SB Financial Group Inc (SBFG) 2008 Q3 法說會逐字稿

Good afternoon and welcome, ladies and gentlemen, to the Rurban Financial Corporation third-quarter 2008 earnings conference call and 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 up the conference to the investment community for questions and answers following the presentation.

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 November 6, 2008.

Joining me today is Ken Joyce, Duane Sinn, Mark Klein and Hank Thiemann. 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 changed 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, Valda, and welcome to the third-quarter 2008 webcast. Joining me today in presenting are Mark Klein, President and CEO of the State Bank and Trust Company; Hank Thiemann, President of RDSI, our data and item processing group; and Duane Sinn, our Chief Financial Officer.

Rurban Financial Corporation had another excellent quarter, earning $1.42 million in comparison to $864,000 for the year ago quarter. Net of a few onetime items detailed in our press release, operating or core income was $1.34 million, which was up from $864,000 for the same year ago quarter, a 55% increase in operating income. This quarter also represents about a 5% increase in operating income over the linked quarter.

Rurban's two business lines continue to produce strong financial performance resulting in Rurban's ROA for the current quarter being 99 basis points with a ROE of 9.54%. Our banking business led by the State Bank and Trust Company continues to improve its performance, earning 88 basis points ROA compared to 50 basis points for the year ago quarter.

As part of this improvement, the efficiency ratio improved to 71% from 80% for the year ago quarter. These financial performance measures reflect the results of our successful banking strategies. Following our credit problems discovered in 2002, we have rebuilt our bank's lending processes and controls to produce quality results as reflected in our asset quality. As loan quality was rebuilt, we began to implement a sales culture that is now successfully growing our loans and deposits even during these difficult periods.

We next begin that process of prudently expanding our franchise through strategic acquisitions and de novo loan production offices in growing markets. We have also been careful to achieve this growth while maintaining expense control as shown by our modest expense growth year-over-year in the Banking Group. These efforts are all enhanced by an intense attention to balance sheet management, which is practiced like a science in our Banking Group and is illustrated by our 43 basis point improvement in our net interest margin.

Our asset quality improved with our nonperforming assets declining on a dollar basis and as a percentage of assets for both the year ago quarter and on a linked quarter basis. We took some charge-offs for the current quarter, but our annualized charge-off rate of 16 basis points on average loans remains very favorable to industry averages. Our loan delinquency rate is a low 1.39% at quarter-end, which is a good forward indicator of asset problems.

I now turn this webcast over to Mark Klein, the President and CEO of the State Bank and Trust Company. Mark will give you more specifics on our banking progress, strategic implementation and our tactical efforts to grow the banking franchise and profitability.

Mark?

Thank you, Ken, and good afternoon. In the midst of a fairly stiff business headwind and unchartered economic waters, we continue to make progress in the Banking Group. Duane Sinn, our CFO, will provide you with more details on our financial picture, but I'm pleased to report we have improved our Banking Group profitability to $1.22 million from $675,000 or an 83% improvement over the year ago quarter. This improvement was driven by revenue enhancements primarily resulting from a net interest margin improvement to 3.84% or 43 basis points over the year ago quarter.

Likewise, margin improvement was the primary component in our efficiency ratio improvement for the quarter, as Ken mentioned earlier. These results went directly to the performance improvement in non-interest income, referrals, electronic banking, asset quality, operating expenses and balance sheet growth. Noninterest income remained relatively unchanged for the prior year quarter even with declining trust fees caused by the decline in the equities market. Our tactics to obtain lower-cost transaction accounts continue to reward us with growth in both core deposits and related fee income. As with prior quarters providing the impetus for non-maturity deposit growth, this high-performance checking account initiative, year-to-date we have increased our retail net DDA accounts position by 475. Including business DDAs, our net accounts increased by 622 or 3.92% over 2007 year-end. While this trend is in line with 2007 results, it is a significant reversal of pre-2007 net account lost levels we experienced.

To bolster loan fee income, we continue to aggressively promote FSA loan originations for our agricultural production sector, resulting in loan sale gains of $80,600 through the third quarter. Selling off these balances of these long-term fixed-rate products provides revenue while limiting the bank's credit exposure and bolstering liquidity, while allowing the client to manage their interest rate risk, a true win-win situation.

