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EXHIBIT
99.1
RURBAN
FINANCIAL CORP.
Moderator:
Valda Colbart
January
28, 2010
4:00
pm ET
Operator: Good
afternoon, and welcome ladies and gentlemen to the Rurban Financial Corp. Fourth
Quarter 2010 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 question and answers following the
presentations.
I will
now turn the conference over to Valda Colbart, Investor Relations Officer;
please go ahead, Valda.
Valda
Colbart: 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 until February 14, 2009 –
2010. Joining me today is Ken Joyce, Mark Klein and Duane
Sinn.
But
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 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 risk 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 on the company's filings with the Security and Exchange
Commissions.
And now
for additional information: RDSI has made an initial Form 10 Registration
Statement with the SEC concerning the contemplated spin-off and the merger
transaction between RDSI and New Core Banking Systems.
Those
filings include a combined information statement to be delivered to Rurban's
shareholders in connection with the spin-off and a proxy statement to be
delivered to the New Core shareholders in connection with the approval of the
merger transaction by the New Core shareholders.
The
combined information statement/proxy statement and other documents filed by
Rurban and/or RDSI with the SEC contain important information about Rurban,
RDSI, New Core and the merger transaction. We urge investors and New
Core shareholders to carefully read the combined information statement/proxy
statement and other documents filed with the SEC, including any amendments or
supplements also filed with the SEC.
New Core
shareholders, in particular, should read the combined information
statement/proxy statement carefully before making a decision concerning the
merger transaction. Investors and shareholders can obtain a free copy
of the combined information statement/proxy statement along with other filings
containing information about Rurban and RDSI at the SEC website at
http://www.sec.gov.
Copies of
the combined information statement/proxy statement and any filings with the SEC
incorporated by reference in such document can and also be obtained free of
charge by directing a request to, Rurban Financial Corp., 401 Clinton Street
Defiance, Ohio 43512, attention Ms. Valda Colbart, Investor Relations Officer,
telephone number 419-784-2759.
I will
now turn the call over to Ken Joyce, Executive Vice Chairman of Rurban Financial
Corp. Ken…
Ken
Joyce: Well, good afternoon and welcome to the Fourth Quarter 2009
Webcast, and thank you for taking the time to better understand your
company.
With me
today is Mark Klein, President and CEO of both Rurban Financial Corp. and The
State Bank and Trust Company, and Duane Sinn, Chief Financial Officer of
Rurban.
There is
a lot to discuss in this webcast so I will quickly move into the various
issues. I am speaking to you as the Executive Vice Chairman of Rurban
Financial Corp., instead of its CEO, as we have begun some of the structural
changes that we announced in the third quarter press release and
webcast.
I am in
the process of transitioning management of the Holding Company and bank to Mark
Klein and managing the RDSI spin-off process. We are proceeding
towards implementing the spin-off of RDSI from Rurban Financial Corp., with a
timeframe of around the end of the first quarter, depending upon the
effectiveness of our Registration Statement filed with the SEC and the other
conditions having been met.
This
process was formally begun with our filing of the initial Form 10 Registration
Statement on December 31, 2009 which provides detail information relative to the
planned spin-off. We continue to plan on the acquisition of New Core
Banking Systems immediately following the RDSI spin-off and the shareholders of
New Core will be receiving a maximum of just under 30% of the combined
entity.
The
details of this merger and acquisition with New Core Banking Systems are
combined and contained in the initial Form 10 Registration Statement, which can
be found on our website. Rurban will continue as a single bank
Holding Company with The State Bank and Trust Company as its primary business
unit.
Mark
Klein has very effectively led the bank for over 4 years and the Board of
Directors of Rurban, after careful consideration, has appointed Mark Klein as my
successor. I will be available for the remainder of 2010 on a
consulting basis.
I'll take
a few minutes here to comment on the most recent quarter and our decision to
suspend the dividend. The loss for the quarter and for the year was
largely driven by the build in reserve, which was $3.5 million for the quarter
and $5.7 million for the year. We have taken what we currently view
as an adequate reserve build to offset the potential losses from the new
non-performing assets which we added at year-end. The true amount of
the loss will not be clear until we dispose of those assets, which should be by
the end of the second quarter.
If the
assets are not disposed of by then we will at least have identified any
potential loss and fully reserved it. At this time, I do not see the
potential loss in these credits as exceeding our ability to cover those losses
with net incomes so earnings for the next quarter will be at risk.
