upon the closing price of the Common Shares of the Registrant on March 10, 2000, the aggregate market value of the Common Shares of the Registrant held by non-affiliates on that date was $51,729,489. Documents Incorporated by Reference: Portions of the Registrant's definitive Proxy Statement for its Annual Meeting of Shareholders to be held on April 24, 2000 are incorporated by reference into Part III of this Annual Report on Form 10-K. Exhibit Index on Page 84 (as numbered sequentially) 2 PART I ------ Item 1. Business. - ------------------- General Rurban Financial Corp., an Ohio corporation (the "Corporation"), is a bank holding company under the Bank Holding Company Act of 1956, as amended, and is subject to regulation by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). The executive offices of the Corporation are located at 401 Clinton Street, Defiance, Ohio 43512. Through its subsidiaries, The State Bank and Trust Company, Defiance, Ohio ("State Bank"), The Peoples Banking Company, Findlay, Ohio ("Peoples Bank"), The First National Bank of Ottawa ("First National Bank") and The Citizens Savings Bank Company, Pemberville, Ohio ("Citizens Savings Bank"), the Corporation is engaged in the business of commercial banking. The Corporation's subsidiary, Rurbanc Data Services, Inc. ("RDSI"), is engaged in the related business of providing data processing services, principally to banks. The Corporation's subsidiary, Rurban Life Insurance Company ("Rurban Life"), is engaged in the related business of accepting life and disability reinsurance ceded in part by American General Assurance Company ("AGAC") from the credit life and disability insurance purchased by customers of the Corporation's banking subsidiaries from AGAC in connection with revolving credit loans secured by mortgages and with certain installment loans made to such customers. State Bank has two wholly-owned subsidiaries: Reliance Financial Services, N.A. ("RFS") and Rurban Mortgage Company ("RMC"). RFS is nationally-chartered trust and financial services company. RMC is an Ohio corporation with its main office located in Clearwater, Florida which engages in the retail and wholesale mortgage banking industry. General Description of Holding Company Group -------------------------------------------- State Bank - ---------- State Bank is an Ohio state-chartered bank. State Bank presently operates six branch offices in Defiance County, Ohio (five in the city of Defiance and one in Ney), one branch office in adjacent Paulding County, Ohio and three branch offices in Fulton County, Ohio (one in each of Delta, Lyons and Wauseon). At December 31, 1999, State Bank had 96 full-time equivalent employees. State Bank offers a full range of commercial banking services, including checking and NOW accounts; passbook savings and money market accounts; time certificates of deposit, automatic teller machines; commercial, consumer, agricultural and residential mortgage loans (including "Home Value Equity" line of credit loans); personal and corporate trust services; commercial leasing; bank credit card services; safe deposit box rentals; and other personalized banking services. In addition, State Bank serves as a correspondent (federal funds investing and check clearing purposes) for three affiliated financial institutions in the region (Peoples Bank, First National Bank and Citizens Savings Bank). RFS --- RFS is a nationally-chartered trust and financial services company and a wholly-owned subsidiary of State Bank. RFS offers various trust and financial services, including asset management services for individuals and corporate employee benefit plans as well as brokerage services through Raymond James Financial, Inc. 2 3 RFS' offices are located in State Bank's main offices in Defiance, Ohio. At December 31, 1999, RFS had 29 full-time equivalent employees. RMC --- RMC is an Ohio corporation with its main office located in Clearwater, Florida. RMC is a wholly-owned subsidiary of State Bank. RMC engages in the retail and wholesale mortgage banking business. The principal activities engaged in by RMC are originating, underwriting and servicing first and second residential mortgage loans and selling such loans in the secondary market. At December 31, 1999, RMC had 11 full-time equivalent employees. Peoples Bank - ------------ Peoples Bank is an Ohio state-chartered bank. The main office of Peoples Bank is located in Findlay, Ohio. Peoples Bank provides checking and NOW accounts; passbook savings and money market accounts; time certificates of deposit; automatic teller machines; commercial and consumer loans and real estate mortgage loans; personal and corporate trust services; and safe deposit box rental facilities. Peoples Bank operates one full-service branch in Findlay and one in McComb, Ohio. At December 31, 1999, Peoples Bank had 27 full-time equivalent employees. First National Bank - ------------------- First National Bank is a national banking association. The executive offices of First National Bank are located at 405 East Main Street, Ottawa, Ohio. At its present location, First National Bank operates four drive-in teller lanes and an automatic teller machine with a traditional banking lobby on the first floor. First National Bank presently operates no branch offices. At December 31, 1999, First National Bank had 14 full-time equivalent employees. First National Bank offers a full range of commercial banking services, including checking and NOW accounts; passbook savings and money market accounts; time certificates of deposit; automatic teller machines; commercial, consumer, agricultural and residential mortgage loans; personal and corporate trust services; commercial leasing; bank credit card services; safe deposit box rentals; and other personalized banking services. Citizens Savings Bank - --------------------- Citizens Savings Bank is an Ohio state-chartered bank. The main office of Citizens Savings Bank is located in Pemberville, Ohio. Citizens Savings Bank provides checking and NOW accounts; passbook savings and money market accounts; time certificates of deposit; an automatic teller machine; commercial, consumer, agricultural and residential loans; personal and corporate trust services; commercial leasing; bank credit card services; safe deposit box rentals; and other personalized banking services. Citizens Savings Bank also operates a full-service branch in Gibsonburg, Ohio. At December 31, 1999, Citizens Savings Bank had 24 full-time equivalent employees. RDSI - ---- Substantially all of RDSI's business is comprised of providing data processing services to 50 financial institutions in Ohio, Michigan and Indiana (including State Bank, Peoples Bank, First National Bank and Citizens Savings Bank), including information processing for financial institution customer 3 4 services, loan and deposit account information and data analysis. At December 31, 1999, RDSI had 35 full-time equivalent employees. Rurban Life - ----------- Rurban Life commenced its business of transacting insurance as an Arizona life and disability reinsurer in January, 1988. Rurban Life may accept life and disability reinsurance ceded to Rurban Life by an insurance company authorized to write life and disability insurance, provided that the amount accepted does not exceed certain limitations imposed under Arizona law. Rurban Life is not currently authorized to write life and disability insurance on a direct basis. Rurban Life accepts reinsurance ceded in part by AGAC from the credit life and disability insurance purchased by customers of State Bank, Peoples Bank, First National Bank and Citizens Savings Bank from AGAC in connection with revolving credit loans secured by mortgages and with certain installment loans made to such customers by State Bank, Peoples Bank, First National Bank and Citizens Savings Bank. The operations of Rurban Life do not materially impact the consolidated results of operations of the Corporation. As of December 31, 1999, Rurban Life has not accepted any other reinsurance. Rurban Life does not currently intend to accept any other reinsurance in the immediate future. At December 31, 1999, Rurban Life had no employees. Competition ----------- State Bank, Peoples Bank, First National Bank and Citizens Savings Bank experience significant competition in attracting depositors and borrowers. Competition in lending activities comes principally from other commercial banks in the lending areas of State Bank, Peoples Bank, First National Bank and Citizens Savings Bank, and, to a lesser extent, from savings associations, insurance companies, governmental agencies, credit unions, securities brokerage firms and pension funds. The primary factors in competing for loans are interest rates charged and overall banking services. Competition for deposits comes from other commercial banks, savings associations, money market funds and credit unions as well as from insurance companies and securities brokerage firms. The primary factors in competing for deposits are interest rates paid on deposits, account liquidity and convenience of office location. RDSI also operates in a highly competitive field. RDSI competes primarily on the basis of the value and quality of its data processing services, and service and convenience to its customers. Rurban Life operates in the highly competitive industry of credit life and disability insurance. A large number of stock and mutual insurance companies also operating in this industry have been in existence for longer periods of time and have substantially greater financial resources than does Rurban Life. The principal methods of competition in the credit life and disability insurance industry are the availability of coverages, premium rates and quality of service. RFS operates in the highly competitive trust services field and its competition is primarily other Ohio bank trust departments. RMC operates in the highly competitive mortgage banking environment. In Florida, RMC competes primarily with large national and regional mortgage brokers who originate well over 50% of new loans. RMC also underwrites loans originated by the Corporation's four affiliate banks and other community banks in Ohio and Florida. 4 5 Supervision and Regulation -------------------------- The following is a summary of certain statutes and regulations affecting the Corporation and its subsidiaries. The summary is qualified in its entirety by reference to such statutes and regulations. The Corporation is a bank holding company under the Bank Holding Company Act of 1956, as amended, which restricts the activities of the Corporation and the acquisition by the Corporation of voting shares or assets of any bank, savings association or other company. The Corporation is also subject to the reporting requirements of, and examination and regulation by, the Federal Reserve Board. Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve Act on transactions with affiliates, including any loans or extensions of credit to the bank holding company or any of its subsidiaries, investments in the stock or other securities thereof and the taking of such stock or securities as collateral for loans or extensions of credit to any borrower; the issuance of guarantees, acceptances or letters of credit on behalf of the bank holding company and its subsidiaries; purchases or sales of securities or other assets; and the payment of money or furnishing of services to the bank holding company and other subsidiaries. Bank holding companies are prohibited from acquiring direct or indirect control of more than 5% of any class of voting stock or substantially all of the assets of any bank holding company without the prior approval of the Federal Reserve Board. A bank holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with extensions of credit and/or the provision of other property or services to a customer by the bank holding company or its subsidiaries. As a national bank, First National Bank is supervised and regulated by the OCC. Reliance, as a nationally-chartered bank, is also regulated by the OCC. As Ohio state-chartered banks, State Bank, Peoples Bank and Citizens Savings Bank are supervised and regulated by the Ohio Division of Financial Institutions and the Federal Deposit Insurance Corporation ("FDIC"). The deposits of State Bank, Peoples Bank, First National Bank and Citizens Savings Bank are insured by the FDIC and those entities are subject to the applicable provisions of the Federal Deposit Insurance Act. A subsidiary of a bank holding company can be liable to reimburse the FDIC, if the FDIC incurs or anticipates a loss because of a default of another FDIC-insured subsidiary of the bank holding company or in connection with FDIC assistance provided to such subsidiary in danger of default. In addition, the holding company of any insured financial institution that submits a capital plan under the federal banking agencies' regulations on prompt corrective action guarantees a portion of the institution's capital shortfall, as discussed below. Various requirements and restrictions under the laws of the United States and the State of Ohio affect the operations of State Bank, Peoples Bank, First National Bank and Citizens Savings Bank including requirements to maintain reserves against deposits, restrictions on the nature and amount of loans which may be made and the interest that may be charged thereon, restrictions relating to investments and other activities, limitations on credit exposure to correspondent banks, limitations on activities based on capital and surplus, limitations on payment of dividends, and limitations on branching. The Federal Reserve Board has adopted risk-based capital guidelines for bank holding companies and for state member banks, such as State Bank and Citizens Savings Bank. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk weighted assets by assigning assets and off-balance-sheet items to broad risk categories. The minimum ratio of total capital to risk weighted assets (including certain off-balance-sheet items, such as standby letters of credit) is 8%. At least 4.0 percentage points is to be comprised of common stockholders' equity (including retained earnings but excluding treasury stock), noncumulative perpetual preferred stock, a limited amount of cumulative perpetual preferred stock, and minority interests in equity accounts of consolidated subsidiaries, less goodwill and certain other intangible assets ("Tier 1 capital"). The remainder ("Tier 2 capital") may 5 6 consist, among other things, of mandatory convertible debt securities, a limited amount of subordinated debt, other preferred stock and a limited amount of allowance for loan and lease losses. The Federal Reserve Board also imposes a minimum leverage ratio (Tier 1 capital to total assets) of 3% for bank holding companies and state member banks that meet certain specified conditions, including no operational, financial or supervisory deficiencies, and including having the highest regulatory rating. The minimum leverage ratio is 1%-2% higher for other bank holding companies and state member banks based on their particular circumstances and risk profiles and those experiencing or anticipating significant growth. National bank subsidiaries, such as First National Bank, are subject to similar capital requirements adopted by the Comptroller of the Currency, and state non-member bank subsidiaries, such as Peoples Bank, are subject to similar capital requirements adopted by the FDIC. The Corporation and its subsidiaries currently satisfy all capital requirements. Failure to meet applicable capital guidelines could subject a banking institution to a variety of enforcement remedies available to federal and state regulatory authorities, including the termination of deposit insurance by the FDIC. The federal banking regulators have established regulations governing prompt corrective action to resolve capital deficient banks. Under these regulations, institutions which become undercapitalized become subject to mandatory regulatory scrutiny and limitations, which increase as capital decreases. Such institutions are also required to file capital plans with their primary federal regulator, and their holding companies must guarantee the capital shortfall up to 5% of the assets of the capital deficient institution at the time it becomes undercapitalized. The ability of a bank holding company to obtain funds for the payment of dividends and for other cash requirements is largely dependent on the amount of dividends which may be declared by its subsidiary banks and other subsidiaries. However, the Federal Reserve Board expects the Corporation to serve as a source of strength to its subsidiary banks, which may require it to retain capital for further investment in the subsidiaries, rather than for dividends for shareholders of the Corporation. State Bank, Peoples Bank, First National Bank and Citizens Savings Bank may not pay dividends to the Corporation if, after paying such dividends, they would fail to meet the required minimum levels under the risk-based capital guidelines and the minimum leverage ratio requirements. State Bank, Peoples Bank, First National Bank and Citizens Savings Bank must have the approval of their respective regulatory authorities if a dividend in any year would cause the total dividends for that year to exceed the sum of the current year's net profits and the retained net profits for the preceding two years, less required transfers to surplus. Payment of dividends by the bank subsidiaries may be restricted at any time at the discretion of the regulatory authorities, if they deem such dividends to constitute an unsafe and/or unsound banking practice. These provisions could have the effect of limiting the Corporation's ability to pay dividends on its outstanding common shares. Rurban Life is chartered by the State of Arizona and is subject to regulation, supervision, and examination by the Arizona Department of Insurance. The powers of regulation and supervision of the Arizona Department of Insurance relate generally to such matters as minimum capitalization, the grant and revocation of certificates of authority to transact business, the nature of and limitations on investments, the maintenance of reserves, the form and content of required financial statements, reporting requirements and other matters pertaining to life and disability insurance companies. Deposit Insurance Assessments and Recent Legislation ---------------------------------------------------- The FDIC is authorized to establish separate annual assessment rates for deposit insurance for members of the Bank Insurance Fund ("BIF") and the Savings Association Insurance Fund ("SAIF"). State Bank, Peoples Bank, First National Bank and Citizens Savings Bank are members of BIF. The 6 7 FDIC may increase assessment rates for either fund if necessary to restore the fund's ratio of reserves to insured deposits to its target level within a reasonable time and may decrease such rates if such target level has been met. The FDIC has established a risk-based assessment system for both BIF and SAIF members. Under this system, assessments vary based on the risk the institution poses to its deposit insurance fund. The risk level is determined based on the institution's capital level and the FDIC's level of supervisory concern about the institution. Monetary Policy and Economic Conditions --------------------------------------- The commercial banking business is affected not only by general economic conditions, but also by the policies of various governmental regulatory authorities, including the Federal Reserve Board. The Federal Reserve Board regulates money and credit conditions and interest rates in order to influence general economic conditions primarily through open market operations in U.S. Government securities, changes in the discount rate on bank borrowings and changes in reserve requirements against bank deposits. These policies and regulations significantly affect the overall growth and distribution of bank loans, investments and deposits, and the interest rates charged on loans as well as the interest rates paid on deposits and accounts. The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of commercial banks in the past and are expected to continue to have significant effects in the future. In view of the changing conditions in the economy and the money market and the activities of monetary and fiscal authorities, no definitive predictions can be made as to future changes in interest rates, credit availability or deposit levels. Financial Services Modernization Act of 1999 -------------------------------------------- On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act, or the Financial Services Modernization Act of 1999, which, effective March 11, 2000, permits bank holding companies to become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. A bank holding company may become a financial holding company if each of its subsidiary banks is well capitalized under the Federal Deposit Insurance Corporation Act of 1991 prompt corrective action provisions, is well managed, and has at least a satisfactory rating under the Community Reinvestment Act by filing a declaration that the bank holding company wishes to become a financial holding company. No regulatory approval will be required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board. The Financial Services Modernization Act defines "financial in nature" to include: (i) securities underwriting, dealing and market making; (ii) sponsoring mutual funds and investment companies; (iii) insurance underwriting and agency; (iv) merchant banking activities; and (v) activities that the Federal Reserve Board has determined to be closely related to banking. The specific effects of the enactment of the Financial Services Modernization Act on the banking industry in general and on the Corporation and its subsidiaries have yet to be determined due to the fact that the Financial Services Modernization Act was only recently adopted. 7 8 Statistical Financial Information Regarding the Corporation ----------------------------------------------------------- The following schedules and tables analyze certain elements of the consolidated balance sheets and statements of income of the Corporation and its subsidiaries, as required under Exchange Act Industry Guide 3 promulgated by the Securities and Exchange Commission, and should be read in conjunction with the narrative analysis presented in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation and the Consolidated Financial Statements of the Corporation and its subsidiaries included at pages F-1 through F-35 of this Annual Report on Form 10-K. 8 9 I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL A. The following are the average balance sheets for the years ending December 31:
ASSETS 1999 1998 1997 ---- ---- ---- Interest-earning assets Securities available for sale (1) Taxable $ 73,661,147 $ 68,465,434 $ 63,329,510 Non-taxable 9,442,497 6,191,050 5,827,365 Federal funds sold 1,477,880 17,112,858 13,009,024 Loans, net of unearned income and deferred loan fees (2) 461,342,591 376,126,488 342,480,740 ------------ ------------ ------------ Total interest-earning assets 545,924,115 467,895,830 424,646,639 Allowance for loan losses (5,698,734) (5,382,901) (5,245,851) ------------ ------------ ------------ 540,225,381 462,512,929 419,400,788 Noninterest-earning assets Cash and due from banks 16,953,255 15,152,187 14,980,442 Premises and equipment, net 11,188,449 10,067,321 8,732,846 Accrued interest receivable and other assets 11,833,035 6,224,187 8,897,276 ------------ ------------ ------------ $580,200,120 $493,956,624 $452,011,352 ============ ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities Deposits Savings and interest-bearing demand deposits $ 82,291,784 $ 96,422,897 $ 90,874,940 Time deposits 354,626,156 281,227,689 265,046,479 Federal funds purchased and securities sold under agree- ments to repurchase 11,313,555 1,093,099 2,294,882 Advances from Federal Home Loan Bank (FHLB) 32,332,414 24,222,456 3,907,485 Other borrowed funds 4,100,000 -- -- ------------ ------------ ------------ Total interest-bearing liabilities 484,663,909 402,966,141 362,123,786 Noninterest-bearing liabilities Demand deposits 45,760,449 45,418,691 44,405,121 Accrued interest payable and other liabilities 6,809,194 5,140,844 3,331,816 ------------ ------------ ------------ 537,233,552 453,525,676 409,860,723 Shareholders' equity (3) 42,966,568 40,430,948 42,150,629 ------------ ------------ ------------ $580,200,120 $493,956,624 $452,011,352 ============ ============ ============
- -------------------------------------------------------------------------------- (1) Securities available for sale are carried at fair value. The average balance includes quarterly average balances of the market value adjustments and daily average balances for the amortized cost of securities. (2) Loan balances include principal balances of nonaccrual loans and loans held for sale. (3) Shown net of average net unrealized appreciation (depreciation) on securities available for sale, net of tax. 9 10 I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (CONTINUED) B. The following tables set forth, for the years indicated, the condensed average balances of interest-earning assets and interest-bearing liabilities, the interest earned or paid on such amounts, and the average interest rates earned or paid thereon.
1999 ---------------------------------------------- Average Average Balance Interest Rate ------- -------- ---- INTEREST-EARNING ASSETS Securities (1) Taxable $ 73,801,410 $ 4,553,538 6.17% Non-taxable 10,019,393 754,935 (2) 7.53 (2) Federal funds sold 1,477,880 76,408 5.17 Loans, net of unearned income and deferred loan fees 461,342,591 (3) 39,824,608 (4) 8.63 ------------ ----------- Total interest-earning assets $546,641,274 45,209,489 (2) 8.27% (2) ============ INTEREST-BEARING LIABILITIES Deposits Savings and interest-bearing demand deposits $ 82,291,784 1,674,222 2.03% Time deposits 354,626,156 17,352,230 4.89 Federal funds purchased and securities sold under agree- ments to repurchase 11,313,555 617,027 5.45 Advances from FHLB 32,332,414 1,765,513 5.46 Other borrowed funds 4,100,000 334,921 8.17 ------------ ----------- Total interest-bearing liabilities $484,663,909 21,743,913 4.49% ============ ----------- Net interest income $23,465,576 (2) =========== Net interest income as a percent of average interest-earning assets 4.29% (2)
- -------------------------------------------------------------------------------- (1) Securities balances represent daily average balances for the amortized cost of securities. The average rate is calculated based on the amortized cost of securities. (2) Computed on tax equivalent basis for non-taxable securities (34% statutory tax rate in 1999). (3) Loan balances include principal balances of nonaccrual loans and loans held for sale. (4) Includes net fees on loans of $1,368,444 in 1999. 10 11 I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (CONTINUED)
1998 ---------------------------------------------- Average Average Balance Interest Rate ------- -------- ---- INTEREST-EARNING ASSETS Securities (1) Taxable $ 68,282,845 $ 3,939,667 5.77% Non-taxable 6,090,977 492,812 (2) 8.09 (2) Federal funds sold 17,112,858 896,714 5.24 Loans, net of unearned income and deferred loan fees 376,126,488 (3) 34,131,651 (4) 9.07 ------------ ----------- Total interest-earning assets $467,613,168 39,460,844 (2) 8.44%(2) ============ INTEREST-BEARING LIABILITIES Deposits Savings and interest-bearing demand deposits $ 96,422,897 2,121,304 2.20% Time deposits 281,227,689 15,221,462 5.41 Federal funds purchased and securities sold under agree- ments to repurchase 1,093,099 62,853 5.75 Advances from FHLB 24,222,456 1,337,080 5.52 ------------ ----------- Total interest-bearing liabilities $402,966,141 18,742,699 4.65% ============ ----------- Net interest income $20,718,145 (2) =========== Net interest income as a percent of average interest-earning assets 4.43%(2) ====
- -------------------------------------------------------------------------------- (1) Securities balances represent daily average balances for the amortized cost of securities. The average rate is calculated based on the amortized cost of securities. (2) Computed on tax equivalent basis for non-taxable securities (34% statutory tax rate in 1998). (3) Loan balances include principal balances of nonaccrual loans and loans held for sale. (4) Includes net fees on loans of $1,041,507 in 1998. 11 12 I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (CONTINUED)
1997 ---------------------------------------------- Average Average Balance Interest Rate ------- -------- ---- INTEREST-EARNING ASSETS Securities (1) Taxable $ 63,305,000 $ 3,900,143 6.16% Non-taxable 5,804,824 473,148 (2) 8.15 (2) Federal funds sold 13,009,024 753,081 5.79 Loans, net of unearned income and deferred loan fees 342,480,740 (3) 31,616,158 (4) 9.23 ------------ ----------- Total interest-earning assets $424,599,588 36,742,530 (2) 8.65%(2) ============ INTEREST-BEARING LIABILITIES Deposits Savings and interest-bearing demand deposits $ 90,874,940 1,971,334 2.17% Time deposits 265,046,479 14,334,398 5.41 Federal funds purchased and securities sold under agree- ments to repurchase 2,294,882 161,505 7.04 Advances from FHLB 3,907,485 221,918 5.68 ------------ ----------- Total interest-bearing liabilities $362,123,786 16,689,155 4.61% ============ ----------- Net interest income $20,053,375 (2) =========== Net interest income as a percent of average interest-earning assets 4.72%(2) ====
- -------------------------------------------------------------------------------- (1) Securities balances represent daily average balances for the amortized cost of securities. The average rate is calculated based on the amortized cost of securities. (2) Computed on tax equivalent basis for non-taxable securities (34% statutory tax rate in 1997). (3) Loan balances include principal balances of nonaccrual loans and loans held for sale. (4) Includes net fees on loans of $891,330 in 1997. 12 13 I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (CONTINUED) C. The following tables set forth the effect of volume and rate changes on interest income and expense for the periods indicated. For purposes of these tables, changes in interest due to volume and rate were determined as follows: Volume Variance - change in volume multiplied by the previous year's rate. Rate Variance - change in rate multiplied by the previous year's volume. Rate/Volume Variance - change in volume multiplied by the change in rate. This variance was allocated to volume variance and rate variance in proportion to the relationship of the absolute dollar amount of the change in each. Interest on non-taxable securities has been adjusted to a fully tax equivalent basis using a statutory tax rate of 34% in 1999, 1998 and 1997.
Total Variance Attributable To Variance ------------------------ 1999/1998 Volume Rate --------- ------ ---- INTEREST INCOME Securities Taxable $ 613,871 $ 330,288 $ 283,583 Non-taxable 262,123 298,100 (35,977) Federal funds sold (820,306) (808,503) (11,803) Loans, net of unearned income and deferred loan fees 5,692,957 7,422,832 (1,729,875) ---------- ---------- ----------- 5,748,645 7,242,717 (1,494,072) INTEREST EXPENSE Deposits Savings and interest-bearing demand deposits (447,082) (295,430) (151,652) Time deposits 2,130,768 3,693,953 (1,563,185) Federal funds purchased and securities sold under agreements to repurchase 554,174 557,577 (3,403) Advances from FHLB 428,433 442,995 (14,562) Other borrowed funds 334,921 334,921 -- ---------- ---------- ----------- 3,001,214 4,734,016 (1,732,802) ---------- ---------- ----------- NET INTEREST INCOME $2,747,431 $2,508,701 $ 238,730 ========== ========== ===========
13 14 I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (CONTINUED)
Total Variance Attributable To Variance ------------------------ 1998/1997 Volume Rate --------- ------ ---- INTEREST INCOME Securities Taxable $ 39,524 $ 295,905 $(256,381) Non-taxable 19,664 23,175 (3,511) Federal funds sold 143,633 220,247 (76,614) Loans, net of unearned income and deferred loan fees 2,515,493 3,060,983 (545,490) ---------- ---------- --------- 2,718,314 3,600,310 (881,996) INTEREST EXPENSE Deposits Savings and interest-bearing demand deposits 149,970 121,734 28,236 Time deposits 887,064 875,800 11,264 Federal funds purchased and securities sold under agreements to repurchase (98,652) (73,109) (25,543) Advances from FHLB 1,115,162 1,121,560 (6,398) ---------- ---------- --------- 2,053,544 2,045,985 7,559 ---------- ---------- --------- NET INTEREST INCOME $ 664,770 $1,554,325 $(889,555) ========== ========== =========
14 15 II. INVESTMENT PORTFOLIO A. The book value of securities available for sale as of December 31 are summarized as follows:
1999 1998 1997 ---- ---- ---- U.S. Treasury and U.S. Government agency securities $19,376,264 $20,110,990 $43,398,433 Obligations of states and political subdivisions 10,581,971 9,201,982 5,395,065 Mortgage-backed securities 50,565,523 50,608,107 21,159,472 Marketable equity securities 2,595,150 2,221,850 1,730,150 ----------- ----------- ----------- $83,118,908 $82,142,929 $71,683,120 =========== =========== ===========
B. The maturity distribution and weighted average yield of securities available for sale at December 31, 1999 are as follows:
Maturing ---------------------------------------------------------- After One Year After Five Years Within But Within But Within After One Year Five Years Ten Years Ten Years -------- ---------- --------- --------- U.S. Treasury and U.S. Government agency securities $ -- $16,339,019 $ 3,037,245 $ -- Obligations of states and political subdivisions 1,325,111 2,343,763 1,794,010 5,119,087 Mortgage-backed securities (2) 2,485,233 11,770,918 16,398,921 19,910,451 Marketable equity securities -- -- -- 2,595,150 ---------- ----------- ----------- ----------- $3,810,344 $30,453,700 $21,230,176 $27,624,688 ========== =========== =========== =========== Weighted average yield (1) 4.37% 06.28% 5.88% 5.78%
(1) Yields are not presented on a tax-equivalent basis. (2) Maturity based upon estimated weighted-average life. The weighted average interest rates are based on coupon rates for securities purchased at par value and on effective interest rates considering amortization or accretion if the securities were purchased at a premium or discount. C. Excluding those holdings of the investment portfolio in U.S. Treasury securities and other agencies of the U.S. Government, there were no securities of any one issuer which exceeded 10% of the shareholders' equity of the Corporation at December 31, 1999. 15 16 III. LOAN PORTFOLIO A. Types of Loans - Total loans on the balance sheet are comprised of the following classifications at December 31 for the years indicated:
1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Commercial, financial and agricultural (1) $326,564,165 $248,840,548 $217,324,268 $185,838,900 $ 63,444,036 Real estate mortgage (1) 80,703,338 72,225,323 75,212,817 72,356,881 152,555,540 Consumer loans to individuals 94,410,123 73,244,850 67,198,876 60,512,850 61,600,664 ------------ ------------ ------------ ------------ ------------ $501,677,626 $394,310,721 $359,735,961 $318,708,631 $277,600,240 ============ ============ ============ ============ ============ Real estate mortgage loans held for resale $ 7,149,585 $ 18,509,275 $ 4,404,327 $ 1,875,636 $ 2,949,293 ============ ============ ============ ============ ============
(1) Beginning in 1996, commercial real estate loans are classified as commercial, financial and agricultural. Prior to 1996, commercial real estate loans are classified as real estate mortgage. Concentrations of Credit Risk: The Corporation grants commercial, real estate and installment loans to customers mainly in northern Ohio. Commercial loans include loans collateralized by commercial real estate, business assets and agricultural loans collateralized by crops and farm equipment. As of December 31, 1999, commercial, financial and agricultural loans make up approximately 65% of the loan portfolio and the loans are expected to be repaid from cash flow from operations of businesses. As of December 31, 1999, residential first mortgage loans make up approximately 16% of the loan portfolio and are collateralized by first mortgages on residential real estate. As of December 31, 1999, consumer loans to individuals make up approximately 19% of the loan portfolio and are primarily collateralized by consumer assets. B. Maturities and Sensitivities of Loans to Changes in Interest Rates - The following table shows the amounts of commercial, financial and agricultural loans outstanding as of December 31, 1999 which, based on remaining scheduled repayments of principal, are due in the periods indicated. Also, the amounts have been classified according to sensitivity to changes in interest rates for commercial, financial and agricultural loans due after one year. (Variable-rate loans are those loans with floating or adjustable interest rates.)
Commercial, Financial and Maturing Agricultural -------- ------------ Within one year $124,018,000 After one year but within five years 104,973,000 After five years 97,573,000 ------------ $326,564,000 ============
16 17 III. LOAN PORTFOLIO (CONTINUED) Commercial, Financial and Agricultural --------------------------------------
Interest Sensitivity -------------------- Fixed Variable Rate Rate Total ---- ---- ----- Due after one year but within five years $62,435,000 $ 42,538,000 $104,973,000 Due after five years 9,828,000 87,745,000 97,573,000 ----------- ------------ ------------ $72,263,000 $130,283,000 $202,546,000 =========== ============ ============
C. Risk Elements ------------- 1. Nonaccrual, Past Due, Restructured and Impaired Loans - The following schedule summarizes nonaccrual, past due, restructured and impaired loans at December 31.
1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (In thousands) (a) Loans accounted for on a nonaccrual basis $1,403 (1) $1,880 (1) $ 2,303 (1) $1,055 (1) $2,403 (1) (b) Accruing loans which are contractually past due 90 days or more as to interest or principal payments 809 (1) 1,742 462 293 711 (c) Loans not included in (a) or (b) which are "Troubled Debt Restruc- turings" as defined by Statement of Financial Accounting Standards No. 15 -- -- -- -- -- (d) Other loans defined as "impaired" 1,103 -- -- 2,490 -- ------ ------ ------ ------ ------ $3,315 $3,622 $2,765 $3,838 $3,114 ====== ====== ====== ====== ======
(1) Includes loans defined as "impaired" under SFAS No. 114. 17 18 III. LOAN PORTFOLIO (CONTINUED) Management believes the allowance for loan losses at December 31, 1999 is adequate to absorb any losses on nonperforming loans, as the allowance balance is maintained by management at a level considered adequate to cover losses that are currently anticipated based on past loss experience, general economic conditions, information about specific borrower situations including their financial position and collateral values, and other factors and estimates which are subject to change over time.
1999 ---- (In thousands) Gross interest income that would have been recorded in 1999 on nonaccrual loans outstanding at December 31, 1999 if the loans had been current, in accordance with their original terms and had been outstanding throughout the period or since origination if held for part of the period $170 Interest income actually recorded on nonaccrual loans and included in net income for the period (40) ---- Interest income not recognized during the period $130 ====
1. Discussion of the Nonaccrual Policy The accrual of interest income is discontinued when the collection of a loan or interest, in whole or in part, is doubtful. When interest accruals are discontinued, interest income accrued in the current period is reversed. While loans which are past due 90 days or more as to interest or principal payments are considered for nonaccrual status, management may elect to continue the accrual of interest when the estimated net realizable value of collateral, in management's judgment, is sufficient to cover the principal balance and accrued interest. These policies apply to both commercial and consumer loans. 2. Potential Problem Loans As of December 31, 1999, in addition to the $3,315,000 of loans reported under Item III, C.1., there are approximately $10,142,000 in other outstanding loans where known information about possible credit problems of the borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans pursuant to Item III. C.1 at some future date. Consideration was given to loans classified for regulatory purposes as loss, doubtful, substandard, or special mention that have not been disclosed in Section 1 above. To the extent that such loans are not included in the $10,142,000 potential problem loans described above, management believes that such loans will not materially impact future operating results, liquidity, or capital resources. 18 19 III. LOAN PORTFOLIO (CONTINUED) 3. Foreign Outstandings None 4. Loan Concentrations At December 31, 1999, loans outstanding related to agricultural operations or collateralized by agricultural real estate aggregated approximately $61,099,000. At December 31, 1999, there were no agriculture loans which were accounted for on a nonaccrual basis; and there are approximately $75,000 of accruing agriculture loans which are contractually past due ninety days or more as to interest or principal payments. D. Other Interest-Bearing Assets ----------------------------- Other than $285,000 in foreclosed real estate, there are no other interest-bearing assets as of December 31, 1999 which would be required to be disclosed under Item III. C.1 or 2 if such assets were loans. 19 20 IV. SUMMARY OF LOAN LOSS EXPERIENCE A. The following schedule presents an analysis of the allowance for loan losses, average loan data and related ratios for the years ended December 31:
1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- LOANS Loans outstanding at end of period (1) $508,480,963 $412,478,828 $363,851,637 $320,321,476 $280,314,137 ============ ============ ============ ============ ============ Average loans outstanding during period (1) $461,342,591 $376,126,488 $342,480,740 $305,611,881 $282,864,867 ============ ============ ============ ============ ============ ALLOWANCE FOR LOAN LOSSES Balance at beginning of period $ 5,408,854 $ 5,239,601 $ 5,066,600 $ 4,270,000 $ 4,770,000 Loans charged-off Commercial, financial and agricultural loans (2) (578,228) (885,132) (438,317) (308,143) (1,267,028) Real estate mortgage (2) (25,181) (59,940) (30,863) (14,470) (509,108) Consumer loans to individuals (489,032) (390,420) (856,426) (555,164) (874,690) ------------ ------------ ------------ ------------ ------------ (1,092,441) (1,335,492) (1,325,606) (877,777) (2,650,826) Recoveries of loans previously charged-off Commercial, financial and agricultural loans (2) 327,122 248,054 308,283 380,951 497,437 Real estate mortgage (2) 72,045 3,610 6,877 8,288 23,432 Consumer loans to individuals 263,132 173,081 235,482 324,129 178,059 ------------ ------------ ------------ ------------ ------------ 662,299 424,745 550,642 713,368 698,928 ------------ ------------ ------------ ------------ ------------ Net loans charged-off (430,142) (910,747) (774,964) (164,409) (1,951,898) Provision for loan losses 1,215,000 1,080,000 947,965 961,009 1,451,898 ------------ ------------ ------------ ------------ ------------ Balance at end of period $ 6,193,712 $ 5,408,854 $ 5,239,601 $ 5,066,600 $ 4,270,000 ============ ============ ============ ============ ============ Ratio of net charge-offs during the period to average loans outstanding during the period .09% .24% .23% .05% .69% ============ ============ ============ ============ ============
(1) Net of unearned income and deferred loan fees, including loans held for sale (2) Beginning in 1996, commercial real estate loans are classified as commercial, financial and agricultural. Prior to 1996, commercial real estate loans are classified as real estate mortgage. The allowance for loan losses balance and the provision for loan losses are judgmentally determined by management based upon periodic reviews of the loan portfolio. In addition, management considered the level of charge-offs on loans as well as the fluctuations of charge-offs and recoveries on loans including the factors which caused these changes. Estimating the risk of loss and the amount of loss is necessarily subjective. Accordingly, the allowance is maintained by management at a level considered adequate to cover losses that are currently anticipated based on past loss experience, general economic conditions, information about specific borrower situations including their financial position and collateral values and other factors and estimates which are subject to change over time. The increase in loans charged-off in 1995 as compared to the other periods presented is due largely to the charge-off of certain credits which were previously reported on a nonaccrual basis. 20 21 IV. SUMMARY OF LOAN LOSS EXPERIENCE (CONTINUED) B. The following schedule is a breakdown of the allowance for loan losses allocated by type of loan and related ratios.
