Rurban Financial Corp. Reports 2012 Third Quarter Results

DEFIANCE, Ohio, Oct. 23, 2012 (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 third quarter and nine months ended September 30, 2012.

Consolidated earnings for Rurban Financial Corp. 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"). For the quarter ended September 30, 2012, Rurban reported net income of $1.3 million, or $0.27 per diluted share, compared to net income of $0.60 million, or $0.12 per diluted share, for the quarter ended September 30, 2011, and net income of $1.0 million, or $0.21 per diluted share, for the quarter ended June 30, 2012.

For the first nine months of 2012, net income was $3.3 million, or $0.68 per common share, compared to $1.4 million, or $0.29 per common share, for the prior-year nine month period. Excluding non-recurring items totaling $0.86 million after tax ($1.3 million pretax) from the first nine months of 2011, mainly from a balance sheet restructuring and a contract buyout penalty paid to RDSI, core earnings for the first nine months of 2011 were $0.53 million, or $0.11 per share.

Key items for the 2012 third quarter include:

• Profitability improvement continues. The return on average assets rose to 82 bps this quarter, raising the YTD return to 69 bps.
• Mortgage originations and gains on sale both reached a record level this past quarter.
• Quarterly noninterest expense continues to trend downward albeit at a modest pace. Profitability improvement in 2012 has been derived primarily from fee income.
• Portfolio loans increased by $16 million over the past twelve months, up 3.7 percent, led by commercial real estate. Recent growth consisted primarily of HELOCs and agricultural loans.
• Nonperforming assets declined by $1.2 million, or 11 percent compared to September 30, 2011; they now stand at $9.4 million, or 1.49 percent of total assets. Reserve coverage of nonperforming loans at quarter-end was 96 percent.
• Tangible leverage improved by 32 basis points from the prior quarter, to 5.53 percent; all bank regulatory ratios are in excess of "well-capitalized" levels.

"Our increasingly strong performance reflects the growing synergies within our organization," stated Mark Klein, president and chief executive officer of Rurban Financial Corp. "Our strategy to build revenue is based on harnessing the energy and expertise of our bankers to build exceptional client relationships. State Bank is unique for a bank its size, with high level regional decision-makers located in the field alongside their bankers whom they quarterback on a day-to-day basis. Proximity to both clients and staff ensures that all aspects of the relationship are addressed and working smoothly. This includes impeccable service as well as the identification and fulfillment of client product needs.

"As a result of these growing synergies, we continue to attract new relationships as well as deepen existing ones. Our clients provide us with numerous opportunities to book high quality loans that are well-structured and appropriately priced. Despite the competitive loan environment, we have not compromised our strong underwriting standards. Our deposit market share is growing in nearly every region, and the mix continues to improve, all of which contributed to a 19 percent decline in our funding costs compared to last year. Every department of the Bank is positioned to refer opportunities to other areas of the Bank; 74 percent of all employees generated a referral last year that resulted in an additional piece of business. Similarly, we are seeing the impact with our mortgage lenders who just completed a record quarter of originations, and with our credit administration staff, where 2012 losses have declined to 23 basis points of average loans.

"Finally, we are also seeing it in our growing cash flow, which has enabled us to repay one quarter earlier than we had anticipated the interest on our trust preferred securities, which we had deferred since September 2010. Beginning next year, we should see a benefit to earnings from these reduced interest costs.

"Although revenue at RDSI has been declining due to market constraints, we have been successful in expanding several relationships and reducing costs to maintain a profit year to date.

"Overall," concluded Mr. Klein, "we are pleased with our continuing progress to become a higher-performing bank, and have every reason to expect that the strategies we have in place will continue to build momentum."

RESULTS OF OPERATIONS

Consolidated Revenue

Total revenue, consisting of net interest income on a fully tax equivalent basis ("FTE") and noninterest income, was $8.9 million for the third quarter of 2012, up $0.97 million, or 12.2 percent, from the third quarter of 2011, and higher by $0.37 million, or 4.3 percent, from the linked quarter.