We have
not seen additional credits come onto the table having these problem
characteristic, but of course that is an unknown element and affected by the
economic environment. These two credit relations --- relationships
were in the TDA--- TDR category for the third quarter and quickly
deteriorated.
We have
suspended the dividend effective as of the first quarter of 2010 to reflect the
loss of revenue and net income. It is prudent at this time to suspend
our dividend payments and preserve capital over the next two quarters as we
assess the impact of these problem credits.
We can
then make a reasonable and informed decision to bring back an appropriate level
of dividend for the third quarter, assuming that circumstances allow us to do
so.
We are
simply sharing with you our best view of our thinking, knowing it can change and
it is subject to changing circumstances. We'll update you on that
picture on a quarterly basis. And some additional information we will
be sharing the pain of the income decline, as well as our shareholders, as the
company has restricted its merit increases and discretionary
benefits.
I also
want to touch on another peculiar event that occurred in this last fourth
quarter, a mortgage fraud loss. This loss resulted in a $1.15 million
of additional loan loss provision for the quarter. State Bank and
Trust is working with its legal advisors and intends to pursue all available
legal remedies.
I will
now turn this webcast over to Mark Klein, President and CEO of Rurban and The
State Bank and Trust Company. Mark will give you some more details on
asset quality, the specifics of our banking progress, strategic implemation---
implementation and our tactical efforts to grow the banking franchise and
improve core profitability. Mark…
Mark
Klein: Thank you, Ken and good afternoon. Our quarterly
net income was a loss of $577,000 contributing to 2009 year-to-date net income
for the banking segment of $2.05 million.
The
primary contributors to our decline in income was an unusually high loan loss
provision of $5.74 million, $20.3 million of assets in non-performing status,
expenses related to the loan losses and the collection efforts, increased FDIC
insurance expense and the fraud-related residential mortgage closings in the
Fort Wayne, Indiana region that Ken just summarized.
Positive
trends hidden in these adverse results are our continued commercial loan growth,
organic core deposit growth that helped produce a high and stable net interest
margin, strong growth in the mortgage banking sector and resulting loan sale
gains, an increasingly successful referral program and newly identified expense
reductions.
I'll
start with asset quality considerations as our loan loss provision of $5.74
million for 2009 reflects the overall general economic contraction, systemic
portfolio stress in the residential real estate sector and the identification of
impairment of several larger commercial credits.
While we
feel we have adequately reserved for these credits based on historical
methodology and general market conditions, ultimately, their resulting
collateral liquidation, as well as borrower support, will determine our
position, as Ken had discussed.
At the
end of 2008 our non-performing assets stood at$ 6.59 million. At
year-end 2009, the nonperforming assets represent over $20.3 million, for a
$13.7 million increase over the prior-year. We are diligently working
these non-performing assets off our balance sheet with the intent to minimize
the potential impact.
Loan
growth for 2009 was a modest $2.5 million year-over-year. However,
with this modest growth, there were a number of significant positive
trends. Commercial loans grew by $17.8 million despite our increasing
scrutiny and more cautious lending standards. We continue to attract
more solid credits as regional banks continue to deleverage. While
our regional real estate loan portfolio contracted in 2009 due to refinances,
this was largely offset by loans held for sale increasing by $13 million,
reflecting our growing mortgage banking operation.
Leading
our improvement in the overall production of non-interest income was the
production of saleable resident real estate loans. Our production for
2008 was $38 million. For 2009, we produced over $238
million. Supporting our position to acquire market share is our
percentage of outstanding refinancings and purchase-money loans.
Of the
$238 million in residential real estate loans produced in 2009, 83% were new
money. Over $115 million were the result of financing competitors
loans, while over $62 million resulted from the new home
purchases. Likewise, our servicing portfolio expanded from $71
million in 2008 to $200 million in 2009, for an increase of $137
million. We continue to develop our newer surrounding regions as a
key strategy to grow our balance sheet and approve our non-interest income while
diversifying our portfolio.
Our
strategy to leverage our geographic diversification has been successful, as
Toledo region grew $5.3 million, Fort Wayne $3.6 million. Our newer
market, Columbus, Ohio, accounted for $19 million in portfolio loans in
2009.
Growth in
our core lower-cost deposits continues to be the impetus to a stable net
interest margin. Our core deposits increased from $242 million at
year-end 2008 to $274.7 million in 2009, for an increase of $32.7 million, a
13.5% increase. This growth coupled with our strategy to price
non-core deposits at the margin, allowed us to drive overall deposit costs down
to 1.08% at year-end. The stable to declining global rate environment
accompanying our less-sensitive asset pool produced positive
results.
