Rurban Financial Corp. Announces Second Quarter 2011 Results

DEFIANCE, Ohio, July 27, 2011 (GLOBE NEWSWIRE) -- Rurban Financial Corp. (Nasdaq:RBNF) ("Rurban" or the "Company"), a diversified financial services company providing full-service community banking, mortgage banking, wealth management and item processing services, today reported earnings for the second quarter and first six months of 2011.

Consolidated results include the results of Rurban's Banking Group, consisting primarily of The State Bank and Trust Company ("State Bank" or "the Bank") and Rurban's data services subsidiary, Rurbanc Data Services, Inc. (dba "RDSI Banking Systems" or "RDSI"). Net income for the second quarter of 2011 was $777,000, or $0.16 per diluted share, compared to $11,000 for the first quarter of 2011, or $0.00 per diluted share, and a net loss of $8.21 million, or ($1.69) per diluted share, for the 2010 second quarter. For the first six months of 2011, Rurban reported net income of $788,000, or $0.16 per diluted share, compared to a net loss of $9.05 million, or ($1.86) per diluted share.

Excluding one-time or non-core items from GAAP results, recurring income after-tax for the second quarter of 2011 was $103,000, or $0.02 per diluted share, compared to $77,000, or $0.02 per diluted share, for the 2011 first quarter and a net loss of $2.25 million, or ($0.46) per diluted share, for the second quarter of 2010. (The reconciliation of GAAP to recurring results can be found in the financial tables.)

Key items for the 2011 quarter and six-month period include:

• Growth in core pre-tax, pre-provision earnings despite decline of RDSI revenue. Higher net interest income and improved expense controls more than offset the decline of RDSI's data processing revenue for the 2011 second quarter and six-month periods. Core pretax, pre-provision earnings were $1.06 million for the 2011 second quarter, up $139,000 or 15.2 percent, from the linked quarter, and higher by $1.40 million from the year-ago quarter.
• Net interest income benefited from margin improvement and recent loan growth. Net interest income on a fully tax-equivalent basis increased $364,000, or 7.3 percent, above the linked quarter, benefitting from a 22 basis point margin improvement on a fully tax-equivalent basis, combined with $7.8 million, or 1.86 percent, growth in average loans.
• The balance sheet deleveraging initiative was completed in June 2011; with the majority of revenue impact anticipated in future quarters. In addition to improved capital ratios, a net gain of $0.79 million was the major impact this quarter from the sale of $43 million of securities and the pay down of $32 million of FHLB advances and repos. It is anticipated that third quarter results should reflect reduced funding costs and margin improvement of approximately 20 basis points. (Expanded detail in the Balance Sheet section).
• Key capital ratios strengthened as a result of deleveraging. The $37 million, or 5.6 percent,  reduction in asset size from first quarter 2011 has had a positive impact on the majority of capital ratios as well as tangible equity to assets, which improved by 25 basis points. Since State Bank grew its loan portfolio at the same time it reduced asset size, the risk-adjusted capital ratios showed less improvement than did the Tier 1 leverage ratio, which increased by 30 and 46 basis points, respectively, at the bank and the consolidated holding company.
• Rurban remains well-diversified. Core noninterest income, including fee income from data processing, wealth management and mortgage banking, accounted for 35.8 percent of second quarter 2011 core revenues on a fully tax-adjusted basis compared to 47.8 percent of core revenues for the year-ago quarter. However, total core revenues have declined 14.9 percent year-over-year as a result of RDSI's exit from the data processing business.
• Rurban's data services subsidiary, RDSI, reported a profit of $142,000 this past quarter. GAAP net income was $142,000, which includes a $519,000 contract buyout fee following the acquisition of a client bank. Excluding this one-time contract buyout fee, core earnings were a net loss of $200,000, virtually unchanged from the prior quarter. Apart from the acquired customer, relationships have remained stable since the beginning of 2011.
• Asset quality reflects strong improvement. NPAs declined by $2.9 million, or 22.3 percent from first quarter 2011 following net charge-offs of $1.0 million. The favorable combination of recoveries of loans previously charged off, OREO sales, and the growing credit strength of borrowers, enabled Rurban to reduce non-performing assets to $10.1 million, or 1.64 percent, of consolidated assets.  