Allocation of the Allowance for Loan Losses ---------------------------------------------- Percentage Percentage of Loans of Loans In Each In Each Category to Category To Allowance Total Allowance Total Amount Loans Amount Loans ------ ----- ------ ----- December 31, 1999 December 31, 1998 ----------------- ----------------- Commercial, financial and agricultural $4,371,000 65.1% $2,704,000 63.1% Residential first mortgage 93,000 16.1 144,000 18.3 Consumer loans to individuals 553,000 18.8 1,026,000 18.6 Unallocated 1,176,712 N/A 1,534,854 N/A ---------- ----- ---------- ----- $6,193,712 100.0% $5,408,854 100.0% ========== ===== ========== ===== December 31, 1997 December 31, 1996 ----------------- ----------------- Commercial, financial and agricultural $3,678,000 60.4% $3,445,000 58.3% Residential first mortgage 203,000 20.9 203,000 22.7 Consumer loans to individuals 742,000 18.7 811,000 19.0 Unallocated 616,601 N/A 607,600 N/A ---------- ----- ---------- ----- $5,239,601 100.0% $5,066,600 100.0% ========== ===== ========== ===== December 31, 1995 ----------------- Commercial, financial and agricultural $1,665,000 22.9% Real estate mortgage 512,000 54.9 Consumer loans to individuals 1,452,000 22.2 Unallocated 641,000 N/A ---------- ----- $4,270,000 100.0% ========== =====
Beginning in 1998, management established a new methodology for allocating the allowance for loan losses which includes identifying specific allocations for impaired and problem loans and quantifying general allocations for other loans based on a detailed evaluation of historical loss ratios and individual portfolio risk factors. Additionally, the unallocated allowance is maintained at approximately 19% of the total allowance due to inherent uncertainty in the allocation process. Prior to 1998, allowance allocations were made on a more subjective basis. Management believes the new methodology more appropriately allocates the allowance for known inherent risks within the individual loan portfolios. While management's periodic analysis of the adequacy of the allowance for loan losses may allocate portions of the allowance for specific problem loan situations, the entire allowance is available for any loan charge-offs that occur. 21 22 V. DEPOSITS The average amount of deposits and average rates paid are summarized as follows for the years ended December 31:
1 9 9 9 1 9 9 8 1 9 9 7 ------- ------- ------- Average Average Average Average Average Average Amount Rate Amount Rate Amount Rate ------ ---- ------ ---- ------ ---- Savings and interest-bearing demand deposits $ 82,291,784 2.03% $ 96,422,897 2.20% $ 90,874,940 2.17% Time deposits 354,626,156 4.89 281,227,689 5.41 265,045,479 5.41 Demand deposits (non-interest bearing) 45,760,449 -- 45,418,691 -- 44,405,121 -- ------------ ------------ ------------ $482,678,389 $423,069,277 $400,326,540 ============ ============ ============
Maturities of time certificates of deposit and other time deposits of $100,000 or more outstanding at December 31, 1999 are summarized as follows:
Amount ------ Three months or less $ 23,339,000 Over three months and through six months 36,940,000 Over six months and through twelve months 26,394,000 Over twelve months 20,113,000 ------------ $106,786,000 ============
22 23 VI. RETURN ON EQUITY AND ASSETS The ratio of net income to average shareholders' equity and average total assets and certain other ratios are as follows:
1999 1998 1997 ---- ---- ---- Average total assets $580,200,120 $493,956,624 $452,011,352 ============ ============ ============ Average shareholders' equity (1) $ 42,966,568 $ 40,430,948 $ 42,150,629 ============ ============ ============ Net income $ 5,230,902 $ 4,277,877 $ 5,515,797 ============ ============ ============ Cash dividends declared $ 1,692,641 $ 1,660,963 $ 1,648,730 ============ ============ ============ Return on average total assets .90% .87% 1.22% ============ ============ ============ Return on average share- holders' equity 12.17% 10.58% 13.09% ============ ============ ============ Dividend payout percentage (2) 32.36% 38.83% 29.89% ============ ============ ============ Average shareholders' equity to average total assets 7.41% 8.19% 9.33% ============ ============ ============
(1) Net of average unrealized appreciation or depreciation on securities available for sale. (2) Dividends declared divided by net income. VII. SHORT-TERM BORROWINGS The Corporation did not have any category of short-term borrowings for which the average balance outstanding during 1998 and 1997 was 30 percent or more of shareholders' equity at the end of the reported periods. The following information is reported for federal funds purchased for 1999:
Amount outstanding at end of year $10,900,000 =========== Weighted average interest rate at end of year 5.73% =========== Maximum amount outstanding at any month end $18,200,000 =========== Average amount outstanding during the year $11,313,555 =========== Weighted average interest rate during the year 5.45% ===========
23 24 Effect of Environmental Regulation ---------------------------------- Compliance with federal, state and local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had a material effect upon the capital expenditures, earnings or competitive position of the Corporation and its subsidiaries. The Corporation believes that the nature of the operations of its subsidiaries has little, if any, environmental impact. The Corporation, therefore, anticipates no material capital expenditures for environmental control facilities for its current fiscal year or for the foreseeable future. The Corporation's subsidiaries may be required to make capital expenditures for environmental control facilities related to properties which they may acquire through foreclosure proceedings in the future; however, the amount of such capital expenditures, if any, is not currently determinable. Item 2. Properties. - --------------------- The following is a listing and brief description of the properties owned or leased by State Bank and used in its business: 1. Its main office is a two-story brick building located at 401 Clinton Street, Defiance, Ohio, which was built in 1971. Including a basement addition built in 1991, it contains 33,400 square feet of floor space. Approximately 4,403 square feet on the second floor and on the lower level presently are leased to RDSI, 7,064 square feet on the second floor are leased to RFS and 2,868 square feet on the lower level are leased to the Corporation. 2. A drive through branch office located in downtown Defiance, Ohio containing 3,200 square feet of floor space was built in 1961. Most of the space is in the basement which is used for storage. It contains a three-bay drive-thru, two inside teller locations, an ATM and a night deposit unit. 3. A full service branch office located on Main Street in Ney, Ohio containing 1,536 square feet of floor space was opened in 1968. 4. A full service branch office located at 1796 North Clinton Street, Defiance, Ohio containing 2,120 square feet of floor space was opened in 1968. It is a free standing structure located in front of a shopping center. 5. A full service branch office located at 1856 East Second Street, Defiance, Ohio containing 2,160 square feet of floor space was opened in 1972 and recently remodeled in 1998. It is a free standing structure located in front of a shopping center. 6. A full service branch office located at 220 North Main Street, Paulding, Ohio containing 6,200 square feet of floor space was opened in 1980 and most recently remodeled in 1999. 7. A full service branch office located at 312 Main Street, Delta, Ohio containing 3,470 square feet of floor space was acquired from Society Bank & Trust ("Society") in 1992. 8. A full service branch office located at 133 E. Morenci Street, Lyons, Ohio containing 2,578 square feet of floor space was acquired from Society in 1992. 24 25 9. A full service branch office located at 515 Parkview, Wauseon, Ohio containing 3,850 square feet of floor space was acquired from Society in 1992. This office was remodeled in 1998. 10. A full service branch located in the Chief Market Square supermarket at 705 Deatrick Street, Defiance, Ohio and containing 425 square feet was opened in 1993. State Bank leases the space in which this branch is located pursuant to a 15-year lease. The following is a listing and brief description of the properties owned by Peoples Bank and used in its business: 1. The full service main office located at 301 South Main Street, Findlay, Ohio was opened in 1990. It contains approximately 30,000 square feet of floor space, of which 12,000 is used by an unrelated law firm. 2. A full service branch office located at 124 East Main Street, McComb, Ohio was opened in 1990. It contains approximately 3,600 square feet of floor space. The only real property owned by First National Bank is the location of the Bank at 405 East Main Street, Ottawa, Ohio. First National Bank's facility is a two-story brick and steel building containing approximately 7,100 square feet of space. The first floor is a traditional banking lobby which was remodeled in 1991. The second floor contains bookkeeping, office and storage space. The following is a listing and brief description of the properties owned by Citizens Savings Bank and used in its business: 1. The full service main office is located at 132 East Front Street, Pemberville, Ohio and contains 6,389 square feet. It was built near the turn of the century and was completely remodeled and added on to in 1992. 2. A full service branch office located at 230 West Madison Street, Gibsonburg, Ohio occupies 2,520 square feet and was built in 1988. RMC leases 2,213 square foot office space located at Estancia Boulevard, Suite 201, Clearwater, Florida. This office was first leased on January 22, 1997. RDSI leases a 5,616 square foot office space located at 2010 South Jefferson, Defiance, Ohio. This office was first leased on December 21, 1999. Item 3. Legal Proceedings. - ---------------------------- There are no pending legal proceedings to which the Corporation or any of its subsidiaries is a party or to which any of their property is subject, except routine legal proceedings to which the Corporation or any of its subsidiaries is a party incidental to its banking business. None of such proceedings are considered by the Corporation to be material. Item 4. Submission of Matters to a Vote of Security Holders. - -------------------------------------------------------------- Not applicable. 25 26 Executive Officers of the Registrant. - ------------------------------------ The following table lists the names and ages of the executive officers of the Corporation as of the date of this Annual Report on Form 10-K, the positions presently held by each such executive officer and the business experience of each such executive officer during the past five years. Unless otherwise indicated, each person has held his principal occupation(s) for more than five years. All executive officers serve at the pleasure of the Board of Directors of the Corporation.
Position(s) Held with the Corporation and Name Age its Subsidiaries and Principal Occupation(s) ---- --- -------------------------------------------- Steven D. VanDemark 47 Chairman of the Board of Directors of the Corporation; Chairman of the Board of Directors of State Bank; Director of RDSI; Director of RMC; General Manager of Defiance Publishing Company, Defiance, Ohio, a newspaper publisher. Thomas C. Williams 51 President and Chief Executive Officer of the Corporation since June 1995; Director of the Corporation, State Bank, Peoples Bank, Rurban Life, RFS, RMC and RDSI. President and Chief Executive Officer of State Bank, June 1995 to August 1996; President of FirstMerit Bank, FSB, Clearwater, Florida, from 1994 to June 1995; Senior Vice President and Managing Officer of the Northern Region of The First National Bank of Ohio, Cleveland, Ohio, from 1990 to 1994. Robert W. Constien 47 Executive Vice President of the Corporation since March 12, 1997; Vice President of the Corporation from 1994 to March, 1997; Chief Executive Officer and a Director of RFS since March 1997; Director of State Bank; Executive Vice President of State Bank from 1994 to 1997, Senior Vice President of State Bank from 1991 to 1993 and Vice President of State Bank from 1987 to 1991. Richard C. Warrener 55 Executive Vice President of the Corporation since December 1997; Chief Financial Officer of the Corporation since December 31, 1996; Senior Vice President of the Corporation from December 31, 1996 to December 1997; Senior Vice President and Chief Financial Officer of FirstMerit Bank, N.A. from March 1994 to December 1996; Senior Vice President and Chief Financial Officer of Life Savings Bank from January 1991 to March 1994; Division Vice President and Chief Financial Officer of Florida Federal Savings Bank from 1988 to November 1990.
26 27
Position(s) Held with the Corporation and Name Age its Subsidiaries and Principal Occupation(s) ---- --- -------------------------------------------- Mark E. Rowland 48 Senior Vice President and Senior Credit Officer of the Corporation since December 1997; Executive Vice President of State Bank since June 1997; Senior Vice President of State Bank since January 1997; Executive Vice President of Bancapital Corporation, a financial services company involved primarily in mortgage lending, from January 1991 to June 1996. Mark A. Soukup 43 President and Chief Executive Officer of State Bank since August 1996; (1) Senior Vice President-Retail Banking of State Bank from November 1995 to August 1996; Branch Administrator FirstMerit - First National Bank of Ohio from 1992 to September 1995. Kenneth A. Joyce 52 Chairman and Chief Executive Officer of RDSI since October 1997; Chairman (1) and Chief Executive Officer of RMC since November 1997; Executive Vice President of State Bank from June 1997 to November 1997; President of FirstMerit Bank, FSB, Clearwater Florida from July 1995 to December 1996. Henry R. Thiemann 53 Senior Vice President and Operations Manager of the Corporation since January 1999; President of RMC since August 1999; Special Projects Manager (Y2K) of the Corporation since January 1999; Independent Consultant from January 1996 to January 1999; Managing Agent of FDIC/RTC from April 1990 to December 1995. Edward L. Yoder 54 Senior Vice President and Senior Agricultural Lender of the Corporation (1) since December 1998; Executive Vice President of State Bank since April 1992; Director of RMC; Chairman and President of Rurban Life; Senior Vice President of State Bank since January 1992; Vice President of State Bank since 1985.
(1) For purposes of this Form 10-K, even though Mr. Soukup, Mr. Joyce and Mr. Yoder are not employed as officers of the Corporation and their salaries are not paid by the Corporation, they are included in the list of Executive Officers of the Corporation because they perform policy making functions for the Corporation. 27 28 PART II ------- Item 5. Market for Registrant's Common Equity and Related Shareholder Matters. - ------------------------------------------------------------------------------ The common shares of the Corporation are traded on the OTC Bulletin Board under the symbol "RBNF". The table below sets forth the high and low bid quotations for, and the cash dividends declared with respect to, the common shares of the Corporation, for the indicated periods. The Corporation is aware of two securities dealers who make a market in its common shares. The bid quotations reflect the prices at which purchases and sales of the Corporation's common shares could be made during each period and not inter-dealer prices. The bid quotations reflect retail mark-ups, but not commissions or retail mark-downs. The bid quotations represent actual transactions in the Corporation's common shares. The per share amounts have been restated for the two-for-one stock split declared in 1998.
Per Share Per Share Bid Prices Dividends 1998 High Low Declared ---- ---- --- -------- First Quarter $17.25 $15.31 $.10 Second Quarter 19.25 17.00 .10 Third Quarter 20.50 16.50 .10 Fourth Quarter 18.00 15.50 .10 Per Share Per Share Bid Prices Dividends 1999 High Low Declared ---- ---- --- -------- First Quarter $17.75 $15.00 $.10 Second Quarter 16.00 13.25 .10 Third Quarter 16.25 13.25 .10 Fourth Quarter 14.25 12.50 .11
There can be no assurance as to the amount of dividends which will be declared with respect to the common shares of the Corporation in the future, since such dividends are subject to the discretion of the Corporation's Board of Directors, cash needs, general business conditions, dividends from the subsidiaries and applicable governmental regulations and policies. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation - Capital Resources and Note 1 of Notes to Consolidated Financial Statements. The approximate number of holders of outstanding common shares of the Corporation, based upon the number of record holders as of December 31, 1999, was 1,650. 28 29 Item 6. Selected Financial Data - ---------------------------------- SUMMARY OF SELECTED FINANCIAL DATA
(Dollars in thousands except per share data) Year Ended December 31, 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- EARNINGS Total interest income $ 44,953 $ 39,293 $ 36,582 $ 32,924 $ 30,969 Total interest expense 21,744 18,743 16,689 14,657 14,238 Net interest income 23,209 20,550 19,893 18,267 16,731 Provision for loan losses 1,215 1,080 948 961 1,452 Total noninterest income 11,064 10,511 8,294 6,781 6,214 Total noninterest expense 25,466 23,630 19,253 16,876 15,271 Income tax expense 2,361 2,073 2,470 2,362 2,127 Net income 5,231 4,278 5,516 4,849 4,095 - ------------------------------------------------------------------------------------------ PER SHARE DATA (1) Basic earnings (2) $ 1.28 $ 1.05 $ 1.24 $ 1.07 $ 0.89 Diluted earnings (2) 1.28 1.04 1.24 1.07 0.89 Cash dividends declared 0.41 0.40 0.37 0.285 0.285 - ------------------------------------------------------------------------------------------ AVERAGE BALANCES Average shareholders' equity $ 42,967 $ 40,431 $ 42,151 $ 40,749 $ 37,877 Average total assets 580,200 493,957 452,011 416,743 398,560 - ------------------------------------------------------------------------------------------ RATIOS Return on average shareholders' equity 12.17% 10.58% 13.09% 11.90% 10.81% Return on average total assets .90 .87 1.22 1.16 1.03 Cash dividend payout ratio (cash dividends divided by net income) 32.36 38.83 29.89 26.99 32.01 Average shareholders' equity to average total assets 7.41 8.19 9.33 9.78 9.50 - ------------------------------------------------------------------------------------------ PERIOD END TOTALS Total assets $627,784 $537,155 $471,371 $433,273 $411,226 Total loans and leases 501,678 394,311 359,736 318,709 277,600 Total deposits 519,296 450,813 415,181 387,766 367,797 Advances from FHLB 40,035 28,890 7,530 -- -- Shareholders' equity 43,900 41,903 39,094 41,489 40,078 Shareholders' equity per share (1) 10.60 10.12 9.44 9.07 8.74 - ------------------------------------------------------------------------------------------
(1) Per share data restated for 5% stock dividend declared in 1996 and two-for-one stock split declared in 1998. (2) Restated to reflect adoption of SFAS No. 128 on December 31, 1997. 29 30 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation. - -------------------------------------------------------------------------------- EARNINGS SUMMARY CONSOLIDATED NET INCOME for Rurban Financial Corp. (the "Corporation") for 1999 was $5.2 million, up from $4.3 million in 1998 and down from $5.5 million in 1997. Basic earnings per share were $1.28 in 1999, an increase of 22% from $1.05 in 1998 and a 3% increase over the 1.24% in 1997. Cash dividends declared per share increased to $.41 for 1999 compared to $.40 in 1998 and $.37 in 1997, increases of 2.5% and 8%, respectively. Per share data has been adjusted to reflect the two-for-one stock split declared in May 1998. RESULTS OF OPERATIONS 1999 COMPARED WITH 1998 - ----------------------- NET INTEREST INCOME for 1999 was $23.2 million an increase of $2.7 million (12.9%) over 1998. The increase was primarily due to a 22.7% increase in the average balance of loans and loans held for sale. The average yield on loans declined to 8.63% compared to 9.07% for 1998. The decline in earning asset yield partially offset by the decrease in the average rate on interest bearing liabilities from 4.65% in 1998 to 4.49% in 1999, combined to result in a decline in the tax equivalent net interest margin from 4.43% in 1998 to 4.29% in 1999. AT DECEMBER 31, 1999, loans and loans held for sale, net of deferred loan fees amounted to $508.5 million, an increase of 23.3% over the December 31, 1998 balance of $412.5 million. This increase was due to the Corporation's loan origination efforts, with the majority of the growth occurring in the Findlay/Hancock county and Cleveland/Akron areas. COMMERCIAL, FINANCIAL AND AGRICULTURAL LOANS increased $77.7 million from $248.8 million at December 31, 1998 to $326.6 million at December 31, 1999. This increase occurred as the result of the Corporation's goal to increase small business loan relationships. AT DECEMBER 31, 1999, approximately $7.1 million of real estate mortgage loans were held for sale in the secondary market. During 1999, approximately $97.3 million of real estate mortgage loans were originated for sale and approximately $103.6 million were sold in the secondary market. This represents an increase of $5.2 million (5.3%) in loans sold in 1999 as compared to 1998. During 1999, most loans were sold on a servicing released basis. Loans originated for sale are primarily fixed rate mortgage loans. SECURITIES AVAILABLE FOR SALE TOTALED $83.1 million at December 31, 1999 which represented an increase of $1 million (1.2%) from $82.1 million at December 31, 1998. As of December 31, 1999, all securities of the Corporation were designated available for sale. Available for sale securities represent those securities which the Corporation may decide to sell if needed for liquidity, asset/liability management or other reasons. Such securities are reported at fair value with net unrealized appreciation (depreciation) included as a separate component of shareholders' equity, net of tax. This resulted in a net decrease in shareholders' equity of $1.5 million at December 31, 1999. TOTAL DEPOSITS at December 31, 1999 amounted to $519.3 million, an increase of $68.5 million (15.2%) over total deposits of $450.8 million at December 31, 1998. The increase in deposits is believed to have 30 31 occurred as a result of increased deposit services and flexibility of products offered. Management believes that customers continue to place a value on federal insurance on deposit accounts and that, to the extent the Corporation continues to pay competitive rates on deposits and continues to provide flexibility of deposit products, the Corporation will be able to maintain and increase its deposit levels. OTHER BORROWINGS at December 31, 1999 were $57.9 million compared to $38.4 at December 31, 1998. These borrowings consisted of $40.0 million of FHLB Advances and $10.9 million of federal funds purchased and $7.0 million borrowed on a line of credit with another financial institution as the Corporation continued to access alternative sources for funding its loan growth. THE PROVISION FOR LOAN LOSSES charged to operations was based on the amount of net losses incurred and management's estimation of inherent losses based on an evaluation of loan portfolio risk and economic factors. The provision for loan losses was $1,215,000 in 1999 compared to $1,080,000 in 1998. THE ALLOWANCE for loan losses at December 31, 1999 was $6.2 million or 1.22% of loans and loans held for sale, net of deferred loan fees, compared to $5.4 million or 1.31% at December 31, 1998. LOANS ARE CONSIDERED IMPAIRED if full principal or interest payments are not anticipated in accordance with the contractual loan terms. Impaired loans are carried at the present value of expected future cash flows discounted at the loan's effective interest rate or at the fair value of the collateral if the loan is collateral dependent. Under this guidance, the carrying value of impaired loans is periodically adjusted to reflect cash payments, revised estimates of future cash flows and increases in the present value of expected cash flows due to the passage of time. A portion of the allowance for loan losses is allocated to impaired loans. SMALLER-BALANCE homogeneous loans are evaluated for impairment in total. Such loans include residential first mortgage loans secured by one-to-four family residences, residential construction loans, and automobile, home equity and second mortgage loans. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment. When analysis of borrower operating results and financial condition indicates that underlying cash flows of the borrower's business are not adequate to meet its debt service requirements, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 30 days or more. Commercial loans are rated on a scale of 1 to 8, with 1-3 being satisfactory, 4 watch, 5 special mention, 6 substandard, 7 doubtful, and 8 as loss which are then charged off. Loans graded a 6 or worse are considered for impairment. Loans are generally moved to nonaccrual status when 90 days or more past due. Such loans are often considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible. This typically occurs when the loan is 120 days or more past due. At December 31, 1999, the Corporation classified three loan relationships as impaired, totaling $1.5 million. Management allocated $807,000 of the allowance for loan losses to impaired loans at December 31, 1999. MANAGEMENT ALLOCATED approximately 71% of the allowance for loan losses to commercial, financial and agricultural loans; 9% to consumer loans; and 1% to residential first mortgage loans at December 31, 1999, leaving a balance of 19% unallocated. Nonperforming loans decreased to $2.2 million at December 31, 1999 from $3.6 million at December 31, 1998. The decrease in nonperforming loans relates primarily to a decrease in accruing loans past due 90 days or more at the end of 1999. The allowance is maintained by management at a level considered adequate to cover losses that are currently anticipated based on past loss experience, economic conditions, information about specific borrower situations including their financial position and collateral values, and other factors and estimates which are subject to change over time. Management believes the allowance for loan losses balance at December 31, 1999 is adequate to absorb losses on impaired, nonperforming and other loans. 31 32 TOTAL NONINTEREST INCOME increased $553,000 to $11.1 million in 1999 from $10.5 million in 1998. This growth was driven by data service fees which increased $828,000 (23.3%) to $4,382,000 in 1999 compared to $3,554,000 in 1998. The primary reasons for the $828,000 increase were increases in the number of customer accounts processed and in the level of sales of ancillary data processing products. The increase in number of accounts was a result of customer account growth at client banks and growth in the number of bank clients from 39 at the end of 1998 to 50 at year-end 1999. Trust fee income increased $20,000 (0.8%) to $2,597,000 in 1999 from $2,577,000 in 1998 primarily due to an increase in trust assets managed from $326 million at December 31, 1998 to $356 million at December 31, 1999. Net gain on sales of loans decreased $787,000 to $1,147,000 in 1999 as compared to $1,934,000 in 1998. This decrease was the result of lower margins in gains on sale in 1999 compared to 1998. Other income increased $318,000 (54.7%) to $899,000 in 1999 from $581,000 in 1998. The primary reason for the increase was a $226,000 gain on sale of a branch site in 1999. TOTAL NONINTEREST EXPENSE increased $1.8 million (7.8%) to $25.5 million in 1999, from $23.6 million in 1998, primarily due to the following factors. Salaries and employee benefits increased $2.0 million (15.7%) to $14.4 million in 1999 compared to $12.4 million in 1998. This increase was due primarily to annual merit increases, and staffing increases in the Corporation's non-interest income generating companies. Equipment rentals, depreciation and maintenance increased $466,000 primarily due to the upgrading of networking and computer equipment. Other expenses decreased $674,000 (8.8%) primarily due to the decrease in operating expenses at Rurban Mortgage Company. INCOME TAX EXPENSE for the year ended December 31, 1999 was $2.4 million, an increase of $288,000 (13.9%) from 1998. This increase was primarily attributable to a increase in income before income tax expense. RESULTS OF OPERATIONS 1998 COMPARED WITH 1997 - ----------------------- NET INTEREST INCOME for 1998 was $20.6 million an increase of $0.7 million (3.3%) over 1997. The increase was primarily due to a 9.8% increase in the average balance of loans and loans held for sale. The average yield on loans declined to 9.07% compared to 9.23% for 1997. The decline in earning asset yield, the increase in the average rate on interest bearing liabilities from 4.61% in 1997 to 4.65% in 1998 and the funding cost of the November 1997 $6.7 million stock repurchase program combined to result in a decline in the tax equivalent net interest margin from 4.72% in 1997 to 4.43% in 1998. AT DECEMBER 31, 1998, loans and loans held for sale, net of deferred loan fees amounted to $412.5 million, an increase of 13.4% over the December 31, 1997 balance of $363.9 million. This increase was due to the Corporation's loan origination efforts. COMMERCIAL, FINANCIAL AND AGRICULTURAL LOANS increased $31.5 million from $217.3 million at December 31, 1997 to $248.8 million at December 31, 1998. This increase occurred as the result of the Corporation's goal to increase small business loan relationships. AT DECEMBER 31, 1998, approximately $18.5 million of real estate mortgage loans were held for sale in the secondary market. During 1998, approximately $112.4 million of real estate mortgage loans were originated for sale and approximately $98.3 million were sold in the secondary market. This represents an increase of $70.1 million (248%) in loans sold in 1998 as compared to 1997. Real estate mortgage loans originated for sale increased $81.6 million in 1998, as compared to 1997, primarily due to the loan 32 33 origination efforts of Rurban Mortgage Company. Net gains on loan sales for 1998 totaled $1,934,000, an increase of $1,382,000 as compared to $552,000 in 1997. During 1998, most loans were sold on a servicing released basis. Loans originated for sale are primarily fixed rate mortgage loans. SECURITIES AVAILABLE FOR SALE TOTALED $82.1 million at December 31, 1998 which represented an increase of $10.4 million (14.5%) from $71.7 million at December 31, 1997. As of December 31, 1998, all securities of the Corporation were designated available for sale. Available for sale securities represent those securities which the Corporation may decide to sell if needed for liquidity, asset/liability management or other reasons. Such securities are reported at fair value with net unrealized appreciation (depreciation) included as a separate component of shareholders' equity, net of tax. This resulted in a net increase in shareholders' equity of $203,000 at December 31, 1998. TOTAL DEPOSITS AT December 31, 1998 amounted to $450.8 million, an increase of $35.6 million (8.6%) over total deposits of $415.2 million at December 31, 1997. The increase in deposits is believed to have occurred as a result of increased deposit services and flexibility of products offered. OTHER BORROWINGS at December 31, 1998 were $38.4 million compared to $12.5 at December 31, 1997. These borrowings consisted of $28.9 million of FHLB Advances and $9.5 million of federal funds purchased as the Corporation continued to access alternative sources for funding its loan growth. THE PROVISION FOR LOAN LOSSES charged to operations was based on the amount of net losses incurred and management's estimation of inherent losses based on an evaluation of loan portfolio risk and economic factors. The provision for loan losses was $1,080,000 in 1998 compared to $948,000 in 1997. THE ALLOWANCE FOR LOAN LOSSES at December 31, 1998 was $5.4 million or 1.31% of total loans and loans held for sale, net of deferred loan fees, compared to $5.2 million or 1.44% at December 31, 1997. MANAGEMENT ALLOCATED approximately 50% of the allowance for loan losses to commercial, financial and agricultural loans; 19% to consumer loans; and 3% to residential first mortgage loans at December 31, 1998, leaving a balance of 28% unallocated. Nonperforming loans increased to $3.6 million at December 31, 1998 from $2.8 million at December 31, 1997. The increase in nonperforming loans relates primarily to an increase in accruing loans past due 90 days or more at the end of 1998. TOTAL NONINTEREST INCOME increased $2,216,000 to $10.5 million in 1998 from $8.3 million in 1997. Net gain on sales of loans increased $1,382,000 to $1,934,000 in 1998 as compared to $552,000 in 1997. Trust fee income increased $250,000 (10.7%) to $2,577,000 in 1998 from $2,327,000 in 1997 primarily due to an increase in trust assets managed from $294 million at December 31, 1997 to $326 million at December 31, 1998. Data service fees increased $726,000 (25.7%) to $3,554,000 in 1998 compared to $2,828,000 in 1997. RDSI purchased a second mainframe computer and doubled its bank data processing capacity during the third quarter of 1998. The $726,000 increase would have been a $964,000 increase excluding the inflation of 1997's data processing fees for a $238,000 cash to accrual change made in 1997. The primary reasons for the $964,000 increase were increases in the number of customer accounts processed and in the level of sales of ancillary data processing products. The increase in number of