Rurban Financial Corp. Reports 2011 Full Year and Fourth Quarter Results

DEFIANCE, Ohio, Feb. 1, 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 fourth quarter and fiscal year ended December 31, 2011.

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 year ended December 31, 2011, Rurban reported net income of $2.1 million, or $0.42 per diluted share, compared to a net loss of $15.6 million, or $(3.21) per diluted share for the year ended December 31, 2010. Net income for the fourth quarter of 2011 was $675,000, or $0.14 per diluted share, compared to $602,000, or $0.12 per diluted share, for the third quarter of 2011, and a loss of $6.6 million, or $(1.35) per diluted share, for the 2010 fourth quarter.

Earnings from operations exclude one-time or non-core items, primarily related to the June 2010 termination of the proposed spinoff and merger of RDSI with New Core Holdings. These non-core or one-time items include the following:

Excluding a net one-time gain of $250,000 after tax in 2011 and a net charge of $11.2 million after tax in 2010, Rurban reported earnings from operations of $1.82 million in 2011, or $0.37 per diluted share, compared to a 2010 net loss from operations of $4.46 million, or $(0.92) per diluted share. For the fourth quarters of 2011 and 2010, excluding after-tax non-core charges of $423,000 and $4.67 million, respectively, earnings from operations were $1.1 million, or $0.23 per diluted share, compared to a loss of $1.9 million, or $(1.35) per diluted share, for the 2010 fourth quarter. Net income for the third quarter of 2011 was $602,000, or $0.12 per diluted share, with virtually no one-time items. (A detailed reconciliation of GAAP to core earnings can be found in the financial tables.)

Key items for the 2011 fourth quarter and full year include:

• Net income improvement of $17.7 million year over year; earnings from operations ("core earnings") improvement of $6.3 million; and pre-tax, pre-provision core earnings improvement of $2.4 million compared to full-year 2010.
   
• Net interest income on a fully tax equivalent (FTE) basis benefited from lower funding costs and a boost from a deleveraging transaction completed in June 2011. For 2011, the net interest margin (FTE) was 3.81 percent, up 14 basis points from 2010.
   
• Core noninterest income declined by $8.7 million year over year, impacted in 2011 by the volatility of the mortgage market and the loss of RDSI data processing fee income. Wealth management and customer service fees have provided ongoing stability to fee income, totaling $5.1 million in 2011, substantially unchanged from 2010.
   
• 2011 mortgage loan originations were only modestly below the record 2010 level. However, lower loan sales and spreads, in addition to higher OMSR valuation adjustments and amortization, lowered net mortgage banking revenue by 44 percent year over year: $2.7 million in 2011 versus $4.7 million in 2010.
   
• Excluding one-time charges, corporate-wide expenses declined $10.2 million year over year both as a result of the downsizing of RDSI and from efficiencies implemented at State Bank. Full-time equivalent employees declined by 32, or 13 percent, since December 31, 2010.
   
• Asset quality has improved year over year, but suffered a modest setback compared to third quarter 2011. Nonperforming assets declined 25 percent, to $11.1 million, or 1.77 percent of total assets over the past twelve months. Costs associated with credit administration and OREO declined by $0.75 million. Including provisions and one-time items, the total savings from credit improvements at State Bank were nearly $7 million in 2011.
   
• The Bank remains well-capitalized. On a consolidated level, Rurban's tangible leverage improved by 76 basis points over the course of the year. At 4.93 percent, it remains a focus of management attention.
   
• Loan growth of $14.7 million in 2011, or 3.5 percent, reflects a solid performance in a slowly recovering economy and a competitive banking environment.

Mark Klein, President and Chief Executive Officer of Rurban Financial Corp., stated, "Our profit potential is emerging more clearly as we resolve several of the ancillary issues that have impacted our performance and competed for our attention. Net income has remained in positive territory throughout the year, while operating earnings have been accelerating. Much has come together for us in the fourth quarter of 2011. Mortgage banking originations approached the record levels we reported for 2010, and RDSI revenue has substantially stabilized. We have a stronger, cleaner balance sheet, and we are seeing the results of our year-long focus on efficiency improvements. In the last quarter alone, our efficiency ratio improved by more than eight percentage points, to 74.7 percent. 

"We made important progress during 2011 resolving the issues at RDSI, our data services operation. Over the past twelve months, we reduced noninterest expenses by nearly $15 million to align with revenues now derived almost exclusively from item processing. With the distractions of downsizing behind us, and a leaner more focused team, we are better positioned to capitalize on opportunities related specifically to item processing, where RDSI has a strong competency and a distinct market advantage.

