Rurban Financial Corp. Reports 2012 Fourth Quarter and Full-Year Results

• Full year earnings per share of $0.99, nearly triple the results of 2011
• Loan growth of 4.7% year over year
• Nonperforming assets declined to 1.40% of total assets
• Tangible leverage of 5.70% -- approaching near-term goal of 6%
• Fourth quarter ROA at 95 basis points

DEFIANCE, Ohio, Jan. 23, 2013 (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 fourth quarter and twelve months ended December 31, 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 2012 fiscal year, net income was $4.81 million, or $0.99 per diluted share, compared to $1.66 million, or $0.34 per diluted share, for the 2011 fiscal year. Excluding a 2012 net gain of $0.20 million after-tax ($0.30 million pretax) from non-recurring items, primarily from the settlement of RDSI matters, including litigation and contract buyouts, 2012 core earnings were $4.62 million, or $0.95 per diluted share. This compares to 2011 core earnings of $1.46 million, or $0.30 per common share, excluding a net gain of $0.21 million ($0.32 million pretax), primarily from balance sheet restructuring, RDSI contract buyouts and RDSI write-downs.

For the quarter ended December 31, 2012, Rurban reported net income of $1.52 million, or $0.31 per diluted share, compared to net income of $0.27 million, or $0.06 per diluted share, for the fourth quarter 2011. Excluding a one-time net gain of $0.10 million ($0.15 million pretax) for the 2012 fourth quarter and a net charge of $0.65 million ($0.99 million pretax) for the 2011 fourth quarter, operating earnings were $1.42 million for the quarter ended December 31, 2012 compared to $0.93 million for the fourth quarter 2011, up 53.4 percent. For the 2012 third quarter, net income was $1.3 million on a GAAP basis, and $1.27 million from operations; earnings from operations for the 2012 fourth quarter were 13.6 percent ahead of the linked quarter.

Mark Klein, president and chief executive officer of Rurban Financial Corp., stated, "I continue to be pleased with our progress toward higher performance. Our primary focus this past year has been to improve profitability. With our strong fourth quarter, we have moved closer to our near-term goal of one percent ROA and top-quartile performance. Over the last twelve month period, we have significantly improved our risk profile, reducing nonperforming assets to under $9 million, while strengthening reserves and tangible capital. Although growth is not our primary consideration, it is gratifying to have expanded our loan portfolio by nearly five percent, especially since loan growth in the community banking sector has been difficult for many banks to achieve. In this context, Rurban has distinguished itself not only with strong loan growth, but also strong asset quality and an attractive fee-generating capability, another rarity among community banks. These three qualities – loan growth, asset quality and revenue diversity – position us to manage our bottom line more successfully than many banks our size. We see no impediments on the near horizon to interfere with our controlled pace of performance enhancement."

RESULTS OF OPERATIONS

Consolidated Revenue

Total revenue, consisting of net interest income on a fully tax equivalent basis ("FTE") and noninterest income, was $35.9 million for 2012, up $0.8 million, or 2.4 percent, from the prior-year twelve-month period. For the fourth quarter of 2012, total revenue was $9.9 million, up $1.1 million, or 12.4 percent, from the year-ago quarter.

Net interest income (FTE) for 2012 was $21.1 million, virtually unchanged from the $21.3 million reported for 2011. The 0.76 percent decline in net interest income resulted from a five basis point, or 1.3 percent, decline in the net interest margin (FTE), to an average of 3.76 percent for the twelve months of 2012, partially offset by a $2.8 million, or 0.5 percent, increase in average earning assets. Net interest income (FTE) for the 2012 fourth quarter was $5.25 million, a decline of $0.13 million, or 2.5 percent, from the fourth quarter 2011. Average earning assets grew $8.6 million year over year: however, average loan growth was $17.7 million. The $9.1 million difference was funded from the securities portfolio. Mr. Klein continued, "Our funding costs continue to decline, albeit more modestly in recent quarters. We have preserved our margins to the extent possible in this challenging interest-rate environment by shifting our earning asset mix in favor of higher-yielding loans."

Noninterest Income

Noninterest income was $14.8 million for the year ended December 31, 2012, an increase of $1.0 million, or 7.1 percent, from the $13.9 million reported for 2011. Non-core gains for 2012 totaled $0.48 million, all related to RDSI matters, including contract buyouts and a vendor settlement, while for 2011, non-core gains totaled $2.4 million, including RDSI contract buyouts and $1.87 million of securities gains. Excluding these one-time items, noninterest income from operations grew 25.3 percent, from $11.5 million in 2011 to $14.4 million for 2012. Fourth quarter 2012 noninterest income, less the $0.33 million vendor settlement, grew 26 percent to $4.3 million.

Despite the loss of RDSI data processing fee income, Rurban continues to report an exceptional level of noninterest income. Fees contributed 45 percent of operating revenue for the 2012 fourth quarter, and 41 percent for the full year. Higher gains on loan sales and a lower impairment of mortgage servicing rights (MSR) in both the fourth quarter and the full year contributed to the growth of 2012 noninterest income.

