Rurban Financial Corp. — Q2 2011 Form 10-Q
Entity note: The supplied filing is for Rurban Financial Corp., not SB Financial Group, Inc. It covers the quarter and six months ended June 30, 2011; interim financial statements are unaudited.
Business context
Rurban is an Ohio bank holding company. Its main businesses are commercial banking through State Bank and data and item processing through Rurbanc Data Services, Inc. (RDSI).
Financial results and key metrics
| Metric | Q2 2011 | First half 2011 | Comparable 2010 |
|---|---|---|---|
| Total revenue | $10.31 million | $18.01 million | Q2: approximately $9.77 million; H1: approximately $21.46 million |
| Net interest income | $5.21 million | $10.05 million | Q2: $5.06 million; H1: $9.96 million |
| Provision for loan losses | $0.90 million | $1.40 million | Q2: $6.50 million; H1: $7.89 million |
| Noninterest income | $5.10 million | $7.96 million | Q2: $4.53 million; H1: $11.28 million |
| Noninterest expense | $8.40 million | $15.46 million | Q2: $15.91 million; H1: $27.67 million |
| Net income (loss) | $0.78 million | $0.79 million | Q2: $(8.21) million; H1: $(9.05) million |
| Diluted EPS | $0.16 | $0.16 | Q2: $(1.69); H1: $(1.86) |
- H1 tax-equivalent net interest margin was 3.69%, up four basis points year over year. The filing does not give a clear Q2 margin value.
- At June 30, total assets were $618.1 million, down 5.6% from March 31; loans were $437.6 million and deposits were $495.9 million. Equity was $46.0 million.
- Cash and cash equivalents were $10.5 million. H1 operating cash flow was $6.0 million, investing cash flow was $16.1 million, and financing cash flow was $(42.1) million.
- Debt included $24.6 million of FHLB advances, $19.9 million of repurchase agreements, $2.0 million of federal funds purchased, $3.1 million of notes payable, and $20.6 million of trust preferred securities. Wholesale borrowings were reported at $46.5 million.
- Liquid assets were $122.5 million, versus $172.3 million at year-end 2010. Management reported $8.4 million of additional FHLB borrowing capacity and $26.5 million in unpledged securities; it said existing liquidity was sufficient for needs.
- State Bank’s total risk-based capital ratio was 11.9%; the consolidated ratio was 10.8%. The company reported that it and State Bank were categorized as well capitalized.
Material changes versus prior periods
- H1 revenue declined 15.1% year over year, primarily reflecting a $4.4 million reduction in data service fees. Excluding investment gains and recoveries, noninterest income from operations fell $4.7 million.
- Lower credit-loss provisions and expenses, including the absence of the prior-year Single Source software impairment, supported the return to profitability. Prior-year H1 results included $4.9 million of software impairment; prior-year Q2 also included substantial software and equipment write-downs.
- Net interest income increased modestly in H1, while average earning assets declined by $4.5 million; management cited margin improvement as a partial offset.
- Nonperforming loans were $8.1 million and nonperforming assets were $10.1 million at June 30. NPAs were 1.64% of assets, down from 2.17% a year earlier. The allowance was $6.4 million, or 1.47% of loans; coverage of nonperforming loans was 79.9%.
- Loans increased from year-end 2010, while deposits declined. Management reported 228 employees at June 30, a 42-person reduction from the prior year.
Outlook, commentary, risks and unusual items
- No specific earnings or financial guidance is provided. Management cautioned that interim results are not necessarily indicative of full-year results.
- In June, the company sold approximately $43 million of securities, recognizing a $1.9 million gain, and used proceeds toward $32 million of borrowings carrying a weighted average rate of 4.64%. The securities sold had a weighted average yield of 3.97%. The transactions reduced assets and improved tangible equity to assets by 25 basis points, but included $1.1 million of prepayment penalties.
- RDSI and Rurban entered into a Federal Reserve Consent Order in March 2011. It requires actions to strengthen RDSI’s oversight, capital, working capital management and strategic plan. RDSI cannot pay dividends to Rurban, and Rurban cannot invest in or lend to RDSI, without Federal Reserve approval. RDSI’s Q2 profit included income related to a customer contract buyout.
- A Consent Order-related covenant violation arose under the First Tennessee Bank credit agreement. Although financial-ratio covenants were met, the $1.7 million facility matured June 30 and was extended to October 31, 2011; the lender could demand repayment. Management said it would seek alternative financing if necessary.
- The company had deferred interest payments on both series of trust preferred securities through September 2011. The indentures prohibit common dividends and share repurchases during deferral.
- RDSI’s customer base is substantially lower than a year earlier, and the company warned that further client attrition or difficulty replacing clients could cause additional segment losses. Other stated risks include interest-rate changes, competition, regulation and compliance costs.
- RDSI sued New Core Holdings, seeking more than $3.26 million plus other relief. The company said it could not predict the outcome or damages.
- Management considered unrealized securities losses temporary and reported no other-than-temporary impairment. It also noted that termination of certain former executives’ life insurance policies contributed to current-year tax expense.
Important facts for investors to verify
- Confirm the registrant identity: this filing is for Rurban Financial Corp., despite the request naming SB Financial Group, Inc.
- Track the October 31, 2011 First Tennessee maturity, covenant waiver or resolution, and availability of replacement financing.
- Review compliance with the RDSI Consent Order, RDSI customer retention and profitability, and any restrictions on intercompany funding or dividends.
- Assess credit quality, especially nonperforming assets, troubled debt restructurings, charge-offs and allowance adequacy.
- Separate recurring operating performance from the $1.9 million securities gain, $1.1 million prepayment cost, RDSI contract buyout and prior-year impairment charges.
- Monitor deposit trends, liquidity, deferred trust preferred interest and the outcome of the New Core litigation.