SB Financial Group Inc (SBFG) 2009 Q1 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the Rurban Financial Corp. first-quarter 2009 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 the conference up 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.

Good morning, 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 May 8, 2009.

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, changes in local real estate market, 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 Corp. Ken?

Thank you, Valda, and welcome to the first-quarter 2009 webcast. Joining me today and presenting are Mark Klein, President and CEO of the State Bank and Trust Company; Hank Thiemann, President of RDSI Banking Systems, our data and item processing segment; and Duane Sinn, our Chief Financial Officer.

Rurban reported first-quarter 2009 earnings of $1.1 million, which represents consistent earnings from the year-ago quarter, when earnings were also $1.1 million. Earnings were down from the fourth quarter of 2008, primarily driven by a build in a loan reserve that was $300,000 greater than the allowance for the quarter one year ago.

The quarter represented success in a number of areas and challenges in the other. We have made excellent progress in developing our mortgage banking business, which has certainly been aided by very favorable mortgage rates. Mortgage production was $60 million for the quarter compared to $18 million for the year-ago quarter.

Our acquisition of National Bank of Montpelier was completed in December of last year, and its integration is progressing according to plan. Former NBM staff is adjusting to a new culture, and NBM's clients are getting the advantage of a larger portfolio of products and more expertise in a number of areas. We have realized expected savings through the consolidation efforts, and we should make further progress, as we have announced plans to close two banking centers in connection with this acquisition. The banking centers will be closed by the end of the second quarter.

We anticipated this acquisition increasing our nonperforming assets, which is the reason we reserved $1.2 million in connection with this acquisition in the fourth quarter of 2008. Approximately $1.8 million or 28 basis points of the nonperformers are acquisition related. Given our collateral position, we see the current reserve coverage for this group as appropriate. We continue to service any problem loans and make certain they are adequately reserved as identified.

Overall, we are pleased with the progress being made by the banking segment and RDSI, our data and item processing business.

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

Thank you, Ken, and good morning. The banking segment finished the quarter with net income of $863,000, short of our 2008 first-quarter net income of $917,000 by approximately $54,000 or 5.9% year over year. The quarterly net income shortfall is reflective of an increase in loan loss provision of $300,000, as Ken mentioned, to the reserve for several large credits and servicing right impairment charge of $150,000.

Along with expense improvements we've realized in our recent National Bank of Montpelier acquisition, we grew core deposits, increased our interdepartmental referrals, implemented several sales culture initiatives and produced substantial loan sale gains. These improvements were offset with a slight contraction in loan balances.

Growth in core deposits continues to be a passion at the bank, as it has enabled us to grow the balance sheet while adding net interest income at the margin or better. As a result, our cost of deposits declined to 1.56% for the quarter compared to 2.9% for the year-ago quarter. Propelling this improvement are our retail sales strategies that have enabled us to improve the composition of our deposit balances.

Currently, core deposits, which include DDA, NOW, savings and money market funds, comprise 52.2% of total deposits, up from 47.6% for the year-ago quarter.

Our aggressive referral program continues to be a driver of improved core deposits and this quarter's loan sale gains. In 2008, we had referrals of 1330 and 410 closed. For this quarter alone, we uncovered 857 referral opportunities while closing 263 so far. To date, these referrals have resulted in over $21 million in loan sale gains, $2.6 million in loan balances and $860,000 in deposits.

By quantifying interdepartmental referrals in 2009, we have raised the bar from the prior year's referrals, and the results are certainly encouraging. With our sales culture continuing to gain traction, positive trends are emerging in the promotion of electronic banking to our clients and net new DDA accounts. Clients utilizing electronic banking have increased from over 15,000 in the first quarter of 2008 to 19,809 today for a year-over-year increase of over 30%.

