The intervening three months since I last wrote you have certainly been one of the most challenging times in the history of the United States, especially for the financial segment of our economy. Fortunately Louisiana, and especially the New Orleans metro area, has not been significantly affected by the economic turmoil throughout much of the country. During a period of significant job losses throughout the U.S., our economy continues to expand and create new jobs, with over 10,000 per month for each of the last few months and our unemployment rate in the area remains below 5%. Real estate values, including residential housing, are stable although the difficulty of finding mortgage financing for jumbo mortgages has slowed sales of high-end residential products, particularly in St. Tammany Parish. Our loan demand has continued strong and even expanded as some of our large bank competitors have reneged on transactions for some of their best customers who have moved their business to us seeking to complete their transactions. In the face of this unique situation, we have increased our targeted loan spreads through the comprehensive use of floors (5% generally) on floating rate loans and pricing fixed rate loans in the 6.75% to 7.50% range providing uniquely high spreads to the same maturity Treasury curve. We are also insisting on the majority of the relationship to accompany credit requests. With the relatively strong market and the absence of normal competition, we are carefully underwriting loan requests using various stress tests to ensure the customers’ ability to repay even in deteriorating economic conditions. The outlook for our area remains strong due to the continual flow of Federal money into our economy to repair state and local government property damaged by Katrina (unbelievably, over 3 years after Katrina, the vast majority of FEMA “assistance payments” are just now starting to flow) and due to billions of dollars of flood control repair and improvements necessary to meet the Corps of Engineers commitment to provide flood protection against the 100 year storm by 2011; in fact the Corps announced last week $4 billion of such contracts to be let over the next 3 months. We also expect an influx of businesses and workers into our market seeking the work available here which will also boost our economy. We do recognize the magnitude of the economic collapse in our country and the world and therefore remain cautious in our underwriting credit requests.
Our Company ended the year with total assets of $711,000,000 and a net income for the year of $2,579,000. A summary of the two banks’ performance follows:
FIRST NBC BANK
Financial Position
First NBC Bank completed the year with $641,026,000 in assets growing 2% since September 30, 2008 and 71% from December 31, 2007. A summary of the sources of our growth are as follows:
42% ($100,391) of the increase in CD’s for the year are attributable to the CDARS program whereby our core customers place their money in our bank and receive the FDIC guarantee for all of that money through our participation in a national CD exchange in which banks throughout the country share in our customer’s CD, all in amounts less than the FDIC insurance limit (now $250,000). Our Bank buys an interest in other banks’ CD’s so as to receive full benefit from the customer’s funding with the exact same maturity. With the current upheaval in the banking sector and the adverse publicity regarding the solvency of the nation’s largest banks, people in our market are especially concerned about protecting their savings and the CDARS program has been very popular, especially in view of the extremely low rates on Treasury securities in the one day to one year maturity range. The strong growth in demand deposits reflects the expansion of our branch system and specific marketing focus on businesses with large cash balances. The moderation of the growth in the NOW and MMA accounts reflect the extremely low rates in the economy which make these products less attractive than CD’s at current market rates.
From an earning asset standpoint, the Bank’s loan growth remained strong throughout the quarter and the year. At December 31, 2008, loans outstanding totaled $543,374,000, an increase of $45,812,000 or 9% for the quarter and $227,310,000 or 72% for the full year. The Bank’s loan growth has been primary in the commercial sector as follows:
$%
Commercial Real Estate – Construction 13,656 30%
Commercial Real Estate – 1 to 4 Family 27,753 91%
Commercial Real Estate – Multi Family 7,519 51%
Commercial Real Estate – Non Farm, Non Residential 87,651 110%
Consumer Real Estate 11,32762%
Total Real Estate 147,90678%
Commercial 66,593 55%
Consumer 1,408 58%
Other (primarily loans in process 11,403323% 227,31072%
The strong growth in the real estate sector is reflective of the rebuilding of the real estate damaged or destroyed in Hurricane Katrina. A large portion of our construction loans and our commercial, one to four family, loans reflect loans to tax credit projects to rebuild housing at very low loan to cost and very high coverage ratios. Our commercial real estate loans primarily consist of loans to small businesses secured by their owner occupied real estate such as convenience stores and retail outlets in the French Quarter, restaurants and small hotels with strong cash flow histories. Our loan demand, reflective of the market economics and the continuing Katrina rebuilding, remains very strong and our outlook for 2009 is excellent.
Our asset quality remains excellent despite the national asset quality issues. Our past dues greater than 30 days amount to .91%. Our non-performing assets total $2,827,333 or .53% of our loans. We continue to build the loan loss reserve which was $3,838,000 at December 31, 2008 and represents 137.30% of our non-performing loans at that date.
Our liquidity declined in the fourth quarter with our total Federal Funds Sold and Investments declining to $51,000,000 from $100,789,000 at September 30, 2008. We used our Federal Funds Sold to fund loan demand in anticipation of a new deposit campaign in the first quarter of 2009. However, deposit growth which has occurred and is expected to occur from a few key customers in the next 30 days has increased our liquidity by $10,000,000 to date with another $30,000,000 due in the next month. Accordingly, we now expect to defer the campaign until the summer of 2009.
