I am happy to report to you on the progress our Company has made in the first quarter of 2009. Despite the significant upheaval in the nation’s economy and financial markets, the New Orleans economy has continued to progress. Unemployment levels in the area remain in the 5.3% range and continue to reflect job creation from the same month of the prior year. After a lull in the growth of construction in the last quarter of 2008, new projects abound and now appear ready to overcome the bureaucratic delays of the Federal, state and local government and are beginning to get started. Our hospitality business had a great spring with pre-Katrina crowds at such events as Mardi Gras, French Quarter Fest, Zurich Golf Tournament, and Jazz Fest despite the national economic slowdown. The only negative side for our economy has been the fall in the price of oil and natural gas which has slowed oil and gas exploration activity and the strong U.S. dollar which combined with the worldwide recession has impacted the planned expansion of the petrochemical business which operates along the Mississippi River between New Orleans and Baton Rouge. However, the absence of new exploration has not slowed the oil service business which has been and will be for the foreseeable future kept busy repairing the damage to the Gulf wells caused by Katrina and Rita in 2005 and Gustav and Ike in 2008.
The overall competitive environment in the New Orleans area has remained as discussed in my last letter to you. The national banking entities in our area and our large local banks remain inactive in the lending area and we see opportunities to serve their customers, almost on a daily basis. We remain cautious in our underwriting and aggressive in our pricing. We rate our credits on a scale of one to ten with ten as cash secured only and have a current overall rating of 6.8. Our past dues remain strong at 77 basis points at March 31, 2009 and our non-accruals at $3,657,000 are only .62% of our loans. We continue to closely monitor concentrations and to diversify our portfolio by industry and geography. Again, although we believe the economic environment of our post Katrina New Orleans will allow us to avoid the major effect of the national recession, we carefully stress test our credits to ensure their ability to handle a significant economic downturn. We also structure our credits carefully to ensure alternative sources of repayment and continued cash flow to service debt.
One key event during the first quarter was the receipt of $17,836,000 of TARP (Troubled Asset Relief Program) funding from the Federal government. Our Board and management carefully reviewed the pros and cons associated with this program and determined that, as currently outlined, the program would be beneficial to our Company and banks. Thus our March 31, 2009 balance sheet reflects the TARP funds in preferred stock which requires a 5% dividend. In addition, we issued warrants for 892 additional preferred shares requiring a 9% dividend which were exercised immediately by the U.S. Treasury. We believe the new capital can be effectively used to continue to grow our Company and increase shareholder earnings well in excess of the dividend and also presents us with an opportunity to make strategic acquisitions which in today’s environment could produce a substantial increase in shareholder value per share. Because of our strong loan pipeline, we believe the TARP transaction will within three months be non-dilutive to shareholders. The TARP funds ultimately will allow us to grow our balance sheet by $178,000,000 without any additional equity; without the TARP funds, we would have had to begin raising equity in the second quarter of 2009.
At the end of March, 2009, our Company reported total assets of $775,619,000 and net income for the quarter of $1,290,000 or $.19 per common and common equivalent share. The following presents a summary of the changes in financial position and results of operations for our two banks
FIRST NBC BANK
Financial Position
First NBC Bank ended the quarter with total assets of $703,226,000, reflecting growth of 10% for the quarter and 88% from the same time in 2008. The growth was achieved as follows (in thousands)::
On a year to year basis, we have shown strong growth across all of our deposit products due to our branch expansion opening three new branches during the period and with continuing growth in our CDARs program which was just beginning in the first quarter of 2008. CDARs increased by $120,651,000 from March 31, 2008 to March 31, 2009 as we aggressively marketed the product to overcome the customer fear of bank failure resulting from the national press on the recession, the collapse of the investment banking industry and the distress of the largest U.S. banks. This product, which takes our customers CD’s and spreads them among other banks so as to give them full FDIC protection has been an effective way of eliminating the perception disadvantage of our industry and allowing us to compete with the larger banks. Moreover, we have limited this product to only core local customers and therefore we have added greatly to our customer list in the New Orleans area. As interest rates have plunged as the Fed fights against the recession, consumers have shifted to CD’s as opposed to NOW and MMA accounts due to the extremely low market rates on those transaction accounts which has restricted their growth. The trend from December 31, 2008 to March 31, 2008 reflects the $17,836,000 TARP preferred transaction which was invested in the Banks’ MMA accounts and the continued growth in CD’s for the reasons discussed above. The shrinkage in the DDA account during the first quarter represented significant loan proceeds on loans closed in late December that were not disbursed until after year end thus temporarily increasing DDAs artificially.