Likewise, core deposits are up from $101.3 million a year-ago quarter to $127 million this quarter and are reflected in our net new DDA accounts of 904 for 2008 and 182 for this quarter alone. Loan sale gains continue to provide earnings momentum. As Ken mentioned, in the year-ago quarter, we recorded approximately $18 million in mortgage production, whereas this year's production for the current quarter exceeded the $60 million mark.

Likewise, our servicing portfolio has expanded with this new production, from $35 million in 2007 to over $122 million at the current quarter end. Our strategic initiatives to expand our mortgage presence in our traditional footprint, along with our one-year-old Columbus LPO, have delivered bottom-line improvements, both in loan sale gains as well as in increases in our servicing portfolio.

Total loans for the quarter were $10.8 million below the linked quarter, but $48.7 million above the year-ago quarter. We continue to proactively make sales calls in each of our markets to commercial and retail clients, as well as numerous prospects. The recent recruitment of John Kendzel, a native of Toledo, as our Toledo Regional President, with over 20 years' banking experience, will further position us for prudent balance sheet growth in that market.

Regionally, from a year-ago quarter, we have experienced growth in both the Columbus and Fort Wayne markets of $13.1 million and $2.5 million, respectively. We continue our rigorous underwriting process that consistently gives way to quality over quantity.

Clearly, the economic environment continues to provide ample challenges for each of our staff members to navigate. However, and perhaps more importantly, these challenges also provide us an opportunity to discover new and better ways to expand our presence and serve our clients while improving our efficiency.

Ken, back to you.

Thank you, Mark, and congratulations on your success with the banking segment. Just a few words on asset quality before we move on to RDSI.

We have seen an increase of nonperforming assets in the first quarter, which needs some discussion. We began to build our reserve in the fourth quarter as we set aside approximately $1.2 million for the potential losses in the acquisition's portfolio. The last quarter of 2008 and in this first quarter of 2009, we have sorted through the acquisition's portfolio and identified what we feel are the nonperformers, which total about $1.8 million.

Given the collateral coverage we have seen in these nonperforming loans, our associated reserve should adequately cover our potential losses.

Also this past quarter, we had a $1.8 million commercial real estate loan go 90 days past due, and therefore it was moved to nonperforming. We placed nearly $700,000 in reserve in the first quarter against what we view as potential loss on this loan. We should have no loss on this loan, but we will let time tell us that and perhaps allow us to bring back that reserve.

In this environment, nonperforming loans will continue to grow until the economy improves. Consumers are struggling with payments, and that in turn impacts commercial loans. Although we are comfortable with our reserve position and our ability to add to reserves as necessary from earnings, without an improvement in economic conditions, virtually all bank loan portfolios will show more stress.

I will now turn the webcast over to Hank Thiemann, President of RDSI, to discuss the progress of his segment. Hank?

Thank you, Ken, and good morning. The first quarter of 2009 for RDSI Banking Systems produced favorable results, with two new client bank conversions located in Ohio and Kansas and a merger of two existing clients. With our continuing emphasis on new bank sales, our proposals and presentations for data processing business in this first quarter have increased by 65% over last quarter.

At quarter end, RDSI had a total of 113 clients using our services for data processing and/or item processing in 11 states. Our gross revenue for the quarter was $5.4 million or 4.9% less than the year-ago quarter, and net income was $767,000, 4.1% less than the first quarter of last year.

We've seen an increase in our client banks wanting to improve their service and operations by purchasing technology solutions that improve revenues or efficiencies. New product sales to our existing banks have totaled over $300,000, on track for equaling or exceeding last year.

Today, 100% of item processing for our banks is done electronically, far ahead of most item processors, who average around 55% electronic. We remain very proactive in our contract renewal process and we have already renewed almost 30% of our 2010 contract expirations. We are pleased with this past quarter, but we are cautiously optimistic about the rest of 2009 because of economic conditions and its effect on the banking industry.

