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EXHIBIT
99.1
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TRANSCRIPT
Rurban
Financial Corp.
Third
Quarter 2010 Financial Conference Call and Webcast
November
16, 2010
OPERATOR:
Good Afternoon and Welcome, Ladies and Gentlemen, to the Rurban Financial Corp.
Third Quarter 2010 Financial Conference Call and Web Cast. 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 & Answers following
the presentation. I will now turn the conference over to Linda
Sickmiller, Investor Relations. Please go ahead, Linda.
Linda
Sickmiller, Investor Relations
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 web site www.rurbanfinancial.net
until December 14, 2010. Joining me today are Mark Klein, President
and Chief Executive Officer, and Tony Cosentino, Chief Financial
Officer.
Before we
get started, I’d 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 Mark Klein.
Mark
Klein, President and Chief Executive Officer
Thank
you, Linda, good afternoon everyone and welcome. Today, I will
provide a high-level overview of our operations this past quarter, including our
holding company, Rurban Financial Corp., our banking group, The State Bank and
Trust Company, and finally our technology subsidiary, Rurbanc Data Services,
Inc., or RDSI. Our CFO, Tony Cosentino, will then expand on these
results in more detail.
First,
let me say that we are pleased that we returned our company to profitability
this past quarter. Our dual focus during the third quarter was first, to
stabilize RDSI, and secondly, to expand our banking activities and market
presence where we saw profitable growth opportunities.
Net
income for the quarter was $26,000. This represents a substantial improvement
over the second quarter which was primarily affected by one-time charges in
connection with our decision to terminate the merger of RDSI and New Core
Holdings. Under new leadership at RDSI, we’ve brought our costs in line with
revenues to achieve breakeven results this past quarter. We feel confident that
RDSI can become profitable from a base of DCM’s item processing customers, but
we also have begun to review opportunities to rebuild RDSI’s revenue stream
through product and industry diversification.
Our
Banking Group reported improved earnings, asset quality, and core deposit growth
during the third quarter. We further expanded our mortgage banking activities
with a near-record level of originations, which we sold in their entirety into
the secondary market. We’ve retained the mortgage servicing on loans we
originate, and now have a servicing portfolio approaching $300 million that we
expect will generate a nice stream of fee income each quarter.
Apart
from residential mortgages, loan demand is still weak in our markets. So we are
pleased with the improved results of Reliance Financial Services, our wealth
management division. Revenues have not shown much growth year-over-year, since
we believe that investors, especially retail investors, have been put off by the
uncertainties in the economy. However, we reported fee income of $650,000 from
Reliance this past quarter, up 10% compared to linked quarter fee income of
$591,000. Likewise, assets under management have grown from $290
million for 2009 year-end compared to $306 million at the end of this quarter.
Also, expenses at Reliance have been well-controlled, with more profit dropping
to the bottom line this year than last.
Asset
quality has improved across-the-board since the beginning of this year.
Nonaccruing loans declined nearly 20% from the previous quarter, and 45% since
year-end 2009. In total, we have $12.1 million of nonperforming assets on our
books. We believe that we’ve managed to avoid the credit quality problems that
have hurt so many banks because we’ve been extremely cautious about who we loan
money to, and consistent in our underwriting standards. Despite a lower level of
problem loans, we continue to build our loan loss reserve, which now stands at
1.47% of total loans.
Residential
real estate lending continues to provide a boost to earnings, as well as
cross-sell opportunities. We originated $67 million of loans this past quarter,
and $145 million year to date. These loan sales have generated approximately $2
million of gains on sale. We believe that our three-year old central Ohio
presence has provided us with geographical and economic diversification. Year to
date, approximately 53% of our loan volume and over 60% of our gains on sale are
from this new Columbus region. Our servicing portfolio now stands at more than
$276 million, up $90 million over the past 12 months.
Our
information technology division, RDSI, has gone through an arduous process of
re-structuring after we decided last quarter to terminate the proposed merger
and spin-off of RDSI. From a company that earned most of its income as a data
processor, RDSI is transitioning to an item processing shop, and striving to be
one of the best. We believe our DCM division is one of the lowest cost
processors in the business, and we are currently reviewing opportunities in
other industries as well as banking where we can apply this technology. In
addition to item processing, we plan to focus on additional products, such as
network services and software consulting. Gary Saxman is RDSI’s new
president; Gary and his team have long-standing experience at RDSI, and his
learning curve has been steep. Gary is charged with creating a new business
model for RDSI, on a smaller scale than the old RDSI model, but able to generate
a positive income stream that will grow over time. While we have begun to see
positive results on many fronts in each of RDSI’s businesses, we still have much
work to do.