Results of Operations
For 2008, First NBC Bank reported net income of $2,978,000, an increase of $2,271,000, or 321%, over that of 2008. A discussion of the components of net income is as follows:
Interest income increased to $30,480,000, an increase of $13,813,000, or 83%, from the $16,667,000 of 2007. This increase resulted from the following:
Average Average Increase in< decrease> CategoryBalance IncreaseRate ChangeInterest Income
Short-term Investments $ 9,139,000 (3.08%) $ < 422,000 >
Investment Securities 26,760,000 ( .94%) 764,000
Loans 238,147,000 (1.40%) 13,471,000
$13,813,000
The increase in the average asset balances has already been discussed in the commentary on the balance sheet. The rate declines reflect the overall drop in rates in the economy. For example, the following rate declines have occurred between December, 2007 and December, 2008:
Federal Funds 375 bp
01 Year Treasury 150 bp
05 Year Treasury 125 bp
30 Year Treasury 110 bp
The Bank has moderated the impact on its loan interest income through the use of floors on its floating rate loans (generally in the 4½% to 5% range) and by holding its fixed lending rates relatively constant despite the overall fall in the rates in the economy. We have also moderated the impact on our investments through the use of callable U.S. government agency securities which provide above market yields until the formal call occurs.
Total interest expense for 2008 was $16,903,000, an increase of $8,265,000, or 96%, from the $8,638,000 of 2007. This increase resulted from the following:
Once again, the balance variations have already been discussed and the rate declines are generally in line with interest rates in the economy. CD rates reflect the large re-pricing in the fall of 2008 of our special branch opening campaign in January of 2008 which preceded the precipitous declines in rates in February, 2008 as the Fed began to aggressively cut rates in an unprecedented manner (a 100 basis point cut, followed closely by a 75 basis point cut) which occurred right after we raised $130,000,000 in our January campaign. This campaign involved 7 month CD’s which repriced by approximately 200 basis points in September and October of 2008. Again we retained over 80% of the dollars raised in that campaign at renewal in the fall of 2008 despite the significant rate reduction.
Net interest income was $18,286,000 for 2008, an increase of $7,383,000, or 68%, over the $10,903,000 of 2007. The provision for loan losses for 2008 was $1,575,000, an increase of $191,000, or 14%, over the $1,384,000 for 2007.
Non-interest income increased to $1,048,000 for 2008, an increase of $613,000, or 141%, over the $435,000 of 2007. Primarily accounting for this increase was the increase in service charges ($164,000) due to increased accounts resulting from the branch expansion, our BOLI income ($343,000), ATM income ($44,000), and SBA loan sale gains ($62,000). Non-interest expense was $9,551,000 for 2008, an increase of $3,294,000, or 53%, over the $6,257,000 for 2007. Primary increases in non-operating expenses were 1) salaries and benefits with an increase of $522,000 due primarily to increased staffing in line with growth and an increase of $300,000 in bonus expense as executives participated in the bonus pool for the first time since the Bank’s inception; 2) occupancy expense with an increase of $861,000 due to the branch expansion, higher utility costs, and higher property taxes; 3) other non-interest expense with an increase of $1,411,000 primarily due to the payment in 2008 of the LA bankshares tax ($451,000), an increase in FDIC premiums due to deposit growth ($153,000), an increase in professional fees ($356,000) due to acquisition reviews and increased auditing expense due to growth, an increase in bank security costs ($193,000) due to the much higher number of locations, as well as the growth of most expense categories due to the Bank’s general expansion in number of locations and personnel.
Pretax income for 2008 was $3,480,000, an increase of $2,567,000, or 281%, over the $913,000 reported in 2007. The income tax provision for 2008 was $502,000, an effective tax rate of 14%. The lower than statutory tax rate reflects our investment in affordable housing and New Market tax credits which we have taken advantage of as traditional purchasers have abandoned the tax credit market (FNMA, Freddie Mac, AIG, Bank of America) for obvious reasons. In addition to the tax credits, we also are allocated the GO-ZONE depreciation write-off (50% depreciation in the first year) which will shelter our cash taxes for the next several years this 50% deduction is paid back on a straight line basis over 39 years yielding a 33% net of tax return. We also received in excess of $100,000 is special work opportunity credits for adding employees in the GO-ZONE. This credit has been continued for 2009 also.
Net income for the Bank for 2008 was $2,978,000, an increase of $2,271,000, or 321%, over the $707,000 of 2008. We are excited about the progress we have made in our second full year of operation and look forward to moving forward in 2009. We believe the opportunities to expand our success are in place and we will capitalize on these opportunities.
DRYADES SAVINGS BANK
Since its acquisition on April 21, 2008, Dryades Bank reported a net loss of $345,000. Our focus since the acquisition has been on conversion of the Dryades computer systems, consolidation of back room operations, and the remediation of the Dryades’ high loan non-accrual and delinquency ratios. We have made substantial progress in all of these areas and we expect Dryades to be profitable beginning in the first quarter of 2009. Asset quality as represented by delinquencies have improved significantly and one of the Bank’s two major non-accrual loans was collected in full in February, 2009 and we expect the second to be resolved in April, 2009. Dryades has begun to participate in our real-estate loans which should improve their margin over time but the key to their long-term success is to expand their size and market share. Dryades will re-open its New Orleans East branch in March, 2009 which was a major deposit source prior to Katrina and has been closed since that date. This should be an excellent first step in growing Dryades and returning it to sustained long-term profitability.
Please do not hesitate to call if you should have any questions regarding the above or any aspect of the Company’s status. We again thank you for your investment in our Company.
Very truly yours,
President - CEO
Ashton J. Ryan, Jr.
P.S. As I told our Board, our shareholders can point out that their bank earned more than Citigroup, J.P. Morgan Chase, Bank of America, and Wells Fargo, combined.
