I am pleased to provide you with a summary of the progress which our company has made during the second quarter of 2009. As you are all aware, the national economy continues in the midst of the strongest downturn since the 1981 recession. This recession was initiated by excesses in the credit markets which led to a major crisis among the very largest financial institutions. This crisis has caused a shrinkage in credit unprecedented in my life; the largest banks in the world have shut down their lending across the economic spectrum – large commercial credit, real estate lending, mortgage lending, auto financing and credit cards. The New Orleans market has remained contrarian with unemployment remaining well below national levels and economic activity continuing at a fairly significant pace. Some industries and borrowers in our region have been effected by the national credit crisis – hospitality, oil and gas, petrochemicals, and upscale residential housing in St. Tammany Parish – but the strength of the construction industry as we rebuild the city after Katrina has lifted most of our local economic segments. This trend will continue and even accelerate over the next several years as the Corps of Engineers has completed its planning for the development of a hurricane protection system for south Louisiana for which Congress has committed over $14 billion to construct. This system designed to protect against the “once in a hundred year storm” has been four years in the planning and now begins with over $4 billion of contracts to be let over the next month. In fact, Pliocene blue clay, e.g. dirt, is the new mineral of choice displacing gold and oil as the source of rags to riches stories in our area as it is the material of choice in building levees that resist water erosion.
In addition to the Corps spending, FEMA under new management has finally begun to agree to amounts under the Stafford Act “Assistance Payment” programs to rebuild uninsured governmental and key non-profit structures damaged by Katrina. After a ridiculous four year analysis to ensure they only funded damage caused by Katrina (and thus not pre-existing) and that they only repair to pre-existing status without any improvement, FEMA has now finalized commitments to rebuild our schools, public buildings, sewerage and water system, etc involving billions of dollars of construction. All of the above will be combined with major projects such as $1.5 billion of SELA funds for drainage improvements in Orleans and Jefferson, major building projects continuing such as the Huey P. Long bridge expansion, rebuilding of the Twin Span bridges, Federal City project in Algiers, the Jackson Barracks project in the Ninth Ward, each involving hundreds of millions of dollars of construction. Then, of course, construction continues on billions of dollars of Go-Zone projects driven by the $15 billion in Go-Zone bond allocation and $2 billion of Go-Zone tax credit allocation. As an example of this, a small town in the rural area north of Jefferson Parish, Gary, Louisiana, is the site of a $7.5 billion expansion to an oil refinery owned by Marathon Oil which is about 50% complete.
Thus, our company finds itself as one of a few banks actually competing for business in a strong market, a very unusual position. High quality customers, offended by their treatment by the largest institutions in the market, are coming to us on a daily basis, not just for credit but for full banking services. During the second quarter, our company grew substantially from $703,000,000 to $983,000,000 as a result of deposit campaigns by both banks during the spring. These campaigns leave both banks with the liquidity to take advantage of the opportunities over the next year. We, of course, remain focused on credit quality to ensure we maintain high standards in our lending and our pricing reflects the unique nature of our competitive environment as well as our perception of interest rate risk facing us in the future. You can thank the U. S. government TARP program which provided the capital for our growth during the second quarter.
At June 30, 2009, our company reported total assets of $982,633,000 and net income for the six months of $2,069,000, or $.27 per common and common equivalent share. The second quarter results of operations were impacted by the special charges of the FDIC to restore the insurance fund to required levels in the face of the banking system risk – a special 7 basis point increase in the first quarter assessment of 3 basis points to 10 basis points and a one-time special assessment of 7 basis points in the second quarter. In total, these assessments cost our company $640,000 pretax and $422,000 after tax. In addition, our earnings per share reflect the TARP dividends on the government preferred stock invested in our company in March, 2009. In our last letter to you, we predicted this stock would be non-dilutive within three months and the success of our deposit campaign pretty much assures that prediction.
FIRST NBC BANK
Financial Position
First NBC Bank finished the second quarter with total assets of $901,886,000, reflecting growth of 28% for the quarter and 57% since June 30, 2008. This quarter’s growth was the result of the deposit campaign associated with our new branch openings in Kenner, Veterans at Lemon, and our acquired Terrytown branch, our first branch on the West Bank of the Mississippi River. Our growth strategy is to grow our balance sheet in spurts in advance of our loan growth. We have initiated four campaigns to date and raised over $100 million on each. The first three involved CD’s and the latest offering involved a mixture of CD’s and Money Market Accounts. We raised $88,002,000 of MMA’s and $114,318,000 of CD’s. We prefer to grow in this manner because of our significant loan demand which we prefer to pre-fund as opposed to run the risk of turning good customers down due to liquidity concerns especially given the current low opportunity for loan participations from other banks. The source of our growth for the quarter and the year since June 30, 2008 is as follows (in thousands):
The above analysis is dominated by the effect of the deposit campaign which drove our MMA and CD increases. Our increases in DDA reflect our strong business relationships and our commitment to obtain deposits from our borrowing customers. The increase in NOW accounts represents the success of our institutional segment business aimed at the union segment and the governmental segment. In fact, we have begun to have success with our trust business winning in excess of $200 million of custodial business from that segment in the second quarter.