accounts was a result of customer account growth at client banks and growth in the number of bank clients from 36 at the end of 1997 to 39 at year-end 1998. TOTAL NONINTEREST EXPENSE increased $4.4 million (22.7%) to $23.6 million in 1998, from $19.3 million in 1997, primarily due to the following factors. Salaries and employee benefits increased $2.2 million (22.0%) to $12.4 million in 1998 compared to $10.2 million in 1997. This increase was due primarily to annual merit increases, and staffing increases in the Corporation's three non-interest income generating 33 34 companies (RDSI, Reliance Financial Services and Rurban Mortgage Company) and in the Holding Company's administrative staff. Equipment rentals, depreciation and maintenance increased $505,000 primarily due to the purchase of a second mainframe computer and associated software licensing to double RDSI's data processing capacity. Other expenses increased $1,526,000 (25.1%) primarily due to inflation and additional expenses attributed to the growth in loan origination volume at Rurban Mortgage Company. INCOME TAX EXPENSE for the year ended December 31, 1998 was $2.1 million, a decrease of $397,000 (16.1%) from 1997. This decrease was primarily attributable to a decrease in income before income tax expense. LIQUIDITY LIQUIDITY RELATES PRIMARILY to the Corporation's ability to fund loan demand, meet deposit customers' withdrawal requirements and provide for operating expenses. Assets used to satisfy these needs consist of cash and due from banks, federal funds sold, securities available-for sale and loans held for sale. These assets are commonly referred to as liquid assets. Liquid assets were $109 million at December 31, 1999 compared to $126 million at December 31, 1998 and $98 million at December 31, 1997. Liquidity levels decreased $17 million from 1998 to 1999 primarily due to strong loan demand which exceeded the growth in deposits and short-term borrowings. Management recognizes that securities may need to be sold in the future to help fund loan demand and, accordingly, as of December 31, 1999, the entire securities portfolio of $83.1 million was classified as available for sale. THE CORPORATION'S RESIDENTIAL FIRST MORTGAGE PORTFOLIO of $80.7 million, which can and has been readily used to collateralize borrowings, is an additional source of liquidity. Management believes its current liquidity level is sufficient to meet anticipated future growth. THE CASH FLOW statements for the periods presented provide an indication of the Corporation's sources and uses of cash as well as an indication of the ability of the Corporation to maintain an adequate level of liquidity. A discussion of the cash flow statements for 1999, 1998 and 1997 follows. THE CORPORATION experienced a net increase in cash from operating activities in 1999 and 1997 and a net decrease in 1998. Net cash from operating activities was $14.6 million, $(6.6) million and $4.1 million for the years ended December 31, 1999, 1998 and 1997, respectively. The increase in net cash from operating activities of $14.6 million for 1999 as compared to 1998 was primarily due to decreases in loans held for sale of $6.2 million. NET CASH FLOW FROM INVESTING ACTIVITIES was $(107.9 million), $(50.0 million) and $(47.8 million) for the years ended December 31, 1999, 1998 and 1997, respectively. The changes in net cash from investing activities include loan growth, as well as normal maturities and reinvestments of securities and premises and equipment expenditures. In 1999, 1998 and 1997, the Corporation received $17.7 million, $24.8 million and $28.6 million , respectively, from sales of securities available for sale, while proceeds from repayments and maturities of securities were $24.2 million, $24.1 million and $8.8 million in 1999, 1998 and 1997, respectively. NET CASH FLOW FROM FINANCING ACTIVITIES was $86.4 million, $59.9 million and $32.0 million for the years ended December 31, 1999, 1998 and 1997, respectively. The net cash increase was primarily attributable to growth in total deposits of $68.5 million, $35.6 million and $27.4 million in 1999, 1998 and 1997, respectively. Other significant changes in 1999, 1998 and 1997 included $11.1 million, $21.4 million and $7.5 million in net borrowings from the Federal Home Loan Bank. Additionally, In 1999 34 35 $7.0 million of funding was received under a line of credit and in 1997, $6.7 million was paid to repurchase common stock. ASSET LIABILITY MANAGEMENT ASSET LIABILITY MANAGEMENT involves developing and monitoring strategies to maintain sufficient liquidity, maximize net interest income and minimize the impact that significant fluctuations in market interest rates would have on earnings. The business of the Corporation and the composition of its balance sheet consists of investments in interest-earning assets (primarily loans, mortgage-backed securities, and securities available for sale) which are primarily funded by interest-bearing liabilities (deposits and borrowings). With the exception of loans which are originated and held for sale, all of the financial instruments of the Corporation are for other than trading purposes. All of the Corporation's transactions are denominated in U.S. dollars with no specific foreign exchange exposure. In addition, the Corporation has limited exposure to commodity prices related to agricultural loans. The impact of changes in foreign exchange rates and commodity prices on interest rates are assumed to be insignificant. The Corporation's financial instruments have varying levels of sensitivity to changes in market interest rates resulting in market risk. Interest rate risk is the Corporation's primary market risk exposure; to a lesser extent, liquidity risk also impacts market risk exposure. INTEREST RATE RISK is the exposure of a banking institution's financial condition to adverse movements in interest rates. Accepting this risk can be an important source of profitability and stockholder value; however, excessive levels of interest rate risk could pose a significant threat to the Corporation's earnings and capital base. Accordingly, effective risk management that maintains interest rate risks at prudent levels is essential to the Corporation's safety and soundness. EVALUATING a financial institution's exposure to changes in interest rates includes assessing both the adequacy of the management process used to control interest rate risk and the organization's quantitative level of exposure. When assessing the interest rate risk management process, the Corporation seeks to ensure that appropriate policies, procedures, management information systems, and internal controls are in place to maintain interest rate risks at prudent levels of consistency and continuity. Evaluating the quantitative level of interest rate risk exposure requires the Corporation to assess the existing and potential future effects of changes in interest rates on its consolidated financial condition, including capital adequacy, earnings, liquidity, and asset quality (when appropriate). THE FEDERAL RESERVE BOARD together with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, adopted a Joint Agency Policy Statement on interest rate risk effective June 26, 1996. The policy statement provides guidance to examiners and bankers on sound practices for managing interest rate risk, which will form the basis for ongoing evaluation of the adequacy of interest rate risk management at supervised institutions. The policy statement also outlines fundamental elements of sound management that have been identified in prior Federal Reserve guidance and discusses the importance of these elements in the context of managing interest rate risk. Specifically, the guidance emphasizes the need for active Board of Director and Senior Management oversight and a comprehensive risk management process that effectively identifies, measures, and controls interest rate risk. FINANCIAL INSTITUTIONS derive their income primarily from the excess of interest collected over interest paid. The rates of interest an institution earns on its assets and owes on its liabilities generally are established contractually for a period of time. Since market interest rates change over time, an institution is exposed to lower profit margins (or losses) if it cannot adapt to interest rate changes. For example, assume that an institution's assets carry intermediate or long term fixed rates and that those assets are funded with short-term liabilities. If market interest rates rise by the time the short-term liabilities must 35 36 be refinanced, the increase in the institution's interest expense on its liabilities may not be sufficiently offset if assets continue to earn at the long-term fixed rates. Accordingly, an institution's profits could decrease on existing assets because the institution will either have lower net interest income or possible, net interest expense. Similar risks exist when assets are subject to contractual interest rate ceilings, or rate sensitive assets are funded by longer-term, fixed-rate liabilities in a declining rate environment. SEVERAL WAYS an institution can manage interest rate risk include: 1) selling existing assets or repaying certain liabilities; 2) matching repricing periods for new assets and liabilities, for example, by shortening terms of new loans or investments; and 3) hedging existing assets, liabilities, or anticipated transactions. An institution might also invest in more complex financial instruments intended to hedge or otherwise change interest rate risk. Interest rate swaps, futures contacts, options on futures contracts, and other such derivative financial instruments can be used for this purpose. Because these instruments are sensitive to interest rate changes, they require management's expertise to be effective. The Corporation has not purchased derivative financial instruments in the past and does not presently intend to purchase such instruments. QUANTITATIVE MARKET RISK DISCLOSURE. The following table provides information about the Corporation's financial instruments used for purposes other than trading that are sensitive to changes in interest rates. For loans receivable, securities, and liabilities with contractual maturities, the table presents principal cash flows and related weighted-average interest rates by contractual maturities as well as the Corporation's historical experience of the impact of interest rate fluctuations on the prepayment of loans and mortgage backed securities. For core deposits (demand deposits, interest-bearing checking, savings, and money market deposits) that have no contractual maturity, the table presents principal cash flows and, as applicable related weighted-average interest rates based upon the Corporation's historical experience, management's judgement and statistical analysis, as applicable, concerning their most likely withdrawal behaviors. The current historical interest rates for core deposits have been assumed to apply for future periods in this table as the actual interest rates that will need to be paid to maintain these deposits are not currently known. Weighted average variable rates are based upon contractual rates existing at the reporting date. 36 37 PRINCIPAL/NOTIONAL AMOUNT MATURING IN: (DOLLARS IN THOUSANDS) - --------------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004 Thereafter Total - -------------------------------------------------------------------------------------------------------------- RATE-SENSITIVE ASSETS: Variable rate loans $110,544 $ 9,032 $ 9,054 $ 3,772 $ 2,250 $ 0 $134,652 Average interest rate 8.97% 8.60% 8.69% 8.40% 18.08% 0.00% 9.07% Adjustable rate loans $ 54,514 $ 35,676 $33,710 $33,976 $10,203 $ 0 $168,079 Average interest rate 8.16% 8.20% 8.13% 8.12% 8.12% 0.00% 8.15% Fixed rate loans $110,323 $ 61,419 $13,643 $12,090 $ 210 $ 1,262 $198,947 Average interest rate 8.51% 8.48% 8.12% 7.97% 4.77% 5.18% 8.42% Total loans $275,381 $106,127 $56,407 $49,838 $12,663 $ 1,262 $501,678 Average interest rate 8.63% 8.40% 8.22% 8.10% 9.84% 5.18% 8.50% Fixed rate investment securities $ 17,790 $ 14,796 $11,221 $ 7,963 $ 5,891 $24,111 $ 81,772 Average interest rate 5.62% 6.21% 6.40% 6.20% 6.15% 5.44% 5.87% Variable rate investment sec. $ 0 $ 0 $ 0 $ 0 $ 1,347 $ 0 $ 1,347 Average interest rate 0.00% 0.00% 0.00% 0.00% 6.73% 0.00% 6.73% Fed funds sold & other $ 111 $ 0 $ 0 $ 0 $ 10 $ 0 $ 121 Average interest rate 5.76% 0.00% 0.00% 0.00% 5.43% 0.00% 5.73% Total rate sensitive assets $293,282 $120,923 $67,628 $57,801 $19,911 $25,373 $584,918 Average interest rate 8.44% 8.13% 7.92% 7.84% 8.53% 5.43% 8.13% RATE SENSITIVE LIABILITIES: Demand - non interest-bearing $ 1,552 $ 2,961 $ 4,200 $ 5,224 $ 6,879 $28,189 $ 49,005 Demand - interest bearing $ 1,551 $ 2,959 $ 4,197 $ 5,220 $ 6,873 $28,165 $ 48,965 Average interest rate 1.81% 1.81% 1.81% 1.81% 1.81% 1.81% 1.81% Money market accounts $ 76,249 $ 13,818 $ 139 $ 129 $ 119 $ 1,519 $ 91,973 Average interest rate 4.45% 3.51% 2.10% 2.10% 2.10% 2.10% 4.26% Savings $ 9,500 $ 1,532 $ 1,420 $ 1,316 $ 1,220 $15,469 $ 30,457 Average interest rate 2.15% 2.15% 2.15% 2.15% 2.15% 2.15% 2.15% Certificates of deposit $237,927 $ 46,275 $ 9,793 $ 1,357 $ 3,438 $ 106 $298,896 Average interest rate 5.14% 5.54% 5.41% 5.52% 5.82% 4.71% 5.22% Fixed rate FHLB advances $ 4,121 $ 2,139 $ 1,925 $ 1,850 $ 0 $ 4,000 $ 14,035 Average interest rate 5.96% 5.80% 5.82% 5.80% 0.00% 5.88% 5.87% Variable rate FHLB advances $ 4,000 $ 3,500 $ 0 $ 0 $ 0 $18,500 $ 26,000 Average interest rate 5.64% 6.18% 0.00% 0.00% 0.00% 5.36% 5.51% Variable rate note payable $ 7,000 $ 0 $ 0 $ 0 $ 0 $ 0 $ 7,000 Average interest rate 8.50% 0.00% 0.00% 0.00% 0.00% 0.00% 8.50% Fed funds purchased $ 10,900 $ 0 $ 0 $ 0 $ 0 $ 0 $ 10,900 Average interest rate 5.73% 0.00% 0.00% 0.00% 0.00% 0.00% 5.73% Total rate sensitive liabilities $352,800 $ 73,184 $21,674 $15,096 $18,529 $95,948 $577,231 Average interest rate 4.97% 4.75% 3.47% 2.04% 1.91% 2.19% 4.25% - --------------------------------------------------------------------------------------------------------------
37 38
Principal/Notional Amount Maturing In: (Dollars in Thousands) Comparison of 1999 to 1998: First Years Total rate-sensitive assets: Year 2 - 5 Thereafter Total ---- ----- ---------- ----- At December 31, 1999 $293,282 $266,263 $ 25,373 $584,918 At December 31, 1998 230,007 231,979 41,876 503,862 -------- -------- -------- -------- Increase (decrease) $ 63,275 $ 34,284 $(16,503) $ 81,056 Total rate-sensitive liabilities: At December 31, 1999 $352,800 $128,483 $ 95,948 $577,231 At December 31, 1998 283,558 112,995 92,650 489,203 -------- -------- -------- -------- Increase (decrease) $ 69,242 $ 15,488 $ 3,298 $ 88,028
THE ABOVE TABLE reflects expected maturities, not expected repricing. The contractual maturities adjusted for anticipated prepayments as shown in the preceding table are only part of the Corporation's interest rate risk profile. Other important factors include the ratio of rate-sensitive assets to rate sensitive liabilities (which takes into consideration loan repricing frequency) and the general level and direction of market interest rates. For some rate sensitive liabilities, their repricing frequency is the same as their contractual maturity. For variable rate loans receivable, repricing frequency can be daily or monthly and for adjustable rate loans receivable, repricing can be as frequent as annually for loans whose contractual maturities range from one to thirty years. While increasingly aggressive local market competition in lending rates has pushed loan rates lower; the Corporation's increased reliance on non-core funding sources has restricted the Corporation's ability to reduce funding rates in concert with declines in lending rates. Therefore, tax equivalent net interest income as a percentage of average interest earning assets declined from 4.43% in 1998 to 4.27% in 1999. THE CORPORATION MANAGES its interest rate risk by the employment of strategies to assure that desired levels of both interest-earning assets and interest-bearing liabilities mature or reprice with similar time frames. Such strategies include; 1) loans receivable which are renewed(and repriced) annually, 2) variable rate loans, 3) certificates of deposit with terms from one month to six years and 4) securities available for sale which mature at various times primarily from one through ten years 5) federal funds borrowings with terms of one day to 90 days, and 6) Federal Home Loan Bank borrowings with terms of one day to ten years. CAPITAL RESOURCES TOTAL SHAREHOLDERS' EQUITY, net of unearned ESOP shares was $43.9 million as of December 31, 1999, an increase of $2 million from $41.9 million as of December 31, 1998. The increase was primarily due to 1999 net income of $5.2 million, reduced by $1.7 million of cash dividends to shareholders and a $1.7 million decrease in the market value of securities available for sale, net of tax. TOTAL REGULATORY (RISK-BASED) CAPITAL was $51.1 million, net of $908,000 of unearned ESOP shares as of December 31, 1999, an increase of $5.0 million from total regulatory (risk-based) capital of $46.1 million as of December 31, 1998. THE COMPONENTS of total risk-based capital are Tier 1 capital and Tier 2 capital. Tier 1 capital is total shareholders' equity less intangible assets. Tier 2 capital is Tier 1 capital plus a portion of the allowance 38 39 for loan losses. The allowance for loan losses is includable in Tier 2 capital up to a maximum of 1.25% of risk weighted assets. (See Note 16 to the consolidated financial statements.) RESTRICTIONS EXIST REGARDING the ability of the subsidiary banks to transfer funds to the Corporation in the form of cash dividends, loans or advances. (See Note 1 to consolidated financial statements.) As of December 31, 1999, management is not aware of any current recommendations by banking regulatory authorities which, if they were to be implemented, would have, or are reasonably likely to have, a material adverse effect on the Corporation's liquidity, capital resources or operations. YEAR 2000 During 1999, the corporation completed its comprehensive Year 2000 (Y2K) plan in preparing for the Year 2000 date change. The plan involved identifying and providing a remedy for date recognition problems that might pertain to any facets of the Corporation's business. These included problems in computer hardware and software, physical plant and other equipment, working with third parties to address their Year 2000 issues, assessing major loan an deposit customers for potential risk and developing contingency plans to address potential risks in the event of Year 2000 failures. As testimony to the success of these efforts, the Corporation experienced no disruption in service of any type in the transition to 2000. In 1999 the Corporation spent $554,000 in out of pocket expenses directly related to year 2000 readiness. Much of this expense was related to assuring that RDSI was fully prepared and that their 50 bank clients were fully aware of their preparation responsibilities as they relate to RDSI's data processing systems. The out of pocket expenses and the significant amount of time devoted to Year 2000 preparation by directors, officers and other personnel combined to have a material impact on the results of operations in 1999. All business processes will continue to be monitored, including interaction with the Corporation's customers, vendors and other third parties, throughout 2000 to address any issues and ensure all processes continue to function properly. Management does not expect the costs of addressing Year 2000 issues to have a material impact on the results of operations in 2000. PLANNED PURCHASES OF PREMISES AND EQUIPMENT MANAGEMENT PLANS to purchase additional premises and equipment to meet the current and future needs of the Corporation's customers. These purchases, including land, buildings and improvements and furniture and equipment (which includes computer software and license agreements), are currently expected to total approximately $3 million over the next year. IMPACT OF INFLATION AND CHANGING PRICES THE MAJORITY OF ASSETS AND LIABILITIES of the Corporation are monetary in nature and therefore the Corporation differs greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. However, inflation does have an important impact on the growth of total assets in the banking industry and the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity to assets ratio. Inflation significantly affects noninterest expense, which tends to rise during periods of general inflation. MANAGEMENT BELIEVES the most significant impact on financial results is the Corporation's ability to react to changes in interest rates. Management seeks to maintain an essentially balanced position between interest sensitive assets and liabilities and actively manages the amount of securities available 39 40 for sale in order to protect against the effects of wide interest rate fluctuations on net income and shareholders' equity. FORWARD-LOOKING STATEMENTS WHEN USED IN THIS FILING and in future filings by the Corporation with the Securities and Exchange Commission, in the Corporation's press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phases, "anticipate," "would be," "will allow," "intends to," "will likely result," "are expected to," "will continue," "is anticipated," "estimated," "project," or similar expressions are intended to identify, "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties, including but not limited to changes in economic conditions in the Corporation's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Corporation's market area, and competition, all or some of which could cause actual results to differ materially from historical earnings and those presently anticipated or projected. THE CORPORATION WISHES TO CAUTION readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and advise readers that various factors, including regional and national economic conditions, substantial changes in levels of market interest rates, credit and other risks of lending and investing activities, and competitive and regulatory factors, could affect the Corporation's financial performance and could cause the Corporation's actual results for future periods to differ materially form those anticipated or projected. THE CORPORATION DOES NOT UNDERTAKE, and specifically disclaims any obligation, to update any forward looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. - --------------------------------------------------------------------- The disclosures required by this item appear in this Annual Report on Form 10-K under the caption "Asset Liability Management" contained in the Management's Discussion and Analysis section of this Annual Report on Form 10-K. Item 8. Financial Statements and Supplementary Data. - ------------------------------------------------------ The Consolidated Balance Sheets of the Corporation and its subsidiaries as of December 31, 1999 and December 31, 1998, the related Consolidated Statements of Income, Changes in Shareholders' Equity and Cash Flows for each of the years in the three-year period ended December 31, 1999, the related Notes to Consolidated Financial Statements and the Report of Independent Auditors, appear on pages F-1 through F-35 of this Annual Report on Form 10-K. The Corporation is not required to furnish the supplementary financial information specified by Item 302 of Regulation S-K. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. - ------------------------------------------------------------------------ None. 40 41 PART III -------- Item 10. Directors and Executive Officers of the Registrant. - ------------------------------------------------------------- In accordance with General Instruction G(3), the information called for in this Item 10 is incorporated herein by reference to the Corporation's definitive Proxy Statement, filed with the Securities and Exchange Commission pursuant to Regulation 14A of the General Rules and Regulations under the Securities Exchange Act of 1934, relating to the Corporation's Annual Meeting of Shareholders to be held on April 24, 2000, under the captions "ELECTION OF DIRECTORS" and "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." In addition, certain information concerning the executive officers of the Corporation called for in this Item 10 is set forth in the portion of Part I, Item 4 of this Annual Report on Form 10-K entitled "Executive Officers of the Registrant" in accordance with General Instruction G(3). During February of 2000, director John R. Compo filed a late Form 4 reporting his purchase of 1,500 of the Corporation's Common Shares which were acquired during September of 1999. This was the only transaction not timely reported. Item 11. Executive Compensation. - --------------------------------- In accordance with General Instruction G(3), the information called for in this Item 11 is incorporated herein by reference to the Corporation's definitive Proxy Statement, filed with the Securities and Exchange Commission pursuant to Regulation 14A of the General Rules and Regulations under the Securities Exchange Act of 1934, relating to the Corporation's Annual Meeting of Shareholders to be held on April 24, 2000, under the captions "COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS" and "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION." Neither the "REPORT ON EXECUTIVE COMPENSATION" nor the "PERFORMANCE GRAPH" included in the Corporation's definitive Proxy Statement relating to the Corporation's Annual Meeting of Shareholders to be held on April 24, 2000, shall be deemed to be incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. - ------------------------------------------------------------------------- In accordance with General Instruction G(3), the information called for in this Item 12 is incorporated herein by reference to the Corporation's definitive Proxy Statement, filed with the Securities and Exchange Commission pursuant to Regulation 14A of the General Rules and Regulations under the Securities Exchange Act of 1934, relating to the Corporation's Annual Meeting of Shareholders to be held on April 24, 2000, under the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." Item 13. Certain Relationships and Related Transactions. - --------------------------------------------------------- In accordance with General Instruction G(3), the information called for in this Item 13 is incorporated herein by reference to the Corporation's definitive Proxy Statement, filed with the Securities and Exchange Commission pursuant to Regulation 14A of the General Rules and Regulations under the Securities Exchange Act of 1934, relating to the Corporation's Annual Meeting of Shareholders to be held on April 24, 2000, under the caption "TRANSACTIONS INVOLVING MANAGEMENT." 41 42 PART IV ------- Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. - --------------------------------------------------------------------------- (a) (1) Financial Statements. -------------------- For a list of all financial statements included in this Annual Report on Form 10-K, see "Index to Financial Statements" at page 47. (a) (2) Financial Statement Schedules. ----------------------------- All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. (a) (3) Exhibits. -------- Exhibits filed with this Annual Report on Form 10-K are attached hereto. For a list of such exhibits, see "Index to Exhibits" at page 84. The following table provides certain information concerning executive compensation plans and arrangements required to be filed as exhibits to this Annual Report on Form 10-K. 42 43 Executive Compensation Plans and Arrangements ---------------------------------------------
Exhibit No. Description Location - ----------- ----------- -------- 10(a) Employees' Stock Ownership Plan of Rurban Incorporated herein by reference to the Financial Corp. Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 0-13507) [Exhibit 10(a)]. 10(b) First Amendment to Employees' Stock Ownership Incorporated herein by reference to the Plan of Rurban Financial Corp., dated June 14, Corporation's Annual Report on Form 10-K 1993 and made to be effective as of January 1, for the fiscal year ended December 31, 1993 1993 (File No. 0-13507) [Exhibit 10(b)]. 10(c) Second Amendment to Employees' Stock Ownership Incorporated herein by reference to the Plan of Rurban Financial Corp., dated March 14, Corporation's Annual Report on Form 10-K 1994 and made to be effective as of January 1, for the fiscal year ended December 31, 1993 1993 (File No. 0-13507) [Exhibit 10(c)]. 10(d) Third Amendment to Employees' Stock Ownership Incorporated herein by reference to the Plan of Rurban Financial Corp., dated March 13, Corporation's Annual Report on Form 10-K 1995 for the fiscal year ended December 31, 1994 (File No. 0-13507) [Exhibit 10(d)]. 10(e) Fourth Amendment to Employees' Stock Ownership Incorporated herein by reference to the Plan of Rurban Financial Corp., dated June 10, Corporation's Annual Report on Form 10-K 1995 and made to be effective as of January 1, for the fiscal year ended December 31, 1995 1995 (File No. 0-13507) [Exhibit 10(e)]. 10(f) The Rurban Financial Corp. Savings Plan and Incorporated herein by reference to the Trust Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (File No. 0-13507) [Exhibit 10(g)]. 10(g) First Amendment to The Rurban Financial Corp. Incorporated herein by reference to the Savings Plan and Trust, dated December 10, 1990 Corporation's Annual Report on Form 10-K and effective January 1, 1990 for the fiscal year ended December 31, 1990 (File No. 0-13507) [Exhibit 10(g)].
43 44
Exhibit No. Description Location - ----------- ----------- -------- 10(h) Second Amendment to The Rurban Financial Corp. Incorporated herein by reference to the Savings Plan and Trust, dated March 11, 1991, Corporation's Annual Report on Form 10-K effective February 1, 1991 for the fiscal year ended December 31, 1992 (File No. 0-13507) [Exhibit 10(d)]. 10(i) Third Amendment to The Rurban Financial Corp. Incorporated herein by reference to the Savings Plan and Trust, dated June 11, 1991 Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (File No. 0-13507) [Exhibit 10(e)]. 10(j) Fourth Amendment to The Rurban Financial Corp. Incorporated herein by reference to the Savings Plan and Trust, dated July 14, 1992, Corporation's Annual Report on Form 10-K effective May 1, 1992 for the fiscal year ended December 31, 1992 (File No. 0-13507) [Exhibit 10(f)]. 10(k) Fifth Amendment to The Rurban Financial Corp. Incorporated herein by reference to the Savings Plan and Trust, dated March 14, 1994 Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 0-13507) [Exhibit 10(i)]. 10(l) Sixth Amendment to The Rurban Financial Corp. Incorporated herein by reference to the Savings Plan and Trust dated May 1, 1995 Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (File No. 0-13507) [Exhibit 10(l)]. 10(m) Summary of Incentive Compensation Plan of State Incorporated herein by reference to the Bank Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 0-13507) [Exhibit 10(j)]. 10(n) Summary of Bonus Program adopted by the Trust Incorporated herein by reference to the Department of State Bank for the benefit of Corporation's Annual Report on Form 10-K Robert W. Constien in his capacity as Manager for the fiscal year ended December 31, of the Trust Department 1991 (File No. 0-13507) [Exhibit 10(e)]. 10(o) Summary of Bonus Program for the Trust Incorporated herein by reference to the Department of State Bank Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (File No. 0-13507) [Exhibit 10(i)].
44 45
Exhibit No. Description Location - ----------- ----------- -------- 10(p) Summary of Sales Bonus Program of State Bank Incorporated herein by reference to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (File No. 0-13507) [Exhibit 10(n)]. 10(q) Summary of Rurban Financial Corp. Bonus Plan Incorporated herein by reference to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 0-13507)[Exhibit 10(q)]. 10(r) Executive Salary Continuation Agreement, dated Incorporated herein by reference to the December 15, 1994, between Rurban Financial Corporation's Annual Report on Form 10-K Corp. and Richard C. Burrows for the fiscal year ended December 31, 1994 (File No. 0-13507)[Exhibit 10(p)]. 10(s) Executive Salary Continuation Agreement, dated Incorporated herein by reference to the October 11, 1995, between Rurban Financial Corporation's Annual Reports on Form 10-K Corp. and Thomas C. Williams; and Amended for the fiscal years ended Schedule A to Exhibit 10(s) identifying other December 31, 1995 and December 31, 1997 identical Executive Salary Continuation (File No. 0-13507) [Exhibit 10(s)]. Agreements between executive officers of Rurban Financial Corp. and Rurban Financial Corp. 10(t) Description of Split-Dollar Insurance Policies Incorporated herein by reference to the Maintained for Certain Executive Officers of Corporation's Annual Report on Form 10-K Rurban Financial Corp. for the fiscal year ended December 31, 1995 (File No. 0-13507)[Exhibit 10(t)]. 10(u) Rurban Financial Corp. Stock Option Plan Incorporated herein by reference to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-13507)[Exhibit 10(u)]. 10(v) Rurban Financial Corp. Plan to Allow Directors Incorporated herein by reference to the to Elect to Defer Compensation Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-13507)[Exhibit 10(v)].
45 46
Exhibit No. Description Location - ----------- ----------- -------- 10(w) Form of Non-Qualified Stock Option Agreement Incorporated herein by reference to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 0-13507[Exhibit 10(w)]. 10(x) Form of Incentive Stock Option Agreement Incorporated herein by reference to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 0-13507 [Exhibit 10(x)]. 10(y) Employees' Stock Ownership and Savings Plan Filed herewith as Exhibit 10(y). of Rurban Financial Corp.
