SB Financial Group Inc (SBFG) 2008 Q2 法說會逐字稿

Good afternoon and welcome, ladies and gentlemen, to the Rurban Financial Corporation second-quarter 2008 earnings conference call and webcast. At this time I would like to inform you that this conference call is being recorded, and all participants are in a listen-only mode. We will open the conference up to investment community for questions and answers following the presentations.

I will now 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 live over the Internet and will also be archived and available at our website www.RurbanFinancial.net until August 7, 2008.

Joining me today is Ken Joyce, Duane Sinn, Mark Klein and Hank Thiemann.

But before we get started, I would like to make 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 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 levels; 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 of Rurban Financial Corporation. Ken?

Well, thank you and welcome to the second-quarter 2008 webcast. Joining me today and presenting are Mark Klein, President and CEO of the State Bank and Trust Company; Hank Thiemann, President of RSDI, our data and item processing company; and Duane Sinn, our Chief Financial Officer.

In the last webcast, I referred to the first quarter of this year as a breakthrough quarter for Rurban. Following through with that view, we're pleased to announce earnings of $1.36 million for the second quarter, which equates to $0.28 per share. This compares to earnings of $785,000 for the year ago quarter, a 73% improvement over the last year's quarter and 22% over last quarter's net income of $1.1 million.

We had some one-time items in all of the comparison quarters, and Duane will give some detail on those, but in summary, operating earnings for the quarter were $1.22 million versus the year ago quarter of $785,000, a 56% increase. Strength in these earnings is the underlying improvement in both our banking business and our data and item processing business. The banking business is guided by a well-defined strategy for commercial lending and retail banking, and the bank's management staff is executing with great success. A key part of our strategy was entering over the last few years into a number of relative growth markets such as Lima, Toledo, Columbus and Fort Wayne, Indiana.

Prior to entering these markets, we had developed a strong set of policies and procedures and a lending approach that was structured and sound, while providing an emphasis on meeting the needs of our clients. This lending approach involves a more thoughtful and consultive approach, which requires a higher level of talent and dedication. These pieces have been put in place and are working as evidenced by our loan growth and stable to improving asset quality.

The retail side of our banking business is equally focused and successful in execution of its strategy. We have modified our product offerings using the resources of a third-party specializing in building retail growth. As a result, our retail account growth has changed from a declining business to a growing business as net income -- as net accounts continue to grow impacting balances and service fees as Mark Klein and Duane Sinn will discuss.

Part of this changed strategy in the branches has also been an involving sales culture that is driving business calls, a well-defined referral process and effective cross-selling, all of which are monitored, coached and rewarded. Results are evident in both the income statement and balance sheet numbers and the behind the scenes numbers such as cross-sell ratios, prospect calls, referrals made and referrals sold.

Tied to this sale strategy are plans and efforts to maintain cost. For example, we carefully measure cost per transaction at teller line and promote electronic transaction with a result both have significantly improved as Mark Klein will discuss. These measures, among many others, lead to greater efficiency as we measured by our expense control and our operating efficiency improvement.

I will now turn the webcast over to Mark Klein, President and CEO of our Banking Group, to discuss the progress of the bank.

Mark?

Thank you, Ken, and good afternoon. I'm pleased to once again report that the Banking Group continues to build strong earnings momentum. Duane Sinn, our CFO, will provide the details of our progress, but at a high-level the consolidated Banking Group, which now has assets of $557 million, improved earnings to $1.2 million compared to $917,000 for the linked-quarter, a 33% increase and up from $830,000 for the same quarter last year for an increase of 47%.

Likewise, the return on assets improved to a second quarter run-rate of 87 basis points, up from 67 basis points from the linked-quarter and 63 basis points from the same quarter last year.

We're pleased with our progress as we have managed the growth of our balance sheet, improved our margins, increased our non-interest income and reduced operating expenses. Of course, it is our objective for the second quarter or second half of the year to continue increasing loans and core deposits organically, improve our fee income and gain additional efficiencies to progress down the path we have started the first two quarters.

Accounting for improvements are several vital initiatives. We have handpicked our key business unit leaders, concentrated on geographical diversification to higher growth markets, utilized a balanced scorecard approach to strategic planning that has enabled us to clearly identify our goals, objectives and major initiatives and detailed action plans that are reinforced with appropriate performance incentives. And lastly, we have tracked and monitored progress on the appropriate controls and metrics weekly. Management's relentless attention and commitment to these strategies have clearly been the driver on our path to becoming a higher performing community bank.

