EXHIBIT 99
[RCI LOGO] Conference Call Transcript
Q2 2004 Rurban Financial Corporation Earnings Conference Call July 28, 2004 4:00
p.m. ET
CORPORATE PARTICIPANTS
Ken Joyce
Rurban Financial Corp. President and CEO
Jim Adams
Rurban Financial Corp., CFO and Executive VP
Sandra Stockhorst
Rurban Financial Corp., Vice President
CONFERENCE CALL PARTICIPANTS
George Geissbuhler
Sweney Cartwright
Mark Saunders
Trident
PRESENTATION
Operator
Good afternoon, and welcome ladies and gentlemen to the Rurban Financial Corp.'s
second quarter earnings conference call and webcast. At this time I would like
to inform you that this conference is being recorded and that all participants
are in a listen only mode. We will open the conference up for questions and
answers after the presentation. I will now turn the conference over to Sandra
Stockhorst, Vice President. Please go ahead, Sandra.
Sandra Stockhorst - Rurban Financial Corp., Vice President
Thank you, Sally. Good afternoon everyone. I would like to remind you that this
conference call is being broadcast over the Internet live and will also be
archived and available at our website, www.rurbanfinancial.net until August 18,
2004. Joining me on today's call are Ken Joyce, President and CEO; Jim Adams,
Chief Financial Officer and Executive Vice President; and Hank Thiemann,
President & CEO of RFC Banking Company. We will be available to answer your
questions following our brief opening remarks.
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, legislative and regulatory decisions or capital
market conditions and other factors that are set forth in the company's filings
with the Securities and Exchange Commission.
I'll now turn it over to Ken, President and CEO.
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[RCI LOGO] Conference Call Transcript
Q2 2004 Rurban Financial Corporation Earnings Conference Call July 28, 2004 4:00
p.m. ET
Ken Joyce - Rurban Financial Corp., President and CEO
Well, thank you, Sandra, and welcome to Rurban Financial Corp.'s second quarter
2004 webcast. Thank you for taking the time to join us this afternoon and learn
about the progress of your company.
We are pleased to report another quarter of increasing net income as we earned
$709,000 versus $612,000 for the first quarter this year. As you may recall, we
sold a number of branches in the first and second quarters of last year, and the
operating earnings were nominal in those quarters. Therefore, in comparison to
the year ago quarter is not meaningful.
This is the fourth quarter of improving net income for Rurban Financial Corp.
The primary story in this quarter's earnings is the continuing significant
improvement in credit quality. We have achieved a remarkable improvement in
classified loans since the discovery of our loan problems in early 2002. As a
specific example, our classified loans, which are the two lowest grades of loan
quality, totaled $77 million at the end of 2002. The same total at the end of
the current second quarter was $39 million, which is just about a 50% reduction.
The rate of improvement has accelerated as we have a $12 million drop in the
first quarter of this year and an $11 million reduction in the current quarter.
[Note: The statement that classified loans dropped by $11 million in the second
quarter of 2004 is incorrect. The company wishes to clarify that the amount of
classified loans dropped by $6 million during the second quarter of 2004.] These
improvements are expected to continue as we aggressively work out our problem
loans.
I think a few comments will give everyone a better understanding of this
quarter's earnings. They are not as transparent as normal because the reporting
mechanisms tend to aggravate several transactions and net them out. So I want to
take a few minutes to explain some key points. On a quarter-to-quarter basis
without some of the one time items on both sides of the income statement, we
would have probably reported earnings in the range of $575 to $600 thousand.
This would be an expected seasonal decline because two of our subsidiaries, the
trust company and data processing company, to higher billings in the first
quarter than the second quarter because of the year end processing activities of
these two companies. However, rather than a slight decline in earnings we were
fortunate this quarter to get a one time tax credit for our past research and
development in our data processing company, which totaled $166,000. The
favorable credit was somewhat offset by associated consulting fees of about 15%
of tax credit amount. Secondly, our improving credit quality allowed us to
recover $340,000 from our allowance for loan loss reserves. The recovery to the
allowance for loan loss reserves was mostly offset by increased costs directly
associated with credit recovery such as higher legal costs and disposition of
OREO. The net improvement in our second quarter results demonstrates the
advantage that we have and the diversity of our earning stream.
Let's talk about our plans and progress in a number of key areas. We continue to
believe that we have adequate reserves for our problem loans. This is
illustrated by the rapid decrease in our level of classified assets and our
ability to recapture the associated surplus in our allowance for loan losses.