Our sales culture continues to pay dividends and is reflected in the referrals between departments in our sales call program. In 2007 we logged 860 referrals with 289 closing that resulted in documented loans, deposits and trust assets of over $33.4 million. Through the third quarter of this year, we have exceeded all of 2007 results with gross referrals of 866 to date with 258 closed. These closed referrals have resulted in an additional business of over $22 million. In fact, over 3000 business development calls this year by retail and commercial personnel continue to build referral momentum for the fourth quarter. Positive reinforcement with our staff, coupled with cash rewards, continues to successfully drive our sales culture while delivering our value proposition and building our franchise.

Electronic banking product usage with its lower cost structure continues to show strong growth. The number of clients utilizing electronic banking services has increased from 13,857 to 16,468, an increase of 2611 users or an 18.9% gain from the year ago quarter. Total electronic transactions also increased from 129,311 at September of 2007 to over 147,000 for this quarter for a year-over-year monthly increase of over 18,000 or 14.2%.

Our cross-selling of debit cards to 100% of new DDA account openings is certainly propelling these improvements.

Remote deposit capture rolled out in the first quarter of 2007 and the third quarter of 2008 introduction of mobile banking are positioning us as a market leader in electronic banking. We have increased remote capture clients from 26 at 2007 year-end to 48 through current quarter end, resulting in over $16 million a month in deposit volume. Meanwhile, mobile banking has enabled us to provide new technology with significant value-added potential.

Asset quality has been and continues to be a top priority of management. As a result of applying prudent lending practices and proactive portfolio management, we have improved our delinquency rate to 1.39%. Additionally nonperforming assets have declined to $6.27 million from $6.43 million from a year ago quarter. We are working to continue to reduce our problem assets as we strategically exit nonperformers.

Operating expenses remained relatively flat as compared to the year ago quarter, improving our efficiency ratio when coupled with our improving revenue. Compensation and benefits showed modest growth, a reflection of employee incentive accruals from meeting well-defined goals linked directly to our performance improvement.

We are introducing a new more detailed profitability model in the fourth quarter that provides product, officer and client relationship profitability allowing our bankers to identify areas of improvement as well as opportunities.

Finally, our Columbus, Ohio LPO continues to provide balance sheet growth as commercial loans now exceed $11 million for 2008. With a solid pipeline of over $3 million closed by year-end, we remain extremely optimistic of our long-term potential.

In summary, we are quite pleased with our continued progress but remain unsettled with our performance. We have assembled a highly qualified team in both our traditional and growth markets that will add geographic diversity, enhancement to operational efficiencies, as well as balance sheet stability. I'm encouraged by our progress and enthusiastic about our future.

Ken, back to you.

Well, thank you and congratulations on your successful Banking Group and the positive results from your leadership and your team's efforts.

We are, of course, not immune to significant downturns in the economy in selected business segments. We are not currently seeing asset concerns but systematic economic difficulties will cause problems for all banks. However, we feel we're well positioned for these problematic times, and it is our plan to continue to build our franchise in size and profitability.

Shifting our focus to our data and item processing group, 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 third quarter for RDSI reflected stable revenue compared to the year ago quarter and the linked quarter, which is reflective of several offsetting factors. Our renewables are being done without our customary rate increases due to pricing pressures in the industry. This is offset by continuing success in growing our client base and providing more products to our existing client banks.

Another factor is our deliberate lowering of some item processing rates as the electronification of checks lowers our costs, and we pass some of those savings back to our client banks. As an example of these revenue trends, in the quarter we added two new item processing banks. We also continued our sales of products to existing client banks as 45 banks contracted for 41 new products such as mobile banking. These actions alone will generate $258,000 in annual contract revenue and $58,000 in onetime installation fees.

Also, to help offset pricing and compression next year, we have pre-renewed all but one of our 2009 contract expirations this year, and we expect to renew that single remaining contract before this quarter is completed. These contracts have been renewed for three to seven-year contract terms.

The end result of these various factors is that revenue is currently relatively stable, but margins are improving. This result is shown by the 2008 year-to-date net income being $280,000 greater than the same period for 2007, an increase of 15%. We are encouraged that these trends will continue as the number of industry publications have indicated that technology spending by banking organizations in 2009 will increase by at least 6%. This reveals the understanding and foresight on the part of many community banks that technology will allow them to stay competitive, provide efficiencies, enhance service levels and improve management reporting and analysis.