(b) Reports on Form 8-K. ------------------- There were no Current Reports on Form 8-K filed during the fiscal quarter ended December 31, 1999. (c) Exhibits. -------- Exhibits filed with this Annual Report on Form 10-K are attached hereto. For a list of such exhibits, see "Index to Exhibits" at page 84. (d) Financial Statement Schedules. ----------------------------- None. 46 47 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. RURBAN FINANCIAL CORP. /s/ Richard C. Warrener ------------------------------------ Date: March 28, 2000 By: Richard C. Warrener, Executive Vice President, Chief Financial Officer and Chief Accounting Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name Date Capacity ---- ---- -------- /s/ Thomas C. Williams March 28, 2000 President, Chief Executive Officer, Principal - ---------------------------- Executive Officer and Director Thomas C. Williams /s/ Richard C. Burrows March 28, 2000 Director - ---------------------------- Richard C. Burrows /s/ John R. Compo March 28, 2000 Director - ---------------------------- John R. Compo /s/ John Fahl March 28, 2000 Director - ---------------------------- John Fahl /s/ Robert A. Fawcett, Jr. March 28, 2000 Director - ---------------------------- Robert A. Fawcett, Jr. /s/ Richard Z. Graham March 28, 2000 Director - ---------------------------- Richard Z. Graham /s/ Eric C. Hench March 28, 2000 Director - ---------------------------- Eric C. Hench /s/ W. Scott Muir March 28, 2000 Director - ---------------------------- W. Scott Muir /s/ Steven D. VanDemark March 28, 2000 Director - ---------------------------- Steven D. VanDemark /s/ J. Michael Walz, D.D.S March 28, 2000 Director - ---------------------------- J. Michael Walz, D.D.S /s/ Richard C. Warrener March 28, 2000 Executive Vice President, Chief Financial - --------------------------- Officer and Chief Accounting Officer Richard C. Warrener
Date: March 28, 2000 47 48 RURBAN FINANCIAL CORP. ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1999 INDEX TO FINANCIAL STATEMENTS -----------------------------
Pages in this Annual Report on Description Form 10-K - ----------- --------- Report of Independent Auditors............................... F-1 Consolidated Balance Sheets at December 31, 1999 and 1998................................................ F-2 to F-3 Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997.................. F-4 Consolidated Statements of Changes in Shareholders' Equity for the three years ended December 31, 1999...... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997............ F-6 to F-7 Notes to Consolidated Financial Statements................... F-8 to F-35
48 49 REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders Rurban Financial Corp. Defiance, Ohio We have audited the accompanying consolidated balance sheets of Rurban Financial Corp. and Subsidiaries as of December 31, 1999 and 1998 and the related consolidated statements of income, changes in shareholders' equity and cash flows for the years ended December 31, 1999, 1998 and 1997. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Rurban Financial Corp. and Subsidiaries as of December 31, 1999 and 1998, and the results of its operations and its cash flows for the years ended December 31, 1999, 1998 and 1997 in conformity with generally accepted accounting principles. /s/ Crowe, Chizek and Company LLP ---------------------------------- Crowe, Chizek and Company LLP South Bend, Indiana February 4, 2000 - -------------------------------------------------------------------------------- F-1 50 RURBAN FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1999 and 1998 - -----------------------------------------------------------------------------------------
1999 1998 ---- ---- ASSETS Cash and due from banks $ 18,571,702 $ 16,790,423 Federal funds sold 11,000 8,718,721 ------------ ------------ Total cash and cash equivalents 18,582,702 25,509,144 Interest-bearing deposits in other financial institutions 110,000 180,000 Securities available for sale 83,118,908 82,142,929 Loans held for sale, net of valuation allowance ($-0-) 7,149,585 18,509,275 Loans Commercial, financial and agricultural 326,564,165 248,840,548 Residential first mortgage 80,703,338 72,225,323 Consumer 94,410,123 73,244,850 ------------ ------------ Total loans 501,677,626 394,310,721 Deferred loan fees, net (346,248) (341,168) Allowance for loan losses (6,193,712) (5,408,854) ------------ ------------ Net loans 495,137,666 388,560,699 Accrued interest receivable 4,147,321 3,196,546 Premises and equipment, net 11,140,327 11,400,045 Other assets 8,397,015 7,656,141 ------------ ------------ Total assets $627,783,524 $537,154,779 ============ ============
- -------------------------------------------------------------------------------- (Continued) F-2 51 RURBAN FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1999 and 1998 - ---------------------------------------------------------------------------------------------
1999 1998 ---- ---- LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Deposits Noninterest-bearing $ 49,005,311 $ 48,135,487 Interest-bearing 470,290,773 402,677,736 ------------ ------------ Total deposits 519,296,084 450,813,223 Federal funds purchased 10,900,000 9,500,000 Advances from Federal Home Loan Bank ("FHLB") 40,035,303 28,890,290 Other borrowed funds 7,000,000 -- Accrued interest payable 2,513,798 1,685,437 Other liabilities 4,137,868 4,362,879 ------------ ------------ Total liabilities 583,883,053 495,251,829 Shareholders' Equity Common stock: stated value $2.50 per share; shares authorized: 10,000,000; shares issued: 1999 - 4,575,702; 1998 - 4,575,702; shares outstanding: 1999 - 4,140,718; 1998 - 4,140,518 11,439,255 11,439,255 Additional paid-in capital 11,518,469 11,518,727 Retained earnings 30,047,158 26,508,897 Accumulated other comprehensive income (loss), net of tax of $(790,008) in 1999 and $104,536 in 1998 (1,533,547) 202,922 Unearned ESOP shares (unearned shares: 1999 - 50,334, 1998 - 63,810) (908,014) (1,100,905) Treasury stock; shares at cost: 1999 - 434,984, 1998 - 435,184 (6,662,850) (6,665,946) ------------ ------------ Total shareholders' equity 43,900,471 41,902,950 ------------ ------------ Total liabilities and shareholders' equity $627,783,524 $537,154,779 ============ ============
- -------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. F-3 52 RURBAN FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, 1999, 1998 and 1997 - ------------------------------------------------------------------------------------
1999 1998 1997 ---- ---- ---- Interest income Loans, including fees $39,824,608 $34,131,651 $31,616,158 Taxable securities 4,553,538 3,939,667 3,900,143 Non-taxable securities 498,257 325,256 312,278 Other interest income 76,408 896,714 753,081 ----------- ----------- ----------- Total interest income 44,952,811 39,293,288 36,581,660 Interest expense Deposits 19,026,452 17,342,766 16,305,732 Short-term borrowings 617,027 62,853 161,505 Advances from FHLB 1,765,513 1,337,080 221,918 Other borrowed funds 334,921 -- -- ----------- ----------- ----------- Total interest expense 21,743,913 18,742,699 16,689,155 ----------- ----------- ----------- NET INTEREST INCOME 23,208,898 20,550,589 19,892,505 Provision for loan losses 1,215,000 1,080,000 947,965 ----------- ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 21,993,898 19,470,589 18,944,540 Noninterest income Service charges on deposit accounts 1,462,925 1,252,274 1,199,153 Loan servicing fees 581,581 540,239 538,881 Trust fees 2,597,465 2,576,823 2,326,629 Data service fees 4,381,746 3,553,998 2,827,782 Net gain (loss) on securities (5,827) 72,468 193,892 Net gain on sales of loans 1,147,339 1,933,834 551,730 Other income 898,767 580,998 656,555 ----------- ----------- ----------- Total noninterest income 11,063,996 10,510,634 8,294,622 Noninterest expense Salaries and employee benefits 14,389,186 12,434,334 10,189,420 Net occupancy expense of premises 1,183,120 1,093,772 992,486 Equipment rentals, depreciation and maintenance 2,952,061 2,486,511 1,981,699 Other expenses 6,941,688 7,615,394 6,089,291 ----------- ----------- ----------- Total noninterest expense 25,466,055 23,630,011 19,252,896 ----------- ----------- ----------- INCOME BEFORE INCOME TAX EXPENSE 7,591,839 6,351,212 7,986,266 Income tax expense 2,360,937 2,073,335 2,470,469 ----------- ----------- ----------- NET INCOME $ 5,230,902 $ 4,277,877 $ 5,515,797 =========== =========== =========== Earnings per common share: Basic $ 1.28 $ 1.05 $ 1.24 =========== =========== =========== Diluted $ 1.28 $ 1.04 $ 1.24 =========== =========== ===========
- -------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. F-4 53 RURBAN FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Three years ended December 31, 1999 - -----------------------------------------------------------------------------------------------------------------------------------
Accumulated Other Additional Comprehensive Unearned Common Paid-In Retained Income (Loss), ESOP Treasury Stock Capital Earnings Net of Tax Shares Stock Total ----- ------- -------- ---------- ------ ----- ----- Balances at January 1, 1997 $ 5,719,628 $17,239,088 $20,024,916 $ (4,984) $(1,490,000) $ -- $41,488,648 Comprehensive Income: Net income for the year -- -- 5,515,797 -- -- -- 5,515,797 Net change in net unrealized appreciation (depreciation)on securities available for sale, net of reclassification adjustments and tax effects -- -- -- 223,824 -- -- 223,824 ----------- Total Comprehensive Income 5,739,621 Pay down of ESOP Loan -- -- -- -- 191,000 -- 191,000 Cash dividends declared ($.37 per share) -- -- (1,648,730) -- -- -- (1,648,730) Purchase of 217,942 treasury shares -- -- -- -- -- (6,676,611) (6,676,611) ----------- ----------- ----------- ----------- ----------- ----------- ----------- Balances at December 31, 1997 5,719,628 17,239,088 23,891,983 218,840 (1,299,000) (6,676,611) 39,093,928 Comprehensive Income: Net income for the year -- -- 4,277,877 -- -- -- 4,277,877 Net change in net unrealized appreciation (depreciation) on securities available for sale, net of reclassification adjustments and tax effects -- -- -- (15,918) -- -- (15,918) ----------- Total Comprehensive Income 4,261,959 Pay down of ESOP Loan -- -- -- -- 198,095 -- 198,095 Declaration of a 2 for 1 stock split and issuance of 2,287,851 common shares 5,719,627 (5,719,627) -- -- -- -- -- Cash dividends declared ($0.40 per share) -- -- (1,660,963) -- -- -- (1,660,963) Issuance of 700 treasury shares due to exercise of stock options -- (734) -- -- -- 10,665 9,931 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Balances at December 31, 1998 11,439,255 11,518,727 26,508,897 202,922 (1,100,905) (6,665,946) 41,902,950 Comprehensive Income: Net income for the year -- -- 5,230,902 -- -- -- 5,230,902 Net change in net unrealized appreciation (depreciation) on securities available for sale, net of reclassification adjustments and tax effects -- -- -- (1,736,469) -- -- (1,736,469) ----------- Total Comprehensive Income 3,494,433 Pay down of ESOP Loan -- -- -- -- 192,891 -- 192,891 Cash dividends declared ($0.41 per share) -- -- (1,692,641) -- -- -- (1,692,641) Issuance of 200 treasury shares due to exercise of stock options -- (258) -- -- -- 3,096 2,838 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Balances at December 31, 1999 $11,439,255 $11,518,469 $30,047,158 $(1,533,547) $ (908,014) $(6,662,850) $43,900,471 =========== =========== =========== =========== =========== =========== ===========
- -------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. F-5 54 RURBAN FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1999, 1998 and 1997 - --------------------------------------------------------------------------------------------------
1999 1998 1997 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Cash received from customers - fees and commissions $ 9,922,484 $ 8,504,332 $ 7,549,000 Cash paid to suppliers and employees (23,415,280) (22,013,138) (18,388,747) Loans originated for sale (97,308,756) (112,427,356) (30,797,914) Proceeds from sales of loans held for sale 104,697,491 100,256,242 28,820,953 Interest received 44,007,116 39,682,791 36,372,890 Interest paid (20,915,552) (18,634,402) (16,533,146) Income taxes paid (2,400,000) (1,955,000) (2,968,950) ------------- ------------- ------------ Net cash from operating activities 14,587,503 (6,586,531) 4,054,086 CASH FLOWS FROM INVESTING ACTIVITIES Net change in interest-bearing deposits in other financial institutions 70,000 349,777 (349,777) Net change in loans (103,341,052) (35,910,252) (42,352,936) Proceeds from sales of securities available for sale 17,657,888 24,765,342 28,631,037 Principal repayments, maturities, and calls of securities available for sale 24,243,471 24,138,929 8,785,410 Purchase of securities available for sale (45,514,178) (59,309,982) (41,936,407) Net purchases of premises and equipment (1,666,906) (4,502,632) (1,149,654) Recoveries on loan charge-offs 662,299 424,745 550,642 ------------- ------------- ------------ Net cash from investing activities (107,888,478) (50,044,073) (47,821,685) CASH FLOWS FROM FINANCING ACTIVITIES Net change in deposits 68,482,861 35,631,937 27,415,213 Net change in federal funds purchased 1,400,000 4,571,000 4,929,000 Proceeds from advances from FHLB 15,000,000 26,500,000 7,529,867 Repayments of advances from FHLB (3,854,987) (5,139,577) -- Proceeds from advances on line of credit 7,000,000 -- -- Cash dividends paid (1,656,179) (1,655,928) (1,234,748) Proceeds from exercise of stock options 2,838 9,931 -- Cash paid to repurchase common stock -- -- (6,676,611) ------------- ------------- ------------ Net cash from financing activities 86,374,533 59,917,363 31,962,721 ------------- ------------- ------------ Net change in cash and cash equivalents (6,926,442) 3,286,759 (11,804,878) Cash and cash equivalents at beginning of year 25,509,144 22,222,385 34,027,263 ------------- ------------- ------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 18,582,702 $ 25,509,144 $ 22,222,385 ============= ============= ============
- -------------------------------------------------------------------------------- (Continued) F-6 55 RURBAN FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1999, 1998 and 1997 - ----------------------------------------------------------------------------------------------------
1999 1998 1997 ---- ---- ---- RECONCILIATION OF NET INCOME TO NET CASH FROM OPERATING ACTIVITIES Net income $ 5,230,902 $ 4,277,877 $ 5,515,797 Adjustments to reconcile net income to net cash from operating activities Depreciation 1,926,624 1,686,548 1,393,531 Amortization of intangible assets 210,000 385,000 180,000 Provision for loan losses 1,215,000 1,080,000 947,965 Net (gain) loss on securities 5,827 (72,468) (193,892) Loans originated for sale (97,308,756) (112,427,356) (30,797,914) Proceeds from sales of loans held for sale 104,697,491 100,256,242 28,820,953 Net gain on sales of loans (1,147,339) (1,933,834) (551,730) Paydown of ESOP loan 192,891 198,095 191,000 Change in assets and liabilities Deferred loan fees, net 5,080 52,517 25,860 Accrued interest receivable (950,775) 336,986 (234,630) Other assets (56,330) (1,834,862) (1,447,829) Accrued interest payable 828,361 108,297 156,009 Other liabilities (261,473) 1,300,427 48,966 ------------ ------------- ------------ Net cash from operating activities $ 14,587,503 $ (6,586,531) $ 4,054,086 ============ ============= ============ Supplemental disclosure of noncash transactions: Transfer from loans held for sale to loans receivable $ 5,118,294 $ -- $ --
- ------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. F-7 56 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The accompanying consolidated financial statements include the accounts of Rurban Financial Corp. and its wholly-owned subsidiaries. Rurban Financial Corp. ("the Corporation") is a bank holding company, organized under Ohio law, that owns all the outstanding stock of The State Bank and Trust Company ("State Bank"), The Peoples Banking Company ("Peoples Bank"), The First National Bank of Ottawa ("First National Bank"), The Citizens Savings Bank Company ("Citizens Savings Bank"), Rurbanc Data Services, Inc. ("RDSI") and Rurban Life Insurance Company ("Rurban Life") (together referred to as "the Corporation"). State Bank owns all of the outstanding stock of Reliance Financial Services, N.A. ("RFS") and Rurban Mortgage Company ("RMC"). RMC was incorporated on November 5, 1997. On December 31, 1997, the operations of the Rurban Mortgage Division of State Bank were merged into RMC along with the acquired operations of S&L Financial Services, Inc. ("S&L"). The S&L acquisition was accounted for as a purchase; income from S&L was not material for the year ended December 31, 1997. All significant intercompany balances and transactions are eliminated in consolidation. Nature of Business and Industry Segments: Internal financial information is primarily reported and aggregated in three lines of business: banking, mortgage banking, and data processing services. For further discussion, see Note 18. The Corporation's subsidiary banks grant credit and accept deposits from their customers in the normal course of business primarily in northern Ohio. RDSI provides data processing services to financial institutions located in Ohio, Michigan and Indiana. Rurban Life accepts reinsurance ceded in part by American General Assurance Company from the credit life and disability insurance purchased by customers of the Corporation's subsidiary banks. RFS offers a diversified array of trust and financial services to customers nationwide. RMC services residential mortgage customers in Northern Ohio, West and Central Florida. Use of Estimates: To prepare consolidated financial statements in conformity with generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the consolidated financial statements and the disclosures provided, and future results could differ. The allowance for loan losses, fair values of financial instruments and the carrying value of loans held for sale are particularly subject to change. Securities: Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with net unrealized appreciation (depreciation), net of tax, reported separately in other comprehensive income (loss) and shareholders' equity. Securities are classified as trading when held for short term periods in anticipation of market gains, and are carried at fair value. Securities are written down to fair value when a decline in fair value is not temporary. - -------------------------------------------------------------------------------- (Continued) F-8 57 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Realized gains and losses resulting from the sale of securities are computed by the specific identification method. Interest and dividend income, adjusted by amortization of purchase premium or discount, is included in earnings. Premiums and discounts on securities are recognized using the level yield method over the estimated life of the security. Loans Held for Sale: Mortgage loans intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized in a valuation allowance by charges to income. Interest Income on Loans: Interest on loans is accrued over the term of the loans based upon the principal outstanding. Management reviews loans delinquent 90 days or more to determine if the interest accrual should be discontinued. When serious doubt exists as to the collectibility of a loan, the accrual of interest is discontinued. Under Statement of Financial Accounting Standards ("SFAS") No. 114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118, the carrying value of impaired loans is periodically adjusted to reflect cash payments, revised estimates of future cash flows, and increases in the present value of expected cash flows due to the passage of time. Cash payments representing interest income are reported as such and other cash payments are reported as reductions in carrying value. Increases or decreases in carrying value due to changes in estimates of future payments or the passage of time are reported as a component of the provision for loan losses. Loan Fees and Costs: Loan fees, net of direct origination costs, are deferred. The net amount deferred is reported in the consolidated balance sheets as part of loans and is recognized in interest income over the term of the loan using the level yield method. Allowance For Loan Losses: An allowance for loan losses is established and maintained because some loans may not be repaid in full. Increases to the allowance are recorded by a provision for loan losses charged to expense. Estimating the risk of loss and the amount of loss on any loan is necessarily subjective. Accordingly, the allowance is maintained by management at a level considered adequate to cover losses that are currently anticipated based on past loss experience, general economic conditions, information about specific borrower situations including their financial position and collateral values, and other factors and estimates which are subject to change over time. While management may periodically allocate portions of the allowance for specific problem loan situations, the entire allowance is available for any loan charge-offs that may occur. A loan is charged off by management as a loss when deemed uncollectible, although collection efforts continue and future recoveries may occur. Loans are considered impaired if full principal or interest payments are not anticipated in accordance with the contractual loan terms. Impaired loans are carried at the present value of expected future cash flows discounted at the loan's effective interest rate or at the fair value of the collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. If these allocations cause the allowance for loan losses to require increase, such increase is reported as a component of the provision for loan losses. - -------------------------------------------------------------------------------- (Continued) F-9 58 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Smaller-balance homogeneous loans are evaluated for impairment in total. Such loans include residential first mortgage loans secured by one-to-four family residences, residential construction loans, and automobile, home equity and second mortgage loans. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment. When analysis of borrower operating results and financial condition indicates that underlying cash flows of the borrower's business are not adequate to meet its debt service requirements, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 30 days or more. Commercial loans are rated on a scale of 1 to 8, with 1 to 3 being satisfactory, 4 watch, 5 special mention, 6 substandard, 7 doubtful, and 8 as loss which are then charged off. Loans graded a 6 or worse are considered for impairment. Loans are generally moved to nonaccrual status when 90 days or more past due. These loans are often considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible. This typically occurs when the loan is 120 days or more past due. Premises and Equipment: Land is carried at cost. Buildings and improvements are depreciated using primarily the straight-line method with useful lives ranging from 10 to 50 years. Furniture and equipment are depreciated using the straight-line and declining-balance methods with useful lives ranging predominantly from 5 to 20 years. These assets are reviewed for impairment under SFAS No. 121 when events indicate the carrying amount may not be recoverable. Maintenance and repairs are expensed and major improvements are capitalized. Servicing Rights: Servicing rights are recognized as assets for purchased rights and for the allocated value of retained servicing rights on loans sold. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates and then, secondarily, as to geographic and prepayment characteristics. Any impairment of a grouping is reported as a valuation allowance. Excess servicing receivable is reported when a loan sale results in servicing in excess of normal amounts, and is expensed over the life of the servicing on the interest method. Intangible Assets: Goodwill arising from the acquisition of subsidiary banks and RMC is amortized over 5 to 25 years using the straight-line method. Core deposit intangibles are amortized on an accelerated basis over 10 years, the estimated life of the deposits acquired. Goodwill and identified intangibles are assessed for impairment based on estimated undiscounted cash flows, and written down if necessary. As of December 31, 1999, 1998 and 1997, unamortized goodwill totaled approximately $404,000, $532,000 and $834,000, and unamortized core deposit intangibles totaled approximately $106,000, $188,000 and $271,000. - -------------------------------------------------------------------------------- (Continued) F-10 59 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Foreclosed Real Estate: Real estate properties acquired through, or in lieu of, loan foreclosure are initially recorded at fair value at the date of acquisition establishing a new cost basis. Any reduction to fair value from the carrying value of the related loan at the time of acquisition is accounted for as a loan loss and charged against the allowance for loan losses. After acquisition, a valuation allowance is recorded through a charge to income for the amount of estimated selling costs. Valuations are periodically performed by management, and valuation allowances are adjusted through a charge to income for changes in fair value or estimated selling costs. Other real estate owned amounted to approximately $285,000 and $456,000 at December 31, 1999 and 1998, respectively, and is included in other assets in the consolidated balance sheets. Income Taxes: Income tax expense is the sum of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. Employee Benefits: The Corporation sponsors an employee stock ownership plan (ESOP) and 401(k) profit sharing plan for which contributions are made and expensed annually. The Corporation also provides split-dollar life insurance plans for certain executive officers of the Corporation. Also, the Corporation sponsors a supplemental retirement plan for certain executive officers of the Corporation. Employee benefits are discussed further in Note 9. Stock Option Plan: The Corporation sponsors a stock option plan for directors, officers and key employees. Expense for employee compensation under the stock option plan is based on Accounting Principles Board ("APB") Opinion 25 with expense reported only if options are granted below market price at grant date. Pro forma disclosures of net income and earnings per common share are provided as if the fair value method of SFAS No. 123 were used to measure expense for stock-based compensation. For further discussion see Note 9. Postretirement Health Care Benefits: The Corporation sponsors a postretirement health care plan that covers both salaried and nonsalaried employees. The Corporation accrues, during the years that employees render the necessary service, the expected cost of providing postretirement health care benefits to employees and their beneficiaries and covered dependents. The Corporation's postretirement health care plan provides that retired employees may remain on the Corporation's health care plan with each retiree's out-of-pocket contribution to the Corporation equal to their premium expense determined exclusively on the loss experience of the retirees in the plan. - -------------------------------------------------------------------------------- (Continued) F-11 60 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Stock Dividends and Stock Splits: Dividends issued in stock are reported by transferring the market value of the stock issued from retained earnings to common stock and additional paid-in capital. Stock splits are recorded by adjusting common stock and additional paid in capital by the par value of the additional shares. On May 27, 1998, the Board of Directors declared a two-for-one stock split, paid on June 30, 1998, increasing shares outstanding by 2,287,851 shares. Earnings and Dividends Per Common Share: Basic earnings per common share is net income divided by the weighted average number of common shares considered to be outstanding during the period. ESOP shares are considered outstanding for this calculation unless unearned. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options. Earnings and dividends per common share are restated for all stock splits and dividends. Comprehensive Income (Loss): Comprehensive income (loss) consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes the net change in net unrealized appreciation (depreciation) on securities available for sale, net of tax, which is also recognized as a separate component of shareholders' equity. Dividend Restriction: Certain restrictions exist regarding the ability of the subsidiaries to transfer funds to Rurban Financial Corp. in the form of cash dividends, loans or advances. Approximately $10,900,000 of undistributed earnings of the subsidiaries, included in consolidated retained earnings, plus current 2000 net profits is available for distribution to Rurban Financial Corp. as dividends in 2000 without prior regulatory approval. Fair Values of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 15. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect such estimates. Concentrations of Credit Risk: The Corporation grants commercial, real estate and installment loans to customers mainly in northern Ohio. Commercial loans include loans collateralized by commercial real estate, business assets and agricultural loans collateralized by crops and farm equipment. Commercial, financial and agricultural loans make up approximately 65% of the loan portfolio and the loans are expected to be repaid from cash flow from operations of businesses. Residential first mortgage loans make up approximately 16% of the loan portfolio and are collateralized by first mortgages on residential real estate. Consumer loans make up approximately 19% of the loan portfolio and are primarily collateralized by consumer assets. - -------------------------------------------------------------------------------- (Continued) F-12 61 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Financial Instruments With Off-Balance-Sheet Risk: The Corporation, in the normal course of business, makes commitments to extend credit which are not reflected in the consolidated financial statements. A summary of these commitments is disclosed in Note 13. Statements of Cash Flows: For purposes of reporting cash flows, cash and cash equivalents is defined to include cash on hand, due from financial institutions and federal funds sold with original maturities under 90 days. The Corporation reports net cash flows for customer loan transactions, deposit transactions, short-term borrowings with original maturities of 90 days or less and interest-bearing deposits in other financial institutions. Reclassifications: Some items in the prior consolidated financial statements have been reclassified to conform with the current presentation. NOTE 2 - BASIC AND DILUTED EARNINGS PER COMMON SHARE A reconciliation of the numerators and denominators of the computations of basic earnings per common share and diluted earnings per common share for the years ended December 31, 1999, 1998 and 1997 is presented below:
Year Ended December 31, ----------------------- 1999 1998 1997 ---- ---- ---- BASIC EARNINGS PER COMMON SHARE Net income $5,230,902 $4,277,877 $5,515,797 ========== ========== ========== Weighted average common shares outstanding 4,140,714 4,140,484 4,519,342 Less: Unallocated ESOP shares (57,072) (70,380) (83,709) ---------- ---------- ---------- Weighted average common shares outstanding for basic earnings per common share 4,083,642 4,070,104 4,435,633 ========== ========== ========== Basic earnings per common share $ 1.28 $ 1.05 $ 1.24 ========== ========== ========== DILUTED EARNINGS PER COMMON SHARE Net income $5,230,902 $4,277,877 $5,515,797 ========== ========== ========== Weighted average common shares outstanding for basic earnings per common share 4,083,642 4,070,104 4,435,633 Add: Dilutive effects of assumed conversions and exercise of stock options 8,324 30,410 2,382 ---------- ---------- ---------- Weighted average common and dilutive potential common shares outstanding 4,091,966 4,100,514 4,438,015 ========== ========== ========== Diluted earnings per common share $ 1.28 $ 1.04 $ 1.24 ========== ========== ==========
- -------------------------------------------------------------------------------- (Continued) F-13 62 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 2 - BASIC AND DILUTED EARNINGS PER COMMON SHARE (Continued) Incentive stock options for 6,500 shares of common stock granted during 1999 and 45,750 shares of common stock granted during 1998 were not considered in computing earnings per common share for 1999 and 1998 because they were antidilutive. Common share numbers have been restated for all stock splits and dividends. NOTE 3 - SECURITIES AVAILABLE FOR SALE Year end securities available for sale were as follows.
Gross Gross Amortized Unrealized Unrealized 1999 Cost Gains Losses Fair Value - ---- ---- ----- ------ ---------- U.S. Treasury and U.S. Government agency securities $19,794,342 $ 618 $ (418,696) $19,376,264 Obligations of states and political subdivisions 11,235,056 19,984 (673,069) 10,581,971 Mortgage-backed securities 51,817,915 387 (1,252,779) 50,565,523 Marketable equity securities 2,595,150 -- -- 2,595,150 ----------- ----------- ----------- ----------- $85,442,463 $ 20,989 $(2,344,544) $83,118,908 =========== =========== =========== =========== 1998 - ---- U.S. Treasury and U.S. Government agency securities $20,011,303 $ 104,387 $ (4,700) $20,110,990 Obligations of states and political subdivisions 9,092,811 163,383 (54,212) 9,201,982 Mortgage-backed securities 50,509,507 211,775 (113,175) 50,608,107 Marketable equity securities 2,221,850 -- -- 2,221,850 ----------- ----------- ----------- ----------- $81,835,471 $ 479,545 $ (172,087) $82,142,929 =========== =========== =========== ===========
- -------------------------------------------------------------------------------- (Continued) F-14 63 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 3 - SECURITIES AVAILABLE FOR SALE (Continued) Contractual maturities of debt securities available for sale at December 31, 1999 were as follows. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.
Available for Sale ------------------ Amortized Cost Fair Value ---- ---------- Due in one year or less $ 1,316,057 $ 1,325,111 Due after one year through five years 19,055,220 18,682,782 Due after five years through ten years 4,900,784 4,831,255 Due after ten years 5,757,337 5,119,087 Mortgage-backed securities 51,817,915 50,565,523 ----------- ----------- Total debt securities available for sale $82,847,313 $80,523,758 =========== ===========
Proceeds, gross gains and gross losses realized from sales of securities available for sale for the years ended December 31, 1999, 1998 and 1997 are as follows:
1999 1998 1997 ---- ---- ---- Proceeds from sales of debt securities available for sale $17,657,888 $24,765,342 $28,631,037 =========== =========== =========== Gross gains from sales of debt securities available for sale $ 25,648 $ 73,245 $ 252,834 Gross losses from sales of debt securities available for sale (31,475) (777) (58,942) ----------- ----------- ----------- Net gain (loss) on securities $ (5,827) $ 72,468 $ 193,892 =========== =========== ===========
At December 31, 1999 there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies and corporations, in an amount greater than 10% of shareholders' equity. Securities with an amortized cost of approximately $70,991,000 and $58,444,000 as of December 31, 1999 and 1998, were pledged to secure public and trust deposits and FHLB advances. - -------------------------------------------------------------------------------- (Continued) F-15 64 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 4 - ALLOWANCE FOR LOAN LOSSES The following is a summary of the activity in the allowance for loan losses account for the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997 ---- ---- ---- Beginning balance $ 5,408,854 $ 5,239,601 $ 5,066,600 Provision for loan losses 1,215,000 1,080,000 947,965 Recoveries of previous charge-offs 662,299 424,745 550,642 Losses charged to the allowance (1,092,441) (1,335,492) (1,325,606) ----------- ----------- ----------- Ending balance $ 6,193,712 $ 5,408,854 $ 5,239,601 =========== =========== ===========
At December 31, 1999 and 1998, loans past due more than 90 days and still accruing interest approximated $809,000 and $1,742,000. Impaired loans were as follows.
1999 1998 1997 ---- ---- ---- Year end loans with no allowance for loan losses allocated $ -- $ 567,000 $ -- Year end loans with allowance for loan losses allocated 1,536,000 689,000 1,801,000 Amount of allowance allocated 807,000 225,000 725,000 Average of impaired loans during the year 1,461,000 1,462,000 1,919,000 Interest income recognized during impairment 40,000 11,000 36,000 Cash-basis interest income recognized 17,000 11,000 36,000
NOTE 5 - PREMISES AND EQUIPMENT, NET Premises and equipment, net at December 31, are summarized as follows:
1999 1998 ---- ---- Land $ 984,216 $ 1,123,546 Buildings and improvements 7,716,803 7,820,057 Furniture and equipment 9,944,385 8,659,988 ----------- ----------- Total cost 18,645,404 17,603,591 Accumulated depreciation and amortization (7,505,077) (6,203,546) ----------- ----------- $11,140,327 $11,400,045 =========== ===========
- -------------------------------------------------------------------------------- (Continued) F-16 65 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 5 - PREMISES AND EQUIPMENT, NET (Continued) The Corporation is obligated under non-cancelable leases for office space and equipment. Rent expense was $229,000, $266,000 and $79,000 for 1999, 1998 and 1997. At December 31, 1999, minimum future lease payments are as follows for the years ended December 31:
2000 $ 99,600 2001 99,600 2002 99,600 2003 99,600 2004 99,600 Thereafter 697,200 ---------- $1,195,200 ==========
NOTE 6 - INTEREST-BEARING DEPOSITS Included in interest-bearing deposits are certificates of deposit in denominations of $100,000 or more of approximately $106,786,000 and $64,888,000 as of December 31, 1999 and 1998, respectively. Certificates of deposit obtained from brokers totaled approximately $29,000,000 and $2,000,000 as of December 31, 1999 and 1998, respectively. At December 31, 1999, the scheduled maturities of certificates of deposit are as follows for the years ended December 31:
2000 $237,927,685 2001 46,275,578 2002 9,792,520 2003 1,356,888 2004 3,437,955 Thereafter 105,753 ------------ $298,896,379 ============
- -------------------------------------------------------------------------------- (Continued) F-17 66 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 7 - ADVANCES FROM FHLB Advances from the FHLB of Cincinnati with fixed and variable interest rates ranging from 4.52% to 6.25% at December 31, 1999 and from 5.27% to 6.25% at December 31, 1998 mature as follows for the years ending December 31:
1999 1998 ---- ---- 1999 $ -- $ 3,854,987 2000 4,121,389 2,121,389 2001 2,138,845 2,138,845 2002 1,925,069 1,925,069 2003 1,850,000 1,850,000 2004 -- -- Thereafter 19,500,000 10,000,000 ----------- ----------- 29,535,303 21,890,290 Line of credit (LIBOR) 10,500,000 7,000,000 ----------- ----------- $40,035,303 $28,890,290 =========== ===========
At December 31, 1999 and 1998, in addition to FHLB stock, the Corporation pledged mortgage loans with a minimum carrying value of approximately $60,086,000 and $43,366,000 to the FHLB to secure advances outstanding. NOTE 8 - OTHER BORROWED FUNDS The Corporation has a line of credit with the Fifth Third Bank of Northwestern Ohio, N.A. in the amount of $10,000,000. At December 31, 1999 and 1998, the Corporation had $7,000,000 and $-0- advances outstanding on this line of credit. The note is unsecured and requires interest to be paid monthly with the principal amount due at maturity on April 30, 2000. The interest rate is variable based on the current prime rate and adjusts immediately. NOTE 9 - EMPLOYEE BENEFITS Employee Stock Ownership Plan: The Corporation has a noncontributory employee stock ownership plan ("ESOP") covering substantially all employees of the Corporation and its subsidiaries. Voluntary contributions are made by the Corporation to the plan. Each eligible employee is vested based upon years of service, including prior years of service. Contributions to the ESOP were $260,000, $715,000 and $212,000, and related expense attributable to the plan included in salaries and employee benefits were approximately $572,000, $568,000 and $391,000 in 1999, 1998 and 1997, respectively. - -------------------------------------------------------------------------------- (Continued) F-18 67 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 9 - EMPLOYEE BENEFITS (Continued) Distributions to plan participants may be paid in cash or stock upon their termination of employment. During 1999, 10,471 shares were withdrawn from the ESOP by participants who terminated their employment with the Company. During 1996, the ESOP borrowed $1,505,527 from the Corporation to purchase 93,758 shares of common stock at a weighted average cost of $16.06 per share. Collateral for the loan is the unearned shares of common stock purchased by the ESOP with the loan proceeds. The loan will be repaid principally from the Corporation's discretionary contributions to the ESOP. The interest rate for the loan is 7.75%. Shares purchased by the ESOP are held in suspense until allocated among ESOP participants as the loan is repaid. During 1999, 1998 and 1997, the ESOP allocated 13,476 shares, 13,140 shares and 13,518 shares. The ESOP shares as of December 31 were as follows:
1999 1998 ---- ---- Allocated shares 582,617 579,612 Unearned shares 50,334 63,810 -------- -------- Total ESOP shares 632,951 643,422 ======== ======== Fair value of unearned ESOP shares at December 31 $679,509 $989,055 ======== ========
The Corporation accounts for its ESOP under AICPA Statement of Position ("SOP") 93-6. Compensation expense is recorded based on the average market price of the shares committed to be released for allocation to participant accounts and cash allocated to participant accounts. The difference between the market price and the cost of shares committed to be released is recorded as an adjustment to additional paid-in capital. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings; dividends on unearned ESOP shares are reflected as a reduction of debt and accrued interest. Stock Option Plan: On March 12, 1997, the Board of Directors of the Corporation adopted the Rurban Financial Corp. Stock Option Plan ("Option Plan"). The purpose of the Option Plan is to advance the interests of the Corporation and its shareholders by granting directors, officers, and key employees of the Corporation options to increase their propriety interest in the Corporation. 400,000 shares of the Corporation's authorized unissued common stock were reserved for issuance under the Option Plan. The option exercise price shall not be less than the fair market value (as defined in the Option Plan) of the common stock on the date the option is granted, and the option term cannot exceed 10 years. - -------------------------------------------------------------------------------- (Continued) F-19 68 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 9 - EMPLOYEE BENEFITS (Continued) On October 22, 1997, 179,000 options with a 10 year term were granted at an exercise price of $14.19 per share. On June 15, 1998, 45,750 options with a ten year term were granted at an exercise price of $18.50. During 1999, 6,500 options with a ten year term were granted at an exercise price of $18.50 per share. At December 31, 1999, 1998 and 1997, 219,100, 217,800 and 179,000 options were granted and outstanding and 168,750, 175,250 and 221,000 options were available to be granted. Eligible directors, officers and key employees are able to exercise options awarded to them at a rate of 20% per year, October 22, 1998, being the first possible exercise date, accordingly no options were exercisable at December 31, 1997. Options outstanding at December 31, 1999 had a range of exercise prices of $14.19 - $18.50 and a weighted average remaining contractual life of 8 years. A summary of the activity in the Option Plan is as follows.
1 9 9 9 1 9 9 8 1 9 9 7 ------- ------- ------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ ----- ------ ----- ------ ----- Outstanding at beginning of year 217,800 $15.09 179,000 $14.19 -- $ -- Granted 6,500 18.50 45,750 18.50 179,000 14.19 Exercised (200) 14.19 (700) 14.19 -- -- Forfeited (5,000) 15.91 (6,250) 14.36 -- -- ------- ------- ------- Outstanding at end of year 219,100 $15.17 217,800 $15.09 179,000 $14.19 ======= ======= =======
Options exercisable at December 31, 1999, 1998 and 1997 were as follows.
1 9 9 9 1 9 9 8 1 9 9 7 ------- ------- ------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Exercise Prices Number Price Number Price Number Price - ------ ------ ----- ------ ----- ------ ----- $14.19 61,700 $14.19 29,100 $14.19 -- $-- $18.50 6,900 18.50 -- -- -- -- ------ ------ --- Exercisable at year end 68,600 $14.62 29,100 $14.19 -- $-- ====== ====== ===
The Corporation applies APB Opinion 25, Accounting For Stock Issued to Employees and related interpretations in accounting for its Option Plan. Accordingly, no compensation expense has been recognized for the Option Plan. SFAS No. 123, Accounting For Stock-Based Compensation requires pro forma disclosures for entities that do not adopt its fair value accounting method for stock-based compensation. Had compensation cost for stock options been measured using SFAS No. 123, net income and earnings per share would have been the pro forma amounts indicated below. The pro forma effect may increase in the future if more options are granted. - -------------------------------------------------------------------------------- (Continued) F-20 69 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 9 - EMPLOYEE BENEFITS (Continued)
1999 1998 1997 ---- ---- ---- Net income as reported $5,230,902 $4,277,877 $5,515,797 Pro forma net income $5,083,603 $4,143,146 $5,492,136 Basic earnings per common share as reported $ 1.28 $ 1.05 $ 1.24 Pro forma basic earnings per common share $ 1.24 $ 1.02 $ 1.24 Diluted earnings per common share as reported $ 1.28 $ 1.04 $ 1.24 Pro forma diluted earnings per common share $ 1.24 $ 1.01 $ 1.24
The pro forma effects are computed using option pricing models, using the following weighted-average assumptions as of grant date.