RDSI gross revenue was $4.1 million for 2012, a decline of $0.96 million, or 19 percent, from the $5.0 million reported for 2011. Included in revenue for both years were certain one-time items arising from RDSI's transition to become an exclusive provider of item processing and network services; for 2012, contract buyouts and a vendor settlement boosted gross revenue by $0.94 million while in 2011, the gain from a contract buyout contributed $0.52 million. Excluding these one-time items, gross revenue from operations was $3.2 million compared to $4.5 million for 2011, a decline of 30.4 percent year over year. Intercompany sales to State Bank accounted for $1.6 million in 2012, including a one-time contract buyout fee of $0.46 million paid by State Bank to RDSI in the first quarter of 2012; for 2011, intercompany sales were $1.4 million. Excluding intercompany sales and one-time items, core net data services fees to third parties were $2.0 million in 2012 and $3.1 million in 2011, a decline of $1.1 million or 34.5 percent.

During the fourth quarter of 2012, RDSI settled all pending litigation with New Core Holdings relating to earlier agreements and transactions, incurring one-time legal expenses of $115,000. In addition, RDSI recognized a $0.33 million gain from the settlement of a vendor agreement. According to Mr. Klein, "RDSI has nearly completed its transformation to a more focused organization committed to network services and item processing for the banking sector. At the same time, we continue to explore opportunities to leverage our technology toward applications that might expand our core expertise into new and profitable directions."

Mortgage banking continued its banner year, with fourth quarter loan originations reaching a new high: $93.6 million, up $8.5 million, or 10 percent, from the $85.1 million generated in the fourth quarter of 2011, and higher by $2.9 million than the third quarter. For the twelve month period, originations were $332.5 million, up 51 percent above 2011, with loan sales into the secondary market also at record levels: $315.3 million, up $118 million, or 60 percent above 2011 levels.

Net mortgage banking income, consisting primarily of gains on the sale of mortgage loans and to a lesser extent, net loan servicing fees, was $6.4 million for the 2012 fiscal year. Loan sales strengthened with each successive quarter throughout the year, and generated a higher spread every quarter as well. The gain on sale of mortgages averaged 1.36 percent for 2012 compared to a spread of 1.08 percent for 2011, generating $6.3 million of 2012 gains – 74 percent ahead of 2011.  

Net mortgage servicing fees were $0.12 million in 2012 compared to a loss of $0.97 million for 2011. The net mortgage servicing valuation adjustment ended 2012  in positive territory, with a gain of $0.31 million for the twelve month period; this compares to the $1.1 million charge incurred for 2011. The mortgage servicing portfolio at the end of the fourth quarter of 2012 was $528 million, up $126 million, or 31.3 percent, from 2011 fourth quarter-end.

"Like many banks in this environment," explained Mr. Klein, "we have looked to mortgage banking to drive revenue growth. We have succeeded on all fronts this past year. With two-thirds of our total production coming from clients new to our bank, we have opportunities to leverage this entry-level, yet highly visible, mortgage servicing product into multifaceted, profitable relationships."

Mortgage banking revenues accounted for 43 percent of noninterest income during the twelve months of 2012 compared to 19 percent in 2011 where impairment valuations reduced the contribution of mortgage banking. Excluding mortgage banking and data services fees, the remainder of noninterest income in both years was derived primarily from wealth management and customer service fees; each of these two business lines has contributed a remarkably stable stream of fee income modestly in excess of $2.5 million every year. In addition, Rurban sold several SBA and FSA guaranteed loans which generated revenue of $264,000 in 2012 and $208,000 in 2011.

Loan Loss Provision

The loan loss provision was $1.35 million for 2012, a decline of $0.64 million, or 32 percent, from the previous year. The decreasing provision expense reflects a 20 percent decline in nonperforming loans over the past twelve months, and a $1.1 million lower level of charge-offs. The loan loss reserve at year-end 2012 was 1.47 percent of total loans, providing 104 percent coverage of nonperforming loans at December 31, 2012; this compares to reserve coverage of 79 percent at year-end 2011. For the fourth quarter of 2012, the $0.40 million provision more than replaced net charge-offs of $0.29 million. 

Noninterest Expense

Noninterest expense for 2012 was $27.5 million compared to $30.3 million for the previous year. In 2012, nonrecurring charges totaled $0.18 million, including $0.12 million for the settlement of all pending New Core litigation and $0.65 million for a branch writedown, all of which occurred in the 2012 fourth quarter; for 2011, nonrecurring charges totaled $2.1 million, including $1.1 million of prepayment penalties incurred during the Bank's balance sheet restructuring, and $1.0 million of RDSI write-downs and write-offs. Excluding these one-time items, 2012 operating expenses declined by 3.1 percent year over year. 

