Rurban Financial Corp. Announces Third Quarter 2010 Results

DEFIANCE, Ohio, Nov. 15, 2010 (GLOBE NEWSWIRE) -- Rurban Financial Corp. (Nasdaq:RBNF) ("Rurban" or the "Company"), a diversified financial services company providing full-service community banking, wealth management, and data/item processing services, today reported financial results for the third quarter and nine months ended September 30, 2010.

Net income for the third quarter of 2010 was $26,000, or $0.01 per diluted share, a decrease of $134,000, or 83.8 percent, from $160,000, or $0.03 per diluted share, for the third quarter of 2009. Net loss for the first nine months of 2010 was $9.03 million, or $(1.86) per diluted share, compared to net income of $2.27 million, or $0.46 per diluted share, for the comparable 2009 year-to-date period.

Included in the nine-month 2010 and 2009 periods were certain nonrecurring charges relating to the previously proposed spinoff of Rurban's data and item processing subsidiary, RDSI Banking Systems, Inc. ("RDSI"), and its subsequent merger with New Core Holdings, Inc. ("New Core"), which was announced in the second quarter of 2009, and the decision to terminate these transactions, which was announced in the second quarter of 2010. Impairments and write-offs of software, hardware and development costs related to these transactions were $10.0 million in year-to-date 2010 ($6.5 million after-tax), and $0.45 million in year-to-date 2009 ($0.30 million after tax).  Excluding these nonrecurring RDSI charges from GAAP results, the Company had an adjusted net loss from operations of $2.41 million for the 2010 year-to-date period compared to adjusted net income of $1.97 million for the comparable 2009 period.

The following table provides segment information for Rurban on a quarterly basis and identifies the nonrecurring charges reported by RDSI for each quarter. Rurban believes excluding those one-time charges provides useful information relating to Rurban's operating (core) performance.

Highlights of the third quarter include:

• Asset quality improved from year-end 2009 to September 20, 2010, as non-accruing loans declined significantly, down $8.4 million, or 45 percent, to $10.1 million, while foreclosed and repossessed assets remained under $2 million. Non-performing assets ("NPAs") were 1.77 percent of total assets at September 30, 2010 compared to 3.02 percent at year-end 2009. 
• Mortgage originations, driven by strong results from the Columbus loan production office of Rurban's banking subsidiary, The State Bank and Trust Company ("State Bank"), were $67.8 million for the third quarter of 2010, generating $0.94 million in gains from mortgage loan sales. This compares to $42.3 million in originations and $0.40 million in gains for the year-ago third quarter.
• RDSI made progress reducing its operating expenses to a level commensurate with its current revenue stream, resulting in a virtually breakeven quarter. Data Processing ("DP") clients are scheduled to complete their de-conversion by year-end, with State Bank remaining as RDSI's only DP client. Payment Solutions (a/k/a Item Processing) clients not tied to DP services remain in place and have generally not been affected by the deconversion of RDSI's DP clients.
• Deposits grew $41 million since the June quarter, of which only $14 million were time deposits. The influx of deposits, despite their relatively low cost, combined with declining loan volume, contributed to a net interest margin decline from 3.87 percent and 3.72 percent for the year-ago and linked quarters, to 3.66 percent for the September 2010 quarter. 
• Non-interest expenses declined $2.1 million compared to the year-ago quarter, primarily from a reduction of 64 full-time equivalent ("FTE") employees, or 20 percent, since third quarter 2009, as well as from the $0.45 million third quarter 2009 charge and subsequent charges taken by RDSI to account for impairments and write-downs of hardware and software. Year-over-year, third quarter equipment expense declined $1.2 million, or 57 percent, while salaries declined $1.36 million, or 25 percent. 
• Capital ratios all remain in excess of "well-capitalized" for State Bank, although holding company ratios have declined somewhat as a result of the second quarter RDSI charge-offs.

Mark A. Klein, President and Chief Executive Officer of Rurban, commented, "We are pleased with the progress we are making in a number of areas. While we still have issues to address, most importantly, the future direction of RDSI, we have reason to be optimistic about future opportunities.

"Our markets continue their gradual improvement. Jobless levels have declined modestly over the course of the past year, buoyed by the recent turnaround in manufacturing employment and relatively robust economy in the Columbus area, which has been the source of strong mortgage origination activity. Mortgage banking fees are becoming a more important source of fee income for State Bank. Although mortgage banking income, net of impairments and amortization, has not grown overall this year compared to 2009 nine-month results, the composition of our mortgage banking fee income has become increasingly cash-based.

