SB Financial Group Inc (SBFG) 2006 Q3 法說會逐字稿

Good afternoon and welcome ladies and gentlemen to the Rurban Financial Corporation third-quarter earnings webcast. At this time, I would like to inform you that this conference call is being recorded and that all participants are in a listen-only mode. We will open the conference up for questions and answers after the presentation. I will now turn the conference over to Valda Colbart, Investor Relations Officer. Please go ahead.

Good afternoon everyone. I would like to remind you that this conference call is being broadcast over the Internet live and will also be archived and available at our website, www.rurbanfinancial.net, until November 9th, 2006.

Joining me on today's call are Ken Joyce, President and CEO; Duane Sim, Executive Vice President and Chief Financial Officer; Mark Klein, President and CEO of the State Bank and Trust Company; and Hank Thiemann, President and CEO of The Exchange Bank.

But before we get started, I would like to remind you, this is to give our usual Safe Harbor statement and remind everyone that comments made during this conference call regarding Rurban's anticipated future performance are forward-looking and therefore involve risks and uncertainties that could cause the results or developments to differ significantly from those indicated in this statement. These risks and uncertainties include, but are not limited to, risks and uncertainties inherent in general and local banking; insurance and mortgage conditions; competitive factors specific to markets in which the Company and its subsidiaries operate; future interest rate level; legislative and regulatory decisions or capital market conditions and other factors as set forth in the Company's filings with the Securities and Exchange Commission. I will out turn the call over to Ken Joyce, President and CEO.

Thank you, Valda, and welcome to Rurban Financial Corp's third quarter 2006 webcast. Thank you for joining us to discuss this quarter's financial results. We look forward to spending the next 15 to 20 minutes providing you with some detail and color (indiscernible) the results that were released last evening following the closing of the market.

There are a few key points that I will cover before turning this webcast over to Duane Sim, our Chief Financial Officer, who will provide some commentary for this quarter's numbers. First, we are very pleased with this quarter's results and they clearly show the tangible, measurable results of Rurban's strategies. While we are not yet what we want to be, we are making good, solid progress. The difficult strategic decisions we made in 2005 are beginning to pay off and improve our profitability. We believe we are leading the organization in the right direction as we diversify our business geographically to strengthen our revenue stream.

We have made significant strides on the banking side to improve our sales culture and move away from an operational orientation without impairing productivity or asset quality. Asset quality continues to improve and we expect that improvement to continue until we equal or improve upon the median ratios for banks our size.

Finally, we continue to make progress with our data processing subsidiary. We completed our acquisition of the DCM this past quarter and it was immediately accretive to earnings. We are very pleased with the initial results of this acquisition and look for them to make a positive impact to 2007 earnings.

These factors resulted in earnings for this quarter for Rurban of $814,000, up $322,000, or 65.3% over the third quarter of 2005. On the banking side, this improvement was primarily driven by the 2005 bank acquisitions, plus organic loan growth since year-end 2005, as well as good expense control and a continuation of asset quality improvement. Partially offsetting these positive factors, our net interest margin reduced 15 basis points from the previous quarter to 3.10%. Loans grew substantially during the year. They increased by $37.4 million, or 11.4%, since the beginning of the year. This is all organic loan growth since the banking acquisitions were completed by year-end 2005. These acquisitions expanded our franchise into new higher-growth markets and we are leveraging these opportunities as we shift our culture to more of a sales orientation.

As a reminder, in 2005, we acquired two branch offices in the Lionel, Ohio market and we brought an impressive team of lenders, led by David Anderson, into that marketplace. The second acquisition is Exchange Bank, serving the greater Toledo, Ohio metropolitan market. This acquisition was completed on December 31, 2005. Average assets have grown at an annualized rate of 7.9% from the first quarter to the third quarter of this year. We view this initial progress as a fast start to the transition team. Profitability at Exchange Bank has improved steadily since our acquisition.

Expenses in the Banking segment continue to be well controlled. They decreased for the third consecutive quarter despite growth in loans and assets. The efficiency ratio for the Banking segment also reflect its improvement as the banks grew revenue and improved their operating efficiencies.

We continue to control expenses and reallocate resources into more productive areas. An example of this is our recent announcement to consolidate one of the smaller branches in Exchange Bank network, while at the same time, we announced the planned acquisition of a branch site in Fort Wayne, Indiana market. This branch in the Ft. Wayne market should open in the last quarter of 2006 or early 2007 subject to regulatory approval and the completion of conditions ordinary to any purchase contract. The Fort Wayne branch will be a strategic extension of our loan production office open in the Fort Wayne market in 2006. The plan is to consolidate the existing LPO into this new branch.