1999 1998 1997 ---- ---- ---- Risk-free interest rate 4.79% 5.38% 6.50% Expected option life 10 10 10 Expected stock price volatility 7.14% 5.45% 5.45% Expected dividend yield 2.67% 2.16% 2.39% Resulting weighted average grant date fair value of stock options granted during the year $2.97 $4.13 $3.77
401(k) Profit Sharing Plan: The Corporation has 401(k) profit sharing plans. The annual expense of the plans is based on 50% matching of voluntary employee contributions of up to 6% of individual compensation. Employee contributions are vested immediately and the Corporation's matching contributions are fully vested after six years. The plans cover substantially all employees of the Corporation. Contributions to the plans were $221,000, $196,000 and $145,000 and related expense attributable to the plans, included in salaries and employee benefits, were approximately $220,000, $186,000 and $117,000 in 1999, 1998 and 1997. Life Insurance Plans: Life insurance plans are provided for certain executive officers on a split-dollar basis and the Corporation is the owner of the split-dollar policies. The officers are entitled to a sum equal to two times either the employee's annual salary at death, if actively employed, or final annual salary, if retired, less $50,000. The Corporation is entitled to the remainder of the death proceeds less any loans on the policy and unpaid interest or cash withdrawals previously incurred by the Corporation. The employees have the right to designate a beneficiary(s) to receive their share of the proceeds payable upon death. The cash surrender value of these life insurance policies was approximately $650,000 and $627,000 at December 31, 1999 and 1998, and is included in other assets in the consolidated balance sheets. - -------------------------------------------------------------------------------- (Continued) F-21 70 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 9 - EMPLOYEE BENEFITS (Continued) Supplemental Retirement Plan: The Corporation established a supplemental retirement plan for selected officers. The Corporation has purchased insurance contracts on the lives of certain participants in the supplemental retirement plan and has named the Corporation as beneficiary. While no direct contract exists between the supplemental retirement plan and the life insurance contracts, it is management's current intent that the proceeds from the insurance contracts will be used to help offset earlier payments made under the supplemental retirement plan. The Corporation is recording an expense equal to the projected present value of the payments due at retirement based on the projected remaining years of service using the projected unit credit method. The obligations under the plans, net of payments already made, was approximately $823,000 and $723,000 at December 31, 1999 and 1998 and is included in other liabilities in the consolidated balance sheets. The expense attributable to the plans, included in salaries and employee benefits, was approximately $165,000, $210,000 and $127,000 in 1999, 1998 and 1997. The cash surrender value of the life insurance was approximately $1,753,000 and $1,675,000 at December 31, 1999 and 1998, and is included in other assets in the consolidated balance sheets. NOTE 10 - OTHER EXPENSES The following is an analysis of other expenses for the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997 ---- ---- ---- Amortization of intangible assets $ 210,000 $ 385,000 $ 180,000 Advertising expense 448,971 434,353 343,771 Professional fees 1,244,190 1,327,552 1,193,329 Insurance expense 211,101 166,376 141,929 Data processing fees 439,365 334,392 412,736 Printing, stationery and supplies 620,853 754,446 686,701 Telephone and communications 665,747 638,901 395,877 Postage and delivery expense 542,536 547,934 362,249 State, local and other taxes 470,742 635,845 655,089 Other operating expenses 2,088,183 2,390,595 1,717,610 ---------- ---------- ---------- $6,941,688 $7,615,394 $6,089,291 ========== ========== ==========
- -------------------------------------------------------------------------------- (Continued) F-22 71 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 11 - INCOME TAX EXPENSE Income tax expense consists of the following for the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997 ---- ---- ---- Current expense $1,612,264 $2,151,100 $2,525,248 Deferred expense (benefit) 748,673 (77,765) (54,779) ---------- ---------- ---------- $2,360,937 $2,073,335 $2,470,469 ========== ========== ==========
Income tax expense (benefit) on net gain (loss) on securities was $(1,981), $24,639 and $65,923 in 1999, 1998 and 1997. The difference between the financial statement income tax expense and amounts computed by applying the statutory federal income tax rate to income before income tax expense is as follows for the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997 ---- ---- ---- Statutory tax rate 34% 34% 34% Income taxes computed at the statutory federal income tax rate $2,581,225 $2,159,412 $2,715,330 Add (subtract) tax effect of Tax-exempt income (243,884) (204,756) (214,877) Non-deductible expenses and other 23,596 118,679 (29,984) ---------- ---------- ---------- $2,360,937 $2,073,335 $2,470,469 ========== ========== ==========
The components of the net deferred tax asset recorded in the consolidated balance sheets as of December 31, 1999 and 1998 are as follows:
1999 1998 ---- ---- Deferred tax assets Provision for loan losses $1,629,197 $1,309,376 Mark to market adjustment -- 104,536 Net deferred loan fees 81,581 15,403 Accrued compensation and benefits 278,901 245,062 Net unrealized depreciation on securities available for sale 790,008 -- Other 5,897 6,085 ---------- ---------- 2,785,584 1,680,462
- -------------------------------------------------------------------------------- (Continued) F-23 72 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 11 - INCOME TAX EXPENSE (Continued)
1999 1998 ---- ---- Deferred tax liabilities Net unrealized appreciation on securities available for sale $ -- $ (104,536) Originated mortgage servicing rights (163,454) (126,411) Mark to market adjustment (790,008) -- ESOP contributions (227,769) (8,183) Depreciation (119,747) (67,718) Purchase accounting adjustments (96,143) (126,698) Other (1,220) (5,544) ----------- ---------- (1,398,341) (439,090) Valuation allowance -- -- ----------- ---------- $ 1,387,243 $1,241,372 =========== ==========
NOTE 12 - RELATED PARTY TRANSACTIONS Certain directors, executive officers and principal shareholders of the Corporation, including associates of such persons, are loan customers. A summary of the related party loan activity, for loans aggregating $60,000 or more to any one related party, follows for the year ended December 31, 1999 and 1998:
1999 1998 ---- ---- Balance, January 1 $ 4,394,000 $3,187,000 New loans 3,018,000 1,928,000 Repayments (3,639,000) (729,000) Other changes 4,000 8,000 ----------- ---------- Balance, December 31 $ 3,777,000 $4,394,000 =========== ==========
Other changes include adjustments for loans applicable to one reporting period that are excludable from the other reporting period. - -------------------------------------------------------------------------------- (Continued) F-24 73 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 13 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES The Corporation is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet financing needs of its customers. These financial instruments include commitments to make loans, unused lines of credit and standby letters of credit. The Corporation's exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to make loans, unused lines of credit and standby letters of credit is represented by the contractual amount of those instruments. The Corporation follows the same credit policy to make such commitments as it uses for on-balance-sheet items. The Corporation has the following commitments for terms of up to two years outstanding at December 31:
1999 1998 ---- ---- Loan commitments and unused lines of credit $121,415,000 $102,692,000 Standby letters of credit 1,935,000 2,168,000 Commercial letters of credit 956,000 60,000 ------------ ------------ $124,306,000 $104,920,000 ============ ============
Since many commitments to make loans expire without being used, the amount does not necessarily represent future cash commitments. In addition, commitments to extend credit are arrangements to lend to customers as long as there is no violation of any condition established in the contract. No losses are anticipated as a result of these transactions. Collateral obtained upon exercise of the commitment is determined using management's credit evaluation of the borrower and may include real estate, business assets, consumer assets, deposits and other items. There are various contingent liabilities that are not reflected in the consolidated financial statements, including claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material effect on the Corporation's consolidated financial condition or results of operations. Salary continuation agreements with certain executive officers contain provisions regarding certain events leading to separation from the Corporation, before the executive officer's normal retirement date, which could result in cash payments totaling approximately $2,446,000 for which $543,000 has been accrued as a liability at December 31, 1999. The Corporation was required to have approximately $4,493,000 and $4,730,000 of cash on hand or on deposit with the Federal Reserve Bank to meet regulatory reserve and clearing requirements at December 31, 1999 and 1998. These balances do not earn interest. Additionally, the Corporation was required to have approximately $1,250,000 of cash on deposit to meet other clearing requirements at December 31, 1999. This balance does earn interest. - -------------------------------------------------------------------------------- (Continued) F-25 74 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 13 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES (Continued) During 1999, the Corporation entered into an agreement whereby borrowings can be made from the Federal Reserve Bank's discount window. The terms of the program allow the Corporation to borrow up to a certain specified percentage of collateral pledged. At December 31, 1999, the Corporation was able to borrow up to $44,000,000 using the percentages then in place. The Corporation has pledged commercial loans against this borrowing capacity with a carrying value of $68,000,000. The outstanding balance as of December 31, 1999 was $-0-. NOTE 14 - PARENT COMPANY FINANCIAL STATEMENTS Presented below are condensed financial statements for the parent company, Rurban Financial Corp.: CONDENSED BALANCE SHEETS December 31, 1999 and 1998
1999 1998 ---- ---- ASSETS Cash and cash equivalents $ 248,292 $ 581,808 Investment in and advances to subsidiaries Banking subsidiaries 44,357,990 36,100,152 Non-banking subsidiaries 3,307,475 4,062,640 ----------- ----------- Total investment in subsidiaries 47,665,465 40,162,792 Accounts receivable from subsidiaries 2,312,160 -- Other assets 1,812,969 2,075,386 ----------- ----------- Total assets $52,038,886 $42,819,986 =========== =========== LIABILITIES Cash dividends payable $ 455,479 $ 419,017 Other borrowed funds 7,000,000 -- Other liabilities 682,936 498,019 ----------- ----------- Total liabilities 8,138,415 917,036 SHAREHOLDERS' EQUITY 43,900,471 41,902,950 ----------- ----------- Total liabilities and shareholders' equity $52,038,886 $42,819,986 =========== ===========
- -------------------------------------------------------------------------------- (Continued) F-26 75 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 14 - PARENT COMPANY FINANCIAL STATEMENTS (Continued) CONDENSED STATEMENTS OF INCOME Years ended December 31, 1999, 1998 and 1997
1999 1998 1997 ---- ---- ---- INCOME Interest on securities-non-taxable $ -- $ -- $ 21,477 Dividends from subsidiaries Banking subsidiaries -- 3,900,000 9,705,299 Non-banking subsidiaries 1,150,000 -- -- ----------- ---------- ----------- Total 1,150,000 3,900,000 9,705,299 Noninterest income 102,183 386,384 225,133 ----------- ---------- ----------- Total income 1,252,183 4,286,384 9,951,909 EXPENSE Interest expense on other borrowed funds 334,921 -- -- Noninterest expense 2,000,128 2,791,944 2,738,038 ----------- ---------- ----------- Total expense 2,335,049 2,791,944 2,738,038 ----------- ---------- ----------- INCOME (LOSS) BEFORE INCOME TAX BENEFIT AND EQUITY IN UNDISTRIBUTED NET INCOME OF SUBSIDIARIES (1,082,866) 1,494,440 7,213,871 Income tax benefit 767,517 818,231 925,702 ----------- ---------- ----------- INCOME (LOSS) BEFORE EQUITY IN UNDISTRIBUTED NET INCOME OF SUBSIDIARIES (315,349) 2,312,671 8,139,573 Equity in undistributed (excess distributed) net income of subsidiaries Banking subsidiaries 6,301,416 1,469,830 (3,542,158) Non-banking subsidiaries (755,165) 495,376 918,382 ----------- ---------- ----------- Total 5,546,251 1,965,206 (2,623,776) ----------- ---------- ----------- NET INCOME $ 5,230,902 $4,277,877 $ 5,515,797 =========== ========== ===========
- -------------------------------------------------------------------------------- (Continued) F-27 76 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 14 - PARENT COMPANY FINANCIAL STATEMENTS (Continued) CONDENSED STATEMENTS OF CASH FLOWS Years ended December 31, 1999, 1998 and 1997
1999 1998 1997 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Dividends received from subsidiaries Banking subsidiaries $ -- $ 3,900,000 $ 9,705,299 Non-banking subsidiaries 1,150,000 -- -- ----------- ----------- ----------- Total 1,150,000 3,900,000 9,705,299 Cash received from customers-fees and commissions 102,183 386,384 59,921 Cash paid to suppliers and employees (4,071,980) (4,060,688) (2,958,725) Interest received -- -- 21,477 Interest paid (334,921) -- -- Income tax refunds 974,543 1,010,903 933,985 ----------- ----------- ----------- Net cash from operating activities (2,180,175) 1,236,599 7,761,957 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sales of securities available for sale -- -- 516,371 Principal repayments and calls of securities available for sale -- -- 155,455 Investment in banking subsidiaries (3,500,000) -- -- ----------- ----------- ----------- Net cash from investing activities (3,500,000) -- 671,826 CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from advances on line of credit 7,000,000 -- -- Cash dividends paid (1,656,179) (1,655,928) (1,234,748) Proceeds from exercise of stock options 2,838 9,931 -- Cash paid to repurchase common stock -- -- (6,676,611) ----------- ----------- ----------- Net cash from financing activities 5,346,659 (1,645,997) (7,911,359) ----------- ----------- ----------- Net change in cash and cash equivalents (333,516) (409,398) 522,424 Cash and cash equivalents at beginning of year 581,808 991,206 468,782 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 248,292 $ 581,808 $ 991,206 =========== =========== ===========
- -------------------------------------------------------------------------------- (Continued) F-28 77 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 14 - PARENT COMPANY FINANCIAL STATEMENTS (Continued) CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED) Years ended December 31, 1999, 1998 and 1997
1999 1998 1997 ---- ---- ---- RECONCILIATION OF NET INCOME TO NET CASH FROM OPERATING ACTIVITIES Net income $ 5,230,902 $ 4,277,877 $5,515,797 Adjustments to reconcile net income to net cash from operating activities Net gain on securities -- -- (165,212) Equity in (undistributed) excess distributed net income of subsidiaries Banking subsidiaries (6,301,416) (1,469,830) 3,542,158 Non-banking subsidiaries 755,165 (495,376) (918,382) Change in accounts receivable and other assets (2,049,743) (1,189,224) (58,882) Change in other liabilities 184,917 113,152 (153,522) ----------- ----------- ---------- Net cash from operating activities $(2,180,175) $ 1,236,599 $7,761,957 =========== =========== ==========
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS The following table shows the estimated fair values and the related carrying values of the Corporation's financial instruments at December 31, 1999 and 1998. Items which are not financial instruments are not included.
1 9 9 9 1 9 9 8 -------------------------------- -------------------------------- Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value ----- ---------- ----- ---------- Financial assets - ---------------- Cash and cash equivalents $ 18,582,702 $ 18,583,000 $ 25,509,144 $ 25,509,000 Interest-bearing deposits in other financial institutions 110,000 110,000 180,000 180,000 Securities available for sale 83,118,908 83,119,000 82,142,929 82,143,000 Loans, net of allowance for loan losses (including loans held for sale) 502,287,251 500,424,000 407,069,974 408,802,000 Accrued interest receivable 4,147,321 4,147,000 3,196,546 3,197,000 Cash surrender value of life insurance 2,403,000 2,403,000 2,302,000 2,302,000 Financial liabilities - --------------------- Demand and savings deposits (220,399,705) (220,400,000) (216,266,622) (216,267,000) Time deposits (298,896,379) (298,311,000) (234,546,601) (235,645,000) Federal funds purchased (10,900,000) (10,900,000) (9,500,000) (9,500,000) Advances from FHLB (40,035,303) (38,066,000) (28,890,290) (29,796,000) Other borrowed funds (7,000,000) (7,000,000) -- -- Accrued interest payable (2,513,798) (2,514,000) (1,685,437) (1,685,000)
- -------------------------------------------------------------------------------- (Continued) F-29 78 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued) For purposes of the above disclosures of estimated fair values, the following assumptions were used as of December 31, 1999 and 1998. The estimated fair value for cash and cash equivalents, accrued interest receivable, cash surrender value of life insurance and accrued interest payable are considered to approximate cost. The estimated fair value for interest-bearing deposits in other financial institutions and securities available for sale is based on quoted market values for the individual deposits or securities or for equivalent deposits or securities. The estimated fair value for loans is based on estimates of the difference in interest rates the Corporation would charge the borrowers for similar such loans with similar maturities made at December 31, 1999 and 1998, applied for an estimated time period until the loan is assumed to reprice or be paid and the allowance for loan losses is considered to be a reasonable estimate of discount for credit quality concerns. The estimated fair value for demand deposits, savings deposits, federal funds purchased, other borrowed funds with variable interest rates and the variable rate line of credit from the FHLB is based on their carrying value. The estimated fair value for time deposits and fixed rate advances from the FHLB is based on estimates of the rate the Corporation would pay on such deposits or borrowings at December 31, 1999 and 1998, applied for the time period until maturity. The estimated fair value for other financial instruments and off-balance-sheet loan commitments approximate cost at December 31, 1999 and 1998 and are not considered significant to this presentation. While these estimates of fair value are based on management's judgment of the most appropriate factors, there is no assurance that were the Corporation to have disposed of such items at December 31, 1999 and 1998, the estimated fair values would necessarily have been realized at that date, since market values may differ depending on various circumstances. The estimated fair values at December 31, 1999 and 1998 should not necessarily be considered to apply at subsequent dates. In addition, other assets and liabilities of the Corporation that are not defined as financial instruments are not included in the above disclosures, such as premises and equipment. Also, non-financial instruments typically not recognized in the financial statements nevertheless may have value but are not included in the above disclosures. These include, among other items, the estimated earnings power of core deposit accounts, the earnings potential of trust assets, the trained work force, customer goodwill and similar items. NOTE 16 - REGULATORY MATTERS The Corporation and its subsidiary banks are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the consolidated financial statements. - -------------------------------------------------------------------------------- (Continued) F-30 79 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 16 - REGULATORY MATTERS (Continued) The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If less than well capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required. The minimum requirements are:
Capital to Risk- Weighted Assets --------------- Tier 1 Capital Total Tier 1 To Average Assets ----- ------ ----------------- Well capitalized 10% 6% 5% Adequately capitalized 8% 4% 4% Undercapitalized 6% 3% 3%
At year end, consolidated actual capital levels (in millions) and minimum required levels were:
Minimum Required Minimum Required To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Regulations ------ ----------------- ------------------ Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- 1999 - ---- Total capital (to risk weighted assets) Consolidated $51.1 10.1% $40.6 8.0% $50.7 10.0% State Bank 31.2 10.3 24.6 8.0 30.7 10.0 Tier 1 capital (to risk weighted assets) Consolidated 44.9 8.9 20.3 4.0 30.4 6.0 State Bank 28.0 9.1 12.3 4.0 18.4 6.0 Tier 1 capital (to averaged assets) Consolidated 44.9 7.2 24.8 4.0 31.0 5.0 State Bank 28.0 7.6 14.8 4.0 18.5 5.0 1998 - ---- Total capital (to risk weighted assets) Consolidated $46.1 11.3% $32.7 8.0% $40.9 10.0% State Bank 25.7 9.7 21.1 8.0 26.4 10.0 Tier 1 capital (to risk weighted assets) Consolidated 41.0 10.0 16.4 4.0 24.5 6.0 State Bank 22.4 8.5 10.6 4.0 15.8 6.0 Tier 1 capital (to averaged assets) Consolidated 41.0 8.3 19.8 4.0 24.7 5.0 State Bank 22.4 7.3 12.4 4.0 15.5 5.0
The Corporation at year end 1999 and 1998 was categorized as well capitalized. State Bank at year end 1999 and 1998 was categorized as well and adequately capitalized, respectively. All other subsidiary banks are not considered significant for this presentation. - -------------------------------------------------------------------------------- (Continued) F-31 80 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 17 - OTHER COMPREHENSIVE INCOME (LOSS) Other comprehensive income (loss) components and related taxes were as follows:
1999 1998 1997 ---- ---- ---- Net change in net unrealized appreciation (depreciation) on securities available for sale Net unrealized appreciation (depreciation) arising during the year $(2,636,840) $ 54,098 $ 527,271 Reclassification adjustments for (gains) losses included in net income 5,827 (72,468) (193,892) ----------- -------- --------- Net change in net unrealized appreciation (depreciation) on securities available for sale (2,631,013) (18,370) 333,379 Tax expense (benefit) (894,544) (2,452) 109,555 ----------- -------- --------- Total other comprehensive income (loss) $(1,736,469) $(15,918) $ 223,824 =========== ======== =========
NOTE 18 - SEGMENT INFORMATION The reportable segments are determined by the products and services offered, primarily distinguished between banking, mortgage banking and data processing operations. Loans, investments, deposits, and financial services provide the revenues in the banking operation, including the accounts of State Bank, Peoples Bank, First National Bank and Citizens Savings Bank. Loan originations and net gains on sales of loans provide the revenues in the mortgage banking operation, including the accounts of RMC. Service fees provide the revenues in the data processing operation, including the accounts of RDSI. Other segments include the accounts of the holding company, Rurban Financial Corp., which provides management services to its subsidiaries and RFS, which provides trust and financial services to customer's nationwide and Rurban Life, which provides insurance products to customers of the Corporation's subsidiary banks. The accounting policies used are the same as those described in the summary significant accounting policies. Segment performance is evaluated using net interest income, other revenue, operating expense, and net income. Goodwill is allocated. Income taxes and indirect expenses are allocated on revenue. Transactions among segments are made at fair value. The holding company allocates certain expenses to other segments, except no expenses are allocated to mortgage banking or to Rurban Life. Information reported internally for performance assessment follows. - -------------------------------------------------------------------------------- (Continued) F-32 81 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 18 - SEGMENT INFORMATION (Continued)
1999 - ---- Mortgage Data Total Intersegment Consolidated Banking Banking Processing Other Segments Elimination Totals ------- ------- ---------- ----- -------- ----------- ------ Income statement information: - ----------------------------- Net interest income (expense) $ 22,764,187 $ 511,462 $ (134,811) $ 68,060 $ 23,208,898 $ -- $ 23,208,898 Other revenue - external customers 3,070,510 760,049 4,381,746 2,851,691 11,063,996 -- 11,063,996 Other revenue - other segments -- -- 1,368,622 2,206,550 3,575,172 (3,575,172) -- ------------ ----------- ---------- ----------- ------------ ------------ ------------ Net interest income and other revenue 25,834,697 1,271,511 5,615,557 5,126,301 37,848,066 (3,575,172) 34,272,894 Noninterest expense 15,403,697 1,346,149 5,112,291 7,179,090 29,041,227 (3,575,172) 25,466,055 Significant non-cash items: Depreciation and amortization 774,668 120,696 1,061,980 179,280 2,136,624 -- 2,136,624 Provision for loan losses 1,215,000 -- -- -- 1,215,000 -- 1,215,000 Income tax expense (benefit) 2,940,249 (43,000) 171,111 (707,423) 2,360,937 -- 2,360,937 Segment profit (loss) 6,275,751 (31,638) 332,155 (1,345,366) 5,230,902 -- 5,230,902 Balance sheet information: - -------------------------- Total assets 627,265,973 13,342,963 4,792,283 6,091,461 651,492,680 (23,709,156) 627,783,524 Goodwill and intangibles 480,000 30,000 -- -- 510,000 -- 510,000 Premises and equipment expenditures, net 726,403 10,358 803,911 126,234 1,666,906 -- 1,666,906
- -------------------------------------------------------------------------------- (Continued) F-33 82 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 18 - SEGMENT INFORMATION (Continued)
1998 - ---- Mortgage Data Total Intersegment Consolidated Banking Banking Processing Other Segments Elimination Totals ------- ------- ---------- ----- -------- ----------- ------ Income statement information: - ----------------------------- Net interest income (expense) $ 19,972,335 $ 506,359 $ (20,201) $ 92,096 $ 20,550,589 $ -- $ 20,550,589 Other revenue - external customers 2,396,019 1,719,589 3,553,998 2,841,028 10,510,634 -- 10,510,634 Other revenue - other segments 5,164 -- 1,314,752 2,407,715 3,727,631 (3,727,631) -- ------------ ----------- ---------- ---------- ------------ ------------ ------------ Net interest income and other revenue 22,373,518 2,225,948 4,848,549 5,340,839 34,788,854 (3,727,631) 31,061,223 Noninterest expense 14,425,520 3,059,817 4,237,517 5,634,788 27,357,642 (3,727,631) 23,630,011 Significant non-cash items: Depreciation and amortization 688,156 320,037 929,038 134,317 2,071,548 -- 2,071,548 Provision for loan losses 1,080,000 -- -- -- 1,080,000 -- 1,080,000 Income tax expense (benefit) 2,240,587 (248,498) 208,177 (126,931) 2,073,335 -- 2,073,335 Segment profit (loss) 4,627,411 (585,371) 402,855 (167,018) 4,277,877 -- 4,277,877 Balance sheet information: - -------------------------- Total assets 532,744,285 19,771,508 4,747,584 5,081,398 562,344,775 (25,189,996) 537,154,779 Goodwill and intangibles 660,000 60,000 -- -- 720,000 -- 720,000 Premises and equipment expenditures, net 1,287,941 225,505 2,639,115 350,071 4,502,632 -- 4,502,632
- -------------------------------------------------------------------------------- (Continued) F-34 83 RURBAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 18 - SEGMENT INFORMATION (Continued)
1997 - ---- Mortgage Data Total Intersegment Consolidated Banking Banking Processing Other Segments Elimination Totals ------- ------- ---------- ----- -------- ----------- ------ Income statement information: - ----------------------------- Net interest income (expense) $ 19,842,395 $ 35,708 $ (22,116) $ 36,518 $ 19,892,505 $ -- $ 19,892,505 Other revenue - external customers 2,172,411 518,923 2,827,782 2,775,506 8,294,622 -- 8,294,622 Other revenue - other segments -- -- 1,263,555 1,256,352 2,519,907 (2,519,907) -- ------------ ----------- ---------- ---------- ------------ ------------ ------------ Net interest income and other revenue 22,014,806 554,631 4,069,221 4,068,376 30,707,034 (2,519,907) 28,187,127 Noninterest expense 12,993,227 711,769 3,186,130 4,881,677 21,772,803 (2,519,907) 19,252,896 Significant non-cash items: Depreciation and amortization 669,669 -- 822,373 81,489 1,573,531 -- 1,573,531 Provision for loan losses 947,965 -- -- -- 947,965 -- 947,965 Income tax expense (benefit) 2,503,692 (56,952) 300,251 (276,522) 2,470,469 -- 2,470,469 Segment profit (loss) 5,569,922 (100,186) 582,840 (536,779) 5,515,797 -- 5,515,797 Balance sheet information: - -------------------------- Total assets 469,805,133 11,270,134 2,778,964 4,084,696 487,938,927 (16,567,837) 471,371,090 Goodwill and intangibles 840,000 265,000 -- -- 1,105,000 -- 1,105,000 Premises and equipment expenditures, net 505,009 66,929 281,957 295,759 1,149,654 -- 1,149,654
- -------------------------------------------------------------------------------- F-35 84 RURBAN FINANCIAL CORP. ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1999 --------------------------------------- INDEX TO EXHIBITS
Exhibit No. Description Reference No. - ----------- ----------- ------------- 3(a) Amended Articles of Registrant, as amended Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 (File No. 0-13507) [Exhibit 3(a)(i)]. 3(b) Certificate of Amendment to the Amended Incorporated herein by reference to Articles of Rurban Financial Corp. Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 0-13507) [Exhibit 3(b)]. 3(c) Certificate of Amendment to the Amended Incorporated herein by reference to Articles of Rurban Financial Corp. Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 0-13507) [Exhibit 3(c)]. 3(d) Amended and Restated Articles of Rurban Incorporated herein by reference to Financial Corp. Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 0-13507) [Exhibit 3(d)]. 3(e) Regulations of Registrant, as amended Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1986 (File No. 0-13507) [Exhibit 3(b)]. 10(a) Employees' Stock Ownership Plan of Rurban Incorporated herein by reference to Financial Corp. Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 0-13507) [Exhibit 10(a)]. 10(b) First Amendment to Employees' Stock Incorporated herein by reference to Ownership Plan of Rurban Financial Corp., Registrant's Annual Report on Form 10-K dated June 14, 1993 and made to be for the fiscal year ended effective as of January 1, 1993 December 31, 1993 (File No. 0-13507) [Exhibit 10(b)].
84 85
Exhibit No. Description Reference No. - ----------- ----------- ------------- 10(c) Second Amendment to Employees' Stock Incorporated herein by reference to Ownership Plan of Rurban Financial Corp., Registrant's Annual Report on Form 10-K dated March 14, 1994 and made to be for the fiscal year ended effective as of January 1, 1993 December 31, 1993 (File No. 0-13507) [Exhibit 10(c)]. 10(d) Third Amendment to Employees' Stock Incorporated herein by reference to Ownership Plan of Rurban Financial Corp., Registrant's Annual Report on Form 10-K dated March 13, 1995 for the fiscal year ended December 31, 1994 (File No. 0-13507) [Exhibit 10(d)]. 10(e) Fourth Amendment to Employees' Stock Incorporated herein by reference to Ownership Plan of Rurban Financial Corp., Registrant's Annual Report on Form 10-K dated June 10, 1995 and made to be for the fiscal year ended December 31, effective as of January 1, 1995 1995 (File No. 0-13507) [Exhibit 10(e)]. 10(f) The Rurban Financial Corp. Savings Plan and Incorporated herein by reference to Trust Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (File No. 0-13507) [Exhibit 10(g)]. 10(g) First Amendment to The Rurban Financial Incorporated herein by reference to Corp. Savings Plan and Trust, dated Registrant's Annual Report on Form 10-K December 10, 1990 and effective January 1, for the fiscal year ended December 1990 31, 1990 (File No. 0-13507) [Exhibit 10(g)]. 10(h) Second Amendment to The Rurban Financial Incorporated herein by reference to Corp. Savings Plan and Trust, dated Registrant's Annual Report on Form 10-K March 11, 1991, effective February 1, 1991 for the fiscal year ended December 31, 1992 (File No. 0-13507) [Exhibit 10(d)]. 10(i) Third Amendment to The Rurban Financial Incorporated herein by reference to Corp. Savings Plan and Trust, dated Registrant's Annual Report on Form 10-K June 11, 1991 for the fiscal year ended December 31, 1992 (File No. 0-13507) [Exhibit 10(e)]. 10(j) Fourth Amendment to The Rurban Financial Incorporated herein by reference to Corp. Savings Plan and Trust, dated Registrant's Annual Report on Form 10-K July 14, 1992, effective May 1, 1992 for the fiscal year ended December 31, 1992 (File No. 0-13507) [Exhibit 10(f)].
85 86
Exhibit No. Description Reference No. - ----------- ----------- ------------- 10(k) Fifth Amendment to The Rurban Financial Incorporated herein by reference to Corp. Savings Plan and Trust, dated March Registrant's Annual Report on Form 10-K 14, 1994 for the fiscal year ended December 31, 1993 (File No. 0-13507) [Exhibit 10(i)]. 10(l) Sixth Amendment to The Rurban Financial Incorporated herein by reference to Corp. Savings Plan and Trust dated May 1, Registrant's Annual Report on Form 10-K 1995 for the fiscal year ended December 31, 1995 (File No. 0-13507) [Exhibit 10(l)]. 10(m) Summary of Incentive Compensation Plan of Incorporated herein by reference to State Bank Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 0-13507) [Exhibit 10(j)]. 10(n) Summary of Bonus Program adopted by the Incorporated herein by reference to Trust Department of State Bank for the Registrant's Annual Report on Form 10-K benefit of Robert W. Constien in his for the fiscal year ended December 31, capacity as Manager of the Trust Department 1991 (File No. 0-13507) [Exhibit 10(e)]. 10(o) Summary of Bonus Program for the Trust Incorporated herein by reference to Department of State Bank Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (File No. 0-13507 [Exhibit 10(i)]. 10(p) Summary of Sales Bonus Program of State Bank Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (File No. 0-13507) [Exhibit 10(n)]. 10(q) Summary of Rurban Financial Corp. Bonus Plan Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 0-13507) [Exhibit 10(q)]. 10(r) Executive Salary Continuation Agreement, Incorporated herein by reference to dated December 15, 1994, between Rurban Registrant's Annual Report on Form 10-K Financial Corp. and Richard C. Burrows for the fiscal year ended December 31, 1994 (File No. 0-13507) [Exhibit 10(p)].
86 87
Exhibit No. Description Reference No. - ----------- ----------- ------------- 10(s) Executive Salary Continuation Agreement, Incorporated herein by reference to dated October 11, 1995, between Rurban Registrant's Annual Reports on Form 10-K Financial Corp. and Thomas C. Williams; and for the fiscal years ended December 31, Amended Schedule A to Exhibit 10(s) 1995 and December 31, 1997 (File No. identifying other identical Executive 0-13507) [Exhibit 10(s)]. Salary Continuation Agreements between executive officers of Rurban Financial Corp. and Rurban Financial Corp. 10(t) Description of Split-Dollar Insurance Incorporated herein by reference to Policies Maintained for Certain Executive Registrant's Annual Report on Form 10-K Officers of Rurban Financial Corp. for the fiscal year ended December 31, 1995 (File No. 0-13507) [Exhibit 10(t)]. 10(u) Rurban Financial Corp. Stock Option Plan Incorporated herein by reference to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-13507) [Exhibit 10(u)]. 10(v) Rurban Financial Corp. Plan to Allow Incorporated herein by reference to the Directors to Elect to Defer Compensation Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-13507) [Exhibit 10(v)]. 10(w) Form of Non-Qualified Stock Option Incorporated herein by reference to Agreement Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 0-13507) [Exhibit 10(w)]. 10(x) Form of Incentive Stock Option Agreement Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 0-13507) [Exhibit 10(x)]. 10(y) Employees' Stock Ownership and Savings Plan Filed herewith as Exhibit 10(y). of Rurban Financial Corp. 11 Statement re Computation of Per Share [Included in Notes 1 and 2 of the Notes Earnings to Consolidated Financial Statements of Registrant in the financial statements portion of this Annual Report on Form 10-K]. 21 Subsidiaries of Registrant Included in this Annual Report on Form 10-K as Exhibit 21.
87 88
Exhibit No. Description Reference No. - ----------- ----------- ------------- 23 Consent of Independent Auditor Included in this Annual Report on Form 10-K as Exhibit 23. 27 Financial Data Schedule Included in this Annual Report on Form 10-K as Exhibit 27.