"There are still operating improvements to be achieved throughout our organization, but the urgency is diminished following our major 2011 cost-saving initiatives, including approximately $2 million of savings at State Bank. Revenue growth has become increasingly important as we identify opportunities that exist within our customer base, and devise strategies to enhance cross-sell and profit per household.

"We have been quite successful this past year with our new jumbo residential loan product that we introduced to our highly qualified private banking clients. We retained over $20 million of these and other variable-rate mortgages in our portfolio, which has more than offset the anticipated roll-off of residential mortgages during 2011. We continue to sell the remainder of our loan production into the secondary markets, which amounted to $198 million in 2011. Still, we are somewhat disappointed that the superb achievements of our mortgage lenders have been masked by the volatility of the marketplace. While our mortgage banking activities generated nearly $2.7 million of net revenue in 2011, our full profit potential was compromised by the declining interest rate environment and the refinancing frenzy. We are hopeful that mortgage rates have finally bottomed out, and a more stable environment going forward will allow mortgage banking revenues to more closely reflect our strong activity levels. There are additional benefits to our mortgage banking initiative as we've added a sizeable number of new households to our customer base, providing us with an opportunity to introduce the full platform of State Bank services.

"Over the past twelve months, our ongoing focus on asset quality has reduced nonperforming assets by more than 25 percent. Costs associated with the administration and resolution of these problem assets have continued to decline, providing a substantial boost to 2011 earnings.

"The totality of these successful initiatives has had a favorable impact on our bank regulatory capital ratios, where the cushion above "well-capitalized" levels continues to grow. On a consolidated basis, the impact on leverage of the recent charge-offs is diminishing, with tangible equity benefiting disproportionately following the write off of RDSI goodwill, which, with the fourth quarter charge of $380,000, is now entirely off our balance sheet. There is still room for improvement on all fronts -- as there always is and will be -- but the message for 2012 is definitely more positive than we have felt for the past eighteen months."

RESULTS OF OPERATIONS

Consolidated Revenue

Total revenue, consisting of net interest income (FTE) and noninterest income, was $35.1 million in 2011, down $6.3 million, or 15.2 percent, from the prior-year twelve month period. For the fourth quarter of 2011, total revenue was $8.8 million, a decline of $1.5 million, or 14.6 percent, from the $10.3 million reported for the 2010 fourth quarter. The lower level of revenue for the year and the fourth quarter versus comparable 2010 periods relates primarily to the loss of RDSI's data processing business.

Net interest income (FTE) for 2011 was $21.3 million, up $0.54 million, or 2.6 percent, compared to 2010. The net interest margin (FTE) was 3.81 percent for 2011 compared to 3.67 percent for the 2010 twelve-month period; the 14 basis point, or 3.8 percent, improvement resulted from a 46 basis point decrease in the cost of interest-bearing liabilities, partially offset by a 34 basis point decline in the yield on earning assets. Year over year, average earning assets declined $6.5 million, or 1.2 percent.

Although Rurban's funding mix has been improving on a quarterly basis, the deleveraging transaction completed in June of 2011 enabled Rurban to further reduce its higher-cost borrowings. In a series of transactions, State Bank sold $43 million of investment securities with a weighted average yield of 3.97 percent, recognizing a $1.9 million gain on sale. Proceeds were applied to pay down $32.0 million of borrowings ($30 million of repos and $2 million of FHLB advances) with a weighted average rate of 4.64 percent. The prepayment penalty for the pay down was $1.1 million. Thus, in addition to margin improvement, the net one-time gain from the deleveraging was $0.79 million.

Net interest income (FTE) for the fourth quarter of 2011 was $5.4 million, up $79,000, or 1.5 percent, from the fourth quarter of 2010. This growth was derived from an 11 basis point, or 2.9 percent, improvement in the net interest margin (FTE), to 3.87 percent, partially offset by a $7.6 million, or 1.35 percent, decline in average earning assets. For the fourth quarter of 2011, average earning assets comprised 87 percent of average assets compared to 82 percent for the prior-year fourth quarter. Compared to the third quarter, net interest income (FTE) declined 2.0 percent from the impact of an eleven basis point, or 2.8 percent, decline in the net interest margin (FTE) partially offset by a 0.8 percent growth in average earning assets.

Noninterest Income

Noninterest income was $13.9 million for the year ended December 31, 2011, a decline of $7.0 million, or 33.4 percent, from the $20.8 million reported for 2010. Excluding non-core items totaling 2.1 million and $0.33 million in 2011 and 2010, respectively, 2010 noninterest income from operations was $11.8 million, a decline of $8.7 million from the prior year. The following table provides a reconciliation of core and non-core items to noninterest income on a GAAP basis:

Among major non-core items, the $1.87 million gain on the sale of securities that originated as part of the deleveraging strategy accounted for the majority of 2011 non-core items; it was partially offset by a prepayment penalty of $1.08 million, resulting in a net gain of $0.79 million. 