Mark Klein, President and Chief Executive Officer of Rurban Financial Corp., stated, "We continue to review all aspects of our operations and balance sheet to identify opportunities for improvement. The adjustment to a lower revenue base from the loss of data processing has preoccupied much of our resources, both human and financial. However, we are achieving steady progress on a consolidated basis as reflected in our pre-tax, pre-provision earnings on the one hand, and the improvement in asset quality on the other.

"The balance sheet deleveraging transaction we completed this past quarter has already improved our capital ratios, and should provide additional positive momentum to our net interest margin in future quarters. We anticipate a pickup of approximately 20 bps in the third quarter, which we believe should get our margin into the four percent range. The continuing expansion of our net interest margin, combined with our growing loan portfolio, should have a synergistic effect on net interest income. This past quarter, we added over $15 million of loans to our books, including nearly $10 million of well-structured commercial real-estate loans. In past years, State Bank has had a lower level of exposure to commercial real estate, and this has served us well. We believe we can now begin to grow our portfolio selectively and add value in our markets.

"Our back office, lenders and retail bankers all continue to play an integral role in the growth of non-bank services, as well as loan and deposit growth. They have been instrumental in the cross-referral of business opportunities that have generated the exceptional stream of noninterest income for a bank our size. Even now, with a significantly lower level of revenue from our data services subsidiary, core noninterest income contributed 36 percent of total core revenue this quarter.

"Reliance Financial Services, our wealth management arm, has been a steady contributor, while mortgage banking activity is more seasonal and, of course, cyclical. Second quarter mortgage originations were stronger than the first quarter of this year, but substantially less robust than the boom fueled by last year's government incentives and refinancing activity. RDSI performs primarily as an item processor these days, and remains focused on high-quality performance and responsiveness to customer needs.

"Lastly, improvement in asset quality deserves mention. Nonperforming assets declined by nearly $3 million this past quarter. With only $10 million of nonperforming assets on our books versus reserves of $6.4 million, we are comfortable that we have adequately mitigated the risk remaining within our portfolio."

RESULTS OF OPERATIONS

Consolidated Revenue

Consolidated core revenue from operations, consisting of net interest income on a fully tax-equivalent basis and recurring noninterest income, was $8.37 million for the second quarter of 2011, a decline of $1.47 million, or 14.9 percent, from the $9.84 million reported for the 2010 second quarter, and an improvement of $395,000 from the preceding quarter. The entire $1.47 million decline in quarterly core revenue year-over-year resulted from the loss of data service fees following RDSI's exit from data processing.

Net interest income on a tax-equivalent basis increased $364,000 from the first quarter of 2011, and $242,000 from the year-ago second quarter; second quarter 2010 recurring net interest income on a tax-equivalent basis of $5.13 million excludes $130,000 of accrued interest on a loan from RDSI to its previously planned merger partner. Both the loan and accrued interest were charged off in the 2010 second quarter after it was announced that the merger could not be completed.

The net interest margin on a fully tax equivalent basis was 3.83 percent for the second quarter of 2011 compared to 3.61 percent in the first quarter of 2011, and 3.71 percent in the second quarter of 2010, amounting to an increase of 22 and 12 basis points, respectively. Margin improvement was due primarily to a 42 basis points decrease in the average cost of funds year-over-year caused by downward re-pricing of certificates of deposit, an improved deposit mix and the deleveraging transaction.

Non-Interest Income

The following table provides a reconciliation of core and non-core items to non-interest income on a GAAP basis. Line items identified as (1) are reported in the financial statements of State Bank, while items identified as a (2) are part of RDSI.