Net interest income (FTE) for the 2012 third quarter was $5.52 million, 0.7 percent ahead of third quarter 2011. Average earning assets grew 2.4 percent; however, volume gains were partially offset by a seven basis point decline year over year in the net interest margin (FTE) to 3.91 percent. Relative to the 2012 second quarter, net interest income (FTE) grew 3.2 percent (12.7 percent annualized) as a result of substantial loan growth (up 1.7 percent for the quarter, or 6.8 percent annualized); this change in asset mix contributed to a ten basis point improvement in the net interest margin despite modestly declining yields.

Noninterest Income

Noninterest income was $3.4 million for the third quarter of 2012, an increase of $0.93 million from the $2.5 million reported for the year-ago third quarter and $0.2 million higher than the second quarter of 2012. Higher gains on loan sales, which for the third quarter included non-mortgage SBA and FSA loan sales, more than offset the decline in RDSI fee income.

Gross revenue generated by RDSI, including services provided to Rurban/State Bank, was $0.72 million for the third quarter of 2012. Excluding Rurban/State Bank intercompany transactions from the quarter, net data services fees were $0.49 million for the current quarter compared to $0.74 million for the year-ago third quarter, a decline of $0.26 million.

Mortgage banking continued its banner year, with third quarter loan originations reaching a new high: $90.7 million, up $21.7 million, or 31 percent, from the $69.0 million generated in the third quarter of 2011, and higher by $10.8 million than the previous quarter. Sales into the secondary market kept pace, with third quarter sales of $81.9 million, up $25.4 million, or 45 percent, above the $56.4 million sold in the year ago-quarter.

Net mortgage banking income, consisting of gains on the sale of mortgage loans and net loan servicing fees, was $1.38 million for the third quarter of 2012 compared to $1.23 million for the linked quarter and $0.31 million for the year-ago third quarter. Year-to-date, the net mortgage servicing valuation adjustment was $0.11 million; the last two quarter's negative valuation adjustments have virtually offset the large gain of the first quarter. The mortgage servicing portfolio at the end of the third quarter of 2012 was $488.9 million, up $118.9 million, or 32.1 percent, from 2011 third quarter-end.

Mortgage banking revenues accounted for 40.5 percent of noninterest income in the third quarter of 2012 compared to 12.3 percent in the year-earlier third quarter where impairment valuations reduced the contribution of mortgage banking. Excluding mortgage banking and data services fees, the $1.5 million remainder of noninterest income in the third quarter of 2012 was derived primarily from wealth management and customer service fees; each of these two business lines have contributed a remarkably stable stream of fee income modestly in excess of $0.6 million every quarter. In addition, during the third quarter, Rurban sold several SBA and FSA guaranteed loans which generated $170,000 of revenue. These gains offset $151,000 of losses on residential real estate properties sold at auction during the quarter.

Rurban's revenue stream has benefited from the magnitude and diversity of its fee income. The Company remains highly diversified for its asset size; core noninterest income contributed 37.8 percent of third quarter 2012 core revenue; this compares to 31.1 percent for the year-ago third quarter.

Loan Loss Provision

The loan loss provision was $300,000 for the third quarter of 2012, unchanged from the third quarter of 2011, but higher by $100,000 from the linked quarter. The provision expense declined by $744,000, or 44 percent, year to date, reflecting a 19 percent decline in nonperforming loans, as well as a 64 percent decline in net charge-offs. As of September 30, 2012, the loan loss reserve was 1.47 percent of total loans, relatively unchanged throughout the past twelve months as a percentage of loans. At current levels, the loan loss reserve provides 96 percent coverage of nonperforming loans compared to reserve coverage of 72 percent at third quarter-end 2011.