Asset quality improved substantially from the year-ago quarter, nonperforming assets as a percentage of total assets improved from 3.43% to 1.07% over this period. The linked quarter was essentially unchanged at 1.07%, however, we expect to resolve a number of the problem loans in the fourth quarter to bring us below the 1% level as we discussed at our annual meeting, which was our target. The controls, training and emphasis on quality of loan production have resulted in strong loan growth this year while maintaining our desired loan quality. We do not plan to have any additional acquisition initiatives in our banking segment through 2007 as we work on building profitability within our expanded banking footprint -- a little feedback here.

At this time, I will turn the discussion over to Duane Sim, our Chief Financial Officer. Duane will provide some detail and a perspective to our operating numbers for the third quarter. After Duane concludes his remarkable, I will discuss operate data processing and [item] processing business with particular emphasis to a new acquisition, DCM. Duane?

Thank you, Ken, and good afternoon. Our third quarter results were encouraging, but they do reflect the challenges the banking industry is facing. We were successful in executing several of our major initiatives during the quarter, which included our increase in quarterly earnings, putting our capital to good use with the acquisition of DCM and continued momentum with respect to loan growth. Our increase in earnings is encouraging, despite the fact that our margin, as expected, declined 15 basis points. The good news is that we did see some relief in September as a result of several initiatives that we executed internally and the Fed's position to pause with interest rate increases. I will also remind you that the 2005 Company income statements provided in our earnings release do not include Exchange Bank, which was acquired at the close of business on December 31st, 2005. However, our year-end balance sheet includes the assets and liabilities of Exchange Bank.

I will start with some high-level balance sheet highlights. On a year-to-date basis, we have increased consolidated loans outstanding by $37.4 million. State Bank and Trust has accounted for the vast majority of this growth. They increased loans by approximately $33.6 million during the first nine months of 2006 while loans at Exchange Bank increased approximately $6 million. This growth was partially offset by the payoff of approximately $6.2 million in commercial credits at the end of the third quarter and the decline in problem loans within our loan workout Company, RFCBC. The increase in loan balances was primarily driven by our commercial and agricultural lending efforts. The majority of residential loans that are originated are sold into the secondary market and the production that we have generated on the consumer side is offsetting the planned runoff of our consumer lease portfolio.

Total deposits have increased $27.3 million year-to-date, which is driven by a $9 million increase in money market accounts and a $26.1 million increase in time deposits. These increases are offset by a $7.7 million decrease in internal demand accounts, driven largely by the payment of the exchange shareholders totaling $6.5 million. We continue to see migration of deposit accounts out of lower-yielding BDAs and into higher-cost funds as short-term rates continue to rise. We have named a new Chief Deposit Officer at State Bank and Trust Company. We will continue to look at better ways to increase our core deposits.

During the quarter, the Corporation paid off FHLB advances and executed a structured repo, which decreased our funding costs. As Ken mentioned previously, we have been successful in reducing our nonperforming assets by $8.9 million during the past 12 months, $6.1 million, or 1.07% of assets.

Let's transition to the income statement, and I will highlight the quarterly and year-to-date results for you. We reported net income of $814,000, or $0.16 per diluted share, for the quarter. This represents a $322,000 increase over 2005 third quarter results and a $100,000, or 14%, increase over second quarter 2006 results. Our year-to-date results were $2 million, or $0.41 per diluted share, compared to $1 million, or $0.22 per diluted share a year ago. The primary reason for this year-over-year improvement was the increase in earning asset levels from the two acquisitions we completed in 2005 and the monthly results of our new item processing company, DCM.

Net interest income totaled $11.5 million on a year-to-date basis, compared to $8.9 million last year. Increases in earning asset levels from the acquisitions completed in 2005 were the main drivers behind this increase. Net interest income for the third quarter decreased slightly compared to the second quarter 2006 results as a result of the previously mentioned decrease in net interest margin. This decrease in margin is mainly a result of rapid increases in short-term interest rates and the competitive pressures occurring in all markets for retail deposits. Loan loss provision for 2006 year-to-date was $337,000, compared with a negative provision of $30,000 last year. Minimal provision for the year reflects the overall improvement in asset quality and the third-quarter provision of $35,000 was a result of both recoveries and improvement in nonperforming loans.