At this
time I would like to turn over the presentation over to our CFO, Tony
Cosentino. Tony…
Anthony
V. Cosentino, Executive Vice President and Chief Financial Officer
Thank
you, Mark. Good afternoon everyone. As Mark said, we are
very pleased to report positive earnings this quarter. Given the expanded
workload imposed on our staff by the de-conversion of data processing clients at
RDSI and the loan-by-loan account review we completed at State Bank, it
certainly feels like we’ve spent an awful lot of time this quarter getting
business done.
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Much of
our effort this past year has been to reduce our level of non-performing
assets. As Mark said, they now stand at $12.1 million, or 1.77% of
total assets, down $8 million, or 40%, from year-end 2009. This $8.2
million reduction has occurred fairly evenly over the past three quarters. As of
September 30th,
approximately $3.4 million of problem assets were 1-4 family residential, and
$3.0 million was commercial real estate. Of our total non-performing assets,
44%, or $5.3 million, consisted of 3 large credits, and we feel very comfortable
with the level of reserves allocated to those specific credits. Right now, our
loan loss reserve of $6.5 million provides coverage of approximately 64% of
non-performing loans which compares very favorably to 38% coverage at
year-end.
One thing
I would like to point out is we have very few construction loans outstanding --
only 3.5% of total loans. We only have $634,000 of non-performing residential
and commercial C&D combined, or 4.1% of C&D loans – just 1.4% of total
loans. So in this respect, we believe our loan portfolio has a lower risk
profile than many other banks. But just to remain cautious, we also took the
opportunity this past quarter to add to our reserves.
Our
balance sheet remains very liquid as a result of strong deposit
growth. We also took the opportunity this past quarter to selectively
prune some problem C&I loan credits. Combined with the weakened loan demand,
we now find ourselves with a surplus of cash and liquid investments higher than
we prefer. We anticipate using this liquidity to fund our loan
pipeline as well as pay down higher rate term funding that is set to mature in
the next few months.
Capital
levels remain strong at State Bank with our Tier 1 and Risk-Based Capital ratios
at 7.1 percent and 11.6 percent, respectively. Due to the
charge-downs at RDSI in the second quarter, capital levels at the holding
company mirror those at State Bank. It is worth noting that $5
million in capital at RDSI is here --- that would not be here as a result of
this spin-off scenario.
Non-interest
expense declined $2.1 million from the year-ago third
quarter. Included in this quarter are an additional $340,000 of OREO
and loan administration expense compared to the year-ago quarter, as well as
$592,000 of expenses related to Originated Mortgage Servicing Rights (OMSR) that
did not exist in the prior year. *(when adjusting for these one-time items, we
would see a 24% percent reduction in our year-over-year quarterly expense
level.) We have reduced staff by 20 percent from the prior year and
we anticipate further reductions prior to year-end.
At RDSI
this quarter we had a net operating loss of $54 thousand, which was almost
breakeven and a big improvement over the previous quarter. We anticipate further
fall-off in data processing revenue until State Bank is RDSI’s only remaining
data processing customer. We expect that RDSI will have a negative operating
quarter in the fourth quarter before expenses are once-again brought in line to
match the lower revenue stream. Our anticipated 2011 proforma at RDSI
calls for positive operating earnings and cash flow.
Operating
results for the Bank during the quarter showed net income of $548
thousand. We expect the Bank to have positive earnings for the year,
despite the size of our loan loss provision during this year. The
bulk of our earnings for the past year have been used to improve our levels of
non-performing assets and for the costs to maintain our OREO and foreclosed
properties. We believe that operating expenses should return to more
normalized levels as credit costs decline and our focus will move away from
conversions towards calling efforts.
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Mark,
back to you.
Mark
A. Klein, President and Chief Executive Officer
Thank
you, Tony.
It feels
good to talk about making some money this quarter, rather than charging things
off. We are now able to give our core businesses the attention they deserve, and
we believe we have made significant progress in a short period of
time.
We have
begun to turn our focus towards 2011 to develop a budget and business plan that
incorporates efficiency enhancements as well as new products and services, in
particular, additional sources of noninterest income. The
deconversions at RDSI took a great deal of time away from more productive
activities and many of the cost-saves we’ve implemented over the past year have
been obscured by the additional auditing, legal and consulting fees we’ve paid
out. Most of these distractions are now behind us, and we are prepared to
move forward to a new and higher level of performance. Linda, I am turning this
Web Cast back to you to determine if we have any questions from our investment
community.
Linda
Sickmiller, Investor Relations
Thank
you, Mark. It’s now time for the question and answer session.