The above described funding sources were employed as follows (in thousands):
Comparing the March 31, 2009 asset mix against that of March 31, 2008, the key trend is the growth of the Bank’s loan portfolio by 88% over the past year. The loan growth continues the trend we have established from the inception of the Bank as our experienced relationship managers continue to move prior customers from other banks in the marketplace. In a very high percentage of this growth, we are lending to customers our officers have known for years from their previous banks and this is the epitome of our relationship banking strategy. Our very low delinquency, non-accrual and loss statistics reflect this long-term knowledge of our loan customers and our very strong underwriting. These customers have been successful in our market for a long time even through the adversity of Katrina and the area’s resulting population loss. As our average rating of 6.8 (scale of 1/poor to 10/cash secured) reflects, this is a high quality portfolio. The mix of our loans at March 31, 2009 is as follows:
Commercial Real Estate (in thousands)
Development 59,677
1-4 Family 63,976
Multi-family 25,813
Non-residential 190,317
Residential Real Estate 31,196
Total Real Estate 370,979
Commercial and Industrial 212,855
Consumer / Other 9,837 593,671
Also to be noted in reviewing our real estate exposure is that $261,477,000 of the total real estate is owner occupied structures as opposed to real estate for rental or sale. We traditionally take a security interest in the real estate owned by our commercial borrowers whenever available preferring hard real estate collateral to receivables, inventory and equipment. Also our real estate loan growth reflects our market which is still in the process of rebuilding homes and businesses which were damaged by Hurricane Katrina; this rebuilding process will continue for years in the future due to the scope of the Katrina damage.
The increase in property reflects our continued branch expansion (the building of a permanent location in the Elmwood area of Jefferson Parish, the purchase of the Terrytown branch from Statewide Bank in June, 2008, and the almost complete permanent branch at Veterans and Aris, also in Jefferson Parish). This trend will continue as we look to start construction in the near future on our Harrison Avenue branch in the Lakeview area of New Orleans and on the St. Charles branch in uptown New Orleans. Our branch total for First NBC today is 7 with only the Main Office, Elmwood and Terrytown locations in permanent buildings. We have recently received regulatory permission to co-brand the two Dryades branches on the West Bank of the Mississippi River and believe this will effectively allow us to expand our deposit gathering to that very deposit rich area; we entered the West Bank through our acquisition of the Terrytown branch and have seen that branch grow very well since acquisition. The increase in other assets generally results from the investment in our First NBC Bank CDC which is actively engaged in rebuilding affordable housing in New Orleans and our investment in tax credit transactions to similarly rebuild our local housing destroyed by Katrina.
Our asset quality remains strong in the face of deterioration in the national marketplace. Our past dues greater than 30 days amount to .77%. Our non-performing loans totaled $3,657,475 as of March 31, 2009, .62% of our loans. Our loan reserve as of March 31, 2009 was $4,304,000 which is $925,000 higher than that of March 31, 2008. Our provision for 2009 has been calculated so as to achieve a reserve of .83% of loans by year-end as we build to our goal of a loan loss reserve of 1% by 2010 year-end. Our coverage of charge-offs and non-accruals remains very strong at 1436% and 120% at March 31, 2009.
Our liquidity has increased since year-end and the prior year through normal customer acquisition. We began a branch deposit campaign in May which should substantially increase our liquidity and provide the funding for our continued loan growth.
Results of Operations
For the first quarter of 2008, First NBC reported net income of $1,332,000, an increase of 928,000, or 230%, over that of the first quarter of 2008. The following provides an analysis of the components of net income.
Interest income increased to $8,223,000, an increase of $1,690,000, or 26%, from the first quarter of 2008. This increase was the result of the following (in thousands):
Average Average Increase in< decrease> CategoryBalance IncreaseRate ChangeInterest Income
Short-term Investments <28,278> <2.67%> < 249 >
Investment Securities 12,223 < .33%> 96
Loans 218,760 <1.40%> 1,843 1,690
The changes in the average balances have already been discussed in the analysis of financial position. The rate declines reflect the Federal Reserve moves to stimulate the economy by lowering rates to levels never seen previously. For example, the following rate declines have occurred between March 31, 2009 and March 31, 2008:
Federal Funds 2.25%
01 Year Treasury .90%
05 Year Treasury .66%
30 Year Treasury .75%
The Bank has aggressively increased its pricing in this environment through the use of floors (generally 5% to 5½% currently) and by widening our fixed rate spreads. As discussed earlier, we see little price resistance in the current competitive environment. We have also moderated the impact of the decline on our investment portfolio by the use of short-term municipal securities and of callable government agencies which provide above market yields until the formal call occurs.