We have a recent example of this thinking from an existing data processing client who has contracted with RDSI to move their existing Internet banking product to the RDSI product with significant savings, operational improvements and feature enhancements. Other examples of this interest in technology spending includes small community banks buying more products to better compete in local niche markets against regional banks with products such as merchant capture and mobile banking.

Looking forward we see continued opportunities. For example, we have scheduled for the fourth quarter two bank conversions, one merger/consolidation and three item processing conversions. So other conversions are already scheduled into the first quarter of 2009, including our first bank in Kansas, which will become our 11th state for doing business.

Ken, that concludes my comments about RDSI banking systems. Back to you.

RDSI continues to have a strong pipeline of bank prospects. There is also a robust set of products under development that will enhance our client banks profitability through new revenue or greater efficiencies. We expect the overall environment for RDSI to be challenging as banks profits are squeezed by the economic environment. This situation is a two-edge sword as our client banks look to lower their costs, but at the same time, banks with renewing contracts are more receptive to discussing alternative systems, which would lower their cost relative to their current processor. It is difficult to see where these trends will balance out, but so far the trend seems to be a push for RDSI with one trend balancing out the other.

I will now turn the webcast over to Duane Sinn, Rurban's Chief Financial Officer, who will discuss the financial information of our two business segments in greater detail and give you some additional color on some key financial areas.

Duane?

Thank you, Ken, and good afternoon. As Ken, Mark, and Hank have indicated, we continue to see improving results of initiatives we started several years ago. Specifically the Banking Group continues to benefit from diversified market demographics, a repositioned balance sheet, reductions of nonperforming assets and greatly improved back room efficiencies. Our banking acquisitions in previous years have allowed us to reposition our balance sheet in this changing rate environment providing 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. We have reviewed in detail every category of our balance sheet for potential impairment and repositioning based upon the current market conditions.

Starting with due from banks, we elected to test our liquidity sources over the end of the quarter as we borrowed money from our correspondent banks and FHLB and placed the funds at the Federal Reserve, increasing our cash in due from banks by approximately $14 million at quarter-end.

As mentioned earlier, we have no common or preferred stock in Freddie Mac or Fannie Mae. We have a nominal amount of stock in Farmer Mac, FHLB and the Federal Reserve, all of which we view as secure investments.

Within our $94 million securities portfolio, we hold no corporate bonds. Approximately 65% of the portfolio is in mortgage-backed securities primarily issued by the agencies, and all are currently performing well.

We also have reviewed our entire portfolio of municipal securities, which make up 17% of our securities portfolio. As part of this review, we examined the underlying insurers assessing the overall combined strength of the securities. For those municipalities that did not have any underlying rating, we evaluated the underlying entity using our internal loan underwriting standards. We have made some minor repositioning moves as a result of this review, and we are comfortable with the current municipal securities portfolio.

As Ken mentioned, we continue to be encouraged by the quality of our loan portfolio and the positive trends in delinquency and nonperformers.

Another material category on our balance sheet is bank owned life insurance, commonly referred to as BOLI, which totals $12.5 million. We have reviewed the four underlying life insurance companies that underwrite our BOLI, and they all remain strong with minimal exposure to their balance sheets to the real estate impairment.

At this point we see no significant signs of weakness. Total assets at September 30, 2008 were $585 million, a $19.3 million increase from the $566 million reported at September 30, 2007. The increase in assets was primarily due to growth in loans, which increased $11.6 million or 3% from the previously mentioned increase in cash in due from banks. Our loan portfolio balanced mix is 20% in commercial C&I loans, 36% in commercial real estate loans, 11% in agricultural loans, 21% in residential real estate loans and 12% in consumer loans.

As mentioned in our press release, we have been successful in changing our mix on the liability side of our balance sheet enhancing profitability. These efforts have paid off as we reported a $788,000 or 22% increase in our net interest income over the 2007 third quarter, primarily driven by a decrease in our cost of funds.

Our many efforts to reduce our cost of funds included the use of repurchase agreements, an increasing contribution from our Chief Deposit Officer, focus on private client offerings, success of our high performance checking account program and continuing improvement in our cross-selling of products to our existing customer base. Overall these efforts have increased total deposit transaction accounts by $21.6 million during the past 12 months, while more costly time deposits have decreased $28.3 million. A portion of these time deposit balances transitioned into money market accounts, and a portion were allowed to run off due to excess liquidity during the year. This has resulted in a 101 basis point decrease in deposit costs during the first nine months of 2008. More recently, we have started to shift our liability sensitive balance sheet toward a more asset-sensitive position given the reasonable assumption that excluding a short-term drop in rates, the expectation is that long-term rates movements will be an increase. Management has responded to the recent 50 basis point decrease in prime and believes that we have identified offsetting savings in the cost of funds.