Savings were achieved across the board, with the exception of salaries and benefits expense, which grew $0.34 million, or 2.4 percent. Increased compensation expense reflects the higher level of mortgage banking activity, since mortgage bankers receive commissions based on volume of originations. Excluding mortgage banking commission of $2.1 million in 2012 and $0.9 million in 2011, the remaining consolidated total compensation expense declined by $1.0 million, or 6.3 percent year over year. Mr. Klein added, "We are making steady progress with our cost-savings initiatives, but much of our progress is masked by our growing and highly profitable non-bank activities, where expense growth, especially compensation expense, has been more closely tied to revenue growth." Reflecting this improvement, the core efficiency ratio declined to 73.8 percent, from 77.6 percent for the preceding year.

For the fourth quarter of 2012, noninterest expense was $7.2 million compared to $8.0 million for the 2011 fourth quarter. Excluding nonrecurring items totaling $0.18 million in 2012 and $1.0 million in 2011, noninterest expense from operations was virtually unchanged at $7.0 million for both fourth quarters.

BALANCE SHEET

Total assets as of December 31, 2012 were $638.2 million, an increase of $9.6 million, or 1.5 percent, above levels at December 31, 2011. Over the same twelve-month time frame, total deposits grew $8.2 million, or 1.6 percent, and loans grew $20.8 million, or 4.7 percent. 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 63 percent of total deposits compared to 57 percent for the prior year-end. The continuing decline in interest rates, combined with a lower-cost deposit mix, has contributed to a 25 basis point decline in the cost of fourth quarter deposits compared to the year-earlier fourth quarter; however, the improvement has narrowed by only three basis points from the linked quarter, suggesting that further progress may be more difficult.

Declining interest rates also contributed to the 37 basis point decline in earning asset yield over the past year. Management's decision to fund higher-yielding loans from the securities portfolio has moderated the decline in earning asset yield, which currently stands at 4.56 percent as of the fourth quarter of 2012. Unlike deposit costs, however, asset yields have continued to decline, with fourth quarter lower by 22 basis points compared to the linked quarter.

Total loans were $463.4 million at December 31, 2012 compared to $442.6 million for the prior-year period, up $20.8 million, or 4.7 percent. Commercial real estate ("CRE") loans accounted for nearly 65 percent of total loan growth over the past twelve-month period, up $13.6 million, or 7.2 percent. CRE loans currently comprise 43.5 percent of State Bank's loan portfolio, followed by residential real estate and C&I loans, at 19.0 percent and 17.6 percent, respectively. Although CRE loans showed the largest dollar increase, agriculture loans grew by a robust 10.2 percent, adding nearly $4 million this past year.

ASSET QUALITY

Rurban's strong underwriting and credit administration expertise continue to position the asset quality in the top quartile of its peers, with only 1.42 percent of its loan portfolio on nonperforming status. Nonaccruing loans were $5.3 million as of December 31, 2012, a decline of $1.6 million, or 23 percent from the year-earlier level. The greatest improvement was reflected in the C&I portfolio, where nonaccrual loans declined over the past twelve months by $1.1 million, or 48 percent; they now stand at $1.2 million as of December 31, 2012. Currently, Rurban has only one nonperforming relationship that exceeds $1.0 million; the three largest nonperforming loans total $3.0 million, accounting for 33 percent of nonperforming assets.

Rurban's strong underwriting and credit administration expertise position the quality of its loan portfolio in the top quartile of its asset peers, with only 1.42 percent of loans on nonperforming status. Nonaccruing loans were $5.3 million as of December 31, 2012, a decline of $1.6 million, or 23 percent from the year-earlier level. The greatest improvement was reflected in the C&I portfolio, where nonaccrual loans declined over the past twelve months by $1.1 million, or 48 percent; they now stand at $1.2 million as of December 31, 2012. Currently, Rurban has only one nonperforming relationship that exceeds $1.0 million; the three largest nonperforming loans total $3.0 million, accounting for 33 percent of nonperforming assets.

Nonperforming assets now stand at $8.9 million, or 1.40 percent of assets. They declined by $1.1 million over the past twelve months, or approximately $0.28 million per quarter, through a combination of asset sales, charge-offs, principal payments, and credit improvements. The loan loss provision has exceeded net charge-offs each quarter.

CAPITALIZATION

Capital ratios continue to improve, but still remain at the low end of management's objectives. The tangible leverage ratio improved by 85 basis points over the past twelve months, and now stands at 5.70 percent. All bank regulatory ratios remain in excess of "well-capitalized" levels, and have improved relative to the prior year; holding company ratios have also demonstrated consistent quarterly improvement since mid-year 2011. At December 31, 2012, State Bank's Total Risk-Based Capital was estimated to be $57.1 million, $19.6 million above the well-capitalized level; with the Total Risk-based Capital Ratio estimated at 12.0 percent. As of December 31, 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. Additional factors that could cause results to differ materially from those described above can be found in Rurban's 2011 Annual Report on Form 10-K and documents subsequently filed by Rurban 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 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.