Integration of a broad-based proactive sales culture at the bank continues to pinpoint areas of opportunity that improve client care while improving bank performance. Specifically commercial sales calls for the last quarter were 581 versus 420 for the same quarter last year. We can identify loan growth of $12.5 million directly related to these efforts. We also have in place a well-defined referral program as Ken mentioned, which generated 357 referrals year-to-date, of which 127 actually closed. These closed referrals accounted for over $10 million in additional business and a combination of loans, deposits, fee income and trust business. We're currently on pace to meet closed referrals for 2007 that were 209, which yielded over $33 million in additional business. The entire sales process is supported and reinforced with a comprehensive bank wide incentive plan based on the premise that everyone has to win -- the client, the stockholder and the employee.

Reinforcing these sales initiatives are referrals of friends and families from our advisory boards and corporate boards that all provide support to our earnings momentum.

We have improved our cost efficiency at the branch level as we now have 10 of our 17 offices at $1.35 of variable cost or less per transaction. On average all losses are now operated operating at $1.23 per transaction, and this represents a reduction of approximately $0.22 per transaction from the 2007 level of $1.45 for a 15% improvement. This equates to a savings of approximately $250,000 annually. This reduction is clearly embedded in the overall improvement in our efficiency ratio with 69.85% from 75.9% for the linked-quarter and from 73.23% for the same quarter last year.

Supporting this initiative was the reduction of 4 FTE at year-end, which coincided with the closure of one of our five retail offices in Defiance, Ohio in early 2008.

We're also emphasizing electronic banking services as a driver of continuing improvement. The number of clients utilizing electronic banking services has increased from 12,995 to 14,868 or an increase of 1873 users or 12.6% improvement from the same quarter last year. Likewise, the activity level continues to increase.

Total transactions increased from 112,939 in June of 2007 to 140,819 today for an increase of 27,888 transactions or 19.8%. As an example of how we're driving this move to electronic transactions, early in 2008 we made a special mailing to our existing checking account holders who previously did not own a debit card. This and other similar actions brought customers through a lower-cost channel while helping to increase the customer service fees to $613,000 for the second quarter, representing an $80,000 or 15% increase in this line item compared to the year ago quarter.

We continue to leverage our Deposit Services group we established in 2007. This group has enabled us to increase our emphasis on retail, commercial and small-business deposit services with more on-site cash management presentations and cross-sell related services at the point of contact with the client. As an example, remote capture clients have increased from 26 in 2007 to 41 today, while private client group customers have increased from 75 to 90 for the same period.

Finally, asset quality ratios continue to improve as nonperforming assets to total assets improved to 1.6% for the current quarter compared to 1.22% for the linked-quarter. We had net recoveries for the quarter as gross charge-offs for the second-quarter 2008 were 11,000, which were more than offset by recoveries totaling 29,000. Total allowance for loan losses through loans increased to 1.04% for the current quarter compared to 1.02% in the linked-quarter. Also, delinquencies have decreased to approximately 1.25% of loans outstanding.

In summary, we're pleased with our continued progress on a number of fronts, but certainly not content with our performance. By continually living an attitude of persistent dissatisfaction, we will continue to identify even greater opportunities to enhance shareholder value.

Ken, back to you.

Well, thank you, Mark, and congratulations on your success in the Banking Group and the positive results achieved by you and your team.

We now announced in this past quarter the offer to acquire National Bank of Montpelier, a profitable local bank having assets of just over $109 million. We offered cash with no stock in this transaction, and we're paying approximately 135% of book value.

The transaction is subject to National Bank of Montpelier's shareholder vote, regulatory approval and the customary transaction requirements. We would expect to close this transaction later this year.

The transaction will be immediately accretive to earnings per share due to the cash nature of the transaction. We see the contribution as significant as we believe that we can achieve 30% expense savings through consolidation into the State Bank and Trust structure, introduce a new set of products and gain better access to a market that we already have some familiarity with as we are in adjoining counties. Getting the full impact of the transaction should take about six months. We and National Bank of Montpelier are excited about this transition and are looking forward to working together.

Shifting our focus to our data and item processing company, RDSI, I will now turn the webcast over to Hank Thiemann, President of RDSI, to discuss the progress of his group.

Hank?

Thank you, Ken. The second quarter for RDSI banking systems was a continuation of our pattern of adding new clients, additional product sales and record revenues and net income. For the quarter our revenue was $5.3 million and net income was $640,000, up 6.8% and 34.5% respectively compared to the year ago quarter.

Our significant increase in quarter-over-quarter net income is attributable to more new bank conversions and efficiencies gained in our item processing function. The most notable efficiency in item processing is the reduction of staffing by approximately one-third, 11 FTE since the second quarter of 2007. We closed the second quarter, adding two new data processing client banks, one of which included item processing. We also added a new client bank for item processing services exclusively. These new client banks are in Ohio, Michigan and Nevada.

Our current roster of client banks totals 117 banks, of which 75 used data processing and 92 used item processing. New product sales to existing client banks also continued in the quarter with 29 banks contracting for 55 new products such as Internet banking, mobile banking and merchant capture, all of which will generate $229,000 in annual contract revenue and $171,000 in onetime installation fees.

