Moving beyond its troubled past, Rurban Financial Corp. in Defiance, Ohio, has set an ambitious goal: doubling its assets within two years in one of the nation's most economically challenged states.
The $571 million-asset parent of State Bank and Trust is coming off what Kenneth Joyce, Rurban's president and chief executive, called a "breakthrough quarter," and now it wants to beef up by acquiring smaller banks in its northwest Ohio market.
Rurban has spent much of the last six years cleaning up credit problems that nearly led to its collapse, but that "chapter is kind of kind of closing," Mr. Joyce said in an interview last week. "We are anything but a sleepy community bank. We have morphed into a pretty aggressive organization."
Buying makes more sense than building branches, because organic growth potential in northwest Ohio is limited, he said. It wants to acquire at least one bank a year, including this year, to reach its goal, and it is eyeing banks with $75 million to $200 million of assets that might be looking to become part of a larger company.
Rurban is not looking so much for loans as it is for deposits, which it intends to use in part to fund loans in faster-growing markets of Columbus and Fort Wayne, Ind., where it recently opened offices, Mr. Joyce said.
Its first-quarter earnings rose 58% from a year earlier, to $1.11 million, but that is not why Rurban is calling the quarter a breakthrough one.
A workout subsidiary created in 2002 to clean up $40 million of bad loans spread out over 100 borrowers is down to its last three credits worth $2 million, according to Mr. Joyce, who was brought in from Rurban's data processing subsidiary that year to lead the company's turnaround.
"Those legacy credits" — his term for loans that came from poor underwriting and poor documentation — "are basically behind us."
In addition to isolating troubled loans in a single subsidiary, Rurban wrote off $35 million, or 5% of its $700 million assets at that time. It sold RFC Banking Co. for $300 million and used the money to recapitalize. It was under an enforcement order from state and federal regulators to clean up its portfolio and improve risk management. The order was lifted in February 2005.
"You don't get rid of problem credits overnight," Mr. Joyce said. "Most banks wouldn't have survived that."
While the subsidiary was working out the problems, the parent company was eyeing ways to improve its performance and change its culture, particularly in terms of asset quality, he said.
In 2006 it hired Mark Klein, a senior vice president of private banking at Sky Financial Inc. of Bowling Green, as the president and CEO of State Bank and Trust. Under Mr. Klein's direction, the traditionally commercial bank has taken on more of a consumer focus, with major increases in retail checking accounts and home mortgages.
According to Mr. Joyce, Rurban gained a net total of about 800 retail accounts last year, and it doubled its mortgage business from a year earlier. The mortgage business is expected to grow again this year, but not as sharply, he said.
The core bank is not yet performing as well as other banks in Ohio, but it is improving. In a report last month on Ohio banking companies, KBW Inc.'s Keefe, Bruyette & Woods Inc. said Rurban had a return on average assets of 0.65%, compared with the state's median return of 0.81%. Its ROA was 0.61% last year.
"We are not good yet," Mr. Joyce said. "But we are going the right way."
One thing offsetting the relatively slow growth of its core bank is the growth of its Rurbanc Data Services Inc., which handles data processing for 117 banks across the country.
Last year its revenue climbed 27% from a year earlier, to $20.6 million, and the unit accounted for roughly 40% of the parent company's net income.
Rurban also has been moving into other faster-growing markets. It recently converted a loan production office it opened in Fort Wayne, 45 miles from Defiance, into a branch. It has similar plans for a loan office in Columbus, and it plans to open a second branch in Fort Wayne.
But its primary growth strategy is to acquire banks close to home.
Its first deal under Mr. Joyce was in 2005, when it acquired the $82 million-asset Exchange Bancshares Inc. in Luckey, Ohio, for $12 million. The acquisition brought Rurban into the Toledo area and signaled a transition from troubled pick-up candidate to shopper.
Mr. Joyce said it has identified 12 to 15 banks that fit its acquisition criteria.
Bert Ely, an independent banking consultant in Alexandria, Va., said Rurban is smart to focus on markets it knows best.
"They should try to build market share in their current markets," Mr. Ely said. "All too often companies get too spread out and too scattered."
Rurban has nearly a quarter of the deposits in Defiance and Paulding counties, according to the Federal Deposit Insurance Corp. In its other Ohio communities, its market share ranges from 0.21% to 7.19%.
With its experience in cleaning up messes, some see Rurban as being in a better position to pick a bank struggling with credit quality issues at a bargain.
Given the current environment for mergers and acquisitions, that is likely its best shot at a deal this year, according to Michael Lipman, an analyst at First Horizon National Corp.'s FTN Midwest Securities Corp.
"There are not many options in the next year unless it is buying something distressed," said Mr. Lipman, who does not cover Rurban but is familiar with the northwest Ohio market.
Mr. Joyce said Rurban would prefer "to pay a reasonable price for an institution with reasonable performance," but he is not ruling out picking up a company that is struggling with credit issues.
"We can go either way with the right price," he said. "We've been there, done that. We can do it, but it is not where we want to go."
