Certainly, the third quarter of 2008 and the intervening two months since then are among the most tumultuous in our country’s history. I am very pleased to inform you that our Company has continued to grow and have success despite two hurricanes and the economic meltdown among the investment banking industry and the credit freeze initiated by the nation’s largest commercial banks. On August 31, 2008, the New Orleans area was hit a glancing blow by Hurricane Gustav. Our Bank relocated to Birmingham, Alabama, its recovery site and continued to operate until our return on Monday a week and a half later. All of our customer’s needs were met during the evacuation period and I am very proud of how well our team carried out the move out and the return to New Orleans without a hitch. We then faced the surge of Hurricane Ike which heavily damaged west Louisiana and east Texas, particularly Houston. Both storms did significant damage to the bayou area west of New Orleans and the west bank of the city. Fortunately, none of our customers sustained substantial losses from these hurricanes and we have not had to give forbearance, as recommended by the regulatory authorities, to any of our customers. Second, let me assure you that First NBC Bank Holding Company has no significant exposure to the subprime loans which have caused such havoc in the financial services industry. First NBC Bank has no investments in such pools and Dryades Savings Bank does have a $5MM investment in a mortgage pool which has less than 5% of its assets in mortgages which display high delinquencies and foreclosures. In connection with the Dryades acquisition, this pool was recorded net of a $350,000 reserve for possible losses and to date the pool continues to provide a market rate yield.
The Company finished the quarter with total assets of $703,000,000 and net income for the nine months ended September 30, 2008 of $1,820,000. A summary of the financial position and results of operations of the two subsidiary banks are as follows:
FIRST NBC BANK
Financial Position
First NBC finished the quarter with total assets of $630,106,000, growing 10% during the quarter and 84% from September 30, 2007. The growth during the quarter was primarily the result of the expansion of the Bank’s branch network as our branches continued to grow their customer base. There were no special deposit campaigns during the quarter but we did receive an additional $8MM class action settlement deposit as part of our specialized product offerings to this customer segment. A summary of the deposit growth during the quarter is as follows:
The Bank’s earning assets growth was centered in its loan portfolio which reflected an increase of $79,485,000, funded by the deposit growth and by transferring funds out of Short Term Investments and maturing Investments. Over 50% of this growth in loans and in our loan pipeline resulted from advances to large pension funds, insurance companies, and other investment funds seeking increased liquidity for fixed income security purchases and are secured by their marketable securities on a margined basis. These entities have no liabilities and have strong net worths on a market value basis. This new loan product developed by us has generated a great deal of interest on the part of these hundred million to billion dollar pension plans and provides us with excellent spreads and great relationship potential for deposits, trust custodial services and long range trust investment services. The remainder of the loan growth was well diversified across the commercial spectrum and had an average rating of approximately 7 on a 10 point scale. Our loan loss reserve stood at $3,587,000 at September 30, 2008, an increase of $1,833,000, or 105 %, since September 30, 2007. At September 30, 2008, our non-performing assets amounted to $650,000 which was .1% of our loans and 1.1% of our capital. Our asset quality remains outstanding.
Our liquidity remains in excellent position as we have over $94,000,000 in Federal Funds Sold and very short-term Investment securities. We expect to hold another deposit campaign in early 2009 once the markets settle down. Currently, we are seeing extremely high short-term CD rates being offered by our large regional and national bank competitors and we have chosen to slow our growth rather than compete with these irrational pricing practices. We expect this behavior to change now that the Federal government has injected billions of capital into these large banks.
The Balance Sheet reflects, for the first time, intangible assets which represent the price paid to acquire the Terrytown branch from Statewide Bank which was consummated on May 28, 2008 and the accounting finalized in the third quarter.
Results of Operations
For the first nine months of 2008, First NBC Bank had net income of $2,059,000, an increase of $1,741,000, or 548%, over the $318,000 of the same period in 2007. A discussion of the components of net income follows:
Total interest income was $22,382,000 as compared to $10,171,000 for the first nine months of 2007, representing an increase of $12,211,000, or 120%. The increase resulted from the following:
Average Average Increase in< decrease> CategoryBalance IncreaseRate ChangeInterest Income
Short-term Investments $ 10,402,000 (2.76%) $ < 376,000 >
Investment Securities 29,628,000 ( .96%) 734,000
Loans 239,888,000 (1.14%) 11,853,000 12,211,000
The increases in the average asset balances have been discussed in the Balance Sheet analysis section of this letter. The decrease in average rates reflects the attempts by the Federal Reserve to stimulate the economy by sharply lower rates. At the beginning of 2007, the Federal Funds rate was 5.25% and it had reached 2.0% by the end of the third quarter of 2008 and the prime rate had declined from 8.25% to 5.0% in the same time frame. We have been able to moderate the rate decline by active management of our short-term investments and our investment portfolio and by more aggressive loan pricing including loan fees and the use of floors for our floating rate loans.