Our allowance for loan losses remains very strong at 2.56% of loans versus the
industry norms from banks of our size of about 1.34%. Our capital with both the
state bank and trust holding company level continues to improve. Our risk based
capital measure is currently 14.5% and 20.8% respectively compared to the
regulatory defined well capitalized level of 10%. We are experiencing improving
margins, which is partially the result of our decline in our level of classified
loans. Our margin improved by 13 basis points during the second quarter. We
would expect that margin to further widen through the third quarter as loan
quality continues to improve and we begin to experience the benefit of rising
rates on our asset sensitive portfolio. This asset sensitivity should give us
some advantages, prime increases over the next business cycle. We would expect
to see improvements in net interest income also as we have bottomed out in our
process of running off of loans that were identified as out of market.
Just to give you a small indication of this process, we began this year with $30
million in loans previously located in our now closed Cleveland LPO. These
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Q2 2004 Rurban Financial Corporation Earnings Conference Call July 28, 2004 4:00
p.m. ET
loans have declined by $14 million since the beginning of the year. Our loan
production and our newly defined market area is now beginning to offset this
intended runoff of our out of market loans.
At this time, I will turn the conference call over to Jim Adams, our Chief
Financial Officer, who will provide you with some additional detail on our
second quarter results. Jim.
Jim Adams - Rurban Financial Corp., CFO and Executive VP
Thank you, Ken. Good afternoon. As Ken said, we've made significant progress in
reducing the level of criticized assets during this calendar quarter by $11
million in addition to the almost $12 million reduction in the first quarter.
[Note: The statement that the level of criticized assets was reduced by $11
million during the second quarter of 2004 is incorrect. The company wishes to
clarify that the level of criticized assets was reduced by $6 million during the
second quarter of 2004.] The aggressive reduction in criticized assets has
allowed Rurban to reduce loan loss reserves during the second quarter by
$340,000 which, at first blush, appears to be one of the principal drivers of
second quarter earnings. However, increased professional fees, principally legal
costs and increases and other expenses, principally loan collection expense and
OREO write-downs, pretty much offset the benefit received from the reduction in
the loan loss reserves.
Let's discuss the other important details of second quarter earnings.
First, net interest income: net interest income declined slightly, about $74,000
in first quarter, principally due to the reduction of almost $10 million in
average earning assets, reflecting the reduced level of credit risk assets
previously discussed and which were partially offset by new loan production
during the second quarter. It's also important to note that although average
earning assets declined, our net interest margin once again widened, moving from
2.93% to 3.06% for the second quarter due to continued pricing discipline in our
loan and deposit gathering strategies.
Second, non-interest income: non-interest income, as expected, was impacted by
seasonality factors relating to both our data processing fees and trust
revenues. Generally our first quarter fees are very strong from both of these
revenue producing units due to the determination of final year end customer
activity billings, which are finalized in the first quarter of each year; and
although as expected, revenues from these sources declined from first quarter
2004 levels, they're running well above year to date comparisons to 2003 insofar
as data processing fees are up 16% and trust revenues have grown by 24%. During
the quarter, we also disposed of various repossessed assets as we continued our
aggressive program to eliminate non-earning assets from our balance sheet.
Results for the quarter are reflected in the gains of approximately $97,000
recorded in the second quarter.
Third, non-interest expenses: non-interest expenses increased by 4% over first
quarter levels. Driving this increase was the higher level of legal costs
associated with the aggressive reduction in credit risk assets previously
mentioned, as well as market value write-downs and collection costs associated
with the disposition of repossessed assets. During the quarter, we also
benefited from a one time refund received from switching ATM service providers,
which will further contribute to increased customer satisfaction, processing
efficiencies, and cost reductions.
Fourth, during the quarter we were able to complete an extensive study in
conjunction with an outside consultant, to avail ourselves of a previously
unclaimed tax credit. The favorable results of this study has a positive impact
on our tax liability of approximately $166,000 for the quarter and included in
professional fees were approximately $25,000 of costs associated with the study.
At this time I'll turn the webcast back to Ken for further comments on our
progress to date and wrap-up before we take questions. Ken.
Ken Joyce - Rurban Financial Corp., President and CEO
OK. Well, thank you, Jim. As a wrap-up, I'll discuss
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Q2 2004 Rurban Financial Corporation Earnings Conference Call July 28, 2004 4:00
p.m. ET
a number of items that we were working on in the relative short term and then a
brief look forward.
We have three goals that we are targeting for the short term, which we have
given our intense focus to. We are working hard to create the conditions for the
release of the written agreement that was entered into just over two years ago.
We believe that we are making substantial progress in each area covered by this
agreement, as well as the overall sense of the agreement to return to a safe and
sound operation. Release of the agreement is under the control of the regulatory
authorities, and therefore we do not make predictions about the release date.
However, we continue to improve by every measurement that we are aware of and we
will continue to do so.
