SB Financial Group Inc (SBFG) 2007 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Rurban Financial third-quarter 2007 earnings conference call and webcast.

At this time I would like to inform everyone that this conference call is being recorded and that all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS). I would now like to turn the conference over to Valda Colbart, Investor Relations Officer. Please go ahead, Valda.

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 8, 2007.

Joining me on today's call are Ken Joyce, President and CEO; Duane Sinn, our Chief Financial Officer; Mark Klein, President and CEO of the State Bank and Trust Company, and Hank Thiemann President of RDSI.

Before we get started, I would like to make our usual Safe Harbor statement and remind everyone the 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 result or developments to differ significantly from those indicated in these statements. 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; changes in local real estate markets; legislative and regulatory decisions or capital market conditions, and other factors set forth in the Company's filings with the Securities and Exchange Commission.

I will now turn the call over to Ken Joyce, President and CEO. Ken?

Thank you and welcome to Rurban Financial Corporation's third-quarter 2007 webcast. We appreciate your joining us to learn more about Rurban's financial progress. Participating in the webcast with me today are Duane Sinn, Rurban's Chief Financial Officer, and Mark Klein, President of the State Bank and Trust Company. Duane will provide additional detail to the financial statements. They were released yesterday evening. Mark will provide color on specific initiatives at State Bank and Trust.

We are encouraged with the continued progress at Rurban while acknowledging that more progress is necessary to achieve the targets we have set for the Company.

Net income for the third quarter was $864,000, up $50,000 or 6.1% over the year ago quarter and $79,000 or 10% over the second quarter. Year-to-date net income is $2.35 million, up 14.6% from the $2.05 million reported for the same 2006 nine-month period.

On the banking side of our business, we're seeking improvements from five key growth and profitability initiatives in place over the past two years. The first of these initiatives is attention to expense reductions primarily at the bank announced in the fourth quarter of 2006 with implementation beginning in the first quarter of 2007. Consolidated expenses for the current quarter excluding our data processing subsidiaries, RDSI and DCM, were down approximately $200,000. We will continue to evaluate expenses on a regular and consistent basis as we continually work toward improving our efficiency.

Our second key initiative is moving the culture at the bank to a greater focus on sales and service. Mark Klein will elaborate on these initiatives, but they are mainly focused on loan and deposit generation, cross-selling and referrals.

Our third initiative is building new retail account balances and associated fees. Our high-performance checking program has increased the number of net new retail accounts three times over the same period last year. Included in this program is a cross-selling effort which is producing nearly three additional services per newly opened retail account.

Our fourth key initiative is building our deposits through the efforts of our recently appointed Chief Deposit Officer and our regular calling officer. As a direct result of these efforts from this particular group, we have placed remote deposit capture devices in 22 offices and are accepting $15 million a month in electronic deposits. This product offering is only in the beginning stage and should have significant more potential.

Our fifth initiative is maintaining or growing net interest margin at our bank. Bucking the general banking trend, we have maintained a stable net interest margin of approximately 3.4% on a year-over-year basis which we feel is an exceptional accomplishment in this environment.

Through diligent management, our loan and investment yields have been improving while funding costs have been limited to increasing in parallel, leaving the net interest margin in a largely stable condition on a quarter to quarter basis for the past year.

Before turning this discussion over to Mark so that he can elaborate on these initiatives and the results, I would like to comment on the impact of the recent Fed rate change of 50 basis points.

As we reported, we are a liability sensitive bank by all measures of interest rate risk. In a declining rate environment, our liabilities should reprice faster than our maturing or rate sensitive asset. Over the next six to 12 months, this should have a positive impact on our net interest margin.

It is difficult to quantify this potential benefit as it will depend on pricing pressures from our competitors, but we should see some benefit overall. I will now turn the webcast over to Mark Klein to discuss his initiatives at State Bank and Trust in greater detail. Mark?

Thank you, Ken, and good afternoon. I am once again pleased to report on the continued performance improvement in the State Bank and Trust Company.

Last quarter we reported consolidated net income of the bank of $917,000. This quarter our consolidated net income is $714,000; however, 2007 year-to-date net income is slightly ahead of 2006 year-to-date net income of $2.3 million or 1.9%. Our linked-quarter decline is a result of second-quarter $70,000 non-accrual interest addition, a third-quarter decline of approximately $146,000 from non-interest income namely gains on sales of government guaranteed commercial loans, residential mortgage loans and trust fees and a $100,000 third-quarter increase in professional fees and marketing costs associated with our high-performance checking account program.

In an effort to continue to improve our core earnings, I would like to give you an update on some of the existing initiatives we already have in place as well as identify new ones. As with the last quarter, I will begin with the revenue side and then key on the expense side.