Looking at the income statement, our consolidated net income for the third quarter was $1.42 million or $0.29 per diluted share compared to $864,000 or $0.17 per diluted share for the same quarter in 2007. The 2008 third-quarter earnings include $86,000 of net after-tax income due to the sale of a closed branch office offset by the write-down of an OREO property. Rurban's return on asset was 99 basis points, return on equity was 9.54%, and our overall bank group efficiency ratio improved to 71%. Excluding the onetime adjustments in the third quarter of 2008, core operating income increased over 55% compared to the prior year quarter. Net interest income was $4.4 million for the three months ended September 30, 2008 compared to $3.7 million for the third quarter of 2007. This increase of $788,000 or 22% was largely due to an improving net interest margin at 3.84% within the Banking Group. Total deposit costs have decreased to 2.19% during the third quarter compared to 3.32% for the prior year third quarter.

This 113 basis point improvement in our deposit cost was only partially offset by a 63 basis point decline in our loan yields. This is evidence that we have managed through the 350 basis point decrease in the prime rate very well. Our objective is to continue to maintain or improve the margin.

We have identified additional outgrow initiatives we plan to execute during the remainder of 2008 targeting margin improvement. A few of these initiatives are our most focused effort in originating floating-rate loans, increased emphasis on loan fees, better profitability models to track product, officer and regional profitability and improved loan pricing models. The provision for loan loss was $146,000 for third quarter of 2008 compared to $140,000 taken in the third quarter of 2007 and a $213,000 taken in the 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.

As Ken and Mark indicated, the trends are stable.

Total non-interest income was $7 million for the third quarter of 2008 compared to $6.8 million for the third quarter -- to the prior year third quarter, an increase of $206,000 or 3%. Excluding the onetime item of $243,000, non-interest income was virtually unchanged. Data processing fees are essentially stable compared to the third quarter of 2007 for the reasons discussed by Hank. Due to the decline in the equity markets and the trust business dependence on those balances for fee income, we recorded $37,000 or 4.8% less in trust fees year-over-year.

We continue to record increases in customer service fees driven by increases in our high performance checking account product. As a spinoff to this product, additional debit card mailings in the quarter helped to increase customer service fees, which totaled $626,000 for the third quarter of 2008, representing a $38,000 or 6.4% increase in this line item compared to the year ago quarter. Total non-interest expense was $9.3 million for the third quarter of 2008, increasing $172,000 or 1.9% from the year ago quarter.

Excluding the write-down of real estate, non-interest expense increased $68,000 or less than 1%. Compensation and benefits decreased $51,000 or 1.2% due to efficiencies within the add-in processing segment of RDSI. Equipment expense within RDSI also decreased 89,000 for the current quarter compared to the year ago quarter. These decreases were partially offset by slight increases in postage and delivery and taxes.

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

Alright. Well, thank you, Duane. While we're pleased with our operating results, we are not satisfied. We continue to aggressively seek improvements and opportunities to expand our franchise. We expect to see regulatory approval of our acquisition of National Bank of Montpelier in the fourth quarter and close the transaction shortly after receiving approval.

As you may recall, this is an all-cash deal, and we expect the transaction to be immediately accretive exclusive of some acquisition expense we incurred at closing. We continue to look forward to this opportunity to bring National Bank of Montpelier and its customers into our banking family.

Valda, I'm turning this webcast back to you to determine if we have any questions from our 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 still listen to today's webcast on our website, www.RurbanFinancial.net, until November.

Okay. With there not being any questions in the queue, I'm going to turn the call back to Ken Joyce.

Well, thank you. We continue to believe that Rurban Financial Corporation offers an outstanding value relative to its current stockprice. A careful review of our progress should lead an investor to that same conclusion.

With no more questions, we will complete this quarter's webcast. We appreciate you taking the time to hear more about the progress that Rurban Financial Corp is making, and we look forward to talking with you next quarter.

Goodbye now.

All parties may now disconnect.