88 EX-10.Y 2 EXHIBIT 10(Y) 1 EXHIBIT 10(y) ------------- EMPLOYEES' STOCK OWNERSHIP AND SAVINGS PLAN OF RURBAN FINANCIAL CORP. 2 EMPLOYEES' STOCK OWNERSHIP AND SAVINGS PLAN OF RURBAN FINANCIAL CORP. WHEREAS, the Employer established the "Employees' Stock Ownership Plan of Rurban Financial Corp." (hereinafter called the "ESOP" or "Plan") which became effective January 1, 1985; WHEREAS, the Employer established "The Rurban Financial Corp. Savings Plan and Trust" (hereinafter called the "Savings Plan") which became effective July 1, 1988; WHEREAS, the ESOP is designed to invest primarily in Qualifying Employer Securities and is intended to meet the applicable requirements of Sections 401(a), 409 and 4975(e)(7) of the Code; WHEREAS, it is desired to amend and restate the ESOP in its entirety effective January 1, 1997 to comply with the provisions of the Small Business Job Protection Act of 1996 and the Taxpayer Relief Act of 1997 ; and WHEREAS, it is further desired to merge the Savings Plan into the ESOP, change the name of the merged plan to the Employees' Stock Ownership and Savings Plan of Rurban Financial Corp., and to make certain other changes effective January 1, 2000; NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained and other valuable considerations, the Plan shall be amended and restated effective January 1, 1997, except with respect to those provisions of this Plan that have a specific effective date, as follows: - -------------------------------------------------------------------------------- Page 1 3 ARTICLE I DEFINITIONS 1.01 ACQUIRED SUBSIDIARY. "Acquired Subsidiary" shall mean any organization, corporate or otherwise, which is acquired by purchase, merger, consolidation or any other method, by the holding company. 1.02 ACT. "Act" means Employee Retirement Income Security Act of 1974, as may be amended from time to time. 1.03 ANNUAL COMPENSATION. "Annual Compensation" means, for each Participant, as of the date of determination, his compensation as reported for federal withholding purposes since becoming a Participant. Annual Compensation includes a Participant's voluntary reduction in cash consideration made in accordance with an arrangement established by the Employer under Sections 125 and 401(k) of the Code. Annual Compensation in excess of $160,000 shall be disregarded. Such amount shall be adjusted for increases in the cost of living in accordance with Code Section 401(a)(17), except that the dollar increase in effect on January 1 of any calendar year shall be effective for the Plan Year beginning with or within such calendar year. For any short Plan Year the Annual Compensation limit shall be an amount equal to the Annual Compensation limit for the calendar year in which the Plan Year begins multiplied by the ratio obtained by dividing the number of full months in the short Plan Year by twelve (12). If, in connection with the adoption of this amendment and restatement, the definition of Annual Compensation has been modified, then, for Plan Years prior to the Plan Year which includes the adoption date of this amendment and restatement, Annual Compensation means compensation determined pursuant to the Plan then in effect. 1.04 BREAK IN SERVICE. "Break in Service" for any Employee occurs in any Plan Year in which such Employee completes fewer than 501 Hours of Service. In determining whether a Break in Service has occurred for purposes of eligibility to participate, benefit eligibility and vesting in a computation period, an individual who is absent from work for maternity or paternity reasons shall receive credit for the Hours of Service which would otherwise have been credited to such individual but for such absence, or in any case in which such hours cannot be determined, eight (8) Hours of Service per day of absence. For purposes of this paragraph, an absence from work for maternity or paternity reasons means an absence: (1) by reason of the pregnancy of the individual; (2) by reason of birth of a child of the individual; - -------------------------------------------------------------------------------- Page 2 4 (3) by reason of the placement of a child with the individual in connection with the adoption of such child by such individual, or (4) for purposes of caring for such child for a period beginning immediately following such birth or placement. If a Participant incurs a Break in Service, but does not terminate employment, the vested percentage of the value of his ESOP Contributions Account and Matching Contributions Account prior to such Break in Service shall not increase as a result of any subsequent service with the Employer until such Participant completes a Year of Service. 1.05 CODE. "Code" means the Internal Revenue Code of 1986, as amended. 1.06 COMMITTEE. "Committee" shall mean the Administrative Committee as provided in Article XII. 1.07 COMPANY. "Company" means Rurban Financial Corp. Except as otherwise specifically provided in the Plan or Trust agreement, the Company may act for and on behalf of each Employer in any matter pertaining to the Plan or Trust Agreement, and each such act shall be effective and binding to the same extent as if the act were that of any Employer. Any action or determination of the Company under the Plan shall be by its Directors. 1.08 DIRECTORS. "Directors" shall mean the Board of Directors of the Company. 1.09 DISABILITY RETIREMENT DATE. "Disability Retirement Date" shall mean the last day of any month (prior to his Normal Retirement Date) in which a Participant terminates employment because of his Permanent and Total Disability. 1.10 DISTRIBUTION DATE. "Distribution Date" means the first day of each month and such other dates during the Plan Year that are established by the Plan Administrator. 1.11 EARLY RETIREMENT. "Early Retirement" means termination of employment on or after age 55 with six (6) Years of Service. 1.12 EARLY RETIREMENT DATE. "Early Retirement Date" means the last day of the month (prior to Normal Retirement Date) coinciding with or following the date on which a Participant attains age 55 and has completed at least six (6) Years of Service. 1.13 EMPLOYEE. "Employee" means any person employed by the Employer. "Employee" shall not include Leased Employees. 1.14 EMPLOYER OR PARTICIPATING EMPLOYER. "Employer" or "Participating Employer" means the Company, and any Participating Employer listed in Appendix A, and any corporation in which the Company owns 50% or more of the outstanding shares of the stock. Any action or determination of the Employer under the Plan shall be by its Directors. - -------------------------------------------------------------------------------- Page 3 5 1.15 ENTRY DATE. "Entry Date" means the date the Employee becomes a Participant hereunder, pursuant to the eligibility requirements of Section 2.01. 1.16 ERISA. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 1.17 ESOP. "ESOP" means an Employee Stock Ownership Plan as defined in Section 4975(e)(7) of the Code. 1.18 HOUR OF SERVICE. "Hour of Service" means: (a) Each hour for which an Employee is directly or indirectly paid or entitled to payment by either the Company or the Employer for the performance of duties; and (b) Each hour for which an Employee is directly or indirectly paid, or entitled to payment, by either the Company or the Employer for reasons (such as vacation, sickness, disability, or similar leave of absence) other than for the performance of duties, and for military leaves, Maternity/Paternity Leaves or leaves for jury duty; and (c) Each hour for which back pay, irrespective of mitigation of damages, has been either awarded or agreed to by either the Company or the Employer provided that the same Hours of Service shall not be credited under this subsection (c) and subsections (a) or (b) above, as the case may be. Hours of Service computed hereunder shall be computed in accordance with Section 2530.200 b-2 (b) and (c) of the Department of Labor Regulations which is incorporated herein by reference. In no event shall more than five hundred and one (501) Hours of Service be credited for any one continuous period of absence during or for which the Employee receives payment for nonperformance of duties whether or not such period occurs in a single computation period. For purposes of this Section 1.18, a Maternity/Paternity Leave means absence in accordance with the Employer's or Company's preapproved leave policy which may permit such leaves: (a) by reason of the pregnancy of an individual, (b) by reason of the birth of a child of an individual, (c) by reason of the placement of a child with an individual in connection with the adoption of such child by such individual, or (d) for purposes of caring for such child for a period beginning immediately following such birth or placement. The Hours of Service credited under this paragraph shall be credited: - -------------------------------------------------------------------------------- Page 4 6 (a) in the computation period in which the absence begins if the crediting is necessary in order to give the Participant 501 Hours, or (b) in all other cases, in the following computation period. If the number of hours which would have been credited cannot be determined, such person shall receive credit for eight (8) Hours of Service per day of such absence. For purposes of this Section 1.18, "computation period" shall mean a twelve (12) consecutive month period commencing on the date of an Employee's first Hour of Service with either the Company or the Employer, or any anniversary thereof. 1.19 LEASED EMPLOYEE. "Leased Employee" shall mean a person who is not a common law Employee of the Company or a related Company but who provides services to the Company or related Company and: (a) such services are provided pursuant to an agreement (written or oral) between the Company or a related Company, and any other person ("leasing organization), (b) such person has performed such services for the Company or a related Company on a substantially full-time basis for a period of at least one year, and (c) such services are performed under primary direction or control by the recipient Employer. A person shall not be deemed a Leased Employee if (1) such Employee is covered by a money purchase pension plan maintained by a leasing organization providing a nonintegrated employer contribution rate of at least 10% for immediate participation and full and immediate vesting, and (2) Leased Employees do not constitute more than 20% of the recipient's non-highly compensated work force. Contributions or benefits provided a Leased Employee by the leasing organization which are attributable to services performed for the recipient employer shall be treated as provided by the recipient employer. A Leased Employee within the meaning of Section 414(n)(2) of the Code shall not be eligible to become a Participant in the Plan while a Leased Employee. 1.20 NAMED FIDUCIARY. "Named Fiduciary" means any person who (a) exercises any discretionary authority or discretionary control respecting management of the Plan or exercises any authority or control respecting management or disposition of its assets, (b) renders investment advice for a fee or other compensation, direct or indirect, with respect to any monies or other property of the Plan or has any authority or responsibility to do so, or (c) has any discretionary authority or discretionary responsibility in the administration of the Plan, including, but not limited to, the Trustee, the Employer and its representative body, and the Plan Administrator. 1.21 NORMAL RETIREMENT AGE. "Normal Retirement Age" means age sixty-five (65) or the fifth anniversary of joining the Plan, if later. A Participant's Accounts shall be nonforfeitable upon attaining his Normal Retirement Age. - -------------------------------------------------------------------------------- Page 5 7 1.22 NORMAL RETIREMENT DATE. "Normal Retirement Date" means the first day of the month coinciding with or next following the date on which a Participant attains Normal Retirement Age. 1.23 PARTICIPANT. "Participant" means an Employee who has satisfied the eligibility requirements for participation in the Plan. 1.24 PERMANENT AND TOTAL DISABILITY. "Permanent and Total Disability" means a physical or mental condition of a Participant resulting from a bodily injury or disease or mental disorder which renders him incapable of continuing in the employment of the Employer. The total and permanent disability of any Participant shall be determined by the Plan Administrator, in accordance with uniform principles consistently applied, upon the basis of such evidence as the Plan Administrator deems necessary or advisable. 1.25 PLAN. Prior to January 1, 2000, "Plan" means the Employees' Stock Ownership Plan of Rurban Financial Corp. Effective January 1, 2000, "Plan" means the Employees' Stock Ownership and Savings Plan of Rurban Financial Corp. 1.26 PLAN ADMINISTRATOR. "Plan Administrator" means the Company or such person(s) or entity designated by the Company who is responsible for the administration of the Plan pursuant to the provisions of Article XII. 1.27 PLAN YEAR. "Plan Year" means the 12-month period beginning on January 1 and ending on the following December 31 of each year. 1.28 QUALIFIED ELECTION. "Qualified Election" means a waiver of the lump sum payment to the spouse in the event of death of the Participant. The waiver must be in writing and must be consented to by the Participant's spouse. The Spouse's consent to a waiver must be witnessed by a Plan representative or notary public and must be limited to a benefit for a specific alternate beneficiary (or a specific form of benefit). Notwithstanding this consent requirement, if the Participant establishes to the satisfaction of a Plan representative that such written consent may not be obtained because there is no spouse or the spouse cannot be located, a waiver will be deemed a Qualified Election. Any consent necessary under this provision will not be valid with respect to any other spouse. Additionally, a revocation of a prior waiver may be made by a Participant without the consent of the spouse at any time before the commencement of benefits. The number of revocations shall not be limited. Any new waiver or change of beneficiary will require a new spousal consent. Any ambiguity in a Participant's death beneficiary designation shall be resolved by the Administrator. The Administrator may direct a Participant to clarify his beneficiary designation and, if necessary, execute a new designation containing such clarification. 1.29 QUALIFYING EMPLOYER SECURITIES. "Qualifying Employer Securities" means any security issued by the Employer or an affiliate thereof which is: (a) stock or an equity security, or - -------------------------------------------------------------------------------- Page 6 8 (b) a bond, debenture, note or certificate, or other evidence of indebtedness which is described in ERISA Section 407(e). 1.30 TRUSTEE. "Trustee" means the original Trustee or any successor Trustee appointed as provided in the Trust Agreement. 1.31 TRUST AGREEMENT. Prior to January 1, 2000, "Trust Agreement" shall mean the Trust Agreement (as it may be amended from time to time) to be known as the "Trust Agreement for Employees' Stock Ownership Plan of Rurban Financial Corp." Effective January 1, 2000, "Trust Agreement" shall mean the Trust Agreement (as it may be amended from time to time) to be known as the "Trust Agreement for Employees' Stock Ownership and Savings Plan of Rurban Financial Corp." 1.32 TRUST FUND. "Trust Fund" means the fund as defined in Section 1 of the Trust Agreement. 1.33 YEAR OF SERVICE. "Year of Service" means the computation period of twelve (12) consecutive months during which an Employee is credited with at least 1,000 Hours of Service. For Plan Years prior to January 1, 2000, for purposes of eligibility for participation, the initial computation period shall begin with the date on which the Employee first performs an Hour of Service. The participation computation period beginning after a one year Break in Service shall be measured from the date on which an Employee again performs an Hour of Service. The participation computation period shall shift to the Plan Year which includes the anniversary of the date on which the Employee first performed an Hour of Service. An Employee who is credited with the required Hours of Service in both the initial computation period (or the computation period beginning after a one year Break in Service) and the Plan Year which includes the anniversary of the date on which the Employee first performed an Hour of Service, shall be credited with two (2) Years of Service for purposes of eligibility to participate. For vesting purposes, the computation period shall be the Plan Year, including periods prior to and subsequent to becoming a Participant. A Participant will be credited with a Year of Service if he or she completes 1,000 Hours of Service during a Plan Year, even though the Participant is not employed for the full twelve-month period. Service of an Employee with the Armed Forces of the United States shall be deemed to be service with the Employer for purposes of Sections 2.01 and 5.03, provided the Employee returns to active employment with the Employer within the prescribed time limits during which he retains re-employment rights by law. If such Employee does not return during such period, his employment will be deemed to have been terminated when he entered the Armed Forces. An Employee who does not initially meet the eligibility requirements of Section 2.01 and later becomes a Participant, will have all Years of Service counted for Plan purposes, both prior to and subsequent to becoming a Participant. - -------------------------------------------------------------------------------- Page 7 9 In the event a terminated Participant is rehired, all Years of Service with either the Company or the Employer shall be counted for purposes of Sections 2.01 and 5.03. Employees of an Acquired Subsidiary shall be granted Years of Service credit for purposes of eligibility and vesting, under the conditions and standards of this Section 1.33 for all service which they had with the Acquired Subsidiary. - -------------------------------------------------------------------------------- Page 8 10 ARTICLE II ELIGIBILITY 2.01 ELIGIBILITY Prior to January 1, 2000, an Employee shall be eligible to participate in the Plan on the January 1 or July 1 coinciding with or next following the date the Employee meets all of the following requirements: (a) Is credited with one (1) Year of Service; (b) has attained age twenty-one (21); and (c) is not a Leased Employee Effective January 1, 2000, an Employee shall be eligible to participate in the Plan on the January 1, April 1, July 1, or October 1 coinciding with or next following the date the Employee meets all of the following requirements: (a) has attained age twenty-one (21); and (b) is not a Leased Employee 2.02 ELIGIBILITY UPON RE-EMPLOYMENT (a) A former Participant shall become a Participant immediately upon his return to the employ of the Employer if such former Participant had a nonforfeitable right to all or a portion of his Participant's Account at the time of his termination. (b) A former Participant who did not have a nonforfeitable right to any portion of his Participant's Account at the time of his termination shall be considered a new Employee, for eligibility purposes, if the number of consecutive one-year Breaks in Service equals or exceeds the greater of five or the aggregate number of Years of Service before such Break in Service. Unless such former Participant's Years of Service before his termination may be disregarded, such Participant shall participate immediately. - -------------------------------------------------------------------------------- Page 9 11 ARTICLE III CONTRIBUTIONS 3.01 EMPLOYER CONTRIBUTIONS (a) ESOP CONTRIBUTIONS. For each Plan Year, the Company shall contribute to the Plan such amount as shall be determined by the Company without regard to net profits. ESOP Contributions for any Plan Year shall not exceed the maximum amount allowable as a deduction to the Employer under the provisions of Code Section 404. All ESOP Contributions shall be made in cash or in Qualifying Employer Securities or a combination of cash and Qualifying Employer Securities valued at the fair market value as of the date of payment. With respect to ESOP Contributions, this Plan is intended to qualify as an employee stock ownership plan under Section 4975(e)(7) of the Code and the regulations thereunder, and is designed to be invested primarily in Qualifying Employer Securities. At any time up to one hundred percent (100%) of the assets in the ESOP Contributions Account may be invested in Qualifying Employer Securities. (b) COMPENSATION DEFERRAL CONTRIBUTIONS. Each eligible Participant may elect to defer up to twelve percent (12%) of his Annual Compensation for each pay period that he remains a Participant in accordance with procedures established by the Plan Administrator. The Participant's election shall be made at such time and in such manner as the Plan Administrator shall determine. Said election shall remain in effect until revoked or superseded by a subsequent election pursuant to procedures established by the Plan Administrator. Compensation Deferral Contributions shall not be considered as income to the Participant for purposes of Section 61 of the Code. Such contributions shall be deemed as those made by the Employer, subject to the limitations of Section 7.01. Except as provided herein, the Employer shall contribute to the Plan on behalf of the Participant the full amount of the Compensation Deferral Contribution authorized by said Participant. No Participant shall be permitted to have Compensation Deferral Contributions made under this Plan, or any other qualified plan maintained by the Employer, during any taxable year, in excess of the dollar limitation contained in Section 402(g) of the Code in effect at the beginning of such taxable year. The Employer shall automatically discontinue Compensation Deferral Contributions for the remainder of the year on behalf of a Participant who reaches this limitation. A Participant may request a distribution of any Excess Deferrals (Compensation Deferral Contributions in excess of the limitation) in accordance with the provisions of Section 6.07 in the event that his Compensation Deferral Contributions to the Plan, when combined with any amounts deferred under any plans or arrangements described in Sections 401(k), 408(k) or 403(b) of the Code, exceed the limit of Section 402(g) of the Code. - -------------------------------------------------------------------------------- Page 10 12 Contributions to a Participant's Compensation Deferral Contributions Account must meet the nondiscrimination requirements of Section 401(k) of the Code pursuant to Section 7.03. (c) MATCHING CONTRIBUTIONS. The Employer may make Matching Contributions to the Trust Fund on behalf of Participants who are authorizing Compensation Deferral Contributions. The amount of the Employer's Matching Contributions shall be determined each year by the Board of Directors. Contributions to a Participant's Matching Contributions Account must meet the nondiscrimination requirements of Section 401(m) of the Code pursuant to Section 7.04. 3.02 ROLLOVER CONTRIBUTIONS The Trustee shall accept transfers on behalf of a Participant from: (a) a qualified pension or profit sharing plan maintained by a former employer of the Participant; (b) a terminated but previously qualified pension or profit sharing plan maintained by the Employer; (c) a "rollover" Individual Retirement Account as that term is defined in Section 408(d)(3)(A)(ii) of the Code. Rollover Contributions made pursuant to this Section 3.02 shall be credited to the Participant's Rollover Contributions Account and shall be at all times nonforfeitable. The Plan will not accept Rollover Contributions from a defined benefit or defined contribution plan subject to Code Sections 401(a)(11) and 417(a) if this Plan would be required by Code Section 411(d)(6) to preserve any joint and survivor or annuity distribution rights. 3.03 TIME FOR PAYMENT OF CONTRIBUTIONS The Employer shall generally pay to the Trustee its contribution to the Plan for each Plan Year within the time prescribed by law, including extensions of time, for filing of the Employer's federal tax return for the Employer's fiscal year. However, Compensation Deferral Contributions shall be paid to the Trustee as of the earliest date on which such contributions are known and can reasonably be segregated from the Employer's general assets. The provisions of Department of Labor Regs. 2510.3-102 are incorporated herein by reference. - -------------------------------------------------------------------------------- Page 11 13 ARTICLE IV ALLOCATIONS 4.01 PARTICIPANT ACCOUNTS Separate Accounts shall be maintained by the Trustee for each Participant as follows: (a) ESOP CONTRIBUTIONS ACCOUNT. The amount of the Employer's contribution to the Trust Fund pursuant to Section 3.01(a) and allocated pursuant to Section 4.02, together with such Participant's share of all income, gains, losses and accumulations, shall be credited or debited to each Participant's ESOP Contributions Account. (b) COMPENSATION DEFERRAL CONTRIBUTIONS ACCOUNT. Compensation Deferral Contributions authorized by each Participant and contributed by the Employer pursuant to Section 3.01(b) and allocated pursuant to Section 4.02, together with such Participant's share of all income, gains, losses and accumulations, shall be credited or debited to each Participant's Compensation Deferral Contributions Account. (c) MATCHING CONTRIBUTIONS ACCOUNT. Matching Contributions made by the Employer pursuant to Section 3.01(c) and allocated pursuant to Section 4.02, together with such Participant's share of all income, gains, losses and accumulations, shall be credited or debited to each Participant's Matching Contributions Account. (d) ROLLOVER CONTRIBUTIONS ACCOUNT. Any Rollover Contributions made by a Participant pursuant to Section 3.02 shall be credited to the Participant's Rollover Contributions Account and shall be credited or debited with its share of all income, gains, losses and accumulations. (e) PRIOR PLAN ACCOUNT. Amounts transferred from a previous qualified plan of the Employer, together with such Participant's share of all income, gains and accumulations therefrom, shall be credited and losses debited to each Participant's Prior Plan Account. A Participant's Prior Plan Account shall be nonforfeitable at all times. The ESOP Contributions Account, Deferral Contributions Account, Matching Contributions Account, Rollover Contributions Account, and Prior Plan Account will sometimes be collectively referred to in this Plan as "Accounts". - -------------------------------------------------------------------------------- Page 12 14 4.02 ANNUAL ALLOCATIONS (a) EMPLOYER CONTRIBUTIONS (1) ESOP CONTRIBUTIONS. Effective as of the last day of each Plan Year, any amount contributed by the Employer pursuant to Section 3.01(a) shall be allocated and credited to the ESOP Contributions Account of each eligible Participant. An allocation will be made only if the Participant was employed on the last day of such Plan Year and was credited with at least one thousand (1,000) Hours of Service during such Plan Year, subject to the provisions of Section 8.04 hereof, except that any Participant who becomes Permanently and Totally Disabled, dies or retires during such Plan Year shall receive an allocation. The annual contribution to this ESOP Contributions Account, if any, and the amount of shares released from a suspense account pursuant to Section 10.02, less any amount of shares allocated to Participant ESOP Contributions Accounts pursuant to Section 9.06(b), will be allocated to each Participant in the same proportion as each Participant's Annual Compensation bears to the total Annual Compensation of all Participants. (2) COMPENSATION DEFERRAL CONTRIBUTIONS. Compensation Deferral Contributions made by the Employer on behalf of a Participant pursuant to Section 3.01(b) shall be credited to said Participant's Compensation Deferral Contributions Account. (3) MATCHING CONTRIBUTIONS. Matching Contributions made by the Employer on behalf of a Participant pursuant to Section 3.01(c) shall be credited to said Participant's Matching Contributions Account. (b) INVESTMENT GAIN OR LOSS Any net gain or net loss resulting from the operation of the investments of the Trust for such year shall be allocated by the Trustee to the respective Participant's Accounts in proportion to the value of the respective interests in the investments preceding such revaluation. The Trustee may use any reasonable method which the Trustee in his sole discretion determines will fairly allocate earnings, gains or losses and the net value of the Trust to each Participant's Account. Any such procedure must be nondiscriminatory and uniformly applied. (c) FORFEITURES Any forfeiture allocable for the current Plan Year, as provided in Section 5.03 shall be allocated to the ESOP Contributions Account of Participants who are otherwise entitled to receive an ESOP Contribution as provided by Plan Section 4.02(a). Such forfeiture shall be allocated and credited to the ESOP Contributions Account of each such Participant as an amount determined in the same proportion that such Participant's Annual Compensation bears to the total Annual Compensation of all Participants. Effective January 1, 2000, forfeitures will be used to reduce Employer contributions for the year in which the forfeiture occurs. - -------------------------------------------------------------------------------- Page 13 15 4.03 DIVIDENDS Any cash dividends received by the Trustee on Employer stock allocated to the ESOP Contributions Accounts of Participants (or former Participants or beneficiaries) may be retained in the Participants' applicable ESOP Contributions Accounts, applied to the payment of an ESOP loan pursuant to Section 9.06, or paid to such participants, former Participants or beneficiaries (in a nondiscriminatory manner) at the sole discretion of the Company; provided that any current payment in cash must be paid to Participants, former Participants or beneficiaries within 90 days after the close of the Plan Year in which the dividend is received by the Trustee. Any such payment of cash dividends on shares of Employer stock shall be accounted for as if the Participant or former Participant receiving such dividends was the direct owner of such shares of Employer stock and such payment shall not be treated as a distribution under the Plan. 4.04 ANNUAL REPORT TO PARTICIPANTS The Plan Administrator shall notify each Participant in writing of the financial status of his Accounts as of the last day of each Plan Year and may provide Participants at other times with additional statements as the Plan Administrator may in its sole discretion determine to be appropriate. - -------------------------------------------------------------------------------- Page 14 16 ARTICLE V BENEFITS TO PARTICIPANTS 5.01 UPON RETIREMENT OR DISABILITY When a Participant retires (whether it be at Normal Retirement Date or after Normal Retirement Date) or becomes Permanently and Totally Disabled, the entire interest in his Accounts, including the amount of any additional credit, as finally determined, representing his participation and contributions for the year in which his disability or retirement occurred, shall become nonforfeitable and his Plan participation shall cease. The Plan Administrator, in accordance with the provisions of Section 6.01, shall then direct the Trustee to distribute to such Participant the entire interest in his Accounts, subject to a Qualified Election. Late Retirement. A Participant who remains in the employment of the Employer after his Normal Retirement Date shall continue to participate in this Plan. No distribution shall be made to the Participant until his actual retirement, subject to the mandatory commencement of benefit provisions of Section 6.04. 5.02 UPON DEATH Upon the death of a Participant, the entire interest in the Accounts of such Participant, including the amount of any additional credit as finally determined, representing his participation and contributions for the Plan Year in which his death occurs, shall become nonforfeitable and the Plan Administrator, in accordance with the provisions of Section 6.01, shall then direct the Trustee to distribute the entire interest in his Accounts to such Participant's designated beneficiary or beneficiaries, or, if none, as provided in this Section 5.02. The Plan Administrator may require such proper proof of death and such evidence of the right of any person to receive payment of the entire interest in the Accounts of such deceased Participant as the Plan Administrator deems desirable and the Plan Administrator's determination shall be conclusive. Such distribution shall be made as soon as administratively feasible following the Participant's death and in accordance with the rules and procedures established by the Plan Administrator. Each Participant, by written instrument delivered to the Plan Administrator, shall have the unqualified right to designate and from time to time change the beneficiary or beneficiaries to receive in the event of his death the entire interest in his Accounts. - -------------------------------------------------------------------------------- Page 15 17 5.03 UPON TERMINATION OF EMPLOYMENT (a) NONFORFEITABLE INTEREST. Prior to January 1, 2000, upon termination of a Participant's employment for any reason other than retirement, death, or being Permanently and Totally Disabled, the Trustee shall, in accordance with the provisions of Section 6.01 and at the instruction of the Plan Administrator, distribute to the Participant the entire interest then constituting his Prior Plan Account which is always nonforfeitable, and the nonforfeitable interest in the remaining portion of his ESOP Contributions Account, based on his Years of Service determined in accordance with the applicable schedule below:
YEARS OF NONFORFEITABLE SERVICE INTEREST ------- -------- Less than 2 years 0% 2 but less than 3 20% 3 but less than 4 40% 4 but less than 5 60% 5 but less than 6 80% 6 or more 100%
Effective January 1, 2000, upon termination of a Participant's employment for any reason other than retirement, death, or being Permanently and Totally Disabled, the Trustee shall, in accordance with the provisions of Section 6.01 and at the instruction of the Plan Administrator, distribute to the Participant the entire interest then constituting his Compensation Deferral Contributions Account, Rollover Contributions Account, and Prior Plan Account, which are always nonforfeitable, and the nonforfeitable interest in his ESOP Contributions Account and Matching Contributions Account, based on his Years of Service determined in accordance with the applicable schedule below:
YEARS OF NONFORFEITABLE SERVICE INTEREST ------- -------- Less than 3 years 0% 3 or more 100%
A Participant shall always be 100% vested at his Normal Retirement Age, death, or Permanent and Total Disability. In the event the nonforfeitable interest schedule is hereafter amended, or the nonforfeitable interest schedule of an existing plan is amended by the Plan, then any Participant who has completed at least three (3) Years of Service on the later of the date the amendment is adopted, or the date the amendment is effective may elect, in writing, beginning on the date the Plan amendment is adopted and ending on the latest of: - -------------------------------------------------------------------------------- Page 16 18 (1) his termination of employment, (2) the date which is 60 days after the day the Plan amendment is adopted, (3) the date which is 60 days after the day the Plan amendment becomes effective, or (4) the date which is 60 days after the day the Participant is issued written notice of the Plan amendment by the Plan Administrator, to have his nonforfeitable interest in his Accounts determined without regard to such amendment by notifying the Plan Administrator. (b) FORFEITURE. (1) If a Participant terminates service, and the value of his vested Accounts (i) does not exceed $5,000 ($3,500 for Plan Years beginning prior to August 6, 1997) and (ii) has never exceeded $5,000 ($3,500 for Plan Years beginning prior to August 6, 1997) at the time of any prior distribution, the Participant will receive a distribution of the value of the entire vested portion of his Accounts and the nonvested portion will be treated as an immediate forfeiture. For years after March 21, 1999 and before December 19, 2001, or such other later date that is established by the IRS or its Commissioner for this rule, clause (ii) shall not apply. (2) If a Participant terminates service and elects to receive, pursuant to Section 6.01, the vested portion of his Accounts, the nonvested portion will be treated as an immediate forfeiture. If the Participant receives a distribution of less than the entire vested portion of his Accounts, the part of the nonvested portion that will be treated as a forfeiture is the total nonvested portion multiplied by a fraction, the numerator of which is the amount of the distribution and the denominator of which is the total value of the vested Accounts. (3) If a Participant receives a distribution pursuant to Section 6.01 which is less than the value of the Participant's Account, and resumes employment within the five consecutive Plan Years following the Plan Year in which termination of employment occurs, the Participant's Account will be restored to the amount on the date of distribution only if the Participant repays to the Plan the full amount of the distribution within five (5) years of the Participant's reemployment date. (4) If a Participant does not receive a distribution pursuant to Section 6.01, no forfeiture will occur until the expiration of five consecutive Plan Years following the Plan Year in which termination of employment occurs during which the Participant is not re-employed. If a Participant does not have any nonforfeitable interest in his Accounts, he will be deemed to have received a distribution of the entire vested portion of his Accounts in accordance with the provisions of subparagraph (2) above without having submitted any application for benefits to the Plan Administrator. If such Participant returns to active service with the Employer prior to the expiration of five consecutive Plan Years following the Plan Year in which his termination of employment occurred, said Participant will be deemed to have paid back the distribution and his Accounts will be restored as provided in subparagraph (3) above. - -------------------------------------------------------------------------------- Page 17 19 5.04 LOCATION OF PARTICIPANT OR BENEFICIARY UNKNOWN In the event that all, or any portion, of the distribution payable to a Participant or his Beneficiary hereunder shall, at the expiration of five (5) years after it becomes payable, remains unpaid solely by reason of the inability of the Plan Administrator, after sending a registered letter, return receipt requested, to the last known address, and after further diligent effort, to ascertain the whereabouts of such Participant or his Beneficiary, the amount so distributable shall be treated as a forfeiture pursuant to Section 5.03(b). In the event a Participant or Beneficiary is located subsequent to his benefit being reallocated, such benefit shall be restored. 5.05 CERTIFICATION BY PLAN ADMINISTRATOR The Plan Administrator shall certify to the Trustee all pertinent facts and information required to determine its proper action in connection with retirement, disability, death and termination of employment of Participants, and the Trustee may rely fully upon information so certified and shall be fully protected in so doing; but in the absence of appropriate certificates as to any such facts or pertinent related facts, the Trustee may rely and act upon other information which it reasonably believes to be true. - -------------------------------------------------------------------------------- Page 18 20 ARTICLE VI DISTRIBUTIONS 6.01 METHOD AND MEDIUM OF PAYMENT The distribution of a Participant's nonforfeitable interest in his Accounts shall be made by the Trustee to such Participant or his beneficiaries upon his retirement, disability, death or termination of employment. If the value of the Participant's vested Accounts (i) exceeds $5,000 ($3,500 for Plan Years beginning prior to August 6, 1997) or (ii) has ever exceeded $5,000 ($3,500 for Plan Years beginning prior to August 6, 1997) at the time of any prior distribution, the Participant or his beneficiaries may elect to receive the full value of his Accounts, in any form of benefit and medium of payment provided by this Section. For years after March 21, 1999 and before December 19, 2001, or such other later date that is established by the IRS or its Commissioner for this rule, clause (ii) shall not apply. Such distribution shall be made in one or any combination of the following methods as such Participant or beneficiary may request subject to a Qualified Election and the requirements of Section 6.02, and the ESOP Contributions Account distribution requirements of Section 6.03: (a) In one sum; or (b) In periodic distributions. However, if the value of the Participant's vested Accounts (i) does not exceed $5,000 ($3,500 for Plan Years beginning prior to August 6, 1997) and (ii) has never exceeded $5,000 ($3,500 for Plan Years beginning prior to August 6, 1997) at the time of any prior distribution, the Plan Administrator shall require a distribution of the value of the entire vested portion of the Participant's Accounts. For years after March 21, 1999 and before December 19, 2001, or such other later date that is established by the IRS or its Commissioner for this rule, clause (ii) shall not apply. 6.02 COMMENCEMENT OF BENEFITS (a) Except as otherwise provided in this Section 6.02, distribution of the vested value of a Participant's Accounts by the method or methods selected in accordance with this Article, shall be made or commenced by the Trustee (in accordance with the written directions of the Committee) within sixty (60) days after the Participant's date of termination of employment if the Participant has accumulated at least 20 Years of Service, Normal Retirement Date, Early Retirement Date, Late Retirement Date, Permanent and Total Disability or death. A Participant who meets the service requirement for Early Retirement upon termination of employment and who is entitled to receive a vested benefit will commence to receive his vested benefit upon satisfaction of the age requirement. (b) Each Participant who is entitled to a distribution by reason of termination of employment prior to retirement by reason of severance, may receive a lump sum distribution of - -------------------------------------------------------------------------------- Page 19 21 the value of his Accounts following the end of the Plan Year in which such Participant incurs a one year Break in Service. (c) In the event that a distribution specified under Section 6.02(a) is made before the end of the Plan Year, the most recent valuation will be used for determining the cash out value of shares of Employer stock. (d) In the event that the valuation of the Plan's assets cannot be completed within the sixty (60) day period specified in Section 6.02(a), the distribution of the vested value of a Participant's Account shall be deferred until such time as a complete valuation will have been made which reflects the appropriate Plan Year end. (e) Effective January 1, 2000, distribution will be made as soon as administratively feasible following the applicable Distribution Date and in accordance with the rules and procedures of the Plan Administrator. (f) If any portion of a Participant's Accounts is to be distributed pursuant to this Section 6.02 over a period of years, such portion shall be distributed in substantially equal installments over such number of years as shall not exceed: (1) A period certain not extending beyond the life expectancy of the Participant, or (2) A period certain not extending beyond the joint and last survivor expectancy of the Participant and a designated beneficiary. 