Valda Colbart- Investment Relations Officer
Kenneth Joyce- President and CEO
Duane Sinn- Executive VP and CFO
Mark Klein- Pres. and CEO of the State Bank and Trust Company
Henry Thiemann- President and CEO of RFCBC, Inc.
Rurban Financial Corporation (RBNF) F2Q08 Earnings Call July 17, 2008 4:00 PM ET
Good afternoon and welcome ladies and gentlemen to the Rurban Financial Corp. 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 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 on our website, www.rurbanfinancial.net until August 7th, 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 risk 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, poor capital market conditions, and other factors set forth in the company’s filings with the SEC. 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 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 RDSI, our Data and Item Processing Company and Duane Sinn, our CFO.
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 are pleased to announce earnings of $1.36 million for the second quarter, which equates to $.28 per share. This compares to earnings of $785,000 for the year ago quarter, a 73% improvement over the last years quarter and 22% over last years’ 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 vs. 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 banks management staff is executing with great success. The key part of our strategy was entry over the last few years into a number of relative growth markets such as Lima, Toledo, Columbus, and Ft. Wayne, IN.
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 of meeting the needs of our clients. This lending approach involved 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 accounts continue to grow, impacting balances and service fees as Mark Klein and Duane Sinn will discuss.
Part of this change in strategy in the branches has also been an evolving 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-scene numbers such as cross-sell ratios, prospect calls, and referrals made and referrals sold.
Tied to this sales strategy are plans and efforts to maintain costs. For example, we carefully measured costs for transactions at teller lines and promote electronic transactions with the result that both have significantly improved as Mark Klein will discuss. These measures, among many others, will lead to greater efficiency as we measure by our expense control and our operating efficiency improvement.
I will now turn the webcast over the Mark Klein, President and CEO of our banking group to discuss the progress of the bank. Mark?
Thank you Ken and good afternoon. I am pleased once again to 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 $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 are 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 in the previous quarters.
Accounting for our improvements are several vital initiatives. We have hand-picked our key business leaders, concentrated on geographical diversification to higher-growth markets, utilized a balanced score-card approach to strategic planning that has enabled us to clearly identify our goals ,objectives, major initiatives and detailed action plans that are re-enforced with appropriate performance incentives and lastly we have tracked and monitored progress on appropriate controls and metrics weekly. Management’s reliance, attention and commitment to these strategies have clearly been the driver on our path to being a higher performing community bank.
Integration of a broad-based proactive sales culture at the bank continues to pin-point areas of opportunity that improves client care while improving bank performance. Specifically commercial sales calls for the last quarter were 581 vs. 420 for the same quarter last year. We can identify loan growth of $1.5 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 in a combination of loans, deposits, fee income and trust business. We are 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: client, stockholder, and the employee. Reinforcing these sales initiatives are referrals to friends and families from our advisory boards and corporate boards, 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 offices are now operating at $1.23 per transaction, and this represents a reduction of approximately $.22 per transaction from the 2007 level of $1.45, or a 15% improvement. This equates to a savings of approximately $250,000 annually. This reduction is clearly imbedded in the overall improvement in our efficiency ratio. The 69.85% from 79.5% for the linked quarter; and from 73.23% from 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, OH in early 2008.
We are 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 1,873 users or 12.6% improvement from 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 27,880 transactions, or 19.8%. As an example of how we are 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 onsite 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 non-performing assets to total assets improve to 1.6% for the current quarter compared to 1.22% for the linked quarter. We have net recovery for the quarter of gross charge-offs for the second quarter of 2008 were $11,000 which were more than offset by recoveries totally $29,000. Total allowance for loan losses through loans increased from 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 are 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 with the banking group and the positive results achieved by you and your team. We 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 are 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 bank products and provide better access to a market that we already have some familiarity with as we are in adjoining counties. Seeing the full impact of the transaction should take about 6 months. We at 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 the 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; our 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 functions. Our most notable efficiency in item processing is the reduction in staffing by approximately 1/3; 11 FTEs 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 use data processing and 92 use 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 one-time installation fees. After beta testing in the first quarter we have launched secure e-mail and global 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. Re-negotiating 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 ten states allowing us to have net additions to our banking base; Midwest, 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, the typical community bank of $200 million in assets for example, has not participated in sub-prime lending, 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 skill sets which several of our staff has developed.
We are also focusing on continual improvements in client services through internal efficiencies to provide better, faster service: Six user’s 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 fees. 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 begin our planning for 2009 which we expect to be an exciting year for RDSI. We also utilize the balanced score card methodology with regular tracking of achievements against targeted completion dates. And that is my update for RDSI.