Total interest expense was $12,715,000 for the first nine months of 2008 compared to $5,253,000 for the same period of 2007, an increase of $7,462,000, or 142%. This increase resulted from the following:
The interest rate declines for NOW, MMA, savings and repurchase agreements reflect the overall rate environment in the U.S. as the Federal Reserve lowered rates. The lower decrease in the CD rate reflects the fact that these instruments are fixed rate and only reprice at maturity. Approximately 60% of the CD’s at June 30, 2008 were issued in early 2008 for a seven to nine month term and will reprice in the fall of 2008. The large decreases in interest rates during the first quarter (the two largest rate decreases in U.S. history – 75 basis points and then 100 basis points) had the impact of squeezing our margin but this effect will adjust when the CD’s reprice in the fall of 2008.
The average rate declines in MMA, Savings, CD’s and Repurchase Agreements again reflect the strong decline in rates in the economy as the Federal Reserve lowered rates significantly. The increase in the average rate on NOW accounts reflect the low rates on that product in the New Orleans area after Katrina and the tiered pricing of that product so that an influx of large balances can result in the average rate increasing even as the rate on the product is being reduced. The increase in the average balances reflects the overall growth of the Bank through the CD branch opening campaigns and the success of the Class Action Settlement product which are primarily placed in Repurchase Agreements.
As a result of the above, net interest income for the nine months of 2008 was $9,667,000, an increase of $4,749,000, or 97%, over that of the same period in 2007. Non-interest income was $800,000, an increase of $593,000, or 287%, over the $207,000 of 2007. The increases resulted primarily from the BOLI plan earnings of $356,000 and SBA fees and gains of $63,000, and increased deposit service charges and fees of $104,000. Non-interest expense was $6,585,000, an increase of $2,779,000, or 73%, over that for 2007. Most of this increase has resulted from the staffing and occupancy costs associated with our rapid branch expansion, the Statewide Terrytown branch acquisition, and the addition of operations personnel required to provide services to Dryades Savings Bank acquired in April, 2008. Our efficiency ratio, which is at the top of our denovo bank peer group, will continue to improve as our branch network grows. Our First NBC Bank network is currently at seven locations with two more expected to open in 2009; we also have applied to the regulatory authorities to allow us to co-brand the Dryades west bank locations which when combined with the Terrytown location will give us a comprehensive branch system to serve the three hundred thousand New Orleanians on the west bank of the Mississippi River.
Despite our excellent asset quality, the Bank continues to build its loan reserve as its loans grow. For the nine months of 2008, the Bank provided an additional $1,319,000 to reach a reserve at September 30, 2008 of $3,587,000. This level of reserve exceeds that of September 30, 2007 of $1,754,000 by $1,832,000, or 104%. Our pretax income was $2,562,000 for the first nine months of 2008, an increase of $2,136,000, or 501%, over the $426,000 of 2007. Income taxes were $503,000, an effective tax rate of 19.6%, due to the Katrina employment tax credits and affordable housing tax credits generated from the Bank’s CDC activities in rebuilding affordable housing destroyed by Katrina. Thus net income for the nine months of 2008 was $2,059,000, an increase of $1,741,000, or 548%, from the $318,000 for the same period of 2007.
DRYADES SAVINGS BANK
Dryades Savings Bank lost $204,000 from the date of acquisition through September 30, 2008. The capital injection planned to stimulate the Dryades profitability has been made and Dryades is now in position to take advantage of its new well-capitalized status to grow the Bank and achieve the operating results we expect it to achieve. Dryades’ return to profitability has been slowed by regulatory restrictions placed on it prior to the acquisition but these just recently have in most aspects been released by the regulators. This will allow Dryades to grow its asset base and loans, especially through participations in First NBC originated loans of high quality. Dryades is now in the process of rebuilding its New Orleans East branch which was damaged by Katrina and was formerly a $25MM deposit location in a market which is currently substantially underserved. This branch, which should be open in early 2009, should provide Dryades with an excellent base for growth over the next several years. The second key issue for Dryades return to profitability is to resolve their two large non-accrual loans totaling $2,757,111. Significant progress has been made on both of these loans and we expect them to be resolved in late 2008 and early 2009 with full recovery of principal and non-accrued interest.
Finally, I will also note that the economy of the New Orleans area remains strong and the outlook for the future is still good despite the national recession. Our economy will be buoyed by the multiple billions of Federal dollars finally arriving to repair uninsured Katrina damage and to improve our levee system. Our economy is normally contrarian to the national economy and the Federal dollars to be spent over the next 3-5 years should further enhance that status. Last month, Louisiana added 10,000 jobs while the nation lost millions of jobs and our local unemployment rates are in the 4% range as opposed to the 6.7% nationally. We expect an in-migration of companies and workers to compete for the jobs associated with all of the Federal funding.
Again, thank you for your investment in First NBC Bank Holding Company and I hope you and yours have a merry holiday season.
Very truly yours,
President - CEO
Ashton J. Ryan, Jr.
P.S. As we print this letter, it is snowing heavily in New Orleans. What a year!
P.S.S. Enclosed please find a copy of a PDF letter from Stifel, Nicolaus & Company, Inc. which has agreed to make a restricted market in First NBC Bank Holding Company shares. They will be happy to discuss your interests in selling or buying our shares.