RDSI began over 40 years ago using its own programs in the State Bank and Trust Company, our sister company, and a handful of local banks. 15 years ago, the affiliation began with ITI and their core system and ancillary products, all being provided to a growing number of banks. Over the years, we have partnered with many other specialized vendors for specific software products. We expect these kinds of third-party affiliations to continue in order to fulfill our value proposition of being a technology leader, a secure provider and a trusted advisor to our clients.

One of our differentiators is personal service. In fact, our client relations managers are often invited to join a client's technology planning meeting to provide suggestions. We also provide various types of training, and to date we have conducted 30 training sessions for about 150 client staff members. We even have scheduled some specialized training for several nonclient banks who do not receive enough assistance from their current data center.

I have mentioned in past webcasts that we continually focus on ways to improve efficiencies for our client banks and the newly launched RDSI Image Exchange Program. That's an excellent example of those efforts. Research and work on that began over six months ago, with the goal of having our Image Exchange provide a more efficient, less costly and potentially faster method for client banks to clear and settle their check items.

With several regional banks participating, we offer the potential to our client banks to be more efficient and to reduce some operating expense with our service, which bypasses the Fed. This service is just now rolling out, and we have high expectations for its success.

In the upcoming months, we will be continuing our executive visits with clients to stay in touch with them and their needs. We also have scheduled three more conversions for the year, and the sales pipeline remains strong. We will be conducting five users' conferences in various locations to improve our client use and understanding of their software and its capabilities. Our annual CEO conference is planned for the third quarter. And, as always, we continue to be driven by focusing on superior customer service, geographic expansion, client product growth and, of course, improving the technology solutions available for our clients. Our intent remains the same, to help our banks win.

Ken, back to you.

Thank you, Hank. Now 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, back to you.

Thank you, Ken, and good morning. I will start out with some balance sheet comments. Total assets at March 31, 2009, were $665.8 million, or $8.2 million increase from the $657.6 million reported at December 31, 2008. The increase in assets was primarily driven by our growth in investment securities, which increased $25.3 million during the quarter.

The Company elected to invest a portion of the liquid assets from the fourth-quarter acquisition and from the increase in core deposit balances into higher-yielding securities. The increase in investment securities was offset by a reduction in loans of $16.1 million and declines of $5.0 million in cash and deal.

Approximately $8 million of the loan decrease was due to the refinancing of mortgages from our in-house mortgage portfolio, which essentially moved them into our serviced loan portfolio. This creates an ongoing revenue stream created by the servicing fee we receive to service these loans, as well as eliminate duration risk within the loan portfolio, which helps us move our balance sheet towards a more asset-sensitive position. The other reduction in loans was the result of paydowns involving a couple of larger credits within the commercial loan portfolio.

An additional bright spot for the banking group during the quarter was lower mortgage rates, which spiked production beginning late in the fourth quarter. Total originations during the quarter were $60 million compared to only $18 million for the first quarter of 2008. Over 95% of these originations were sold into the secondary market, with servicing retained.

As mentioned in our press release, on the deposit side, we received an increase in core deposits of $12.8 million or 5% core transaction balances. Our repurchase agreements with our business clients also increased $4.5 million for the quarter, as these customers moved cash into higher-yielding investments. This product still provides a very low-cost funding source for us at the bank. These balances continue to be a driver of the improvement in our net interest margin.

I will transition to the income statement and focus on our quarterly results compared to the year-ago quarter. Net income for the quarter was $1.1 million or $0.23 per diluted share compared to $1.11 million or $0.22 per diluted share a year ago. The growth in revenue for the quarter included the increase in net interest income driven by our acquisition, the improving net interest margin, and growth in mortgage banking fees.

Offsetting these increases in revenues were decreases in truest fees and data processing fees and the increases in noninterest expense, which is a result of Rurban's growth initiatives. The increase over the year-ago quarter of $1.2 million in net interest income was due to our acquisition and the increase in our margin to 3.93% within our banking segment. We reported a 0.84% decrease in our loan yield over the past 12 months, and we were able to offset this decrease with a 1.57% decrease in our cost of funds. These changes all contributed to a 48-basis-point increase in net interest margin over the past 12 months.