Core noninterest income for the second quarter of 2011 was $3.0 million, unchanged from the linked quarter, but down by $1.7 million from the 2010 second quarter. Non-bank fee income from data service fees, trust fees, and mortgage banking activities accounted for $2.1 million of second quarter 2011 core noninterest income, or 71.6 percent. This compares with $2.17 million, or 73.3 percent, and $3.88 million, or 82.5 percent, for the linked and year-ago quarters, respectively.

Additionally, non-core noninterest income increased in the current quarter by $2.2 million, including a $1.9 million gain from the sale of securities which occurred as part of the balance sheet deleveraging completed in June, and a $0.52 million contract buyout fee paid to RDSI by a departing client.

Mortgage Banking

Net mortgage banking revenue for the second quarter of 2011 was $563,000, virtually unchanged from the linked quarter, but higher by $60,000 than the year-ago quarter.

Mortgage banking activity in Northwestern and Central Ohio, as well as Northeast Indiana, has returned to a more normalized state after the exceptionally strong activity experienced in 2010. Rurban's Banking Group continues to aggressively seek mortgage originations through its Northwest Ohio and Northeast Indiana regions, and its loan production office in Columbus. Originations for the June 2011 quarter increased by $10.0 million, or 36.0 percent, above the March 2011 quarter, but declined by $8.1 million or 17.5 percent, from the year-ago second quarter, when government incentives were still in place. State Bank sold $30.0 million of loans in the second quarter of 2011, unchanged from the linked quarter, but lower by $16.6 million, or 35.9 percent, than the 2010 second quarter. Gains on sale of mortgage loans were $0.57 million for the current quarter, or 1.88 percent of mortgage loans sold; this compares to gains of $0.43 million in the 2011 first quarter and $0.58 million for the year-ago quarter, with spreads of 1.42 percent and 1.24 percent, respectively. The spread reflects the mix of mortgage loans sold; State Bank retains servicing on conventional mortgages but sells its servicing on all other types of mortgages. 

Core loan servicing fees, net of amortization ("net administrative fees") were $125,000 for the current quarter compared to $141,000 for the linked quarter and higher by $23,000 than the year-ago second quarter. State Bank recorded valuation adjustments in both second quarters: $127,000 in 2011 and $175,000 in 2010. The servicing portfolio grew by $10.3 million, or 3.0 percent, from the 2011 first quarter, and by $107.6 million, or 44.0 percent, over the past twelve months, to $351.9 million at June 30, 2011.

Trust Services

Reliance Financial Services, Rurban's wealth management division, has been gradually expanding its presence within the State Bank footprint, assisted by referrals by back office, retail, and lending staff. The unit reported revenues of $694,000 for the second quarter of 2011, a decline of $78,000 or 10.1 percent from the linked quarter. For the first six months of 2011, revenues were $1.5 million, up 14.3 percent to the comparable 2010 period. Assets under management of $325.8 million are virtually unchanged from year-end 2010.

The mix of products provided by Reliance in recent years has trended toward a higher level of advisory and IRA benefits, and away from trust services. Reliance's contribution to Rurban's bottom line has resulted from improved operating efficiencies. Net income for the first six months of 2011 was $0.33 million compared to $0.22 million for the year-ago period.

Data Services

Revenue derived from Rurban's data services subsidiary, RDSI, was $1.3 million in the second quarter of 2011, up $0.4 million from the $0.9 million reported for the previous quarter, and a decline of $1.3 million from the year-ago quarter. On a stand-alone basis, excluding fees paid by Rurban/State Bank to RDSI for data and item processing of $0.34 million, $0.38 million, and $0.24 million, respectively, for the second and first quarters of 2011, and the second quarter of 2010, RDSI reported revenue of $1.6 million for the current quarter compared to $1.3 million for the previous quarter. Second quarter 2011 revenue includes a one-time $0.52 million contract buyout fee paid by a former client bank. Excluding the buyout fee, core revenue was $1.1 million, which was $0.17 million, or 13.1 percent, lower than the first quarter of 2011. Core earnings after tax were a net loss of $0.20 million, unchanged from the March 2011 quarter.