"A second reason for optimism is our core deposit growth, which has been exceptionally strong. Non-maturity deposits (DDAs, Money Market, NOW and Savings accounts) have grown nearly nine percent since last quarter alone. State Bank has been able to capture deposit market share in several of our regions from larger institutions, despite their heavier advertising expenditures. The excess liquidity will be put to good use, helping us to pay down higher priced borrowings as they mature.  

"We continue to be pleased with the performance of our loan portfolio. We only wish we had more of the high-quality loans we've booked over the past several years. But weak loan demand appears to be an industry-wide phenomenon, exacerbated by our low-growth market demographics. And this past quarter, we pruned our portfolio of some of our weaker commercial loans. However, market stability has worked in our favor to prevent the over-expansion of commercial and residential real estate activity that caused credit quality problems throughout the country.  

"Results for the third quarter continue to be impacted by the RDSI/New Core wind-down, but we believe the overall process is ahead of schedule. Rurban and RDSI continue to evaluate opportunities, but until a definitive agreement or decision is reached, we expect that State Bank will be the sole data processing client of RDSI at year-end. Our Payment Solutions segment under Diverse Computer Marketers ("DCM"), RDSI's payment processing affiliate continues to service its item processing clients without interruption or loss of clientele. As a low-cost provider of item processing services, we believe that DCM stands to benefit as industries other than banking convert to electronic imaging.

"As you can tell, we remain firmly committed to propelling Rurban to a higher level of performance for our shareholders. We have initiatives in place throughout our organization to encourage cross-referrals and behaviors which result in higher profitability and quality customer service. While there is still much work to be done, I am proud of the progress we have made thus far."

Consolidated Operations

For the third quarter of 2010, total revenue, consisting of net interest income and non-interest income, declined 19.4% to $10.0 million from $12.4 million in the third quarter of 2009. For the first nine months of 2010, total revenue decreased 17.5 percent to $31.5 million from $38.1 million for the prior-year nine months.

Net interest Income

Rurban reported consolidated net interest income of $4.88 million for the 2010 third quarter, a decline of $0.46 million, or 8.6 percent, from the $5.34 million earned in the year-ago quarter. Included in consolidated net interest income in the third quarter of both years is approximately $0.45 million of interest expense associated with $20.6 million of trust preferred securities at the holding company level, and $6.2 million of borrowings at the non-bank subsidiary. Average earning assets decreased 2.5 percent year-over-year, from $569.1 million for the third quarter of 2009 to $554.7 million for the third quarter of 2010, while the consolidated net interest margin declined 21 basis points, or 5.0 percent, to 3.66 percent (fully-taxable equivalent), from 3.87 percent for the year-ago quarter. Excluding the $0.45 million of non-bank interest expense, State Bank earned net interest income of $5.36 million and $5.80 million in the third quarters of 2010 and 2009, respectively, giving rise to net interest margins at the bank level of 3.65 percent and 3.98 percent for the 2010 and 2009 third quarters, respectively. The decline in the net interest margin was primarily the result of loan yields declining faster than funding costs.

For the first nine months of 2010, Rurban earned net interest income of $14.8 million, a decline of $0.87 million, or 5.5 percent, from the $15.7 million of net interest income earned in the 2009 nine-month period. Excluding $1.11 million of interest expense paid primarily on $20 million of trust preferred securities at the corporate level and $ 6.0 million of borrowings at the non-bank subsidiary level, State Bank reported net interest income of $16.3 million, a decline of 4.0 percent.

Loan Loss Provision

The third quarter provision for loan losses was $0.90 million, compared to $6.5 million and $0.90 million for the linked and year-ago quarters. Second quarter 2010 included a $3.0 million loan loss provision recorded by RDSI and a concurrent charge-off of a $3.0 million loan made by RDSI to support development activities at New Core. State Bank charged-off $1.45 million in the 2010 third quarter, or 1.32 percent of average loans on an annualized basis. This compares to net charge-offs of 0.57 percent and 0.73 percent of average loans annualized for the linked and year-ago quarters. Year-to-date, Rurban added a total of $8.79 million to the allowance for loan losses, while charging-off $9.37 million, including the $3.0 million RDSI loan. At the Bank, the year-to-date addition to the loan loss provision was $5.79 million and net charge-offs were $6.37 million. As of September 30, 2010, the allowance for loan losses stood at $6.45 million, or 1.47 percent of total loans, compared to 1.55 percent of total loans for the linked quarter, and 1.29 percent for the year-ago third quarter.