Consequently
our net interest margin expanded from 3.80% at 2008 year-end to 4% for The Bank
for 2009. Driving our results is our insatiable desire to continue to
attract every demand deposit account. We have moved from a net
decrease in DDA accounts to a net increase of 920 DDA accounts in
2009.
Energy in
our retail delivery process continues to provide the tools for building
lower-cost core funding and the resulting stable interest margin. The
path to working interdependently initiated in 2007 continues to
widen. In 2008, we had gross referrals of 1,330 with 410 closed,
reflecting year-over-year increases of 42%.
Momentum
in 2009 continued. We gave each other 2,242 referrals and closed
1,050 for a 3-year high closing rate of 46.8% resulting in over $86 million in
referred business. Specific departmental referrals commitments
continued to propel related departments to a higher level of
success.
In the
fourth quarter of 2009, we initiated an expense reduction program targeting $1.2
million of pre-tax savings. Capturing these savings is particularly
critical as The Bank and the Holding Company gain independence and lose past
profitability from RDSI.
Going
forward, we continue to identify and implement strategies to lower non-interest
expenses. The positive trends I just discussed could easily get lost
in the adverse economic conditions, but we remain enthusiast for our improvement
and affirm to our shareholders that we remain committed to passionately pursue
improved performance in 2010.
Certainly
as we move to become independent, with the spin-off of RDSI, it is with optimism
as we view our challenges as opportunities. Finally, we wish Ken,
Duane and the entire RDSI team much success in 2010 and beyond as they begin to
introduce the next generation of software, Single Source™.
Ken, back
to you.
Ken
Joyce: Well thank you, Mark, and congratulations on your continuing
progress in improving the core banking operations and profitability despite the
current asset quality problems we're facing. I'll make a few comments
here relative to RDSI, before passing the webcast over to Duane Sinn for some
expanded financial information.
RSDI and
the New Core staff continue to be very busy and productive over the past
quarter. The spin-off and merger were disclosed in substantial detail
through the initial Form 10 I previously discussed. We received this
morning the first round of comments from the SEC. We will be
answering those comments and providing a modified Form 10 within a limited
amount of time. The updated Form 10 will be disclosed by an 8-K
filing, so you should watch for that disclosure.
RDSI is
working to convert State Bank and Trust to the New Core Banking System and we
anticipate that conversion will take place in February. Implementing
that conversion has taken us longer than anticipated because of a number of
complexities that are being introduced for the first time in a software version
being installed in State Bank.
It should
be noted that New Core has crossed over the 1-year anniversary of the first
installation of the Single Source™ software in a $300 million bank and that bank
continues its use of the software and is satisfied that its meeting its
needs.
We are
not accepting any contracts from our client banks until we've had a successful
conversion of State Bank and Trust and they have had the opportunity to view
that conversion. We have certainly lost banks to our competition as
we have released all of our client banks from their contracts.
We have
received notice from 23 of our 70 plus banks that they will be de-converting to
other software providers. We continue to have a loyal following based
upon the merits of the new software, but that loyalty is primarily based upon
RDSI's 40-year history of providing outstanding service and our commitment to
making our clients our first concern.
This is
not always the same value proposition for many of our competitors. We
see this as the largest launch of a new core banking system in the last 15 to 20
years. And I could clearly spend much more time on the RDSI story,
but our time is limited in this webcast.
We expect
this to be a successful launch and the end result will be a release of the
inherent value of RDSI to our shareholders over the next few years.
I'll 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…
Duane
Sinn: Thank you, Ken and good afternoon. The fourth
quarter continued to be difficult for Rurban Financial Corp. as we recorded
elevated levels of provisions. We also continued to record costs
associated with the planned spin-off of our data processing company,
RDSI.
The costs
associated with RDSI will slow substantially as we get through the first
quarter. Despite these very difficult times within the banking
environment, Rurban continues to work diligently on improving core
earnings. A reflection of that is the $1.2 million identified in the
fourth quarter by management to improve the Banking Segment's
earnings.
In
general, for the quarter, we continued to take a larger loan loss provision to
build the balances within the allowance for loan loss due to several troubled
debt restructured loans deteriorating and transitioning to non-performing
assets. And the addition of one additional commercial ray---real
estate loan totaling $3.3 million and continued residential real estate
foreclosures.