With respect to operating income, the loss of RDSI's data processing fee income accounted for a $6.6 million decline in recurring fee income compared to 2010. The remaining $2.1 million decline reflects a lower level of mortgage banking revenue, both from a lower gain on mortgage sales and a more volatile mortgage banking environment that impacted servicing fee revenue. For the fourth quarter of 2011, core noninterest income was $3.47 million. Compared to the year-ago fourth quarter, core noninterest income declined $1.6 million or 31.3 percent.

Despite the loss of data processing fees, Rurban remains highly diversified for a bank of its asset size. Core noninterest income contributed 39.2 percent of 2011 core revenue; this compares to a 48.8 percent contribution for 2010.

Gross revenue generated by RDSI, including services provided to Rurban/State Bank was $1.04 million for the fourth quarter of 2011, virtually unchanged from the previous quarter, but lower by $0.42 million compared to the year-ago fourth quarter where data processing clients were still deconverting. Net data services fees, excluding Rurban/State Bank intercompany transactions, were $0.67 million in the fourth quarter of 2011, down $0.38 million from the year-ago quarter.

Rurban continues to aggressively seek mortgage originations throughout its Northwest Ohio and Northeast Indiana community franchise, as well as through its loan production office in Columbus, Ohio. For the twelve months of 2011, mortgage loan originations were $220.2 million, down $19 million, or 7.9 percent, from 2010's record level of $239.2 million. The fourth quarter in both years contributed to strong full-year performance, with $85.1 million of residential mortgage loans originated in the 2011 fourth quarter compared to $90.3 million in 2010, a decline of $5.2 million, or 5.8 percent. However, Rurban retained in portfolio over 10 percent of mortgage loan originations in 2011, or $22.4 million, primarily jumbo loans to highly-qualified private banking clients, while in 2010, Rurban retained $13 million, or 5.4 percent of originations; as a result, mortgages sold declined $28.7 million, or 12.7 percent. Reflecting a change in the mix of mortgage loans sold, spreads on both the servicing retained and the loans sold were lower in 2011 compared to 2010. Rurban retains servicing on conventional mortgages but sells its servicing on all other types of mortgages. These two factors – a 12.7 percent decline in loans sold and an eight percent decline in spread income – lowered the gain on mortgage loans sold by 19.4 percent to $3.6 million for 2011 compared to $4.5 million in 2010.

The loan servicing portfolio at year-end 2011 was $402.1 million, up $73.6 million, or 22.4 percent, from year-end 2010. As a result of volatile market conditions, however, with declining interest rates and a high level of refinancing activity, the capitalized value of servicing rights declined 11.6 percent during the course of the year, to $2.8 million. Loan servicing fees, which average 25 basis points of the average servicing portfolio, were $0.89 million, up 47.2 percent from the $0.61 million reported in 2010. However, higher amortizations and valuation adjustments reduced the cash value of servicing fees to a negative $0.97 million in 2011 compared to income of $0.21 million in 2010, a negative swing of $1.18 million. Still, Rurban posted net mortgage banking revenue, consisting of gains on mortgage loan sales plus net servicing fees, of $2.65 million for 2011. Compared to 2010, mortgage banking revenue declined $2.1 million, or 43.6 percent, from the $4.7 million reported in 2010.

Loan Loss Provision

The loan loss provision was $2.0 million for 2011, a decline of $8.6 million from 2010. Excluding the $3 million provision related to an RDSI loan charged off in 2010, the provision declined $5.6 million, or 73.7 percent. The decreased provision expense reflects a 35 percent decline in nonaccruing loans over the past twelve months, and lower net charge-offs. The loan loss reserve at year-end 2011 was 1.48 percent of total loans, providing 82 percent coverage of nonaccruing loans at December 31, 2011; this compares to reserve coverage of 55 percent at year-end 2010. Nonaccruing loans declined by $4.3 million year over year, while net charge-offs, excluding the RDSI loan, declined by $5.4 million. For the fourth quarter of 2011, the $0.3 million provision compares to net charge-offs of like amount. For the fourth quarter of 2010, the provision was $1.8 million compared to net charge-offs of $1.5 million.

Noninterest Expense

Noninterest expense for 2011 was $29.6 million, a decline of $22.7 million, or 43.3 percent, from the $52.3 million reported for the 2010 period. Non-core expenses reported during the twelve months of 2011 were substantially reduced from 2010 levels: $1.7 million in 2011 compared to $14.1 million for the 2010 twelve-month period. Excluding these one-time or non-core items, noninterest expense from operations was $28.0 million in 2011, a decline of $10.2 million, or 26.8 percent. The following table provides a reconciliation of core and non-core items to noninterest expense on a GAAP basis.