Total non-interest income year-to-date improved nicely from last year, increasing by $2.3 million, or 17%. Driving this increase was the continuation of RDSI's strong topline performance which contributed $1 million of the $2.3 million increase. These year-to-date results were also aided by the increases in service fees, gain on sales of loans and other income related to sales OREO, plus income associated with the payment of impaired loans at Exchange Bank. Third quarter non-interest income increased $635,000 from the previous quarter's results. This increase was driven by data processing fees, which increased $500,000 for the quarter, partially driven by the initial monthly results of our DCM acquisition.

The quarterly increase of non-interest income is also a result of the increase in gain on sale of loans which is driven by our improved mortgage banking operations and the gains realized from SBA loan sales. Total non-interest expense increased to $24.5 million year-to-date, compared to $21.4 million for the same period in 2005, reflecting a $3.1 million increase. 2006 results include $3.6 million of expenses related to The Exchange Bank and $300,000 in expenses associated with DCM. Excluding those items, non-interest expense decreased $800,000 between 2005 and 2006.

Professional fees year-over-year have declined $172,000 as problem loan balances have been substantially reduced. The current quarter operating expenses totaled $8.5 million compared to $8.1 million for the linked quarter and were driven by the $300,000 in additional operating expenses associated with the first month results of our acquisition of DCM.

The performance of our Banking group continues to improve on an individual bank basis despite the margin pressure that we have endured. Third quarter earnings for our Banking group increased to $177,000 and 39% over the last year's quarterly results. Reliance Financial Services reported an excellent $75,000, or 42.6 improvement in earnings over their previous year's quarter.

At this time, I will turn the discussion back over to Ken, and he will update you on the progress of RDSI.

Okay, Duane, thank you very much. All of that information will provide you an improved understanding of Rurban's third quarter results.

The acquisition of DCM by RDSI was completed on September 5th and our September results include approximately one month of DCM numbers. If you missed the announcement, DCM was operating in a number of new western states, with its principal offices in Indiana and Michigan. It provides item processing service to approximately 30 banks in five states.

The integration with RDSI has gone very well with (indiscernible) to the new RDSI relationship by both the employees and customers of DCM. We are excited about the potential offered by the alliance of DCM and RDSI because of potential synergies of these two companies and the sales and opportunities open by this merger. The DCM acquisition was accretive to earnings for the quarter, although there were additional expenses incurred by RDSI during the quarter that were not capitalized or recognized in the purchase transaction. RDSI's revenue continues to grow organically since over 20 banks were signed for either data processing or item processing over the last 12 months. We see a continuation of RDSI's growth into 2007 as the pipeline for prospects remains very encouraging.

At this time, I will return the webcast over to Valda to see if there are any questions from our investment community. Valda?

Thank you, Ken. It's now time for the question-and-answer session. (Caller Instructions).

While we're waiting to see if we have any questions, we would like to inform everyone that our website has a new look. To check out over newly designed website, go to www.rurbanfinancial.net.

[George Geisberger], [Sweeney Cartwright] & Company.

I just had one little question, guys. What kind of economy does Fort Wayne have? How are they doing compared to rest of the country? I know Ohio is kind struggling; how is Fort Wayne doing?

The location of our branch that we selected is in a pretty good growth area. It's in the North Fort Wayne area. The residential up there has been -- it continues strong, despite some of the downturns. They've really never had the bubble that we've seen elsewhere. The entire area up there is growing from a retail perspective, and all of the demographics that we have seen and looked at and kind of the local information we have supports that area. It's one that we've looked at constantly. We have -- George, we opened a loan production office there early in 2006, and we have been very pleased with the loan production results that we have seen out of there. So for that reason, we think that there's reason to be positive about that area and we continue to get very good feedback on our potential there.

And just also a comment, great quarter, and that's really why I called in, not so much for the question, but just a great quarter and you guys are making real progress, I think.

And your name is [Geisberger].

Right, yes, it gets mispronounced all the time.

I'm sure it does -- okay, thanks, George.

That's all I have. Thanks.

(Operator Instructions). [Charlie Criley], Ryan Beck.

With the nonperformers getting so low, would it make sense at some point to collapse our CBC?

Yes, it would, and we will most likely do that at the end of this year. The assets that are sitting in there now aren't any more than about $1.2 million, maybe $1.4 million at most, and we expect to include the majority of them out. We have a strategy to do that in this fourth quarter. I cannot guarantee that will happen, but we expect to. And then, for all practical purposes, RFCBC will be going away, our workout company. So that will close a very significant chapter, and you can see from our numbers we're moving ahead and we expect to be able to continue to move ahead.

Okay, sounds good. Thanks.

(Operator Instructions).

Well, I don't see any questions, so I would suggest that we stop the call. I want to thank everyone for joining us.

Thank you everyone for joining us today for the third quarter webcast.

All parties may now disconnect.