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 its cost structure has changed through electronification of checks. RDSI is also emphasizing products that add revenues to its banking clients and products that enhance productivity.
We continue to examine strategic alternatives for RDSI in improving bank profitability picture aids in our consideration of these options. I will now turn the webcast over the Duane Sinns, Rurbans CFO who will discuss our financial information in greater detail.
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 benefitting from better market demographics, a repositioned balance sheet, reduction of non-performing assets and greatly improved back-room 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 National Bank of Montpelier later this year as we bring them into our banking group. Our story has been consistent over the past twelve months as we continued to manage our balance sheet initially to a liability sensitive position and now beginning to shift it towards great asset sensitivity.
Let’s discuss a few of the balance sheet highlights. Total assets as of June 30th, 2008 were $576 million; a $28 million increase from the $548 million reported at June 30th, 2007. Increase in assets were primarily driven due to growth in loans which increased $22.8 million or 6% over the past twelve months. Loans likewise increased $15.2 million, or 7.8% on an annualized basis over the first six months of 2008. As has been the pattern over the last 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, OH loan production office has provided quality growth generating $10 million in portfolio loans for the first six months of this year. They also have generated $3 million in additional full residential loans during this time period from this market. Our Fort Wayne, IN full-service branch is now fully staffed. Growth continues targeting the private client base in the 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 in 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 re-purchase agreements; increasing the role of our Chief deposit officer; focus on private client [inaudible] offering; 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 $13.5 million during the past twelve months, while time deposits increased $18.5 million for the same period. A portion of these time deposit balances transitions 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 re-priced $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 assets driven position given the market expectations 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 $.28 per diluted share compared to $785,000 or $.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 one-time legal fees associated with our work-out company RFCBC. Excluding the one-time adjustment in the second quarter 2008 four operating earnings increased over 56% compared to the prior year quarter.
Net interest was $4.4 million for the three months ended June 30th, 2008 compared to $3.8 million for the second quarter of 2007. This increase of $680,000 or 18% was due to the improvement in our net interest margin which increased 3.83% within our banking group, which was also due to growing loans approximately $22 million. As mentioned previously we continue to show excellent progress in gross transaction deposit accounts. We have shifted over $20 million or 5% of our deposit balances from time deposits into transaction accounts which enables us to change price on a daily basis versus longer term fixed rates CD offerings. Overall deposit costs have decreased to 2.51 % this second quarter compared to 3.24% for the prior year second quarter. This 73 basis point decline in deposit costs was offset by a 42 basis point decline in fund yield. This is evidence that we have managed a 2-300 basis points decrease in prime rate very well. Our objective is to continue to maintain or improve the margins. We have therefore identified additional outcomes that we plan to execute during the remainder of 2008 targeting margin improvement.
Provisions to loan loss was $213,000 in the second quarter of 2008 compared to $146,000 in the second quarter of 2007; and $192,000 in linked quarter. At this time we do not see any concerns concerning trends in delinquencies and foreclosures; however we are not insulated from the current economic cycle and we do expect to have to work harder and harder to maintain our [inaudible] level.
Total managed income was $6.8 million in the second quarter of 2008 compared to $6.5 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 mailing drove increases in customer services which totaled $613,000 which represents a 15% increase in line items 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% for the second quarter of 2008 compared to the same quarter of 2007. This is primarily driven by incentive accruals from our banking group. We monitor over 27 different metrics in our bank incentive plan on a monthly basis. We accrue for these pay-outs throughout the year when benchmarks are met then pay-outs are made and annual results are the same. The increase in compensation and benefits within our operating was offset by a $216,000 reduction in 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.
As we mentioned in our press release the majority of 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 proficiencies on a daily basis. At this point I will turn the discussion back over to Ken.
Thank you Duane. As stated in my opening comments we are making excellent progress and are 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 $.09, and increase of $01 from the prior quarter. The dividend is payable on August 22nd to all shareholders on record as of August 8th.
We have certainly been conscious of the decline in our stock price during 2008. While the financial segment 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 our those organizations with impairments and those with opportunities. We believe that we are an organization with opportunities and we have backed it up with improved earnings. Performance should be recognized in the market and we look for our shareholders to be appropriately rewarded as we continue to improve our organizations performance. Now I am turning this webcast back to you to determine if we have any questions from the investment community.
This completes this quarter’s webcast and we appreciate you for taking the time to hear more about the progress that Rurban Financial Corp. is making. We look forward to talking with you next quarter.