Our loan
loss provision expense totaled $3.5 million, up significantly from the $898,000
in the third quarter of 2009, and up from the $138,000 reported in the fourth
quarter of 2008. Our allowance for loan loss totaled $7 million, or
1.55% of total loans at December 31, 2009, compared to $5.9 million, or 1.32% of
loans on December 31, 2008.
Net
charge-offs for 2009 totaled $3.8 million, or an annualized 84 basis points of
average loans. Approximately $1 million of the $3.5 million in
charge-offs during the fourth quarter was attributable to one specific credit
which had been previously reserved for and required no additional reserve in the
quarter. The remaining charge-offs were due to several smaller loan
relationships.
Management
continues the process for nat--- analyzing the loan portfolio and made decisions
to continue to allocate additional resources to work on past due and
non-performing loans, taking aggressive actions designed to mitigate
losses. Included within the $3.5 million in charge-offs during the
quarter was a mortgage fraud charge of $1.15 million. Ken has
provided you the background on that event.
Some
detail on the mix of credits within the $20.3 million in non-performing assets
is as follows: $4 million, or 20%, are commercial C&I loans; $11.2 million,
or 55%, are commercial real estate loans, $4.3 million, or 21%, are residential
real estate loans, and approximately $814,000, or 4%, are consumer-related
credits.
The
challenge that all financial institutes face within the next 12 months within
the asset quality world is finding buyers of distressed assets. This
likely will result in banks, including us, reporting elevated level of
non-performing assets for an extended period of time as we work to liquidate and
litigate these problem assets.
The loan
balances and troubled debt restructured credits decreased to $1.3 million at
year-end, compared to $6.9 million at September 30,
2009. Transitioning to the balance sheet: total assets at December
31, 2009 were $673 million, an increase from the $657.6 million reported at
December 31, 2008. Loans increased $2.4 million during the
year.
Loans
held for sale increased by $13 mi--- million year-over-year. The
majority of the loans held for sale were delivered in early January 2010, and
this is a reflection of our increase in production of mortgage
loans.
During
2009, commercial loans grew $17.8 million while residential loans decreased $15
million. While balance sheet, while balance sheet changes were
minimal, management spent considerable time moving the balance sheet $57 million
towards a more asset-sensitive position during 2009. This position -
this positioned the balance sheet to take advantage of the next increase in
interest rates.
Total
deposits were $491.2 million at year-end compared to $484.2 million at the end
of 2008. We have discussed previously the transition of funds to core
transaction accounts from time sensitive accounts. This is best
illustrated by $32.7 million, or 13.5% increase, in core transaction accounts
during the year.
With
funding rates at historic lows, we will focus our future attention to the asset
side of the balance sheet. We started this process late in 2009 by
selling $10 million in long-term investments.
Total
capital was $61.7 million at year-end. While we have not yet finished
our final calculation of regulatory capital ratios, our estimates reflect the
Corporation's Tier 1 leverage ratio and total risk-based capital ratios at 8.4%
and 12.6%, respectively, well above the regulatory minimums of 5% and
10%.
Our
estimate is that both ratios will decline by approximately 110 basis points
after the spin-off of RDSI. These ratios will remain strong after the
spin-out and well-above the regulatory requirements.
I will
now spend a few minutes on the income statement. Net income for the
fourth quarter was a loss of $1.9 million, or $0.39 per share. Items
that impacted the fourth quarter included the loan loss provision of $3.5
million, legal and accounting fees of $486,000 associated with the anticipated
spin-off of RDSI, accelerated amortization of the ITI software, which totals
$659,000, and a $442,000 increase in operating expenses at RDSI associated with
the increased staffing and related costs for the conversion of clients to the
Single Source™ system.
Providing
additional details of these overhead charges, legal and accounting fees were
directly associated with the preparation of the SEC document that was filed in
late December. We expect a continuation of these fees during the
first quarter, although at a reduced level, as we currently are responding to
the SEC comments related to the document.
The
accelerated amortization is related to an accounting change, and the estimated
useful life of the ITI software that remains on the RDSI books. On
July 28, 2009, RDSI entered into an agreement with Fiserv to terminate the use
of the ITI software effective December 31, 2010.
As a
result of this agreement, RDSI has tested this long-lived asset for
impairment. Test results illustrate that the asset is currently not
impaired. However, due to the change in the useful life of the asset,
the amortization has been significantly increased. RDSI will continue
to test this asset for impairment on a quarterly basis and write-down this
asset, if necessary.