Non-interest Income

Consolidated non-interest income generated in the third quarter of 2010 was $5.13 million, a 27.5 percent decline from the $7.08 million of non-interest income generated in the 2009 third quarter. The decline was due largely to the wind-down of RDSI's data processing activities, which also impacted multi-product RDSI clients. Data service fees dropped $2.76 million from the year-ago quarter, or 57 percent, to $2.04 million for the current quarter.

Excluding data service fees from consolidated results, the remainder of non-interest income was generated by State Bank. Third quarter non-interest income from banking activities was $3.08 million compared to $2.27 million for the year-ago quarter, an improvement of $0.81 million, or 36 percent.

Mortgage banking activity accounted for the majority of banking fee income improvement. Mortgage originations reached near-record levels this past quarter at $67.8 million, generating gains on sale of $0.94 million for the 2010 third quarter, more than double the $0.40 million of fees earned in the 2009 third quarter. A 49 percent, or $62,000, improvement in loan servicing fees over the prior-year third quarter more than offset the 8.0 percent, or $56,000, decline in customer service fees experienced from the drop-off in overdraft charges. Loss on the sale of other assets was $129,000 for the third quarter of 2010 compared to $53,000 for the year-ago quarter.

State Bank currently sells all loans originated into the secondary market, and retains the servicing fee. Over the past year, its servicing portfolio grew 48 percent, to $275.3 million, all from internally generated sales activity. However, declining interest rates impacted the valuation of the Bank's mortgage servicing rights; year-to-date, the Bank recognized $0.23 million of OMSR amortization expense and $0.58 million of OMSR impairment expense compared to $25,000 and $0.28 million, respectively, for the 2009 nine-month period.

For the third quarter of 2010, data service fees generated by RDSI were $2.04 million; in addition, Rurban/State Bank paid $281,000 for data and item processing services rendered by RDSI in the third quarter of 2010. This relationship has been structured as an arm's length transaction, at the same markup that prevails for RDSI's external clients. For the year-ago third quarter, RDSI reported data services revenue of $4.81 million, excluding sales to State Bank/Rurban.

The terminated merger of RDSI and New Core contributed directly to the decline in total data services revenue, which consists of fee income from data and item processing services. Following the April 2009 announcement of Rurban's plan to spin-off RDSI and merge with New Core Holdings, many of RDSI's data processing clients elected to terminate their contract with RDSI. Over the past twelve months, RDSI's data processing client base has shrunk from 75 customers to 19 at September 30, 2010. It is anticipated that the remaining data processing clients will de-convert before year-end 2010, and only State Bank will remain as a client utilizing the legacy ITI core processing system. Since many of the data processing clients were multiple users of RDSI services, revenue from network services and payment solutions have also been impacted, but to a lesser extent; RDSI's DCM division provides item processing services to a separate and stable customer base without ties to data processing.  Over the past twelve months, item processing clients have decreased from 91 to 49 at September 30, 2010; virtually all were data processing as well as item processing clients. Rurban plans to continue item processing and network services as stand-alone RDSI offerings.    

Non-interest Expense

Noninterest expense was $9.33 million for the 2010 third quarter, a decline of $2.12 million, or 18.5 percent, from the third quarter of 2009. Excluding nonrecurring items from the third quarter results, including $0.59 million of OMSR impairment and amortization charges in 2010 and a one-time software impairment charge of $0.45 million in the third quarter of 2009, adjusted non-interest expense declined $2.27 million, or 20.6 percent, from the 2009 third quarter. Improvement was experienced in nearly every category, led by significant savings in salaries and employee benefits, down $1.36 million, or 25 percent, and equipment expense, down $1.17 million or 57 percent; these improvements were partially offset by $0.35 million of additional foreclosure and OREO expenses compared to the 2009 third quarter. The Company reduced FTE employees by 64 year-over-year -- 51 of which are from RDSI, with 257 FTE employees remaining as of September 30, 2010. Equipment expense also benefited from write-downs and accelerated depreciation of RDSI hardware and software recorded in prior quarters.

For the year-to-date 2010, non-interest expense was $37.2 million, up $4.17 million compared to the 2009 nine month period. Non-interest expense for the 2010 nine-month period included $6.66 million of nonrecurring charges associated with the RDSI/New Core wind-down, as well as $0.81 million of non-cash OMSR expenses; for the 2009 nine-month period, non-cash charges include $0.40 million of one-time RDSI expenses and $0.28 million of OMSR expenses. Excluding these non-cash charges, non-interest expense from operations was $29.7 million, an improvement of $2.7 million, or 8.3 percent, compared to adjusted operating non-interest expense of $32.4 million recorded in the 2009 year-to-date period.   