Next is payment of the trust preferred interest, which is a key priority. We
will again be seeking permission to pay the next installment of the trust
preferred interest, which has been deferred as allowed in the note agreement. We
have the cash available, and expense of this debt instrument has been accrued to
date. Our next focus is resumption payment of the shareholder dividend, which is
obviously of prime importance to our shareholders in the management of this
company. We need to first pay the deferred interest on the trust preferred debt
instrument before we are contractually allowed to resume dividends. This
requirement is why I previously mentioned the need to bring the trust preferred
current. We will either need to request permission to pay the shareholder
dividend while under the written agreement, or we will need to wait until the
written agreement is released. We will make a decision on this approach once we
are able to bring the trust preferred current.
Looking forward, we are very pleased with the progress within all of the Rurban
companies. Continuing improvements in credit quality is the biggest component to
returning to State Bank and Trust to industry norm profitability. Core earnings
continue to improve virtually every month, and we expect those earnings to
continue and to accelerate as we move into the last two quarters of this year
end to 2005. We are working down State Bank's efficiency ratio from its high in
the 80's to its current 70's level. By improving both income and expenses, we
are targeting the 60's by the end of the fourth quarter and further improvements
in 2005.
The trust company, Reliance Financial Services, continues its strong earnings as
it produces us a record year with return on equity in the 30% range. In a
similar fashion, the data processing company, RDSI, is also having a record year
and should continue revenue and net income growth in its historic ranges.
We remain very confident of the future or Rurban, and I continue to be a buyer
of the stock, as I believe there is a strong potential for growth and improved
earnings.
I will now turn the conference call back over to Sandra Stockhorst to see if we
have any questions from our investment community. Sandra.
QUESTION AND ANSWER
Sandra Stockhorst - Rurban Financial Corp., Vice President
Thank you, Ken. It's now time for the question and answer session. If you are
using a speaker phone, please pick up the handset before pressing any numbers.
If you have a question, please press the star, one on your push button
telephone. If for some reason, someone asks the questions you would like to and
you need to withdraw that, just press star, two. We'll take the questions in the
order that they are received. We'll stand by for just a few moments.
I wanted to mention that while we're waiting to see if we have any more
questions, we would like to remind everyone that we'd be happy to e-mail you
directly regarding Rurban Financial Corp.'s corporate event earnings releases,
key presentations. If you'd like to take advantage of this, please visit our
website. Again, it's www.rurbanfinancial.net, and click on the investor
relations tab and then on the e-mail alert service to sign up and then we'll
send you a brief reminder as the events take place.
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Q2 2004 Rurban Financial Corporation Earnings Conference Call July 28, 2004 4:00
p.m. ET
Operator
Ms. Stockhorst, we have a question from George Geissbuhler of Sweney Cartwright.
George Geissbuhler - Sweney Cartwright
How you doing? Just a couple questions here. One, the data processing fees, I
guess, were down for the first quarter and then up for the first six months. Is
that at all through acquisition or is that just kind of the seasonal nature of
the billing or I wasn't sure? I thought it was mentioned, but I just didn't get
the explanation.
Jim Adams - Rurban Financial Corp., CFO and Executive VP
It's the seasonality for the data services company. They finalized their year
end billings in the first quarter of the year, send that out to customers. So
the first quarter for data service fees are usually pretty strong.
George Geissbuhler - Sweney Cartwright
So do you bill on a quarterly basis then or a yearly or half--
Ken Joyce - Rurban Financial Corp., President and CEO
Well, they bill on a monthly basis, but they chew up the final year end activity
charges, of course, after the close of the year for their customers that they
serve.
Ken Joyce - Rurban Financial Corp., President and CEO
Primarily, George, they're January processing the tax statements and so on and
year end reports. There's something of another billing cycle that goes on almost
in that January period.
George Geissbuhler - Sweney Cartwright
OK. And the other question on the trust fees, up a solid 24% for the six months.
How is--is that more market related or new accounts or new assets or anyway to
break that down at all?
Jim Adams - Rurban Financial Corp., CFO and Executive VP
Right now it's running just about 50/50. It's interesting--I'm sorry, this is
Jim Adams, George. It's really interesting. It's not only the markets that are
contributing to the earnings stream of Reliance Financial Services, but also new
product development. That area came out with a TAPS product that has just really
taken hold in this marketplace and is generating some very nice fees as well as
picking up another customer to, quite frankly, process their back office for
them, another trust division of a bank. And that's adding very nicely to the
revenue stream of the trust area.
George Geissbuhler - Sweney Cartwright
OK. One final question. Define the criticized assets for me if you would.
What do you classify as that?