Mainly the sales calling efforts that Mark reported on were the major factors contributing to our improvement in margin. In addition to those items, we're focusing on improving our margin further by transitioning our balance sheet to a more asset-sensitive position, transferring some of our dollars out of investment securities into higher-yielding loans, and continuing to attract more low-cost deposit accounts.

Total noninterest income was virtually unchanged at $7.5 million for the first quarter of 2009 compared to the prior-year first quarter. Certainly mortgage banking has given us a lift with the $60 million in production that was completed during the quarter. We also feel that we have made very good progress in bringing a good portion of this revenue to the bottom line. However, there is an opportunity to improve this margin on this piece of business.

We should also start to see a benefit from the recovery in the equity markets, which will be reflected in our trust fee income. I will also point out that we did record one-time revenue items totaling $330,000 in the first quarter of last year related to the Visa IPO and investment security recoveries.

Total noninterest expense was $10.5 million for the first quarter of 2009, up $874,000 or 9% from the 2008 first quarter. As mentioned in the press release, the three material expense items in the quarter were ongoing Williams County acquisition expense of $488,000; $150,000 in impairment charges on mortgage servicing rights; and $265,000 in additional incentive payments associated with mortgage banking lenders.

The $485,000 or 11% increase in compensation and benefits for the first quarter compared to the year-ago quarter was due to the aforementioned increase in mortgage banking incentives of $265,000 and the increases associated with the five additional branches in Williams County, which totaled $291,000. These two increases offset a decrease within RDSI in compensation and benefits, driven by efficiencies in many areas.

Increases in occupancy, office supplies, taxes and employee expenses are all a direct result of the Montpelier acquisition. Once again, we expect to continue to get additional efficiencies going forward from this acquisition within all expense categories.

I'll spend a couple of minutes discussing our asset quality numbers. Total provision for loan loss was $495,000 for the quarter, and net charge-offs were $167,000 or 15% of average -- excuse me, 15 basis points of average loan on an annualized basis.

Total nonperforming loans were $9.2 million at the end of the first quarter compared to $5.3 million for the first quarter of 2008. The following represents the breakdown in balances of loans within the $9.2 million of nonperforming loans -- $1.1 million in commercial C&I loans, $4.6 million in commercial real estate, $50,000 in agricultural, $2.8 million in residential one-to-four-family, and $665,000 in consumer loans.

One strength of our overall loan portfolio is the diversification of purpose and collateral that supports our loans. An example of this diversification is the low concentration of real estate development loans, which totals $13.1 million or 2.9% of total loans.

At this time, I will turn the discussion back over to Ken to provide closing comments and observations. Ken?

Thank you, Duane. Appreciate your discussion and follow-up on the item processing expenses, data processing expenses and the bank expenses.

So, Valda, at this time we will turn it over to the webcast 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 to see if we have any questions, I would like to let you know that today's webcast will be on our website home page until May 8.

Ross Haberman, The Haberman Fund.

I was wondering if you could give us sort of an overview of the general local environment in your markets, what the unemployment rate is, and your expectation for loan demand and loan growth for the coming year?

Sure. We've got enough people here that we can put together some fairly good looks at that. We have in the Defiance County area, for instance, the unemployment rate is close to 14%. That is not an uncommon rate in the number of the markets that we work in, including the Toledo market. Fort Wayne market is substantially less. I haven't seen a real good figure on that. I have been told it's somewhere in the 6% to 8% range. A similar number has been given to me on the Columbus market. So the unemployment rates there are not as onerous, and we have received better production there.

In terms of loan production, we actually see a little bit of a buildup in the pipeline and have some expectation that we will see some growth in that area. Mark, anything you want to add to that?