Total interest expense for the quarter was $4,027,000, an increase of 19,000, or 1%, over that of the prior year first quarter. The following provides a rate / volume analysis of that change (in thousands):
The increase in the average balances represent the overall growth of the bank as it expanded its branch network during 2008 adding Veterans at Lemon, Kenner and Terrytown locations. As noted, the product in favor was the CD since the holder could gain 100% FDIC insurance for all of his balances, no matter how large, through the CDARS program previously described. The rate changes generally reflect the change in rates in the economy as previously explained. In particular, the Bank raised over $120 million through a CD campaign in the first quarter of 2008 just before the Fed launched its historical rate cutting program to save the economy. These CD’s were seven months in duration and repriced significantly downward in September of 2008 adding to the overall decline in the Bank’s cost of funds. The increase in the NOW account rate reflected a special campaign aimed at the union deposits in which the Bank offered a better rate than the market for this product although the rate was still well below the CD and MMA rates; the balance change reflects the success of this campaign.
As a result, net interest income was $4,196,000, an increase of $1,671,000, or 66%, over that of the first quarter of 2008. The provision for loan losses for the first quarter was $500,000, an increase of $25,000, over that of the first quarter of 2008 as the Bank continued to build its reserve despite the absence of losses of any substance.
Non-interest income declined from $295,000 in 2008 to $236,000 in 2009 totally due to the absence of security gains in 2009. The Bank has over $250,000 in profit in its investment portfolio but has not chosen to take these gains due to the difficulty of replacing the yield in this current market environment. The Bank also was unable to sell its SBA loans guaranteed portion due to the collapse of that market in 2009 and has over $3,000,000 of such loans on its books awaiting the return of that market.
Non-interest expense increased to $2,776,000 in the first quarter of 2009, an increase of $982,000, or 55%, over that of 2008’s first quarter. Primarily responsible for the increase were 1) increase in salaries and benefits of $409,000 as we staffed the additional branches and our support units to deal with the increased volumes resulting from our growth; 2) an increase of $258,000 in occupancy expense due to the costs of our branch expansion in terms of rent, utilities, insurance and other direct branch costs; 3) an increase in other non-interest expense of $315,000 due to increased FDIC premiums ($25,000), increased data processing costs ($97,000), increased advalorem taxes ($30,000) and increased professional fees ($100,000) along with a general across the board increase in costs due to the much higher volume of activity in 2009 versus 2008.
Pretax income for the Bank was $1,156,000 for the first quarter which represented an increase of $605,000, or 110%, over that of 2008. The Bank’s provision for income taxes was a credit for the first quarter of 2009 due to its use of affordable housing tax credits, new market tax credits and Go-Zone employment credits, the total of which offset our current year tax provision and some of our 2008 provision.
Net income for the quarter was $1,332,000, an increase of $928,000, or 230%, over the $404,000 of the 2008 first quarter. We believe that this is a solid effort for a bank not yet completing its third year since inception. Nevertheless we have a long way to go before we can fully judge ourselves as successful since our team has lofty expectations. We believe the current environment offers us some very significant opportunities and we are committed to pursuing these opportunities with great prudence.
DRYADES SAVINGS BANK
For the first quarter of 2009, Dryades has made significant progress in asset quality, strategic execution and market definition and execution. Dryades reported a net loss of $31,000 for the first quarter which was a major improvement against its 2008 loss of $344,000. More importantly it has rebuilt its management team, re-opened a key branch in New Orleans East, closed since Katrina and dramatically decreased its non-performing assets from $2,856,000 at acquisition to $1,690,000 at March 31, 2009. Indeed its last major non-accrual loan is expected to be paid out this month or at the latest next month. It has grown its deposits by 11% since December 31, 2008, a 44% annual growth rate. Its move to breakeven status is impressive in view of the significant personnel addition it has made to increase its ability to be competitive in its target market. The future here is bright and I believe our partnership with Dryades will add value to our shareholders beginning in the near future.
Please do not hesitate to call if you should have any questions regarding the above or have any other questions about our Company.
Very truly yours,
President - CEO
Ashton J. Ryan, Jr.
P.S. We received the annual denovos statistics for all 170 plus banks chartered in 2006 around the country and our Bank ranked second in assets and second in net income of all of the 2006 denovo banks.