Our balance sheet restructuring in the fourth quarter of 2006 enabled us to stabilize our bank only net interest margin at approximately 3.4%. We continue to increase interest income through loan growth. We've now added 17.1 million of net loans since year-end, equal to a 6.1% annualized loan growth rate. This growth is a direct result of our call program and not the relaxing or prudent underwriting standards.

New originations include approximately $22 million in commercial loans consisting of $6.3 million in C&I loans, $13.3 million in commercial real estate, $2 million in agricultural loans and $392,000 in municipal loans. These increases are all offset by a runoff of approximately $4.9 million in the residential real estate loans.

We continue to change our sales culture with a focus on retail DDA balances to reduce our dependency on high cost funding. We launched our high-performance checking campaign in April with a focus on improved retail cross sales, a client loyalty program and the alignment of employee incentives with State Bank's improved performance.

Through September 30 we increased our net DDA accounts by 641, as Ken mentioned nearly three times over our 2006 year-to-date results. Deposit balances from these new DDA accounts opened this quarter are 1.4 million at a weighted average rate of 1.2%. We continue to pursue this strategy, which is also improving our market presence, as well as providing us with low-cost funds, more services per household and increasing our branch utilization. We are selling guaranteed portions of our SBA-related agricultural and business loans wherever we chose to do so. And we're selling our residential loans, although this volume has declined given the current housing slowdown. These loan sales provided third-quarter gains of $74,000 compared to second-quarter gains of $174,000 and $54,000 for the first quarter.

Our trust division continues to make progress also. Trust fees rose $151,000 or 6.4% to $2.5 million during the first nine months of 2007 compared to $2.4 million for the first nine months of 2006. Assets under management increased from $347 million at the beginning of the year to $389 million at quarter end. We're expanding our trust activities into our newer high-growth markets where so far we appear to be very well-received.

Now for the expense side. We're focusing on initiatives that we believe can make a big impact on expense control. As we reported in the second quarter, we reduced our full-time equivalent from 188 to 162, a net reduction of 26 full-time equivalent. This initiative has enabled us to reduce our year-to-date non-interest expense to $14.9 million from 2006 year-to-date non-interest expense of $15.6 million or a reduction of $700,000. We continue our focus on reducing frontline costs in each office while maintaining our service levels.

In the second quarter, we reported that we reduced our cost per transactions from $1.57 to $1.32 or a 16% reduction. These per transaction cost savings were realized in spite of the reduction of additional transactions to customer initiated electronic banking transactions. In fact, electronic banking transactions have increased from approximately 101,000 per month at year-end to over 129,000 per month at quarter end for an increase of nearly 21.6%.

Merchant capture for our commercial clients continues to expand. We have gone from one client 150 transactions and $1 million in monthly volume to 22 clients and 20,000 transactions and over $15 million in monthly volume. While technology has made this paperless initiative possible, it is clearly our Chief Deposit Officer and the deposit services divisions that have ensured its success.

Finally, referrals between departments also continue to improve. First-quarter referrals for 196 with 52 closed. Second-quarter year-to-date referrals increased to 451 with 122 closed. Year-to-date referrals through the third quarter totaled 691 with 207 closed. These closed interdepartmental referrals have resulted in $1.6 million of new deposits, over $10 million in loans and over $13 million in trust assets.

Ken, back to you.

Well, thank you, Mark, and congratulations on your continuing success at the State Bank and Trust. I want to take a few minutes to discuss our asset quality. We have seen the numerous bank earnings announcements discussing declining asset quality, some of a very significant nature. We experienced a severe downturn in asset quality several years ago. We learned from these experiences as we have worked our way through numerous and complicated credit problems and created policies, controls and processes to prevent the reoccurrence of these issues. Not that they can be eliminated as we're in the business of taking measured risk, but the risk can be moderated.

At this time we do not see a deterioration of our credit quality nor any leading indicators of an asset quality problem. Nonperforming assets increased only moderately from the year ago quarter, and we addressed that increase with an appropriate level of loan loss provision.

I will now turn the webcast over to Duane Sinn, Rurban's Chief Financial Officer, who will supply more detail to our press release information and discuss that press release to help clarify its information. Duane?

Thank you, Ken, and good afternoon. Our third-quarter results were encouraging and were driven by an excellent quarter by our data processing group. Our banking results reflect the changes and challenges the banking industry is facing today. The good news for our banking group is that we should see some relief from the Fed's actions to reduce rates. As we discussed in our press release, we have been able to reduce our offering rates on deposits late in the third quarter, and we feel that our deposit costs will decrease in the next six to 12 months.