Consolidated Balance Sheet

Total assets at September 30, 2010 were $681.2 million, up $8.14 million, or 1.2 percent, over year-end 2009 levels; assets were higher by $32.7 million, or 5.0 percent, compared to the previous quarter. Rurban's asset growth was derived primarily from higher levels of liquid assets, which was partially offset by reduced loan balances and over $10.0 million of write-offs of RDSI equipment, software and investments in the second quarter of 2010. Cash and due from banks more than doubled since 2009 year-end, up $35.8 million to $60.6 million, while available-for-sale securities increased by $10.9 million during the same nine-month period, or 10.4 percent, to $116.0 million at September 30, 2010.

Total loans, net of unearned income, were $437.5 million as of September 30, 2010 compared to $448.9 million and $469.9 million at June 30, 2010 and December 31, 2009, respectively. Compared to year-end 2009, every loan category experienced declines with the exception of construction and development loans ("C&D"). These C&D loans remain modest in comparison with total loans outstanding -- $15.3 million at September 30, 2010 (3.5 percent of total loans), up $3.7 million over the past nine months. Reductions among commercial and industrial ("C&I") loans and 1-4 family residential mortgages represented approximately 75 percent of the $31 million loan decline year-to-date. C&I loans decreased $10.8 million from December 31, 2009, to $69.9 million at September 30, 2010 as the combined result of a planned pruning of lower quality loans and a sluggish economy. Despite mortgage loan originations of $144 million year-to-date, 1-4 family residential mortgages declined $13 million from December 31, 2009 to $108.8 million at September 30, 2010. A higher level of loan sales, combined with portfolio runoff due to widespread refinancing activity, accounted for the 10.7 percent balance sheet decline in residential loans outstanding since December 31, 2009.

Total deposits as of September 30, 2010 were $522.3 million, up $40.5 million and $31.1 million, from the second quarter of 2010 and the fourth quarter of 2009, respectively. Since June 30, 2010, State Bank added $26.1 million in core deposits, namely non-maturity accounts (DDA, NOW, Savings and Money Market accounts), all of which bear a lower funding cost than time deposits. Core deposits, excluding retail time deposits, were $297.8 million at September 30, 2010, which accounted for 57.0 percent of total deposits. This compares to $271.7 million for the quarter ended June 20, 2010, where core deposits accounted for 56.4 percent of total deposits.  

Asset Quality

Rurban's asset quality has improved substantially since year-end 2009, with non-performing assets, consisting of non-accruing loans, foreclosed real estate ("OREO") and other assets owned ("OAO"), down $8.3 million, or 40.7 percent, to $12.1 million as of September 30, 2010. The reduction has been gradual, at the rate of approximately $2.0 million per quarter, with investor-owned commercial real estate showing the greatest improvement. Non-accruing loans in virtually every loan category have declined since December 31, 2009. Foreclosed real estate, consisting primarily of residential real estate has remained steady at less than $2 million over the past five quarters.

At 2.33 percent of total loans at September 30, 2010, Rurban's level of non-accruing and 90 day past due loans compares favorably to its loan loss reserve of $6.45 million, or 1.47 percent of loans. This also compares favorably to year-end 2009 non-accruals of 3.95 percent of loans and a loan loss reserve of 1.50 percent at September 30, 2010. The loan loss reserve provided 64 percent coverage of problem loans compared to 38 percent coverage at year-end. Delinquent loans in the 30-89 day category have averaged below $3 million throughout 2010. 

Capital

As of September 30, 2010, 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 7.06 percent of total assets, while its Tier I and Total Risk-Based Capital ratios were 10.34 percent and 11.59 percent of risk-weighted assets, respectively. Holding company ratios are rebuilding after second quarter charge-offs from RDSI, with Tier 1 Leverage and Total Risk-Based Capital ratios at 10.37 percent and 11.63 percent, respectively. Rurban's common shares outstanding as of September 30, 2010 were 4,861,779.  

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 banking center in Indiana, and a loan production office in Columbus, Ohio. State 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, as more fully discussed in the "Risk Factors" section of the Company's Annual Report on Form 10-K for the year ended December 31, 2009, as the same have been updated, and may be updated from time to time in the Company's subsequent filings with the Securities and Exchange Commission.

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. Rurban believes that providing these non-GAAP financial measures provides investors with information that is useful in understanding Rurban's financial performance, 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.