Ken Joyce - Rurban Financial Corp., President and CEO
We talked about our classifieds being down in this conference call. Classified
assets are--we've got eight grades of loans. The eighth grade is not too
relevant because it's basically charge-off loans. The classifieds are the two
lowest grade loans of the
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Q2 2004 Rurban Financial Corporation Earnings Conference Call July 28, 2004 4:00
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seven remaining grades. Grade seven loans are essentially what we classify as
doubtful, and those are loans that we're not going to collect anywhere full
market value for, and we have already written those down to a collateral value
and also deducted and it becomes part of the reserve, what we call a transaction
cost. For instance, if it's a piece of real estate we've already deducted what
would be a real estate commission. So those loans have been ripped down to
collateral value if there is any collateral behind them.
The second group in the classified listing is what we call substandard, and
those are impaired or have some expectation that we may have some collection
problem with those, and we write those, again, with a reserve against them,
depending upon what we think the probability of collection. We go back and look
at the collateral value on those and assess the collateral and then write them
according to what the probability on the collection is. So those are the ones
that we've been very well targeted in terms of getting the reserve write-off.
George Geissbuhler - Sweney Cartwright
OK. So, thanks, and keep up the good work.
Operator
Thank you. Our next question comes from Mark Saunders of Trident. Please state
your question.
Mark Saunders - Trident
Good afternoon, gentlemen. A couple questions. First of all, can you give me a
tangible book value number?
Jim Adams - Rurban Financial Corp., CFO and Executive VP
I can give you a book value number, Mark. I don't have the tangible book value
calculated. There are two ways to look at book value. Let me give you both of
those. The GAAP book value, which includes, of course, in the unrealized danger
losses on security transactions, is $10.56 at the end of the quarter. The book
value, which really excludes the unrealized gains or losses on transactions on
securities is $10.85 a share.
Mark Saunders - Trident
OK. The other question is, give me some color as far as the non-performers plus
90 days past due as a percentage of total assets. What's the trend there and do
you have an idea what that number is?
Ken Joyce - Rurban Financial Corp., President and CEO
Yeah, those numbers, Jim is going to pull out some of the specifics here, but
they're a little bit over 4%, which is quite high obviously for a bank. That's
at the holding company level, which includes a workout subsidiary. And those are
clearly trending down. We're very pleased with that particular progress. But
that's why we're watching very carefully and it needs a lot of work. Do you
happen to have that specific number, Jim?
Jim Adams - Rurban Financial Corp., CFO and Executive VP
No, I don't have that scheduling yet.
Ken Joyce - Rurban Financial Corp., President and CEO
We'll be happy to give you a call, Mark, and let you know what that number is.
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Q2 2004 Rurban Financial Corporation Earnings Conference Call July 28, 2004 4:00
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Mark Saunders - Trident
Appreciate it. Any sense of when we might see sort of the tide turn as far as
less runoff and more balance sheet growth? Right now we still have a shrinking
balance sheet. Any idea when that might turn?
Ken Joyce - Rurban Financial Corp., President and CEO
We are in that bottom period right now. The loans that--if we go to specific to
our lead bank, State Bank and Trust, the loans of State Bank and Trust have
stabilized over about the last four months. They're beginning a small growth up
now as we overcome that runoff from the Cleveland LPO. So we've actually had
pretty remarkable loan growth for a fairly limited market area that we operate
in. I'm very pleased that we've been able to overcome that.
Mark Saunders - Trident
What kind of loans have been leading that?
Ken Joyce - Rurban Financial Corp., President and CEO
We are a commercial lender. Almost 50% of our book is commercial loans, and that
has been certainly the lead. We were very pleased that the consumer loan
portfolio is growing. For us it's been a large growth. We've been doing between
$800 and $1 million a month of consumer lending, which given the fairly limited
brand system that we've got, is a huge improvement; we used to do somewhere in
the neighborhood of $200,000 to $300,000 a month. So by applying some sales
process and some better management and a well motivated branch force, it's
increased tremendously, and we're not done with that either.
Mark Saunders - Trident
OK.
Jim Adams - Rurban Financial Corp., CFO and Executive VP
Mark, as a matter of fact, during the month of May and June in the lead bank,
State Bank and Trust, we actually did see net new loan growth. So it's clearly
headed in the right direction.
Ken Joyce - Rurban Financial Corp., President and CEO
It's bottomed out; we're now in an upward phase in terms of loan growth. We're
now right at the trough. So it may take a couple of months, but we're there.
Mark Saunders - Trident
OK. Thank you, gentlemen.
Ken Joyce - Rurban Financial Corp., President and CEO
I don't see any other questions on the board, Sandra.
Sandra Stockhorst - Rurban Financial Corp., Vice President
OK. Ladies and gentlemen, we thank you for your attendance and for your
questions. This concludes our conference call for today, and all parties may now
disconnect.
END
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