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If
you are using a speakerphone, please pick up the handset before pressing
any numbers and un-mute your phone.
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IF
you have a question, we would like you to press star one on your
telephone.
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If
for some reason you would like to withdraw your question, press star
two.
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So
again, if you have a question, please press star one on your telephone and
we will take the questions in the order they are received. We’ll stand by
for a few moments.
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OPERATOR:
And we’ll take our first question from David Horn with Kiron
Advisors.
<Q – David Horn>: Hi,
Gentlemen. Thank you for taking my questions, for hosting call.
<A – Mark Klein>:
Thanks, David.
<Q – David Horn>: Can
you just give a little bit more color on the non-performing assets, the 12
million, what’s the makeup of those?
<A – Anthony Cosentino>:
Yes, happy to do that for you. We have approximately $3.4
million of residential real estate, $3 million roughly of commercial real estate
both owner-occupied and investor-occupied, and $2.5 million of the C&I,
those are the three largest characterizations of our $10.1 million. In our OREO
balance of roughly $2 million, we have $1.3 million that’s in a commercial real
estate property that’s been fully written down.
<Q – David Horn>: Okay,
all right, great, thank you. You’ve done a nice job sort of riding
the shift, we are not losing money anymore. What do you think – which
lever between the net interest income and non-interest income and non-interest
expense do you think you’d pull next to get us back to
profitability?
<A – Mark Klein>: Well,
David, we are continuing to focus on non-interest income. Our areas
of emphasis, as you might expect, would be improving our
efficiencies. We’re looking at every office and every division that
we have in terms of the expenses. We have begun to look at the
business model of related insurances that’s going to get us some additional fee
income and we continue to propel our mortgage banking to higher
levels. I am quite pleased with the size of our servicing portfolio
and a much bigger one I think is still in line for us given our presence – and
newer presence in Columbus of only three years. And, of course, the
other half of the volume coming up this way, but we do have some initiatives
that are on the table with regard to extending the duration of our liabilities
on that side and reducing some of those costs so that we can get some lift in
our current margin.
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<Q – David Horn>: Okay.
Because now that we’ve written down so much of RDSI and we’ve taken – the
non-performing assets we have really taken a lot of reserves this year and
gotten that level up, I mean what sort of things do you see impeding us from
being profitable in 2011?
<A – Mark Klein>: Well,
again there is the – I mean obviously the economy is a huge part of
it. We’ve gone through some – our safety and soundness exam and we
are quite pleased at this point where we are currently at with that
exam. We have some very favorable results on our current grades of
our credits, so we’re pleased with that. If we get a little marginal
lift in the economy and a little help in that respect, we continue to remain
optimistic, but there’s always going to be risk in the loan portfolio that we
think we have properly quantified. But clearly I think the big caveat
would be the economy.
And
again, we think we’ve right-sized or will by the end of the year have
right-sized RDSI to return to profitability and we have some key opportunities
on the table that we’re not at liberty to speak of yet. But we
continue to strategize on way s to return that franchise back to
profitability. So, a number of variables, but, again, optimistic from
where we’ve come from and where we’ve kind of landed this quarter.
<Q – David Horn>: Okay.
Great. I mean any thoughts on the fact the stock trades at sort of half of
tangible book. So, I guess there is skepticism in the market. I mean, do you
find that to be just a blatant mis-pricing or – I mean obviously a much larger
discount to actual book value…?
<A – Mark Klein>: Well,
obviously both are below where we would certainly think they should be, but
again, for lack of any solid earnings and some communication by our leadership,
which we have begun to do, we will be hosting some Town Hall meetings and
talking with some of our retail investors to ensure that they know that we’ve
certainly made some adjustments and that we are content with the progress we’ve
made, but certainly not with the results that we’re currently turning
in. But, again, the process has begun, and I repeat, we remain
optimistic.
<Q – David Horn>: Okay.
Great. Well good luck and thank you and for taking the question. I look forward
to speaking with you next quarter.
<A – Mark Klein>: Thank
you very much.
OPERATOR:
[Operator instructions]
Linda
Sickmiller, Investor Relations
While
we’re waiting to see if we have any additional questions, I would like to remind
you that today’s webcast will be accessible on our website at www.rurbanfinancial.net
until December 14, 2010.
OPERATOR:
If there are no further questions, I’ll now turn the conference back to Mark
Klein.
Mark
A. Klein, President and Chief Executive Officer
Once
again, thank you for joining us. And we look forward to chatting with
you again in the coming quarter. Take care.
OPERATOR: This
does conclude today’s conference. We thank you for your participation. All
parties may now disconnect.
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