I will start with some high-level balance sheet highlights. We increases consolidated assets by $17.5 million for the quarter. Loans increased approximately $6.6 million during the quarter. We also executed a $10 million securities leverage which we funded with a repurchase agreement. Year-to-date we have increased loans by $18.2 million. Our Fort Wayne market provided $9.8 million of this increase, followed by a $7.3 million increase in Lima and a $2.2 million increase in our Toledo market.

Our original markets of Defiance, Paulding and Fulton Counties experienced a small decrease in balances, primarily due to the sale of approximately $3 million in SBA and FSA loans sold during the year. The month and year-to-date increase in loan balances was once again due to our commercial lending efforts. Increases in commercial balances have been offset by decreases in residential and consumer loans. We continue to sell the majority of new residential loans into this secondary market.

Core deposits increased by $5.6 million for the quarter and have decreased by $1.4 million on a year-to-date basis. The quarterly increase was driven by $2.5 million increase in core transaction accounts, as well as an increase in retail certificate of deposits of $8.5 million. This increase -- these increases were offset by a $5.2 million decrease in money market and savings accounts. The year-to-date overall decrease is mainly a result of the planned runoff in higher costing municipal deposit accounts.

We continue to see migration of deposit accounts out of lower yielding DDA and money market accounts and into higher cost funds. We have experienced deposit balance increases within our Toledo and Fort Wayne markets.

To transition to the income statement, I will highlight the quarterly and year-to-date results for you. Reported net income of $864,000 or $0.17 per diluted share for the quarter. This represents a $50,000 or 6.1% increase over 2006 third-quarter results and a $79,000 or 10% increase over second-quarter 2007 results. Our year-to-date results were $2.4 million or $0.47 per diluted share compared to $2 million or $0.41 per diluted share a year ago.

The primary reason for this year-over-year improvement was the efficiencies that were executed on the bank side and the increase in revenue generated from the data and item processing side of our business.

Net interest income totaled $11 million year-to-date for 2007 compared to $11.5 million last year. Net interest income totaled $3.7 million for the third quarter of 2007 compared to $3.8 million for the third quarter of 2006 results. The decrease of $95,000 is partially due to the decrease of $17.8 million in earning assets as a result of the deleveraged strategy completed at the end of 2006. The average yield on interest-earning assets increased by 35 basis points from 6.49% for the quarter ended September 30, 2006 to 6.84% for the quarter ended September 30, 2007, while the average cost of interest-bearing liabilities also went up 35 basis points from 3.16% at September 30, 2006 to 3.51% in the third quarter of 2007.

The 35 basis point increase in earning assets was due to two factors. The first item was the previously mentioned balance sheet restructuring and secondly the incremental increase gained from loans repricing. 35 basis point increase in interest baring liabilities is due to a 42 basis point increase in cost of deposits, offset by a slight decrease in the cost of alternative funding.

Loan loss provision for 2007 year-to-date was $379,000 compared to $337,000 provision last year. The third-quarter provision of $140,000 was a result of the continued loan growth within the loan portfolio. Total non-interest income year-to-date improved nicely from last year increasing by $3.8 million or 23.8%. Driving this increase was the continuation of RDSI's strong topline performance which increased $4.2 million year over year. These year-to-date results were offset by decreases in gains on sale loans and other income.

The decrease in other income year-over-year is associated with the payment of impaired loans at Exchange Bank during 2006. The third-quarter non-interest income increased $880,000 from the 2006 third-quarter results. This increase was driven by data processing fees which increased $1.2 million or 32% and trust fees which increased $67,000 or 8.8%.

DCM accounted for $758,000 of the $1.2 million increase in data processing fees. The 8.8% increase in trust fees was due to the growth of $57 million in managed assets during the past 12 months within Reliance Financial Services. These increases in data processing and trust fees were offset by a $210,000 decrease in the gain on sale of loans and a $214,000 decrease in other income. The decrease and gain on sale of loans was driven by lower mortgage banking production. The decrease in other income was due to the recording of a $174,000 in loan recoveries on impaired loans associated with Exchange Bank during 2006 third quarter.

Total non-interest expense increased to $27.5 million year-to-date compared to $24.5 million for the same period in 2006, reflecting a $2.9 million increase. 2007 results include $3.1 million of expenses related to the DCM acquisition on September 2, 2006. The current quarter operating expenses totaled $9.1 million compared to $8.5 million for the 2006 third quarter. This $592,000 increase once again associated with the expenses of our acquisition of DCM. Excluding the DCM acquisition, non-interest expenses actually declined $203,000. This decline is a reflection of the expense reductions taken within the banking group in the beginning of 2007.

The large increases in equipment expense and postage and delivery from the third quarter of 2006 to the third quarter of 2007 were also a direct result of our acquisition of DCM.