After beta testing in the first quarter, we have launched secure e-mail and mobile banking products to several banks, and these products should have attraction by our client banks.

The economic conditions affecting the banking industry obviously have an effect on RDSI. Renegotiating contracts has been more challenging, and the loss of existing clients has occurred because of aggressive competitive pricing and mergers.

RDSI has a distinct advantage of having successfully broadened its marketing territory to 10 states, allowing us to have net additions to our banking base.

Midwest, the West, Southeast regions are all affected by the economy but to different degrees, and therefore, so is RDSI. However, it is important to remember that our client bank profile, a typical community bank with $200 million in assets, for example, has not participated in subprime lending and, therefore, seldom has direct credit issues. However, they struggle instead with difficult local and regional economic conditions. As we continue to move forward with the analysis and the release of new products, we have begun to offer consulting services in a limited way, which addresses these changing needs of our clients. Special project programming, bank merger coordination and efficiency-oriented initiatives are examples of new and needed services. These efforts require somewhat different skills sets, which several of our staff have developed.

We're also focusing on continual improvements in client services through internal efficiencies to provide better, faster service; six users conferences conducted during the second quarter; expanded training session offerings for clients; and our annual CEO conference to be held next month. Our executive group has a commitment to visit every client bank at least once during the year. These visits are important to bankers and to us for our mutual success.

Unique to RDSI for several years has been our ability to assist de novo banks with their data processing needs. As part of this specialization, we have begun to host periodic conference calls for all of our de novo banks to share ideas, share solutions and best practices.

At this time of year, we began our planning for 2009, which we expect to be an exciting year for RDSI. We also utilize a balance scorecard methodology with regular tracking of achievements against targeted completion dates.

Ken, that is my update for RDSI.

Well, thank you very much, Hank. RDSI continues to make excellent progress and pleases its customers with outstanding service. It is a difficult environment as the profitability pressure on banks clearly results in more pressure on pricing from key partners such as RDSI. RDSI has responded by lowering prices on item processing as the cost structure has changed through electronification of checks.

RDSI also is emphasizing products that add revenues to its banking clients and products that enhance productivity.

We continue to examine strategic alternatives for RDSI, and the improving bank profitability picture aids in our consideration of these options.

I will now turn the webcast over to Duane Sinn, Rurban's Chief Financial Officer, who will discuss our financial information in greater detail.

Duane?

Thank you, Ken, and good afternoon. As Ken, Mark and Hank have indicated, we have started to see the results of initiatives we started several years ago. The Banking Group is benefiting from better market demographics, a repositioned balance sheet, reduction of nonperforming assets and greatly improved backroom operating efficiencies gained from merging our banking-related activities. Our banking acquisitions in 2005 and 2006 have allowed us to reposition our balance sheet in this changing rate environment as both acquisitions provided solid core funding.

We expect to leverage the additional funding sources provided by the acquisition of the National Bank of Montpelier later this year as we bring them into our Banking Group.

Our story has been consistent over the past 12 months as we continued to manage our balance sheet, initially to a liability-sensitive position and now beginning to shift it towards greater asset sensitivity.

Let's discuss a few of the balance sheet highlights. Total assets at June 30, 2008 were $576 million, a $28 million increase from the $548 million reported at June 30, 2007. Increase in assets was primarily driven due to growth in loans, which increased $22.8 million or 6% over the past 12 months. Loans likewise increased $15.2 million or 7.8% on an annualized basis during the first six months in 2008.

As has been the pattern over the past several years, our loan growth continues to be generated from our niche of lending to small commercial businesses. Our loan portfolio includes approximately $144 million in commercial real estate, of which approximately 65% is owner-occupied.

Our Columbus, Ohio loan production office has provided quality growth, generating $10 million in portfolio loans for the first six months of this year. We also have generated $3 million in additional sold residential loans during this time period from this market.

Our Fort Wayne, Indiana full-service branch is now fully staffed, and its growth continues targeting the private client base within this market. Loan totals have grown to over $40 million in this market.

As mentioned in our press release, we have allocated considerable time managing the liability side of our balance sheet. These efforts have paid off as we reported a $682,000 or 18% increase in our net interest income over the 2007 second quarter, which was primarily driven by decreases in our cost of funds. Our efforts to reduce our cost of funds include use of repurchase agreements, increasing the role of our chief deposit officer, a focus on private client group offerings, promotion of our high-performance checking account program and improving our cross-selling of products to our existing customer base. These efforts have increased total deposit transaction accounts by $13.5 million during the past 12 months, while time deposits decreased $18.5 million for this same period. A portion of these timed deposits balances transitioned into money market accounts and a portion we allowed to run off due to excess liquidity during the year.