No. Good morning, Ross. We continue to make a number of calls, and one of our strengths certainly is the fact that we have four high-level Regional Presidents, and our diversification in Columbus and Toledo and Lima and Fort Wayne, in addition to our traditional footprint. That geographic diversity I think is going to play, at least in this economy is going to play a particular strength to us.

So we see the volume continuing. We are working twice as hard to get half as many credits, but that's kind of the nature of the economy we have. But, no, we're optimistic.

So, Ross, we are challenged, but we're working through it, I guess is the best way I can tell you.

And just one other question. Cost of funds, most banks I'm talking to are seeing deposit rates drop like a rock. I was wondering if you experienced similar -- similar experience now.

We are. I'm going to turn that over to Duane to comment on. He can give you the specifics of it. But as a general statement, we've seen a significant inflow of cash. We have seen a good amount of deposits coming in. There's been deposits from some of the regionals, have moved into what I would assume to be a number of community banks, as there is a little bit of uncertainty -- not that it's warranted, but it's just the safety reaction probably from some depositors.

Duane, you want to talk about what we've been able to do with deposit rates as a result of that somewhat oversupply?

Yes. Thanks, Ken. And, Ross, good to talk to you. Just to give you a perspective on deposit costs, Ross, in the first quarter of 2008, we saw a total deposit cost of roughly 2.97%. That dropped to 2.51% in the second quarter of 2008. Then it dropped clear down to 2.19% in the third quarter of 2008, down to 2% in the fourth quarter of 2008, and then we really saw that drop precipitously down to 1.56%, so a 46-basis-point drop.

Now, a little of that, Ross, has to do with timing of our retail CDs and the maturities of those. So throughout 2008, we were the benefactor of a good amount of maturities during that time. And then our acquisition provided for nice low-cost core deposits. So we have not had to pay up at this point, nor do we expect to. We continue to have nice liquidity. So we continue to be competitive. But, yes, we saw significant decreases in our cost of deposits.

We have also, you know, the alternative funding sources outside of what we just discussed have dropped. We're seeing some historic lows on two-, three- and five-year money from the FHLB, so starting to ladder in small pieces of that.

Finally, if rates stay the same, for argument's sake, how do you see the spread or margin going for the rest of the year?

Well, if rates stay the same, we will probably actually see a little bit of improvement in the margin. We are continuing to reprice the CDs as they come due. That tends to kind of widen that spread a little bit.

One thing we are doing, though, Ross, that may counter that to a certain extent is that we have begun the process of repositioning the balance sheet to make it more asset sensitive. And the reason we are doing that is that we feel that we are going to see -- we will probably see ourselves at the bottom of the rate cycle here. Don't know how long that's going to last. We would think the next move is going to be up. And therefore, if we move our balance sheet to asset sensitive, we will be able to take advantage of that.

Now, in the short term, that results in some slight narrowing of the margin as we shift people and clients into our variable rate loans, which are low at this point. So we will probably see a little bit of improvement, not as much as we could potentially take advantage of because we are going to position the balance sheet differently to make sure that we are doing the right things here and some 12 to 18 months out.

Okay, thank you, guys. Best of luck.

(Operator Instructions).

Also available on our website is the presentation from yesterday's Annual Meeting of Shareholders that will be on our website on Monday, and along with the transcript from today. If you would like to listen to it, or read, you are more than welcome to go to our website, www.rurbanfinancial.net.

If there are no further questions, I will now turn the conference back to Ken Joyce.

Okay. Well, thank you. We're going to wrap the conference up at this point. We are very confident of where we are headed with the organization. We are very confident about our very sound core earnings and our relative positioning relative to nonperforming assets.

We are continuing to explore strategic options for RDSI. That is a very careful process that we are working through. And we should be able to continue with that process and make some announcements perhaps within six to nine months. Any other questions, we will be happy to answer those one on one. Just simply give us a call, and we will talk to you later. Valda, back to you.

Thank you, Ken. And that concludes our call for today. Thank you very much for joining us.

All parties may now disconnect.