6.03 SPECIAL ESOP DISTRIBUTION REQUIREMENTS This Section 6.03 shall apply to distributions of the portion of a Participant's Account that is attributable to Qualified Employer Securities and shall not act to eliminate any alternative form or time of distribution otherwise available under the Plan. (a) TIME OF DISTRIBUTION. Notwithstanding any other provision of this Plan, other than such provisions as require the consent of the Participant and the Participant's spouse to a distribution where the value of his Accounts (i) exceeds $5,000 ($3,500 for Plan Years beginning prior to August 6, 1997) and (ii) has ever exceeded $5,000 ($3,500 for Plan Years beginning prior to August 6, 1997) at the time of any prior distribution (for years after March 21, 1999 and before December 19, 2001, or such other later date that is established by the IRS or its Commissioner for this rule, clause (ii) shall not apply), a Participant may elect to have the portion of his Account attributable to Qualifying Employer Securities acquired by the Plan after December 31, 1986 distributed as follows:. (1) If the Participant separates from service by reason of the attainment of Normal Retirement Age, death or Permanent and Total Disability, the distribution of such portion of the Participant's Account will begin not later than one year after the close of the Plan Year in which such event occurs unless the Participant otherwise elects pursuant to Section 6.01. - -------------------------------------------------------------------------------- Page 20 22 (2) If the Participant separates from service for any reason other than those enumerated in paragraph (1) above, and is not re-employed by the Employer at the end of the fifth Plan Year following the Plan Year of such separation from service, distribution of such portion of the Participant's Account will begin not later than one year after the close of the fifth Plan Year following the Plan Year in which the Participant separated from service unless the Participant otherwise elects pursuant to Section 6.01. (3) If the Participant separates from service for a reason other than those described in paragraph (1) above, and is employed by the Employer as of the last day of the fifth Plan Year following the Plan Year of such separation from service, distribution to the Participant, prior to any subsequent separation from service, shall be in accordance with Plan Section 6.01. For purposes of determining when a distribution of Qualifying Employer Securities will occur, the Participant's Account shall be deemed not to include any Qualifying Employer Securities acquired with the proceeds of a loan described in Article X until the close of the Plan Year in which such loan is repaid in full. At that date, those Qualifying Employer Securities that had been acquired with a loan shall be subject to the distribution rules of this Section. (b) FORM OF DISTRIBUTION. Distributions may be made either in whole shares of Employer stock or in cash as the Plan Administrator shall decide, provided that any distribution in cash shall only be made after a Participant has been offered the right to receive such distribution in shares of Employer stock. In the event the distribution is to be made in Employer stock, any cash balance in a Participant's ESOP Contributions Account will be applied to acquire for distribution the maximum number of whole shares of Employer stock at the applicable value. Any fractional share value unexpended balance will be distributed in cash. If the Employer stock is not available for purchase by the Trustee, then the Trustee shall hold such balance until Employer Stock is acquired and then make such distribution. The Trustee will make distribution from the Trust Fund only on instructions from the Plan Administrator. (c) PERIOD FOR PAYMENT. Unless the Participant otherwise elects under the provisions of Section 6.01, distributions required under this Section 6.03 shall be made in substantially equal annual payments over a period of: (i) five years, or (ii) in the case of a Participant with an Account balance in excess of $500,000, five years plus one additional year (but not more than five additional years) for each $100,000 or fraction thereof by which such balance exceeds $500,000. The dollar amounts specified in (ii) above shall be subject to adjustment by the Secretary of the Internal Revenue Service. In no event shall such distribution period exceed the period permitted in Section 401(a)(9) of the Code. - -------------------------------------------------------------------------------- Page 21 23 6.04 MANDATORY COMMENCEMENT OF BENEFITS Unless the Participant elects otherwise, distribution hereunder shall commence not later than the sixtieth (60th) day after the end of the Plan Year in which the later of the following events occurs: (a) The Participant attains age sixty-five (65); (b) The tenth (10th) anniversary of the year in which the Participant commences participation in the Plan; or (c) The Participant terminates his employment with the Employer. If the Participant's entire interest is to be distributed in other than a lump sum, then the amount to be distributed each year must be at least an amount equal to the quotient obtained by dividing the Participant's entire interest by the life expectancy of the Participant or joint and last survivor expectancy of the Participant and designated beneficiary. Life expectancy and joint and last survivor expectancy are computed by the use of the return multiples contained in Section 1.72-9 of the Income Tax Regulations. For purposes of this computation, a Participant's life expectancy may be recalculated no more frequently than annually, however, the life expectancy of a non-spouse beneficiary may not be recalculated. If the Participant's spouse is not the designated beneficiary, the method of distribution selected must assure that more than 50% of the present value of the amount available for distribution is paid within the life expectancy of the Participant. Anything above to the contrary notwithstanding, distributions of a Participant's benefits must commence by April 1 of the calendar year following the calendar year in which the Participant attains age 70-1/2 in accordance with the minimum distribution requirements of Section 401(a)(9) of the Code. Effective for Plan Years beginning after January 1, 1997, in the case of a Participant who is not a 5-percent owner, the required beginning date for minimum distributions is April 1 of the calendar year following the later of the calendar year in which the Participant attains age 70-1/2 or the calendar year in which the Participant retires from employment with the Employer. Additionally, for a Participant (other than a 5-percent owner) who attained age 70-1/2 in 1996, but who had not retired from employment by December 31, 1996, the required beginning date for minimum distributions is the April 1 of the calendar year following the calendar year in which the Participant retires from employment with the Employer. For purposes of this minimum distribution, the Participant may elect prior to the date of the first required distribution not to have his life expectancy and his spouse's life expectancy recalculated annually. Such election shall be irrevocable once made, and shall apply for all subsequent Plan Years. The Participant and his spouse shall have the right to separately elect as to whether each wants his life expectancy recalculated, and the election of one shall not affect the election of the other. In the event that either the Participant or his spouse fails to make an election, the life expectancy of each shall be recalculated annually. - -------------------------------------------------------------------------------- Page 22 24 All distributions must meet the minimum distribution incidental benefit requirements in Section 1.401(a)(9)-2 of the proposed regulations. The mandatory commencement of distribution to a Participant or beneficiary pursuant to this Section, shall not apply provided (i) that prior to January 1, 1984, or such other date permitted by law, a Participant (including Key Employees) who had an Account balance under this Plan as of December 31, 1983 made a written designation providing for the commencement of distributions at a later date, and (ii) further providing for a method of distribution of the benefit which satisfy the provisions of Code Section 401(a)(9) as in effect prior to the enactment of the Tax Equity and Fiscal Responsibility Act of 1982 (including rules relating to incidental death benefits). Any written designation, if made, shall be binding upon the Plan Administrator. 6.05 DISTRIBUTIONS AFTER DEATH OF A PARTICIPANT If a Participant dies before any of his interest in the Plan has been distributed, the Participant's interest shall be distributed in one of the following methods: (a) The entire interest of the Participant shall be distributed no later than December 31 of the calendar year which contains the fifth (5th) anniversary of the date of the Participant's death, regardless of who is to receive the distribution. (b) If the distribution is to be made to a designated beneficiary, the distribution of a Participant's interest shall commence not later than December 31 of the calendar year immediately following the calendar year in which the Participant died, and payments shall occur over a period not extending beyond the life expectancy of such designated beneficiary. If distribution is to be made to the Participant's surviving spouse, distributions must commence on or before the later of: 1) December 31 of the calendar year immediately following the calendar year in which the Participant died, or 2) December 31 of the calendar year in which the Participant would have attained age 70-1/2. Such distributions shall occur over a period not extending beyond the life expectancy of such designated beneficiary. A Participant or his spouse or designated beneficiary, may elect the method of distribution described in subparagraph (b) above. Such election must be made no later than the earlier of 1) the date which distribution would have to occur according to the provisions of subparagraph (a) above; or 2) the date which distribution would have to occur according to the provisions of subparagraph (b) above. As of such date, the election is irrevocable and shall apply for all subsequent years and any subsequent beneficiaries. If no such election is made, distribution shall be made in accordance with subparagraph (a) above. If the Participant spouse dies before the distributions to such spouse begin, the payment of the Participant's interest shall be made as if the surviving spouse were the Participant. The Plan may not require a surviving spouse to begin receiving benefits prior to the time the deceased Participant would have attained Normal Retirement Age, except where the present value of the nonforfeitable benefit does not exceed $5,000 and has never exceeded $5,000 at the time of any prior distribution. - -------------------------------------------------------------------------------- Page 23 25 If distribution of the Participant's interest has begun at the time of such Participant's death, distribution may be made for a term certain at least as rapidly as under the method of distribution used prior to the death of the Participant. 6.06 INSTALLMENTS AND DEFERRED DISTRIBUTIONS (a) Where, in accordance with the provisions of this Article, all or any part of any distribution is to be made in installments, the Committee may direct the Trustee to segregate and deposit cash of the Trust Fund to provide for such installments in one or more savings accounts in banking or savings institutions (one of which accounts may be in the Trustee's savings department). (b) Such segregated savings accounts shall be credited with interest at the savings account interest rates of each depository, and such interest shall be added to the amount distributable. Such accounts shall be a segregated part of the Trust Fund and shall be subject to all provisions of the Plan and Trust Agreement, except that such accounts shall not be included in the valuation of the Trust nor in the determination of the balances of Participant Accounts for the purpose of allocation of Trust income or loss. 6.07 DISTRIBUTION OF EXCESS DEFERRALS Notwithstanding any other provision of this Plan, Excess Deferrals and income attributable thereto shall be distributed no later than the April 15th following the calendar year in which the Participant claims Excess Deferrals. The Participant's claim must be in writing; must be submitted to the Plan Administrator no later than March 1 of the calendar year following the calendar year of the Excess Deferrals; must specify the amount of the Participant's Excess Deferrals for the preceding calendar year; and must be accompanied by a written statement of the Participant that if such amounts are not distributed, the Excess Deferrals, when added to amounts deferred under other plans or arrangements described in Sections 401(k), 408(k) or 403(b) of the Code, exceed the limit imposed on the Participant by Section 402(g) of the Code for the calendar year in which the contributions were made. The Plan Administrator shall have the authority to use such other procedures as it determines necessary or appropriate to verify the existence and amount of Excess Deferrals, subject to the limitation that such procedures be nondiscriminatory and consistently applied. The Excess Deferrals distributed to a Participant with respect to a calendar year shall be adjusted for income and, if there is a loss allocable to the Excess Deferrals, shall in no event be less than the lesser of the Participant's Compensation Deferral Contributions Account under the Plan or the Participant's Compensation Deferral Contributions for the calendar year. For purposes of this Section 6.07, "Excess Deferrals" means the amount of a Participant's Compensation Deferral Contributions to this Plan which the Participant claims, pursuant to the procedure outlined above, to be in excess of the amount allowable under Section 402(g) of the Code. - -------------------------------------------------------------------------------- Page 24 26 6.08 RESTRICTIONS ON DISTRIBUTIONS OF COMPENSATION DEFERRAL CONTRIBUTIONS Compensation Deferral Contributions may not be distributed from this Plan prior to the earlier of: (a) retirement, separation from service, death or disability of the Participant; (b) attainment of age 59-1/2 by the Participant; (c) termination of the Plan without establishment of a successor plan; (d) sale of substantially all of the assets of the Employer to an entity that is not an affiliated employer; or (e) upon the sale of a subsidiary of the Employer to an entity that is not an affiliated employer, only Participants who are employed by such subsidiary may receive a distribution of their Compensation Deferral Contributions Account. 6.09 RIGHT TO HAVE ACCOUNTS TRANSFERRED By notice to the Plan Administrator, a Participant entitled to a distribution shall have the right to have the nonforfeitable portion of his Accounts transferred to another plan and trust which is qualified under Section 401(a) of the Code and is a tax-exempt trust under the provisions of Section 501(a) of the Code or to an Individual Retirement Account as provided under Section 408 of the Code. 6.10 DIRECT PLAN TO PLAN TRANSFERS Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee's election under this Section, a distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. (a) Eligible rollover distribution. An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Code Section 401(a)(9); and the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). (b) Eligible retirement plan. An eligible retirement plan is an individual retirement account described in Code Section 408(a), an individual retirement annuity described in Code Section 408(b), an annuity plan described in Code Section 403(a), or a qualified trust described in Code Section 401(a), that accepts the distributee's eligible rollover distribution. However, in - -------------------------------------------------------------------------------- Page 25 27 the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. (c) Distributee. A distributee includes an employee or former employee. In addition, the employee's or former employee's surviving spouse and the employee's or former employee's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Code Section 414(p), are distributees with regard to the interest of the spouse or former spouse. (d) Direct rollover. A direct rollover is a payment by the plan to the eligible retirement plan specified by the distributee. - -------------------------------------------------------------------------------- Page 26 28 ARTICLE VII LIMITATION ON CONTRIBUTIONS AND BENEFITS 7.01 LIMITATION OF BENEFITS (a) DEFINITIONS: The following definitions shall apply for purposes of this Section 7.01: (1) "Annual Addition." Annual Addition means for each Plan Year the sum of the following amounts credited to a Participant's Accounts for the Limitation Year under all Defined Contribution Plans maintained by the Employer: (A) Employer contributions; (B) Voluntary Employee Contributions; (C) Forfeitures; and (D) Any amounts allocated to an individual medical account (as defined in Section 415(l)(2) of the Code) which is part of any pension or annuity plan maintained by the Employer are treated as Annual Additions to a Defined Contribution Plan. Amounts derived from contributions paid or accrued after December 31, 1985 in taxable years ending after such date which are attributable to post retirement medical benefits allocated to the separate account of a key employee (as defined in Section 419A(d)(3) of the Code) under a welfare benefit fund (as defined in Section 419(e) of the Code) maintained by the Employer are treated as Annual Additions to a Defined Contribution Plan. These amounts are treated as Annual Additions but are not subject to the 25% of Compensation limit. The Annual Addition for any Limitation Year beginning prior to January 1, 1987 shall not be recomputed to treat all Employee contributions as an Annual Addition. Rollover Contributions made by the Participant pursuant to Section 3.02 shall not be taken into account in computing Annual Additions. (2) "Compensation." Compensation means a Participant's earned income, wages, salaries, fees for professional services and other amounts received for personal services actually rendered in the course of employment with the Employer maintaining the Plan (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips and bonuses), but excluding the following: (A) Employer contributions to a plan of deferred compensation which are not included in the Employee's gross income for the taxable year in which contributed, Employer contributions under a simplified employee pension plan to the extent such - -------------------------------------------------------------------------------- Page 27 29 contributions are deductible by the Employee or any distributions from a plan of deferred compensation; (B) Amounts realized from the exercise of a nonqualified stock option, or when restricted stock (or property) held by the Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture; (C) Amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; and (D) Other amounts which received special tax benefits or contributions made by the Employer (whether or not under a salary reduction agreement and whether or not the amounts are actually excludable from the gross income of the Employee). For Limitation Years beginning after December 31, 1997, for purposes of applying the limitations of this Article, Compensation paid or made available during such limitation year shall include any elective deferral (as defined in Code Section 402(g)(3)), and any amount which is contributed or deferred by the employer at the election of the Employee and which is not includible in the gross income of the Employee by reason of Section 125 or 457. (3) "Defined Contribution Plan." Defined Contribution Plan means a pension plan or profit sharing plan which provides for an individual account for each Participant and for benefits based solely upon the amount contributed to the Participant's account and any income, expenses, gains, losses and any forfeitures of accounts of other Participants which may be allocated to such Participant's account. (4) "Limitation Year." Limitation Year means the Plan Year. (b) LIMITATION ON ANNUAL ADDITIONS: Any other provision of this Plan to the contrary notwithstanding, the maximum Annual Addition allocated to the Accounts of any Participant under the Plan and any other Defined Contribution Plan maintained by the Employer or the Company may not exceed the lesser of: (1) Thirty Thousand Dollars ($30,000), as adjusted under Code Section 415(d), or (2) Twenty-five per cent (25%) of the Participant's Compensation for the Limitation Year. If, as a result of a reasonable error in estimating a Participant's Compensation, the allocation of forfeitures, a reasonable error in determining the amount of elective deferrals (within the meaning of Code Section 402(g)(3)) that may be made with respect to any individual under the limits of Code Section 415, or under other limited facts and circumstances as may be provided under the Regulations to Section 415 of the Code, the Annual Addition exceeds the maximum under this and any other defined contribution plan maintained by the Employer, the - -------------------------------------------------------------------------------- Page 28 30 Trustee shall make the adjustments by returning to the Participant his Compensation Deferral Contributions (plus attributable earnings) for such year. If after such reduction, the maximum Annual Addition limitation is still exceeded, an amount attributable to the Employer's contribution for the current Plan Year necessary to reduce the Annual Addition to the maximum Annual Addition shall be held in a separate account, shall be utilized as a contribution of the Employer for the next succeeding Plan Year and shall be accounted for accordingly by the Trustee. Any such sums held in suspense shall not share in the gains or losses of the Trust Funds. If no more than one-third of the Employer contributions to the Plan for a year which are deductible under paragraph (9) of Code Section 404(a) are allocated to Highly Compensated Employees (within the meaning of Code Section 414(q)), the limitations imposed by this Section shall not apply to -- (a) forfeitures of Qualifying Employer Securities (within the meaning of Code Section 409) if such securities were acquired with the proceeds of a loan (as described in Code Section 404(a)(9)(A)), or (b) Employer contributions to the Plan which are deductible under Code Section 404(a)(9)(B) and charged against the Participant's Account. The amount of any qualified gratuitous transfer (as defined in Code Section 664(g)(1)) allocated to a Participant for any limitation year shall not exceed the limitations imposed by this Section, but such amount shall not be taken into account in determining whether any other amount exceeds the limitations imposed by this Section. (c) LIMITATION OF BENEFITS UNDER ALL PLANS: This Section applies only to Plan Years beginning prior to January 1, 2000. Where an Employee is a Participant under the Plan and a defined benefit plan maintained or previously maintained by the Employer, the sum of the defined contribution fraction and the defined benefit fraction for any Limitation Year may not exceed 1.0 as computed under the terms and conditions as set forth under Section 415(e) of the Code. For purposes of computing the defined contribution fraction for any Limitation Year, the numerator shall be the sum of the Annual Additions to the Participant's Accounts during such Limitation Year and for all prior Limitation Years, and the denominator shall be the lesser of: (1) the product of 1.25 multiplied by the maximum permissible dollar amount under Section 415(c)(1)(A) of the Code for such year and for all prior years, or (2) the product of 1.4 multiplied by the maximum permissible percentage of compensation contributed under Section 415(c)(1)(B) of the Code for such year and for all prior years. - -------------------------------------------------------------------------------- Page 29 31 For purposes of computing the defined benefit plan fraction for any Limitation Year, the numerator shall be the Participant's projected annual benefit under the defined benefit plan as of the end of the Limitation Year and the denominator shall be the lesser of: (1) the product of 1.25 multiplied by the maximum permissible dollar amount of benefit in effect under Section 415(b)(1)(A) of the Code for such year, or; (2) the product of 1.4 multiplied by the maximum permissible percentage of compensation limitation of the amount of benefit in effect under Section 415(b)(1)(B) of the Code for such year. If the Defined Contribution Plans and the Defined Benefit Plans in which an Employee is a Participant satisfy the requirements of Section 415 of the Code in effect for all Limitation Years beginning prior to January 1, 1987, where necessary, an amount shall be subtracted from the numerator of the defined contribution fraction (not to exceed such numerator) as prescribed by the Secretary of the Treasury so that the sum of the defined benefit plan fraction and the defined contribution fraction computed under Section 415(e)(1) of the Code does not exceed 1.0 for such Limitation Year. 7.02 DEFINITIONS (a) The following definitions shall apply for purposes of Sections 7.03, 7.04, and 7.05: (1) Actual Contribution Percentage. "Actual Contribution Percentage" means the average (expressed as a percentage) of the Actual Contribution Ratios of either the Highly Compensated Employee or Non-Highly Compensated Employee group. (2) Actual Contribution Ratio. "Actual Contribution Ratio" means the ratio (expressed as a percentage) of the Participant's Employee Contributions and Employer Matching Contributions to the Plan for the Plan Year (and any other plan which is aggregated with the Plan for purposes of meeting the nondiscrimination requirements of Section 401(m) of the Code) to the Participant's Compensation for the Plan Year. The Actual Contribution Ratio of a Participant who is eligible, but neither makes Employee Contributions nor receives Employer Matching Contributions is zero. (3) Actual Deferral Percentage. "Actual Deferral Percentage" means the average (expressed as a percentage) of the Actual Deferral Ratios of either the Highly Compensated Employee or Non-Highly Compensated Employee group. (4) Actual Deferral Ratio. "Actual Deferral Ratio" means the ratio (expressed as a percentage) of the Participant's Elective Deferrals for the Plan Year to the Participant's Compensation for the Plan Year. At the option of the Plan Administrator, Qualified Matching Contributions and/or Qualified Nonelective Contributions may be included for purposes of determining each Participant's Actual Deferral Ratio. The Actual Deferral Ratio of a Participant who is eligible, but has no Elective Deferrals, Qualified Employer Matching Contributions or Qualified Nonelective Contributions is zero. - -------------------------------------------------------------------------------- Page 30 32 (5) Compensation. "Compensation" means Annual Compensation as defined in Plan Section 1.03. (6) Elective Deferrals. "Elective Deferrals" means any Employer contributions made to the Plan at the election of the Participant, in lieu of cash compensation, and shall include contributions made pursuant to a salary reduction agreement or other deferral mechanism. With respect to any taxable year, a Participant's Elective Deferrals is the sum of all Employer contributions made on behalf of such Participant pursuant to an election to defer under any qualified cash or deferred arrangement as described in Code Section 401(k), any salary reduction simplified employee pension as described in Code Section 408(k)(6), any eligible deferred compensation plan under Code Section 457, any plan as described under Code Section 501(c)(18), and any Employer contributions made on the behalf of a Participant for the purchase of an annuity contract under Code Section 403(b) pursuant to a salary reduction arrangement. Elective Deferrals shall not include any deferrals properly distributed as excess annual additions. (7) Employee Contributions. "Employee Contributions" means any contributions to the Plan (and any other plan which is aggregated with the Plan for purposes of meeting the nondiscrimination requirements of Section 401(m) of the Code) that are designated or treated as after-tax Employee contributions and are allocated to a separate account to which attributable earnings and losses are allocated. (8) Excess Contributions. "Excess Contributions" means, with respect to any Plan Year, the excess of (i) the aggregate amount of Employer contributions actually taken into account in computing the Actual Deferral Percentage of Highly Compensated Employees for such Plan Year, over (ii) the maximum amount of such contributions permitted under the limits determined in accordance with Section 7.03. (9) Excess Aggregate Contributions. "Excess Aggregate Contributions" means the excess of: 1) the Employee Contributions and Matching Contributions and Elective Deferrals and Qualified Nonelective Contributions treated as Matching Contributions actually made by or on behalf of a Highly Compensated Employee or Family Group for such Plan Year, over; 2) the maximum amount of such contributions permitted under the limits determined in accordance with Section 7.04. (10) Highly Compensated Employee. "Highly Compensated Employee" means an Employee who: (1) was a 5-percent owner at any time during the year or the preceding year, or (2) for the preceding year had Compensation from the Employer in excess of $80,000. The $80,000 amount is adjusted at the same time and in the same manner as under Section 415(d), except that the base period is the calendar quarter ending September 30, 1996. For this purpose the applicable year of the Plan for which a determination is being made is called a determination year. A Highly Compensated Former Employee is based on the rules applicable to determining highly compensated employee status as in effect for that determination year, in - -------------------------------------------------------------------------------- Page 31 33 accordance with Section 1.414(q)-1T, A-4 of the temporary Income Tax Regulations and Notice 97-75. In determining whether an Employee is a Highly Compensated Employee for years beginning in 1997, the amendments to Section 414(q) stated above are treated as having been in effect for years beginning in 1996. In determining who is a Highly Compensated Employee (other than as a 5-percent owner) the Employer makes a calendar data election. The effect of this election is that the look-back year is the calendar year beginning with or within the look-back year. (11) Matching Contributions. "Matching Contributions" means an Employer contribution made to this or any other defined contribution plan on behalf of a Participant on account of an Employee Contribution made by such Participant, or on account of a Participant's Elective Deferral, under a plan maintained by the Employer. A contribution made by the Employer in order to meet the Top Heavy minimum contribution requirements of Article VIII may not be treated as a Matching Contribution. (12) Non-Highly Compensated Employee. "Non-Highly Compensated Employee" means any Employee who is not a Highly Compensated Employee. (13) Qualified Matching Contributions. "Qualified Matching Contributions" means Matching Contributions that are fully vested at the time of contribution and are subject to the withdrawal restrictions of Code Section 401(k)(2)(B). (14) Qualified Nonelective Contributions. "Qualified Nonelective Contributions" means Employer contributions, other than Elective Deferrals, Qualified Matching Contributions, and Matching Contributions, that are fully vested at the time of contribution and are subject to the withdrawal restrictions of Code Section 401(k)(2)(B). 7.03 NONDISCRIMINATION REQUIREMENTS FOR COMPENSATION DEFERRAL CONTRIBUTIONS (a) ACTUAL DEFERRAL PERCENTAGE TEST. In no event shall the Actual Deferral Percentage of Participants who are Highly Compensated Employees exceed the Actual Deferral Percentage of the Participants who are Non-Highly Compensated Employees by more than the greater of: (1) 125% of the Actual Deferral Percentage for Participants who are Non-Highly Compensated Employees, or (2) The lesser of 200% of the Actual Deferral Percentage for Participants who are Non-Highly Compensated Employees or 2 percentage points higher than the Actual Deferral Percentage for Participants who are Non-Highly Compensated Employees. For purposes of this Section, the Actual Deferral Percentage for both the Highly Compensated Employee group and Non-Highly Compensated Employee group shall be based on prior year data. Any change from the prior year testing method to the current year testing method - -------------------------------------------------------------------------------- Page 32 34 shall be made pursuant to Internal Revenue Service Notice 98-1, Section VII (or superseding guidance), the provisions of which are incorporated herein by reference. (b) EXCESS CONTRIBUTIONS. Notwithstanding any other provision of the Plan, Excess Contributions, plus any income and minus any loss allocable thereto, shall be distributed no later than the last day of each Plan Year to Participants to whose Accounts such Excess Contributions were allocated for the preceding Plan Year. Excess Contributions are allocated to the Highly Compensated Employees with the largest amounts of Employer contributions taken into account in calculating the Actual Deferral Percentage for the year in which the excess arose, beginning with the Highly Compensated Employee(s) with the largest amount of such Employer contributions and continuing in descending order until all the Excess Contributions have been allocated. For purposes of the preceding sentence, the "largest amount" is determined after distribution of any Excess Contributions. If such excess amounts are distributed more than 2-1/2 months after the last day of the Plan Year in which such excess amount arose, a ten percent (10%) excise tax will be imposed on the Employer maintaining the Plan with respect to such amounts. Income or loss attributable to Excess Contributions allocated to each Participant shall be determined in the same proportion that the amount of the Participant's Elective Deferrals distributed bears to the balance of his appropriate Account. The distribution of Excess Contributions and income may be made without the consent of the Participant or his spouse, and shall be considered as income to the Participant for purposes of Section 61 of the Code. (c) SPECIAL RULES. (1) In the event that the Plan satisfies the requirements of Sections 401(k), 401(a)(4) and 410(b) of the Code only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of such Sections of the Code only if aggregated with the Plan, then this Section 7.03 shall be applied by determining the Actual Deferral Ratios of all eligible Participants as if all such plans were a single plan. Plans may be aggregated under this paragraph (c)(1) only if they have the same Plan Year. Notwithstanding the above, for Plan Years beginning on and after January 1, 1997, if two or more plans which include cash or deferred arrangements are permissively aggregated under Regulation 1.410(b)-7(d), all plans permissively aggregated must use either the prior year testing method or the current year testing method for the testing year. (2) For purposes of this Section 7.03, the Actual Deferral Ratio for any Participant who is a Highly Compensated Employee for the Plan Year and who is eligible for Elective Deferrals under two or more plans described in Section 401(a) of the Code or arrangements described in Section 401(k) of the Code that are maintained by the Company or the Employer shall be determined as if all such contributions were made under a single plan. If a Highly Compensated Employee participates in two or more cash or deferred arrangements that have different Plan Years, all cash or deferred arrangements ending with or within the same calendar year shall be treated as a single arrangement. Notwithstanding the foregoing, certain - -------------------------------------------------------------------------------- Page 33 35 plans shall be treated as separate if mandatorily disaggregated under regulations under Section 401(k) of the Code. 7.04 NONDISCRIMINATION REQUIREMENTS FOR MATCHING CONTRIBUTIONS (a) ACTUAL CONTRIBUTION PERCENTAGE TEST. In no event shall the Actual Contribution Percentage of Participants who are Highly Compensated Employees exceed the Actual Contribution Percentage of the Participants who are Non-Highly Compensated Employees by more than the greater of: (1) 125% of the Actual Contribution Percentage for Participants who are Non-Highly Compensated Employees, or (2) The lesser of 200% of the Actual Contribution Percentage for Participants who are Non-Highly Compensated Employees or 2 percentage points higher than the Actual Contribution Percentage for Participants who are Non-Highly Compensated Employees. For purposes of this Section, the Actual Contribution Percentage for both the Highly Compensated Employee group and the Non-Highly Compensated Employee group shall be based on prior year data. Any change from the prior year testing method to the current year testing method shall be made pursuant to Internal Revenue Service Notice 98-1, Section VII (or superseding guidance), the provisions of which are incorporated herein by reference. (b) EXCESS AGGREGATE CONTRIBUTIONS. Notwithstanding any other provision of the Plan, Excess Contributions, plus any income and minus any loss allocable thereto, shall be distributed no later than the last day of each Plan Year to Participants to whose Accounts such Excess Aggregate Contributions were allocated for the preceding Plan Year. Excess Contributions are allocated to the Highly Compensated Employees with the largest amounts of Employer contributions taken into account in calculating the Actual Contribution Percentage for the year in which the excess arose, beginning with the Highly Compensated Employee(s) with the largest amount of such Employer contributions and continuing in descending order until all the Excess Aggregate Contributions have been allocated. For purposes of the preceding sentence, the "largest amount" is determined after distribution of any Excess Aggregate Contributions. If such excess amounts are distributed more than 2-1/2 months after the last day of the Plan Year in which such excess amount arose, a ten percent (10%) excise tax will be imposed on the Employer maintaining the Plan with respect to such amounts. Income or loss attributable to Excess Aggregate Contributions allocated to each Participant shall be determined in the same proportion that the amount of the Participant's Employee Contributions or Matching Contributions distributed bears to the balance of his appropriate Account. The distribution of Excess Aggregate Contributions and income may be made without the consent of the Participant or his spouse, and shall be considered as income to the Participant, except to the extent of Employee Contributions distributed, for purposes of Section 61 of the Code. - -------------------------------------------------------------------------------- Page 34 36 (c) SPECIAL RULES. (1) In the event that the Plan satisfies the requirements of Sections 401(m), 401(a)(4) and 410(b) of the Code only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of such Sections of the Code only if aggregated with the Plan, then this Section 7.04 shall be applied by determining the Actual Contribution Ratios of all eligible Participants as if all such plans were a single plan. Plans may be aggregated under this paragraph (c)(1) only if they have the same Plan Year. Notwithstanding the above, for Plan Years beginning on and after January 1, 1997, if two or more plans which include cash or deferred arrangements are permissively aggregated under Regulation 1.410(b)-7(d), all plans permissively aggregated must use either the prior year testing method or the current year testing method for the testing year. (2) For purposes of this Section 7.03, the Actual Contribution Ratio for any Participant who is a Highly Compensated Employee for the Plan Year and who is eligible for Elective Deferrals under two or more plans described in Section 401(a) of the Code or arrangements described in Section 401(k) of the Code that are maintained by the Company or the Employer shall be determined as if all such contributions were made under a single plan. If a Highly Compensated Employee participates in two or more cash or deferred arrangements that have different Plan Years, all cash or deferred arrangements ending with or within the same calendar year shall be treated as a single arrangement. Notwithstanding the foregoing, certain plans shall be treated as separate if mandatorily disaggregated under regulations under Section 401(k) of the Code. 7.05 MULTIPLE USE OF THE ALTERNATIVE TEST (a) DEFINITIONS (1) Multiple use of the Alternative Test means that the conditions described in Plan Section 7.05(b) exist. (2) The Alternative Test means the nondiscrimination limitations of Code Sections 401(k)(3)(A)(ii)(II) and 401(m)(2)(A)(ii) as provided in Plan Sections 7.03(a)(2) and 7.04(a)(2). (b) MULTIPLE USE OF THE ALTERNATIVE TEST (1) Multiple use of the Alternative Test exists if all of the conditions of this paragraph are satisfied: (a) One or more Highly Compensated Employees of the Employer are eligible employees in both a cash or deferred arrangement subject to Section 401(k) and a plan maintained by the Employer subject to Section 401(m). (b) The sum of the Actual Deferral Percentage of the entire group of eligible Highly Compensated Employees under the arrangement subject to Section 401(k) and the - -------------------------------------------------------------------------------- Page 35 37 Actual Contribution Percentage of the entire group of eligible Highly Compensated Employees under the Plan subject to Section 401(m) exceeds the aggregate limit of paragraph 7.05(b)(2). (c) The Actual Deferral Percentage of the entire group of eligible Highly Compensated Employees under the arrangement subject to Section 401(k) of the Code exceeds the amount described in Section 401(k)(3)(A)(ii)(I) of the Code. (d) The Actual Contribution Percentage of the entire group of eligible Highly Compensated Employees under the arrangement subject to Section 401(m) of the Code exceeds the amount described in Section 401(m)(2)(A)(i) of the Code. (2) For purposes of this Section, the aggregate limit is the greater of: (a) The sum of: (i) 1.25 times the greater of the relevant Actual Deferral Percentage or the relevant Actual Contribution Percentage, and (ii) Two percentage points plus the lesser of the relevant Actual Deferral Percentage or the relevant Actual Contribution Percentage. In no event, however, may this amount exceed twice the lesser of the relevant Actual Deferral Percentage or the relevant Actual Contribution Percentage; or (b) The sum of: (i) 1.25 times the lesser of the relevant Actual Deferral Percentage or the relevant Actual Contribution Percentage, and (ii) Two percentage points plus the greater of the relevant Actual Deferral Percentage or the relevant Actual Contribution Percentage. In no event, however, may this amount exceed twice the greater of the relevant Actual Deferral Percentage or the relevant Actual Contribution Percentage. (c) CORRECTION OF MULTIPLE USE (1) If multiple use of the alternative limitation occurs with respect to two or more plans or arrangements maintained by an Employer, it must be corrected by reducing the Actual Deferral Percentage or Actual Contribution Percentage of Highly Compensated Employees in the manner described in Plan Section 7.05(c)(2). Alternatively, at the Employer's option, the Employer may eliminate the multiple use of the alternative limitation by making Qualified Nonelective Contributions. The Actual Deferral Percentages and Actual Contribution Percentages of the Highly Compensated Employees are determined after any corrections required to meet the Actual Deferral Percentage Test and Actual Contribution Percentage Test and are deemed to be the maximum permitted under such tests for the Plan Year. (2) The Employer may elect to reduce either the Actual Deferral Ratios or the Actual Contribution Ratios of the Highly Compensated Employees affected. - -------------------------------------------------------------------------------- Page 36 38 (3) The amount of the reduction of the Actual Deferral Percentage of the entire group of Highly Compensated Employees eligible in the arrangement subject to Code Section 401(k) is calculated in the manner described in Plan Section 7.03(b) or the amount of the reduction of the Actual Contribution Percentage of the entire group of Highly Compensated Employees eligible in the plan subject to Code Section 401(m) is calculated in the manner described in Plan Section 7.04(b), so that there is no multiple use of the alternative limitation. The Employer may elect to reduce the Actual Deferral Ratios or the Actual Contribution Ratios, as designated in the plan, either for all Highly Compensated Employees under the plan or arrangements subject to reduction or for only those Highly Compensated Employees who are eligible in both the plan subject to Code Section 401(k) and the plan subject to Code Section 401(m). - -------------------------------------------------------------------------------- Page 37 39 ARTICLE VIII TOP HEAVY PROVISIONS 8.01 DEFINITIONS The following definitions shall apply for purposes of this Article VIII: (a) "Aggregation Group." Aggregation Group means a group of Plans including: (1) Each plan of the Employer in which a Key Employee is a Participant; and (2) Each other Plan of the Employer which enables the Plan described in (a) above to meet the nondiscrimination requirements of Code Section 401(a)(4) or the minimum participation requirements of Code Section 410; and (3) At the option of the Employer, any other Plan maintained by the Employer as long as the expanded Aggregation Group including such plan or plans continues to satisfy the coverage rules of Section 410 and the anti-discrimination rules of Section 401(a)(4) of the Code. (b) "Determination Date." Determination Date shall mean the last day of the Plan Year preceding the Plan Year which is being tested for Top Heavy status. In the first Plan Year, the Determination Date shall mean the last day of the Plan Year which is being tested for Top Heavy status. (c) "Key Employee." Key Employee means any Employee, former Employee, or beneficiary of such Employees, who at any time during the Plan Year or the four (4) preceding Plan Years is: (1) An officer of the Employer having Annual Compensation from the Employer greater than 50% of the Section 415(b)(1)(A) dollar limit, (2) One of 10 employees having Annual Compensation from the Employer of more than the limitation in effect under Section 415(c)(1)(A) of the Code, and owning (or considered as owning within the meaning of Section 318 of the Code) the largest interests in the Employer. However if two Employees have the same ownership interest in the Employer, the Employee having the greater Annual Compensation shall be treated as having the larger interest, (3) A 5% owner of the Employer, or (4) A 1% owner of the Employer having an Annual Compensation from the Employer of more than $150,000. - -------------------------------------------------------------------------------- Page 38 40 For purposes of determining the top 10 owners, 5% owners, or 1% owners, ownership is determined without regard to the aggregation rules of Sections 414(b), (c), and (m) of the Code. For purposes of determining Key Employees, no more than 50 Employees (or, if lesser, the greater of 3 or 10 percent of the Employees) shall be treated as officers and for purposes of determining the number of officers taken into account, Employees described in Section 414(q)(8) shall be excluded. (d) "Non-Key Employee." Non-Key Employee means any Employee who is not a Key Employee. Non-Key Employees include Employees who are former Key Employees. (e) "Valuation Date." Valuation Date means (1) the last day of the Plan Year. 8.02 DETERMINATION OF TOP HEAVY STATUS The plan will be considered Top Heavy if, as of the Determination Date, the present value of cumulative accrued benefits under the Plan for Key Employees exceeds 60% of the present value of the cumulative accrued benefits under the Plan for all Employees. In determining the ratio of accrued benefits for Key Employees to all other Employees, the Plan Administrator shall use the procedure as outlined in Section 416(g) of the Code which is incorporated herein by reference. For this purpose, all Employer contributions, and forfeitures shall be taken into account in determining the contribution percentage made on behalf of any Key Employee. In determining whether the Plan is considered Top Heavy, all plans within the Aggregation Group will be utilized for the calculation. Solely for the purpose of determining if the Plan, or any other plan included in the Aggregation Group, is Top Heavy the accrued benefit of an Employee other than a Key Employee shall be determined under: (a) The method, if any, that uniformly applies for accrual purposes under all plans maintained by the Employer or the Company, or (b) If there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional accrual rate of Section 411(b)(1)(C) of the Code. The present value of cumulative accrued benefits of a Participant who has not been credited with an Hour of Service for the Employer maintaining the Plan during the five (5) year period ending on the Determination Date will be disregarded for purposes of this Article VIII. 8.03 COMBINATION OF DEFINED BENEFIT AND DEFINED CONTRIBUTION PLAN In the event the Plan is deemed to be Top Heavy, the defined benefit and defined contribution fraction set forth in Section 7.01(c) will be calculated by substituting 1.0 for 1.25. If - -------------------------------------------------------------------------------- Page 39 41 a non-Key Employee participates in this Plan and a defined benefit plan which are both Top Heavy, the minimum contribution requirement for this Plan and the minimum benefit requirement for the defined benefit plan, pursuant to Section 416 of the Code, will be satisfied if such Participant is provided with a contribution to the Plan equal to 5% of Annual Compensation. 8.04 MINIMUM CONTRIBUTION In the event that the Plan in aggregation with any other Defined Contribution Plans of the Employer is determined to be Top Heavy, the Participants who are non-Key Employees will be eligible for a minimum contribution for such Plan Year. This minimum contribution, which shall be allocated to the Accounts of Participants who are non-Key Employees, will be contributed to this Plan in an amount equal to 3% of Annual Compensation or if less, the largest contribution percentage of Annual Compensation provided on behalf of any Key Employee. The minimum contribution required by this Section 8.04 shall be made on behalf of such Participants who are employed as of the last day of the Plan Year regardless of the number of Hours of Service credited to each Participant for such Plan Year and regardless of such Participant's level of Annual Compensation. In the event the highest rate allocated to a Key Employee for a year in which the Plan is Top Heavy is less than 3%, amounts contributed as a result of a salary reduction agreement shall be included in determining contributions made on behalf of Key Employees. If this minimum contribution is provided by another Defined Contribution Plan of the Employer, then this Section 8.04 will not apply to this Plan. If part of this minimum contribution is provided by another Defined Contribution Plan of the Employer, then the balance of the minimum contribution shall be provided by this Plan. For purposes of this Section 8.04, "Annual Compensation" means compensation as defined in Section 7.01(a)(2). 8.05 MINIMUM VESTING Prior to January 1, 2000, in the event the Plan is determined to be Top Heavy, each Participant shall have a nonforfeitable interest in his Accounts at least equal to the following schedule:
YEARS OF NONFORFEITABLE SERVICE INTEREST ------- -------- Less than 2 years 0% 2 but less than 3 20% 3 but less than 4 40% 4 but less than 5 60% 5 but less than 6 80% 6 or more 100% Normal Retirement Age 100%
On and after January 1, 2000, in the event the Plan is determined to be Top Heavy, each Participant shall have a nonforfeitable interest in his Accounts at least equal to the following schedule: - -------------------------------------------------------------------------------- Page 40 42
YEARS OF NONFORFEITABLE SERVICE INTEREST ------- -------- Less than 3 years 0% 3 or more 100% Normal Retirement Age 100%
Irrespective of this provision, the above schedule shall not apply where the nonforfeitable interest in the Participant's Accounts under Section 5.03 would be greater. - -------------------------------------------------------------------------------- Page 41 43 ARTICLE IX SPECIAL ESOP REQUIREMENTS 9.01 VOTING EMPLOYER STOCK All Employer stock in the ESOP Contributions Account of each Participant shall be voted by the Trustee in accordance with instructions received from the Plan Administrator. The Trustee shall not exercise its power to vote any Employer stock for which it has not received instructions. Each Participant shall be entitled to direct the Plan as to the manner in which voting rights of Employer securities which are allocated to the ESOP Contributions Accounts of such Participant are to be exercised with respect to a corporate matter which (by law or charter) involves the voting of such stock with respect to the approval or disapproval of any corporate merger or consolidation, recapitalization, reclassification, liquidation, dissolution, sale of substantially all assets of a trade or business, or any similar transaction prescribed in regulations. 9.02 APPRAISAL OF EMPLOYER STOCK If the Employer stock is not readily tradable on an established securities exchange, annually, as of the last day of the Plan Year, the Employer shall have made an appraisal of the Employer stock by a person who customarily makes such appraisals and who is independent of the Plan or the Employer. The Employer, in its sole discretion or if necessary to comply with legal requirements, may have other interim valuations performed. For all purposes, except with regard to a transaction between the Plan and a party-in-interest or if otherwise required by law, the most recent valuation shall be used. For all transactions between the Plan and a party-in-interest as that term is defined in section 3(14) of ERISA, the value of the Employer stock must be determined as of the date of the transaction. In the event of such transaction, an independent appraisal of the Employer stock as of the date of the transaction shall be made by a person who customarily makes such appraisals and who is independent of the Plan or the Employer. Any appraisals made shall be performed in a manner which will meet all ERISA and Code requirements. 9.03 DIVERSIFICATION OF INVESTMENTS (a) DEFINITIONS. (1) "Qualified Participant" means a Participant who has attained age fifty-five (55) and who has completed at least ten (10) years of participation in the Plan. - -------------------------------------------------------------------------------- Page 42 44 (2) "Qualified Election Period" means the six (6) Plan Year period beginning with the later of: a) the Plan Year in which the Participant first becomes a Qualified Participant, or b) the first Plan Year beginning after December 31, 1986. (b) ELECTION BY QUALIFIED PARTICIPANTS. Each Qualified Participant may elect as provided at Section 9.03(d) with respect to twenty-five percent (25%) of the value of the Participant's Account attributable to Employer Stock which was acquired by the Plan after December 31, 1986, within 90 days after the last day of each Plan Year during the Participant's Qualified Election Period. Within 90 days after the close of the last Plan Year in the Participant's Qualified Election Period, a Qualified Participant may direct the Plan as to the investment of fifty percent (50%) of the value of his Account. (c) METHOD OF DIRECTING INVESTMENT. The Participant's direction shall be provided to the Plan Administrator in writing; shall be effective no later than 90 days after the close of the Plan Year to which the direction applies; and shall specify which, if any, of the options set forth in subsection (d) below the Participant selects. (d) INVESTMENT OPTIONS. (1) At the election of the Qualified Participant, the Plan shall distribute (notwithstanding Section 409(d) of the Code) the portion of the Participant's ESOP Contributions Account that is covered by the election within 90 days after the last day of the period during which the election can be made. Such distribution shall be subject to such requirements of the Plan concerning put options as would otherwise apply to a distribution of Qualifying Employer Securities from the Plan. This Section 9.03(d)(1) shall apply notwithstanding any other provision of the Plan other than such provisions as require the consent of the Participant to a distribution where the value of his Account (i) exceeds $5,000 ($3,500 for Plan Years beginning prior to August 6, 1997) or (ii) has ever exceeded $5,000 ($3,500 for Plan Years beginning prior to August 6, 1997) at the time any prior distribution. For Years after March 21, 1999 and before December 19, 2001, or such other date that is established by the IRS or its Commissioner for this rule, clause (ii) shall not apply. If the Participant does not consent, such amount shall be retained in this Plan. (2) In lieu of distribution under Section 9.03(d)(1), the Qualified Participant who has the right to receive a cash distribution under Section 9.03(d)(1) may direct the Plan to invest the portion of the Participant's ESOP Contributions Account that is covered by the election in any of the investment options offered by this Plan for investment of Deferral Contributions, provided that such investments do not include Qualifying Employer Securities to a substantial degree. Such transfer shall be made no later than ninety (90) days after the last day of the period during which the election can be made. 9.04 RIGHT OF FIRST REFUSAL For any period during which Employer stock is not publicly traded, distribution of any portion of a Participant's ESOP Contributions Account in the form of Employer stock may, as determined by the Company, be subject to a "right of first refusal", until such time as such shares - -------------------------------------------------------------------------------- Page 43 45 are publicly traded. Such a "right" shall provided that prior to any subsequent transfer, the shares must first be offered by written offer to the Company, and then, if refused by the Company, to the Trust. The selling price and other terms under the right must be no less favorable to the seller than the greater of the fair market value of the shares of Employer stock or the price and other terms offered by a prospective bona fide purchaser making a good faith offer in writing. The Company may exercise the right of first refusal at any time during a period not exceeding fourteen (14) days after receipt of the written offer. In the event the Company does not accept such offer, the Trustee, at the direction of the Plan Administrator, may accept such offer at any time during said fourteen (14) days period. As used in this Section, unless otherwise required by the Code or applicable law, the term "transfer" shall include all transfers whether by sale, by gift, as a result of death or otherwise. 9.05 REDEMPTION OF EMPLOYER STOCK - PUT OPTION For any period during which Employer stock is not publicly traded, with regard to any Employer stock distributed to a Participant from his ESOP Contributions Account, the Participant or his beneficiary, donee or heir shall have the option to require the Employer to redeem the stock within fifteen (15) months of the date of distribution. The shares of stock shall be redeemed at the value established as of the last day of the Plan Year prior to the exercise of the option. Payment by the Employer may be in a lump sum or in installments. The Employer, or the Plan if the Plan so elects, shall repurchase the Qualifying Employer Securities as follows: (a) If the distribution constitutes a Total Distribution, payment of the fair market value of a Participant's ESOP Contributions Account shall be made in five substantially equal annual payments. The first installment shall be paid not later than 30 days after the Participant exercises the put option. The Plan will pay a reasonable rate of interest and provide adequate security on amounts not paid within 30 days. (b) If the distribution does not constitute a Total Distribution, the Participant shall be paid an amount equal to the fair market value of the Qualifying Employer Securities repurchased no later than 30 days after the Participant exercises the put option. For purposes of this Section 9.05, "Total Distribution" means a distribution to a Participant or a Participant's beneficiary of the entire ESOP Contributions Account within one tax year of the recipient. The Plan shall not be obligated to, but may elect to assume the rights and obligations of the Employer with regard to the exercise of the option. The Employer shall notify the Plan within five days of its receipt of notice of the exercise of an option under this Section 9.05. The Plan then shall have a reasonable time, not to exceed fifteen (15) days, of its intention to assume the rights and obligations of the Employer with regard to the option. - -------------------------------------------------------------------------------- Page 44 46 The option provided for in this Section 9.05 shall not be restricted by any loan to the Plan or to the Employer or by any other arrangement, including the terms of the Employer's Articles of Incorporation, unless required by applicable state law. 9.06 DIVIDENDS (a) The Company may direct that dividends paid with respect to Qualifying Employer Securities acquired with an ESOP loan described in Code Section 404(a)(9) be used to make payments on the loan used to acquire the Employer securities. (b) If the Company elects to deduct pursuant to Code Section 404(k) the dividends used as described in Plan Section 9.06(a), Employer securities with a fair market value of not less than the amount of such dividend shall be allocated to such Participant for the year in which such dividend would have been allocated to such Participant's Account. Such Employer securities used to replace dividend value shall be taken from those securities released from the suspense account pursuant to Plan Section 10.02(d). 9.07 NONTERMINABLE RIGHTS The provisions of this Section IX shall continue to be applicable to shares of Employer stock even if the Plan ceases to be an ESOP within the meaning of Section 4975(e)(7) of the Code. 9.08 VALUATION OF THE FUND The assets of the Fund shall be valued at fair market value as of the end of each Plan Year and at such other time as the Plan Administrator may direct. The Accounts of each Participant shall then be adjusted by apportioning the Fund, including income, as thus revalued, among Participants' Accounts in proportion to the value of their respective interests in the Fund immediately preceding such revaluation. In making such valuation of the Fund, the Trustee may rely upon the annual appraisal of the Employer stock prepared pursuant to Section 9.02. 9.09 ADDITIONAL REQUIREMENTS (a) The Plan shall not be obligated to acquire Employer stock from a particular security holder at any indefinite time determined upon the happening of an event such as the death of the holder. (b) An exempt loan shall not be used to purchase key man life insurance. (c) If Company stock acquired with the proceeds of an exempt loan available for distribution consists of more than one class, a distributee must receive substantially the same proportion of each such class. (d) Assets attributable to Qualifying Employer Securities acquired by the Plan in a sale to which section 1042 applies (section 1042 securities) cannot accrue for the benefit of the - -------------------------------------------------------------------------------- Page 45 47 persons specified in section 409(n). Also, the section 1042 securities acquired by the Plan cannot be allocated directly or indirectly under any qualified plan of the Employer. Allocations of section 1042 securities cannot be made during the nonallocation period to any taxpayer who makes a section 1042 election, or to anyone who is related to the taxpayer within the meaning of section 267(b), unless the lineal descendant exception applies. This exception provides that an allocation of section 1042 shares to a relative of the taxpayer who made the section 1042 election is not prohibited if he or she is a lineal descendant of the taxpayer, and the amount allocated to all such lineal descendants during the nonallocation period does not exceed five percent of the Qualifying Employer Securities held by the Plan attributable to a sale under section 1042 by a person related to such descendants (within the meaning of section 267(c)(4)). The nonallocation period is the period beginning when the securities are sold to the Plan pursuant to section 1042, and ends on the later of 1) 10 years after the date of sale, or 2) if the Plan borrowed money to purchase the section 1042 securities, the date this indebtedness is repaid. Allocations of section 1042 securities also cannot be made, at any time, to a person who owns, after the application of section 318(a), more than 25 percent of 1) any class of outstanding stock of the corporation which issued the Qualifying Employer Securities or of any corporation which is a member of the same controlled group, or 2) the total value of any class of outstanding stock of such a corporation. Section 318(a) is applied to the "25 percent ownership of any class of stock" test without regard to the employee trust exception in 318(a)(2)(B)(i). A person is not treated as a 25 percent shareholder if he or she fails the limitation at any time in the one-year period ending on the date of the sale to the Plan, or the date the securities are allocated to participants in the Plan. - -------------------------------------------------------------------------------- Page 46 48 ARTICLE X EXEMPT LOAN 10.01 DEFINITION OF EXEMPT LOAN An Exempt Loan is a direct loan of cash, a purchase money transaction, an assumption of the obligation of the Plan, or a guarantee of the obligation of the Plan assumed in conjunction with one of the above between the Plan and a disqualifying person as defined in Code Section 4975(e)(2). 10.02 REQUIREMENTS FOR AN EXEMPT LOAN Any Exempt Loan entered into by the Plan shall meet the following requirements: (a) The loan shall primarily be for the benefit of Participants. The rate of interest shall be reasonable and the net effect of the rate of interest and the price of the securities to be acquired with the loan shall be such that Plan assets would not be depleted. The loan shall be made only upon such terms as would result from arm's length negotiations between the Plan and independent third parties. (b) The proceeds received shall be used only to acquire Qualifying Employer Securities, to repay the loan or to repay a prior exempt loan. (c) The loan shall be made without recourse against the general assets of the Plan. The collateral shall consist only of securities acquired with the proceeds of the loan, or securities acquired with proceeds of a prior exempt loan if the prior exempt loan is being paid with proceeds of the current exempt loan. There shall be no right of any lender to the Plan against assets of the Plan other than collateral given for the loan, contributions made to the Plan to meet the obligations of the loan, and earnings attributable to collateral and investment of the contributions made to meet the obligations of the loan. In the event of default, the amount of Employer stock transferred to the lender in satisfaction of a default cannot exceed the amount of such default. In the case of a default in favor of a Party-in-interest, the default shall only be to the extent of current payments due. (d) Payments made by the Plan to repay an exempt loan shall not exceed an amount equal to contributions and earnings received during or prior to the year minus such payments in prior years. The Employer stock purchased with the proceeds of the loan shall be held in a suspense account until the stock is released from the suspense account and allocated to the Participants' ESOP Contributions Accounts. Stock released from the suspense account must be equal to an amount calculated by multiplying the amount of encumbered stock by the fraction of the principal and interest paid for the Plan Year divided by the sum of the principal and interest paid for the Plan Year plus principal and interest for all future years. Any encumbered stock released from the suspense account must be allocated to Participant's Accounts in shares of stock or other non-monetary units rather than by dollar amounts. - -------------------------------------------------------------------------------- Page 47 49 (e) The Employer stock acquired with the proceeds of an exempt loan shall not be subject to any option other than the option provided for in Plan Section 9.05 or a buy-sell or similar arrangement or a right of first refusal as described in Plan Section 9.04 when the stock is held by or distributed from the Plan whether or not the Plan ceases to be an ESOP or the exempt loan is fully repaid. - -------------------------------------------------------------------------------- Page 48 50 ARTICLE XI AMENDMENT OR TERMINATION 11.01 AMENDMENT The Employer reserves the right, at any time and from time to time, to amend in whole or in part either retroactively or prospectively any or all of the provisions of the Plan without the consent of any Participant or his beneficiaries hereunder. Such amendment shall be stated either in an instrument executed by the Employer in the same manner and form as the Plan or in a Directors resolution and upon the execution thereof, the Plan shall be deemed to have been amended in the manner therein set forth and the Employer and all Participants and their beneficiaries shall be bound thereby; provided, however, that no amendment: (a) Shall authorize, cause or permit any part of the Trust Fund (other than such part as is required to pay taxes and administrative expenses) to be used or diverted to purposes other than the exclusive benefit of the Participants, former Participants or their beneficiaries or estates. (b) Shall have the effect of vesting in the Employer any interest in or control over any policies of insurance purchased hereunder or over any part of the Trust Fund subject to the terms of the Plan. (c) Shall affect the rights, duties or responsibilities of the Trustee without its consent. (d) Shall have any retroactive effect so as to deprive any Participant of his nonforfeitable interest already accrued, or eliminate an optional form of benefit, except only that any amendment may be made retroactive which is necessary to conform the Plan to mandatory provisions of Federal or State law, regulations or rulings. The Employer may unilaterally amend the Plan without Trustee consent. Such amendments, however, must be provided to the Trustee by the Employer. 11.02 PLAN TERMINATION OR DISCONTINUANCE OF CONTRIBUTIONS The Employer shall have the right, at any time, to terminate the Plan. Upon such termination, or any partial termination, the entire interest of each Participant's Accounts shall become nonforfeitable. Upon the discontinuance of the Employer's contributions or suspension thereof on other than a temporary basis, the entire interest of each Participant's Accounts shall become nonforfeitable. Any unallocated funds existing at the time of such termination or discontinuance shall be allocated to the then Participants in the same manner as Employer contributions under Section 4.02(a)(2). In the event the Employer terminates the Plan but does not terminate the Trust Fund, the Trustee, in its sole discretion, may either continue to maintain and administer the Trust Fund or - -------------------------------------------------------------------------------- Page 49 51 terminate the same. No termination of the Plan shall have the effect of vesting in the Employer any interest in or control over any part of the Trust Fund. Distributions upon Plan termination shall be made in accordance with the provisions of Article VI. 11.03 MERGER, CONSOLIDATION OR TRANSFER OF ASSETS The Plan may be merged, consolidated or its assets or liabilities transferred to any other plan provided each Participant would receive a benefit immediately after such merger, consolidation or transfer, if the successor plan then terminated, which is equal to or greater than the benefit he would have received immediately prior to such merger, consolidation or transfer if the Plan were to have terminated on such date. - -------------------------------------------------------------------------------- Page 50 52 ARTICLE XII ADMINISTRATIVE COMMITTEE 12.01 APPOINTMENT, RESIGNATION, REMOVAL The Directors shall appoint an Administrative Committee to manage and administer the Plan. The Committee shall be the Plan Administrator and named fiduciary of the Plan. The Committee shall consist of not fewer than three members who may, but need not, be Participants, directors, officers, stockholders or Employees of the Employer. The members of the Committee may be removed by the Directors at any time, with or without cause or notice. Upon the death, resignation, removal or inability to serve of any member of the Committee, as now or hereafter constituted (and of such inability the Directors shall be sole judge), the Directors shall name the successor of such member. 12.02 NOTICE TO TRUSTEE The Employer shall give written notice to the Trustee of the names of the members of the Committee promptly after appointment of the Committee and immediately after each change in membership of the Committee. The Trustee shall not be deemed to be on notice of any change in membership of the Committee unless so notified. 12.03 PROCEDURE The Committee shall act by agreement of a majority of its members either by vote at a meeting or in writing without a meeting. By such action it may authorize one or more of its members to execute documents on its behalf and direct the Trustee in the performance of its duties. The Trustee, upon written notification of such authorization, shall accept and rely upon such documents and directions until notified in writing that the authorization has been revoked or changed by the Committee. Subject to the provisions of this Article, a member of the Committee who is also a Participant shall not vote or act upon any matter directly affecting any of his benefits under the Plan. In the event of a deadlock or other situation which prevents agreement of a majority of the Committee members, the matter shall be decided by the Directors. 12.04 POWERS AND DUTIES The Committee shall have the power and duty to do all things necessary or convenient to effect the intent and purposes of this Plan and not inconsistent with any of the provisions hereof, whether or not such powers and duties are specifically set forth herein. Not in limitation, but in amplification of the foregoing, the Committee shall have power to: (1) Provide rules and regulations for the administration of the Plan, and, from time to time, to amend or supplement such rules and regulations. (2) Construe the Plan and Trust Agreement, which construction shall be final and binding. - -------------------------------------------------------------------------------- Page 51 53 (3) Correct any defect, supply any omission, or reconcile any inconsistency in the Plan in such manner and to such extent as it shall deem expedient to carry the Plan into effect. (4) Determine all questions that may arise under the Plan including directions to and questions submitted by the Trustee on all matters necessary for it to properly discharge its powers and duties. (5) Delegate to such other parities as are appropriate pursuant to ERISA all or any part of the responsibilities specifically required of the Committee under the terms of the Plan or Trust Agreement. 12.05 FINALITY OF ACTION Except as provided in Section 12.06, the acts and determinations of the Committee within the powers conferred by the Plan shall be final and conclusive for all purposes of the Plan and Trust Agreement. The Employer, Employees, Participants, Beneficiaries, Trustee and all others having any interest under the Plan shall be bound thereby. 12.06 CLAIMS PROCEDURES Each Participant (or Beneficiary) may make applications to receive a benefit under the Plan by filing such form as the Committee prescribes. Within 60 days of the date that the application is received, the Committee will inform the Participant (or Beneficiary), in writing, of the amount of benefit due, if any, or of the denial of the claim for benefit. Any denial of a claim for benefit will include a statement of the reasons for the denial, specific references to Plan provisions on which the denial is based, a description of any additional information the Committee needs to make a decision under the Plan, an explanation of why such information ins necessary and an explanation of the Plan's claims procedure. Within 90 days of the expiration of such 60 day period, the Participant (or Beneficiary) because of denial, inaction or otherwise, may request, in writing, that his application for a benefit be reviewed. Within 30 days of receipt of a request for review, the Committee will schedule a date to review the application and will notify the Participant (or Beneficiary), in writing, of such date at least seven days before the date of the review. The Participant (or Beneficiary) may, prior to the date of the review, inspect all documents and records pertaining to his claim for benefit and may submit issues and comments, in writing, to the Committee. Within 60 days after receiving the request for a review, and after the date of the review, the Committee will submit to the Participant (or Beneficiary), in writing, a statement of their decision and their reasons for arriving at such decision. After such statement has been given, the action of the Committee shall be final and conclusive and shall not be subject to further appeal or review. - -------------------------------------------------------------------------------- Page 52 54 The Committee may extend, in writing, for a period not to exceed 60 days, for reasonable cause, the time which the Participant (or Beneficiary) has to comply with any of the provisions of this Section. Where a Participant (or Beneficiary) does not comply with the provisions of this Section within the time prescribed (including extensions), the action of the Committee shall then be final and conclusive and shall not be subject to further appeal or review. Any action to be taken by a Participant (or Beneficiary) pursuant to this Section may be taken by a representative designated by such Participant (or Beneficiary) to act for him or to assist him. 12.07 CHAIRMAN, SECRETARY AND OTHERS The Committee shall appoint a chairman who shall be a member of the Committee, a secretary who may, but need not, be a member of the Committee, and such advisors, agents and representatives as it shall deem advisable. 12.08 LIABILITY No fiduciary shall be directly or indirectly responsible or under any liability so long as: (1) he shall act with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use the conduct of an enterprise of a like character and with like aims; and (2) he did not knowingly conceal a breach of duty of any other fiduciary. The Employer shall indemnify each member or former member of the Committee against any and all expenses and liabilities arising out of his own membership on the Committee, except expenses and liabilities arising out of his own fraud, willful misconduct or breach of his responsibilities under this Section. The fact that any member of the Committee is a director, officer, employee, or a Participant shall not disqualify him from doing any act or thing which the Plan authorizes or requires him to do as a member of such Committee (except as otherwise provided in Section 12.03 with respect to a member who is a Participant or a former Participant) or render him accountable for any allowance, distribution or other profit or advantage received by him. 12.09 COMPENSATION AND EXPENSES The members of the Committee shall be entitled to receive their reasonable expenses incurred in administering the Plan. Any such compensation and expenses and actuarial fees and other expenses with respect to the Plan shall be paid by the Employer (in addition to its contributions under the Plan). However, the Employer may, in its discretion, determine that all or part thereof shall be payable out of the Trust Fund, in which case the Employer shall so direct the Committee and the Committee, in turn, shall so direct the Trustee. - -------------------------------------------------------------------------------- Page 53 55 12.10 INFORMATION FURNISHED TO COMMITTEE The Employer shall furnish to the Committee, in writing, such information as the Committee may request in the exercise of its powers and duties in the administration of the Plan. Such information may include, but not necessarily be limited to: names of Employees, their compensation, dates of birth, employment, termination of employment, retirement or death. 12.11 EXAMINATION BY PARTICIPANTS The Committee shall make available to each Participant for examination a copy of the Plan and such of its records or copies thereof as may pertain to any benefits of such Participant under the Plan. 12.12 NONDISCRIMINATORY ACTION In the exercise of any power or discretion under the Plan or Trust Agreement, the Committee shall not take any action or direct the Trustee to take any action with respect to any of the rights, benefits or obligations of Employees under the Plan which would be discriminatory in favor of Employees who are officers, shareholders, or highly compensated as between such Employees and other Employees in substantially similar situations or under substantially similar sets of facts. - -------------------------------------------------------------------------------- Page 54 56 ARTICLE XIII MISCELLANEOUS 13.01 PARTICIPANT'S RIGHTS Neither the establishment of the Plan, nor any modification thereof, nor the creation of any fund or account, nor any distributions hereunder, shall be construed as giving to any Participant or other person any legal or equitable right against the Employer or an Adopting Employer, or any officer or Employee thereof, or the Trustee, or the Plan Administrator except as herein provided. Under no circumstances shall the terms of employment of any Participant be modified or in any way affected thereby. 13.02 ASSIGNMENT OR ALIENATION OF BENEFITS No benefit or interest available hereunder will be subject to assignment or alienation, either voluntarily or involuntarily. The preceding sentence shall also apply to the creation, assignment, or recognition of a right to any benefit payable with respect to a participant pursuant to a domestic relations order, unless such order is determined to be a Qualified Domestic Relations Order or any domestic relations order entered before January 1, 1985. For purposes of this Section 13.02, "Qualified Domestic Relations Order" means any domestic relations order which creates or recognizes the existence of an alternate payee's right to, or assigns to an alternate payee the right to, receive all or a portion of the benefits payable with respect to a Participant, and which otherwise meets the requirements of Section 414(p) of the Code. As soon as practical after receipt of a domestic relations order, the Plan Administrator shall determine whether it is a Qualified Domestic Relations Order. If the domestic relations order is determined to be a Qualified Domestic Relations Order, the Plan Administrator shall be permitted, in accordance with rules and regulations promulgated by the Internal Revenue Service and the rules and regulations established by the Plan Administrator, to direct the Trustee to make an immediate distribution to the alternate payee (i) if the amount is less than $5,000, (ii) as provided in any such Order, or (iii) as elected by the alternate payee. Such distribution shall be permitted regardless of the age or employment of the Participant and regardless of whether the Participant is otherwise entitled to a distribution. 13.03 REVERSION OF FUNDS TO EMPLOYER All Employer Contributions are conditioned upon their deductibility pursuant to Section 404 of the Code. The Employer or an Adopting Employer shall not directly or indirectly receive any refund on contributions made to the Trust Fund except in the following circumstances: (a) The contribution was made by reason of a mistake of fact, (b) The deduction for such contribution is disallowed, or (c) The initial qualification of the Plan is denied under the Code. - -------------------------------------------------------------------------------- Page 55 57 Earnings attributable to any contribution subject to refund shall not be refunded. The amount subject to refund shall be reduced by any loss attributable thereto, and by any amount which would cause the individual account of any Participant to be reduced to less than the balance which would have been in the account had the contribution subject to refund not been made. The return of the contribution shall be made within one year of the mistaken payment, the disallowance of deduction (to the extent disallowed) or the denial of qualification, as the case may be. Except as provided above, under no circumstances shall any amount of the principal or income of the Trust Fund be used for or diverted to the Employer or be used for or diverted to purposes other than the exclusive benefit of Participants, former Participants, and their beneficiaries. 13.04 UNIFORMED SERVICES EMPLOYMENT AND REEMPLOYMENT RIGHTS ACT OF 1994 Notwithstanding any provision of this Plan to the contrary, contributions, benefits and service credit with respect to qualified military service will be provided in accordance with Code Section 414(u). 13.05 THIRD PARTY IMMUNITY No third party, including but not limited to life insurance companies and regulated investment companies, shall be deemed to be a party to the Plan for any purpose or to be responsible for the validity of the Plan; nor shall such third party be required to take cognizance of the Trustee or of the Plan Administrator hereunder, nor shall such third party be responsible to see that any action of the Trustee or the Plan Administrator is authorized by the terms of the Plan. Any such third party shall be fully discharged from any and all liability for any amount paid to the Trustee or paid in accordance with the direction of the Trustee or the Plan Administrator, as the case may be, or for any change made or action taken by such third party upon such direction; and no such third party shall be obligated to see to the distribution or further application of any monies so paid by such third party. 13.06 RIGHTS OF THE EMPLOYER AND DELEGATION OF AUTHORITY BY THE EMPLOYER Whenever the Employer, under the terms of the Plan, is permitted or required to do or perform any act or matter or thing, it shall be done and performed by any officer, except the decision to terminate or discontinue contributions to the Plan, which is specifically reserved to the Directors. Further, the Directors may take action with respect to the Plan which shall supersede and be paramount to any right to act delegated to an officer. Any action taken by an officer with respect to this Plan shall be by amendment to this Plan written and executed in a style and format similar to that of this Plan, or may under appropriate circumstances be by correspondence directed to the Trustee, or employee or agent which or who is acting in an administrative capacity. - -------------------------------------------------------------------------------- Page 56 58 Any action reserved to the Directors or any specific action taken by the Directors with respect to this Plan shall be by resolution in accordance with its Articles of Incorporation and related rules, bylaws and procedures. 13.07 ALLOCATION OF RESPONSIBILITIES None of the allocated responsibilities or any other responsibilities shall be shared by any two or more Named Fiduciaries unless such sharing is provided by a specific provision of the Plan. Whenever one Named Fiduciary is required to follow the directions of another Named Fiduciary, the responsibility shall be that of the Named Fiduciary giving the directions. 13.08 CONSTRUCTION OF PLAN To the extent not in conflict with the provisions of ERISA, all questions of interpretation of the Plan shall be governed by the laws of the state of Ohio. 13.09 GENDER AND NUMBER Wherever any words are used herein in the masculine gender, they shall be construed as though they were also used in the feminine gender in all cases where they would so apply, and wherever any words are used herein in the singular form, they shall be construed as though they were also used in the plural form in all cases where they would so apply. 13.10 HEADINGS Headings of sections are for general information only, and the Plan is not to be construed by reference thereto. - -------------------------------------------------------------------------------- Page 57 59 Executed at Defiance, Ohio this ______ day of _________, 19____. RURBAN FINANCIAL CORP. Witness By: ------------------------------ ------------------------------ - -------------------------------------------------------------------------------- Page 58 60 INDEX
PAGE NUMBER ARTICLE I DEFINITIONS 2 1.01 Acquired Subsidiary 2 1.02 Act 2 1.03 Annual Compensation 2 1.04 Break in Service 2 1.05 Code 3 1.06 Committee 3 1.07 Company 3 1.08 Directors 3 1.09 Disability Retirement Date 3 1.10 Distribution Date 3 1.11 Early Retirement 3 1.12 Early Retirement Date 3 1.13 Employee 3 1.14 Employer or Participating Employer 3 1.15 Entry Date 4 1.16 ERISA 4 1.17 ESOP 4 1.18 Hour of Service 4 1.19 Leased Employee 5 1.20 Named Fiduciary 5 1.21 Normal Retirement Age 6 1.22 Normal Retirement Date 6 1.23 Participant 6 1.24 Permanent and Total Disability 6 1.25 Plan 6 1.26 Plan Administrator 6 1.27 Plan Year 6 1.28 Qualified Election 6 1.29 Qualifying Employer Securities 7 1.30 Trustee 7 1.31 Trust Agreement 7 1.32 Trust Fund 7 1.33 Year of Service 7
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PAGE NUMBER ARTICLE II ELIGIBILITY 9 2.01 Eligibility 9 2.02 Eligibility Upon Re-Employment 9 ARTICLE III CONTRIBUTIONS 10 3.01 Employer Contributions 10 3.02 Rollover Contributions 11 3.03 Time for Payment of Contributions 11 ARTICLE IV ALLOCATIONS 12 4.01 Participant Accounts 12 4.02 Annual Allocations 13 4.03 Dividends 14 4.04 Annual Report to Participants 14 ARTICLE V BENEFITS TO PARTICIPANTS 15 5.01 Upon Retirement or Disability 15 5.02 Upon Death 15 5.03 Upon Termination of Employment 16 5.04 Location of Participant or Beneficiary Unknown 18 5.05 Certification by Plan Administrator 18 ARTICLE VI DISTRIBUTIONS 19 6.01 Method and Medium of Payment 19 6.02 Commencement of Benefits 19 6.03 Special ESOP Distribution Requirements 20 6.04 Mandatory Commencement of Benefits 22 6.05 Distributions After Death of a Participant 23 6.06 Installments and Deferred Distributions 24
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PAGE NUMBER 6.07 Distributions of Excess Deferrals 24 6.08 Restrictions on Distributions of Compensation Deferral Contributions 25 6.09 Right to Have Accounts Transferred 25 6.10 Direct Plan to Plan Transfers 25 ARTICLE VII LIMITATIONS ON CONTRIBUTIONS AND BENEFITS 27 7.01 Limitation of Benefits 27 7.02 Definitions 30 7.03 Nondiscrimination Requirements for Compensation Deferral Contributions 32 7.04 Nondiscrimination Requirements for Matching Contributions 34 7.05 Multiple Use of Alternative Test 35 ARTICLE VIII TOP HEAVY PROVISIONS 38 8.01 Definitions 38 8.02 Determination of Top Heavy Status 39 8.03 Combination of Defined Benefit & Defined Contribution Plan 40 8.04 Minimum Contribution 40 8.05 Minimum Vesting 40 ARTICLE IX SPECIAL ESOP REQUIREMENTS 42 9.01 Voting Employer Stock 42 9.02 Appraisal of Employer Stock 42 9.03 Diversification of Investments 42 9.04 Right of First Refusal 43 9.05 Redemption of Employer Stock - Put Option 44 9.06 Dividends 45 9.07 Nonterminable Rights 45 9.08 Valuation of the Fund 45 9.09 Additional Requirements 45
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PAGE NUMBER ARTICLE X EXEMPT LOAN 47 10.01 Definition of Exempt Loan 47 10.02 Requirements for an Exempt Loan 47 ARTICLE XI AMENDMENT OR TERMINATION 49 11.01 Amendment 49 11.02 Plan Termination or Discontinuance of Contributions 49 11.03 Merger, Consolidation or Transfer of Assets 50 ARTICLE XII ADMINISTRATIVE COMMITTEE 51 12.01 Appointment, Resignation, Removal 51 12.02 Notice to Trustee 51 12.03 Procedure 51 12.04 Powers and Duties 51 12.05 Finality of Action 52 12.06 Claims Procedures 52 12.07 Chairman, Secretary and Others 53 12.08 Liability 53 12.09 Compensation and Expenses 53 12.10 Information Furnished to Committee 54 12.11 Examination by Participants 54 12.12 Nondiscriminatory Action 54 ARTICLE XIII MISCELLANEOUS 55 13.01 Participant's Rights 55 13.02 Assignment or Alienation of Benefits 55 13.03 Reversion of Funds to Employer 55 13.04 Uniformed Services Employment and Reemployment Rights Act of 1994 56 13.05 Third Party Immunity 56
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PAGE NUMBER 13.06 Rights of the Employer and Delegation of Authority by the Employer 56 13.07 Allocation of Responsibilities 57 13.08 Construction of Plan 57 13.09 Gender and Number 57 13.10 Headings 57
- -------------------------------------------------------------------------------- Page 63 65 APPENDIX A PARTICIPATING EMPLOYERS - ----------------------- The State Bank and Trust Company The Peoples Banking Company Rurbanc Data Services, Inc. The Citizens Savings Bank Company The First National Bank of Ottawa Rurban Mortgage Company Rurban Financial Corp. Reliance Financial Services, N.A. - -------------------------------------------------------------------------------- Page 64 EX-21 3 EXHIBIT 21 1 EXHIBIT 21 ---------- LIST OF SUBSIDIARIES --------------------
Name State of Incorporation ---- ---------------------- The State Bank and Trust Company Ohio The Peoples Banking Company Ohio The Citizens Savings Bank Company Ohio The First National Bank of Ottawa Nationally Chartered Bank Reliance Financial Services, N.A. * Nationally Chartered Trust Company Rurban Mortgage Company * Ohio Rurban Life Insurance Company Arizona Rurbanc Data Services, Inc. Ohio
- ---------- * Reliance Financial Services, N.A. and Rurban Mortgage Company are wholly-owned subsidiaries of The State Bank and Trust Company. EX-23 4 EXHIBIT 23 1 EXHIBIT 23 ---------- We consent to the incorporation by reference and use of our report dated February 4, 2000, on the consolidated financial statements of Rurban Financial Corp. and Subsidiaries, which appears in Rurban Financial Corp.'s Form 10-K for the year ended December 31, 1999 and in Rurban Financial Corp.'s Registration Statement on Form S-8 pertaining to the Rurban Financial Corp. Stock Option Plan. /s/ Crowe Chizek and Company LLP -------------------------------- Crowe, Chizek and Company LLP South Bend, Indiana March 27, 2000 EX-27 5 EXHIBIT 27
9 12-MOS DEC-31-1999 DEC-31-1999 18,571,702 110,000 11,000 0 83,118,908 0 0 508,480,963 6,193,712 627,783,524 519,296,084 22,021,389 6,651,666 35,913,914 0 0 11,439,255 32,461,216 627,783,524 39,824,608 5,051,795 76,408 44,952,811 19,026,452 21,743,913 23,208,898 1,215,000 (5,827) 25,466,055 7,591,839 5,230,902 0 0 5,230,902 1.28 1.28 4.29 1,403,000 809,000 0 11,245,000 5,408,854 1,092,441 662,299 6,193,712 5,017,000 0 1,176,712
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