Loan Loss Provision

The loan loss provision was $0.9 million for the second quarter of 2011, an increase of $0.4 million from the first quarter of 2011 and a $5.6 million decline from the year-ago second quarter. The increased provision expense this quarter reflects a higher level of net loan charge-offs this quarter compared to the first quarter of 2011 as approximately $0.75 million in specific reserves were charged off during the quarter.

The allowance for loan losses was $6.4 million, or 1.47 percent, of total loans as of June 30, 2011 compared to $6.6 million, or 1.56 percent, of total loans, and $7.0 million, or 1.60 percent, of total loans as of March 31, 2011 and June 30, 2010, respectively.

Non-interest Expenses

Core noninterest expense was $7.3 million in the second quarter of 2011, an increase of $255,000 from the first quarter of 2011 and a decline of $2.9 million from the year-ago quarter. Downsizing of RDSI accounted for $2.7 million of the annual corporate-wide expense cuts; salaries and benefits declined by $1.3 million year-over-year from their 40 FTE reduction in staff. Also, occupancy and equipment expense declined by $1.7 million at RDSI.

Additionally, during the course of the past twelve months, RDSI took a $6.3 million charge for the impairment of goodwill and other intangibles, and wrote off or wrote down $4.8 million of hardware and software assets following the termination of its spinoff and merger plans and its exit from data processing. During the second quarter of 2011, State Bank completed its balance sheet deleveraging, incurring a one-time charge of $1.1 million from the pay down of $32 million of FHLB advances and repos. 

As a result of improving expense control, Rurban's efficiency ratio on a core basis improved from 101.5 percent for the June 2010 quarter to 85.0 percent for the current quarter.

BALANCE SHEET

Total assets as of June 30, 2011 were $618.1 million, down by $36.9 million, or 5.6 percent, from the linked quarter, and by $28.3 million, or 4.4 percent, from the year-earlier quarter. In a series of transactions completed during June of 2011, State Bank sold $43 million of investment securities with a weighted average yield of 3.97 percent. State Bank recognized a gain on sale totaling $1.9 million with the proceeds applied to the pay down of $32.0 million in borrowings with a weighted average rate of 4.64 percent. The prepayment penalty for the pay-down of $30 million in repos and $2 million in FHLB advances was $1.1 million. As a result of these and other activities during the course of the second quarter, cash and investment securities declined by $53.9 million, from $172.9 million at March 31, 2011 to $119.0 million at June 30, 2011.

The deleveraging reduced the Bank's balance sheet by $36.9 million of assets, or 5.6 percent. This reduction in asset size has had a positive impact on the majority of capital ratios as well as tangible equity to assets, which improved by 25 basis points. Since State Bank grew its loan portfolio at the same time it reduced asset size, the risk-adjusted capital ratios showed less improvement than did the Tier 1 leverage ratios, which increased by 31 and 46 basis points, respectively, at the bank and the consolidated holding company.

Total loans increased by $15.4 million from the first quarter of 2011, to $437.6 million. In effect, the portfolio grew back to where it had been at June 30, 2010: $437.3 million. The majority ($9.6 million) of State Bank's loan growth occurred within the real estate sector, primarily commercial real estate and construction.

Loan Portfolio

The largest loan category, commercial real estate ("CRE"), accounts for 37.2 percent of total loans, or $162.7 million, up $9.9 million, or 6.5 percent, from the prior year; $7.3 million was booked in the most recent quarter. Along with $19.5 million of construction and development loans, these commercial real estate categories together accounted for 41.6 percent of total loans at June 30, 2011, up from 37.9 percent for the prior year. State Bank's portfolio of 1-4 family residential real estate loans currently stands at $93.5 million, or 21.4 percent of total loans. This segment has declined by approximately $10 million since the year-ago quarter, as State Bank has ramped up its sales into the secondary market. Commercial and Industrial loans now stand at $70.7 million, a decline of $3.8 million year-over-year, but $3.1 million higher than the previous quarter.