Noninterest Expense

For the third quarter of 2012, noninterest expense was $6.73 million compared to $6.87 million and $6.82 million for the linked and year-ago quarters, respectively. Rurban has taken steps to make its salary structure more responsive to revenue growth through the implementation of incentive and commission-based compensation. Excluding $0.55 million and $0.27 million of commissions paid primarily to State Bank's mortgage bankers in the third quarters of 2012 and 2011, respectively, salary expense declined 8.0 percent, consistent with a decline of 16 full-time equivalent staff, or 7.4 percent, over the past twelve-month period. Reflecting this improvement in third quarter 2012 operating revenue and expense, the core efficiency ratio declined to 73.0 percent, from 83.1 percent for the year-ago quarter.

Balance Sheet

Total assets as of September 30, 2012 were $630.2 million, an increase of $6.4 million, or 1.0 percent, from September 30, 2011. Over the same twelve-month time frame, total deposits grew $0.9 million and loans grew $16.1 million. This higher level of loans outstanding relative to assets has provided support to Rurban's net interest margin as has the shift in deposit mix further toward lower-cost non-maturity deposits, which now comprise 61 percent of total deposits compared to 57 percent for the year-ago quarter. Improvements in the deposit mix, combined with the continuing decline in interest rates, reduced the cost of interest-bearing liabilities a further 21 basis points, or 17.7 percent, during the course of the past twelve months, to 98 basis points. The same factors, a change in the mix and declining rates, contributed to the 29 basis point, or 5.7 percent, decline in earning asset yields.

Total loans were $455.0 million at September 30, 2012 compared to $438.9 million for the prior-year period, up $16.1 million, or 3.7 percent. Commercial real estate ("CRE") loans accounted for 76 percent of total loan growth over the past twelve-month period, up $12.3 million, or 6.6 percent. CRE loans currently comprise 43.6 percent of State Bank's loan portfolio, followed by residential real estate and C&I loans, at 18.8 percent and 16.7 percent, respectively. Although CRE loans showed the largest dollar increase at $12.3 million, agriculture loans showed the highest growth rate year over year, at 11.4 percent.

Asset Quality

Nonaccruing loans were $5.2 million as of September 30, 2012, a decline of $2.1 million, or 28 percent from the year-earlier level. The greatest improvement was reflected in the CRE portfolio, where nonaccrual loans declined over the past twelve months by $1.8 million, or 80 percent, to $0.45 million as of September 30, 2012. Currently, Rurban has only two nonperforming relationships that exceed $1.0 million; together, they account for $2.3 million, or 25 percent, of nonperforming assets.

Rurban moved one large loan in excess of $500,000 to nonperforming status this past quarter. Apart from this one major addition, problem assets continue to reduce at an expeditious rate.

Capitalization

Capital ratios continue to improve, but still remain at the low end of management's objectives. Tangible leverage increased 90 basis points over the past twelve months, and now stands at 5.53 percent. All bank regulatory ratios remain in excess of "well-capitalized" levels, and have improved relative to the prior year and linked quarter; holding company ratios have shown consistent quarterly improvement since mid-year 2011. At September 30, 2012, State Bank's Total Risk-Based Capital was $58.0 million, $20.7 million above the well-capitalized level; the Total Risk-based Capital Ratio was 12.4 percent. As of September 30, 2012, Rurban had 4,861,779 common shares outstanding.

About Rurban Financial Corp.

Based in Defiance, Ohio, Rurban Financial Corp. is a financial services holding company with two wholly-owned operating subsidiaries: The State Bank and Trust Company (State Bank) and RDSI Banking Systems (RDSI). State Bank operates through 18 banking centers in seven Northwestern Ohio counties, and one center in Fort Wayne, Indiana; and three loan production offices: two in Columbus, Ohio and one in Angola, Indiana. The Bank offers a full range of financial services for consumers and small businesses, including wealth management, mortgage banking, commercial and agricultural lending. RDSI provides item processing services to community banks located 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 its 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.