At this time I will turn the discussion back over to Ken. Ken?

Alright. Well, thank you, Duane. That detail should be helpful in understanding where we are from a financial perspective.

Our data and item processing business continues its growth pattern. As Duane has indicated, revenue for the business was up substantially on a quarter-over-quarter basis, as well as on a linked-quarter basis. This increase in revenue resulted from new banks, contracted and continued growth of the services being purchased by our client banks that are making them more efficient, creating products for sales opportunities or allowing them to operate less expansively. We have four banks contracted and scheduled for conversion before year-end, and we're now servicing over 110 banks for some combination of data and item processing.

The increase in revenue for the quarter-over-quarter comparison contains the impact of our DCM acquisition which was completed on September 2, 2006, and therefore, the comparison is somewhat skewed as Duane indicated.

This business segment has potentially significant value in the marketplace, and that value may not be fully recognized in our current stock value. Therefore, we are beginning the process of considering strategic alternatives for releasing the value of our data and item processing business.

This completes our comments on the third-quarter 2007 results. I will now turn over the webcast to Valda to see if we have any questions from the investment community. Valda?

Thank you, Ken. It is now time for the question and answer session. (OPERATOR INSTRUCTIONS).

Ross Haberman, Haberman Fund. How are you, gentlemen? Nice quarter.

Good, Ross. Good to hear from you. Thank you very much.

I just want to ask you on the data processing, I got a little lost from your press release today. Please excuse me for asking the question. If I understood it on the segment data processing earned, on a segment basis, $659,000 for the quarter and $1.8 million for the nine months?

That is correct.

What were those cash flow numbers?

We don't necessarily report those cash flow numbers. The EBITDA for the data processing company has probably been in excess of $5 million on an annual basis and continues to grow.

Okay. Well, let me ask another, what is the D&A running?

The D&A, I am sorry. I am not sophisticated enough to understand that term.

What?

What is D&A?

Depreciation and amortization at that segment.

Okay. Do you have that number, Duane?

Yes, I can dig for it here.

Duane is working to pull that number out for you.

While you're working that, DCM -- refresh our memory, how much in dollars was paid for that segment for that operation, and what kind of multiple was paid for that?

The price was about $7 million. As a multiple of revenue, it was probably doing about $4.5 million I would say as best I recall. So it was probably close to about a 1.5 multiple of revenue. That is the numbers that I recall. I would have to go back and look in terms of net income.

Generally does this business -- generally does data processing, do you -- is Metavante one of your competitors, or they are sort of Cadillac you might say and you are just a small potato compared to the likes of them?

Well, I would never agree to the term small potato.

A big potato, how is that?

Metavante is a competitor. We do compete against them. We do submit bids against them. They are typically in the data processing world kind of a high-end product, and we are more probably in the middle market I would say than the high-end world that Metavante works in. But we typically compete very well and very easily against Metavante. Not always. They sometimes win. It depends on what the -- usually it depends upon the past experience of who the CEO has been working with or the Chief Operating Officer.

Just one final question. And if you described it, I apologize. What is your strongest local market for loan demand today geographically?

That is an interesting question. We generate more loans in our current footprint, but the processes at those loan generations kind of replaces what comes due from maturities and payoffs. So we are actually getting our true kind of over the top growth from the Toledo, Fort Wayne and Lima markets. And right now Fort Wayne is probably the top contributor of that trio.

Fort Wayne, okay.

Fort Wayne, Indiana. Yes.

Okay. Appreciate it. The best of luck, guys.

And Duane has got (multiple speakers) I think he has got some numbers here.

Yes, through the first nine months of 2007, we've got a little bit over $3 million on an annualized basis. This is going to be in excess of $4 million for the amortization --

$4 million on an annualized basis for depreciation and amortization?

Yes.

That sounds great. And I guess it would be something higher if you were to include the DCM?

Well, that is inclusive of DCM.

It is, okay.

Yes, the amortization of the intangible is a couple of hundred thousand dollars a year, and that is totally DCM related.

And just refresh my memory, the 659 of income for that segment this quarter includes a whole quarter of DCM or a partial?

It is a full quarter this year. Last year DCM was only in our numbers for one month (multiple speakers) September.

Appreciate it. Again, the best of luck. Thanks, guys.

(OPERATOR INSTRUCTIONS). Gentlemen, we have no further questions here. So I would like to turn the conference back to Mr. Joyce.

Alright. I appreciate that, and thank you, Ross, for your question. And I want to thank everyone for joining us here on the third-quarter 2007 Rurban Financial Corp webcast. Thank you and good bye.

Thank you. That does conclude the call. We do appreciate your participation. At this time you may disconnect. Thank you.