Total deposits as of June 30, 2011 were $495.9 million, up $14.1 million, or 2.9 percent, from the prior year, but $17.1 million lower than March 31, 2011. Declines were distributed evenly among noninterest-bearing demand deposits, NOW accounts and Money market accounts. As a result of the balance sheet deleveraging, repos declined by $30 million, and now stand at $19.9 million.

Asset Quality

Rurban's asset quality has improved sharply over the previous quarter, with non-performing assets ("NPAs") down $2.9 million, or 22.4 percent, since March 31, 2011. Non-performing real estate related loans declined by $3.6 million, of which $1.0 million was residential real estate and $2.7 million was commercial real estate. However, approximately $1 million of the improvement in non-performing loans was the result of a transfer into OREO. Currently, State Bank has only three non-performing relationships that exceed $1.0 million, but they account for 53 percent of total non-performing assets. 

Non-Performing Assets by Category

Further evidence of Rurban's/State Bank's improving asset quality lies in the low level of delinquencies. The total 30-89 day past due loans stand at $1.4 million, of which only $0.2 million is in the 60-89-day category.

In addition to the continuing low level of delinquencies, several additional factors reflect Rurban's continuing improvement in asset quality. This quarter, new additions to nonperforming status, were only $289,000 compared to $1.1 million and $4.6 million in the two preceding quarters. The additions to non-performing status were more than offset by the $1.6 million decline from the combination of asset sales, principal payments and improved performance. The loan loss reserve of $6.4 million provides 80 percent coverage of problem loans compared to 56 percent coverage at June 30, 2010.

Capitalization

As of June 30, 2011, the capital ratios of Rurban's banking subsidiary, State Bank, were all in excess of the regulatory thresholds for a "well-capitalized" institution. The Bank's Tier I Leverage ratio was 7.54 percent of total assets, a substantial improvement from the 6.90 percent reported at year-end 2010. The Total Risk-Based Capital ratio was 11.89 percent of risk-weighted assets. At the holding company, ratios are also rebuilding after 2010 write downs at RDSI; the Total Risk-Based Capital ratio should reach 11.58 percent (estimated), while Tier 1 risk-based and leverage ratios are estimated at 8.89 and 6.29 percent, respectively.

About Rurban Financial Corp.

Based in Defiance, Ohio, Rurban Financial Corp. is a financial services holding company with two wholly-owned subsidiaries: The State Bank and Trust Company (State Bank) and RDSI Banking Systems (RDSI). State Bank operates through 18 banking centers in seven Ohio counties, one center in Indiana; and a loan production office in Franklin County, Ohio. The Bank offers a full-range of financial services for consumers and small businesses, including trust services, mortgage banking, commercial and agricultural lending. RDSI provides data and item processing services to community banks located primarily in the Midwest. Rurban's common stock is listed on the NASDAQ Global Market under the symbol RBNF.

Forward-Looking Statements

Certain statements within this document, which are not statements of historical fact, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties and actual results may differ materially from those predicted by the forward-looking statements. These risks and uncertainties include, but are not limited to, risks and uncertainties inherent in the national and regional banking, insurance and mortgage industries, competitive factors specific to markets in which Rurban and its subsidiaries operate, future interest rate levels, legislative and regulatory actions, capital market conditions, general economic conditions, geopolitical events, the loss of key personnel and other factors.

Forward-looking statements speak only as of the date on which they are made, and Rurban undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made except as required by law. All subsequent written and oral forward-looking statements attributable to Rurban or any person acting on our behalf are qualified by these cautionary statements.

Non-GAAP Financial Measures

In addition to results presented in accordance with GAAP, this release contains certain non-GAAP financial measures. Management believes that providing certain non-GAAP financial measures provides investors with information useful in understanding Rurban's financial performance, its performance trends and financial position. Specifically, Rurban provides measures based on "core operating earnings," which excludes merger, integration and restructuring expenses that are not reflective of on-going operations or not expected to recur. These non-GAAP measures should not be considered a substitute for GAAP basis measures and results.