We reward customers that have a relationship with us versus those having a single price sensitive product. During the first six months of 2008, we have repriced $269 million or 67% of our total deposits. This has resulted in a 67 basis point decrease in deposit costs during the first six months of 2008. More recently, we have started to manage our balance sheet to a more asset sensitive position given the market expectation that interest rates may rise later this year.

I will now transition to the income statement and focus on our second-quarter results compared to the year ago quarter. Net income for the first quarter was $1.36 million or $0.28 per diluted share compared to $785,000 or $0.16 per diluted share for the same quarter in 2007. 2008 second-quarter earnings included $132,000 of net after-tax income due to the recovery of onetime legal fees associated with our workout company, RFCBC. Excluding the onetime adjustments for the second quarter of 2008, core operating earnings increased over 56% compared to the prior year quarter. Net interest income was $4.4 million for the three months ended June 30, 2008 compared to $3.8 million for the second quarter of 2007. This increase was $682,000 or 18% and was due to the improvements in our net interest margins, which increased to 3.83% within our Banking Group and was also due to growing loans approximately $23 million.

As mentioned previously, we continue to show excellent progress in growth of our deposit transaction accounts. We have shifted over $20 million or 5% of our deposit balances from time deposits into transaction accounts, which enables us to change our pricing on a daily basis versus longer-term fixed-rate CD offerings. Total deposit costs have decreased to 2.51% for the second quarter compared to 3.24% for the prior year second quarter. This 73 basis point decline in our deposit cost was offset by a 42 basis point decline in loan yields. This is evidence that we have managed through the 300 basis point decrease in prime rate very well.

Our objective is to continue to maintain or improve the margins, and we have, therefore, identified additional outgoing initiatives that we plan to execute during the remainder of 2008, targeting margin improvement.

Provision for loan-loss was $213,000 for the second quarter of 2008 compared to $146,000 taken in the second quarter of 2007 and $192,000 in linked-quarter. At this time we do not see any concerning trends in delinquencies or foreclosures. However, we are not insulated from the current economic cycle, and we do expect to have to work smarter and harder to maintain our asset quality level.

Total non-interest income was 6 1 $8 million for the second quarter of 2008 compared to $6.5 million for the prior year second quarter, an increase of $293,000 or 4.5%. Data processing fees contributed $320,000 or 7% of the increase compared to the second quarter of 2007. We also continue to record increases in customer service fees driven by increases in our high-performance checking account product. As Mark stated earlier, the additional debit card mailings drove increases in customer service fees, which totaled $613,000 for the second quarter of 2008, which represents an $80,000 or 15% increase in this line item compared to the year ago quarter.

Total non-interest expense was $9.1 million for the second quarter of 2008 and virtually unchanged from the year ago quarter. Compensation and benefits increased $250,000 or 6% from the second quarter of 2008 compared to the second quarter of 2007. This is primarily driven by incentive accruals within our Banking Group. We monitor over 27 different metrics within our bank incentive plan on a monthly basis. We accrue for these payouts throughout the year as benchmarks are met, and then payout is made after annual results are attained.

The increase in compensation and benefits within our operating expenses is offset by a $216,000 reduction to professional fees, which reflects the previously mentioned recovery of legal fees within our workout company. We also continue to see a reduction in litigation costs for loan workouts.

As we mentioned in our press release, the majority of our operating expense line items showed decreases in the second quarter of 2008 compared to the second quarter of 2007. We remain very focused on finding additional operating efficiencies on a daily basis.

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

Alright. Well, thank you, Duane. I appreciate that. As stated in my opening comments, we are making excellent progress, and we're encouraged that the fundamentals behind our numbers should allow us continuing progress.

We are pleased to announce the Rurban Board of Directors announced that the quarterly shareholder dividend will be $0.09, an increase of $0.01 from the prior quarter. The dividend is payable on August 22 to all shareholders of record on August 8.

We have certainly been conscious of the decline in our stockprice during 2008. While the financial statement as a whole has been challenged, it is clear that there are organizations with real problems. But unfortunately the majority of the banking stocks, regardless of performance, have been painted with the same brush of pessimism.

The investors will sort out those organizations with impairments and those with opportunities. We believe that we are an organization with opportunities, and we have backed it up with improving earnings. Performance should be recognized in the market, and we look for our shareholders to be appropriately rewarded as we continue to improve our organization's performance.

Valda, I'm turning this webcast back to you to determine if we have any questions from the investment community.

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

While we are waiting, I want to remind everyone that you can listen to this webcast again, and it is found on our website at www.RurbanFinancial.net. It will be available until August 7 so if you would like to participate and listen again.

That completes this quarter's webcast, and we appreciate you for taking the time to hear more about the progress that Rurban Financial Corporation is making. We look forward to talking with you next quarter. Good-bye.

Ladies and gentlemen, this does conclude today's conference. You may disconnect at this time. We appreciate your participation.