Although
there is an impact to the income statement as a result of the accelerated
amortization, there is no impact to cash flow. The additional cost of
$442,000 at RDSI is a direct result of hiring 15 full-time equivalent employees
that are focused on upcoming Single Source™ conversions. As we
proveed--- proceed through the first quarter, we will have a clearer picture of
the conversion calendar and address the operating expenses accordingly at
RDSI.
In
closing, I would like to point to the future and the underlying earnings of the
organization. Certainly underneath our asset quality issues and the
costs to spin-out RDSI are very encouraging and a solid base of core earnings
that we continue to focus on improving.
We have a
very nice margin at 4%. We have a mortgage banking operation that
closed in excess of $200 million in production in 2009, we have an improving
trust fee income, and we have identified $1.2 million of improvements within our
Banking Segment. We must continue to take a long-term view of our
operation and focus on the future.
At this
time, I'll turn the discussion back to Ken to provide closing comments and
observations. Ken…
Ken
Joyce: All right, well thank you, Duane. Valda, I'm going
to turn this webcast back to you to determine if we have any questions from our
investment community.
Valda
Colbart: Thank you, Ken. It's now time for the question
and answer session. If you are using a speakerphone, please pick up
the handset before pressing any numbers and un-mute your phone. If
you have a question, we would like you to press star 1 on your
telephone. That's star 1 if you have a question. And if
for some reason someone asks the question you would like to and you need to
withdraw your question, press star 2.
So again,
if you have a question, please press star 1 on the telephone and we will take
the questions in the order they are received. We'll stand by for just
a few moments to see if there are any questions. While we are
waiting, I would like to remind everyone that today's webcast will be available
on our website at www.rurbanfinancial.net until February 18, 2010.
Ken, we
don't have any questions in the queue today, so I'm going to turn the call back
to – oh, we have one question in the queue.
Operator: And
your question will come from John Deysher.
John
Deysher: Hi, you do have one question here.
Ken
Joyce: Yes, John, go ahead. It's Ken
talking.
John
Deysher: Good afternoon. The fraud case, the mortgage
fraud, anytime you hear that word “fraud”, um, it's cause for
concern. So I'm just wondering if you could spend a couple of minutes
just kind of outlining how that occurred and how you plan to pursue that going
forward?
Ken
Joyce: Sure. It's a very unusual case,
John. I've been involved with mortgage banking for a long
time. I actually ran a national mortgage banking company for a long
period of time. I haven't seen the kind of fraud that that particular
one was, although I have just recently learned that there was a precedent case
in Columbus.
Basically
what happens is the loans get closed in the title company and you get an insured
closing letter, and that has always been taken with great faith. And
the end result is that the money's sent, and typically the mortgages behind that
closing, that you're paying off, are indeed paid off.
In this
case, there was fraud within the title company, as we see it. And I
think it's been all identified and there were a good number of banks involved,
actually, who were apparently taken advantage of here. And you know
that loss is well-defined and we've taken the entire amount.
And going
forward, we have enhanced our, our controls, but that entire system is based
upon that insured closing letter. And we believe that we will
eventually prevail and precedent says that we will – we will indeed
prevail.
John
Deysher: Do you have insurance in case that's not the
case?
Ken
Joyce: We have insurance. We've made notice to our insurer
of the nature of what has gone on here and put them on notice assuming that
we're not successful with our litigation claims.
John
Deysher: OK. Who is the defendant in this case,
then?
Ken
Joyce: Well, I'm not able to disclose that at this
point. Probably in the course of next week, the suits will be filed
and that will all be public information.
John
Deysher: OK. It is a title company though, you
say?
Ken
Joyce: Yes.
John Deysher: OK, fair enough. And on the spin-off, what's the antic – assuming you get through the SEC comments with no trouble …
Ken
Joyce: Yes.
John
Deysher: … that spin-off should occur – I can't
recall. Did you say first quarter or second
quarter?
Ken
Joyce: We're anticipating getting it done by the end of the first
quarter. You know if you give any slippage to it, it's probably no
more than 30 days.
John
Deysher: OK. So by mid-second quarter at the latest,
probably.
Ken
Joyce: At the latest, yes.
John
Deysher: OK, very good. Good luck.
Ken
Joyce: OK. All right, thanks, John. All right,
Valda, I see there are no additional questions. So I'm going to thank
everyone on the line for taking the time for listening to this update and thank
you very much. Bye now.
Operator: And
all parties may now disconnect.
END