In addition to the $1.08 million prepayment penalty arising from the deleveraging transaction in June 2011, 2011 non-core charges were limited to $0.60 million of goodwill and OREO impairments recorded in the fourth quarter of 2011. This compares to $14.1 million of 2010 charges, of which RDSI accounted for $13.1 million.

Approximately half of the $10.2 million of 2011 operational savings reflect the continued downsizing of RDSI in response to the loss of its data processing business. Of the 32 FTE total staff reductions in 2011, 17 were from RDSI. More recent cost savings have been the result of efficiencies at the bank level; savings were derived in several areas, including employee and professional expenses, as well as from lower credit administration and OREO expense, which declined by $0.76 million over the past year. For the fourth quarter of 2011, noninterest expense from operations was $6.8 million, a decline of $2.1 million, or 23.7 percent, from the fourth quarter of 2010, and virtually unchanged from the third quarter of 2011. As a small community bank, State Bank is benefiting from FDIC premium reductions as a result of the Dodd-Frank legislation; the fourth quarter 2011 premium was $0.19 million, down $0.27 million from the year-ago quarter.

Balance Sheet

Total assets as of December 31, 2011 were $629.1 million, a decline of $31.2 million, or 5.0 percent, from year-end 2010. The deleveraging transactions completed during June of 2011 contributed to a $37 million decline in second quarter assets to $618.1 million, from $655 million at the March quarter-end. The investment securities portfolio declined $26.3 million, ending the June quarter at $108.5 million, while surplus cash declined by $27.6 million, to $10.5 million at June 30, 2011. Approximately $15 million of surplus cash was used to fund loan growth in the second quarter. Since June 30, 2011, Rurban's assets increased by $11.0 million. 

Total loans held for investment (HFI) were $442.6 million at December 31, 2011, compared to $427.5 million at the prior year-end, up $15.0 million, or 3.4 percent. Real estate loans accounted for the majority of growth, namely, commercial real estate ("CRE"), up $8.2 million, or 4.2 percent, and residential mortgages, up $4.3 million, or 3.2 percent. Commercial & Industrial ("C&I") loans increased by $2.9 million, or 3.3 percent.  

The Bank's loan portfolio is well-diversified. Approximately $201 million, or 45.5 percent, consists of commercial real estate loans, primarily owner-occupied CRE (16.0 percent of total loans) and investor-owned CRE (20.6 percent of total loans). Its portfolio of 1-4 family residential real estate loans (1^st & 2^nd) currently stands at $139 million, or 31.5 percent of total loans. This segment grew by approximately $4.3 million since December 31, 2010 primarily as a result of State Bank's successful initiative to cross-sell its jumbo mortgage product to its private banking clients.

Total deposits as of December 31, 2011 were $518.8 million, higher by $3.1 million than at year-end 2010. As a result of the balance sheet deleveraging, combined with lower cash reserves, State Bank was able to reduce higher cost repos and FHLB advances by $37.0 million since the prior-year fourth quarter; they now stand at $31.6 million.

Asset Quality

The quality of Rurban's loan portfolio has remained strong throughout the current credit cycle. Rurban continues to improve on its performance, reporting nonaccruing assets of $10.0 million for the current quarter, which were lower by $4.0 million, or 29.1 percent, than the prior year-end. Accruing restructured loans totaled $1.3 million, substantially unchanged from December 31, 2010. However, recent 30-89 day delinquencies increased by $1.2 million above the third quarter 2011 level, primarily from delinquent residential real estate loans; they now stand at $2.0 million compared to $1.6 million at year-end 2010.

Progress with the resolution of CRE loans more than offset the recent setback with respect to residential and C&I nonaccruals, accounting for the majority of the year over year improvement in the nonaccrual portfolio. By year-end 2011, only 0.7 percent of CRE loans were on nonaccrual status compared to 2.81 percent at the prior year-end, an improvement of $4.0 million, or 72 percent. Currently, State Bank has only four nonperforming relationships that exceed $1.0 million; together, they account for $5.4 million, or 55 percent, of nonaccruing assets.

Capitalization

As of December 31, 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 8.01 percent of total assets, a substantial improvement from the 6.90 percent reported at year-end 2010. The Total Risk-Based Capital ratio was 12.01 percent of risk-weighted assets, with the Tier 1 Risk-Based Capital ratio at 10.76 percent.

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, one center in Fort Wayne, Indiana; and loan production offices in Columbus, Ohio and Angola, Indiana. 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 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.