Having summarized our sources of growth, we turn now to the deployment of those funds on our balance sheet. It is important to note that the deposit campaign began on May 1st and concluded on June 15, 2009. Thus at June 30th, the asset deployment was a work in progress with a heavy investment in Federal Funds Sold at June 30th earning basically nothing (12 to 18 basis points). We have worked with our excellent short-term money manager who has helped us substantially increase yields with short-term investments to invest $130 million of the June 30, 2009 Federal Funds balance with $50 million invested in high grade commercial paper with less than nine month duration yielding 1 to 2% and $80 million in a combination of municipals, AAA and AA corporates with less than three year duration to achieve better than prime rate returns. This ladder allows us to fund our loan demand over the next six months and also to take advantage of the extraordinary spreads in the market which should shrink as the economy improves. Also, we finally have broken the code with respect to the Federal Home Loan Bank funding and now have over $140 million line of credit from that bank just granted to us last week in case loan growth exceeds our current estimates. A summary of the changes in our assets is as follows:
As discussed, the large increase in Federal Funds Sold is an anomaly due to the lateness of our deposit campaign in the second quarter and is in the process of being invested as discussed earlier. Our loan growth remains strong as we have consistently averaged approximately $20 million increase per month. Our asset quality remains strong with non-performing assets of $5,103,000, or 0.78% of our loan portfolio and our over 30 day delinquency rate at 0.91% at June 30, 2009. We have no other real estate.
Our property and equipment continue to expand with the opening of our third permanent branch, Veterans and Aris, opened on June 28th. We are currently under construction at our Harrison Avenue branch and miraculously have driven pilings at our long-awaited uptown New Orleans branch at St. Charles Avenue and Louisiana Avenue. Our branch success reflects the value of the First NBC name and the hard work and contacts of our employees as follows (in thousands):
I want to particularly congratulate the Terrytown team who joined us in mid-year 2008 from Statewide Bank and has grown the branch in the past year from $58 million to $96 million. They adopted a different culture and made it work for their customers. Our branch focus for the next year is to expand on the West Bank. Our second priority is the north shore of our market, St. Tammany Parish, which is a very attractive demographic market and for which the existing highly competitive banking environment offers challenges to successful denovo entry. We are evaluating a number of opportunities for entry into that market.
Results of Operations
For the six months ended June 30, 2009, First NBC Bank reported net income of $2,169,000, an increase of $1,187,000, or 121%, over that of the same period in 2008. The following provides an analysis of the components of net income.
Interest income increased to $17,527,000 for the six months, an increase of $3,717,000, or 27%, from the first six months of 2008. This increase resulted from the following (in thousands):
The primary factor in the growth of interest income between the periods has been the strong loan growth offset by the much lower interest rate environment as the Federal Reserve lowered rates substantially to combat the economic crash and mitigate its effects. A summary of the magnitude of the rate declines from June 30, 2008 to June 30, 2009 are as follows:
Federal Funds 1.75%
Prime Rate 1.75%
01 Year Treasury 1.91%
05 Year Treasury .78 %
30 Year Treasury .17 %
The Bank has mitigated the increase in rates through the use of floors (5% to 5½% currently) and by widening our fixed rate loan spreads. We have had significant success in managing our investment yields to almost totally eliminate the rate reduction through an active management of our investment portfolio while maintaining short durations by taking advantage of unique spreads as they occur in the marketplace. We also continue to be very aggressive with loan fees collecting $927,000 of fees during the first six months of 2009.
Total interest expense for the six months was $8,846,000, an increase of $644,000, or 7%, over that of the first six months of 2008. A summary of the factors behind this increase are as follows (in thousands):
The increase in the average balances reflects the branch expansion, the success of our branch opening deposit campaigns and the success of our institutional area. The rate declines are in line with the overall rate environment between June 30, 2008 and 2009. The lower decline in MMA rates reflects our tiered pricing of that account offering more competitive rates to customers with large economic wallets and the result of our focus on MMA balances during our May and June deposit campaigns. The reduction in our average CD rate reflects the repricing discussed in our comments on the deposit campaigns and indicates our success in retaining balances.
As a result, net interest income was $8,679,937, an increase of $3,072,000, or 55%, over that of the first six months of 2008. The provision for loan losses for the first six months of 2009 was $1,076,000, an increase of $351,000, or 48%, over that of the same period in 2008 reflecting our loan growth and commitment to reach a reserve of 1% of loans by 2010. This increase was made despite the absence of loan losses (only $35,000 of net charge-offs) and very low non-accrual and delinquency ratios.
Non-interest income was $645,000 for the first six months of 2009 as opposed to $585,000 in the same period of 2008. Service charges and fees on deposits increased by $123,000, or 135%, to totally account for this increase; offsetting this increase were lower SBA loan sales gains as that market disappeared with the economic crisis. The good news is that we are now once again receiving reasonable quotes on SBA guaranteed loans and expect this income area to pick up significantly.
Non-interest expense increased to $6,696,000, an increase of $2,436,233, or 57%, over that of the same period of 2008. The increase resulted from 1) additional personnel costs in connection with the branch expansion and the overall volume of activity due to the Bank’s growth ($474,000), 2) occupancy cost increase of $662,000 due to increased depreciation, taxes, utilities, rent, insurance, maintenance and other direct branch costs and 3) an increase in other non-interest expense of $1,300,000 due primarily to the $640,000 of the special FDIC insurance charges, $210,000 in increased data processing costs due to volume, $91,000 of marketing and advertising costs, $115,000 of increased professional fees, $66,000 of supply costs and $68,000 of increased bank shares tax.
Pretax income for the Bank was $1,553,000 for 2009 year-to-date as opposed to $1,207,000 in 2008, an increase of $346,000. Again, the Bank has utilized tax credits to offset its income tax provision yielding a net credit provision. These credits consist of Go-Zone employment credits, new market tax credits, affordable housing tax credits and historic tax credits.
Net income for the quarter was $2,169,000, an increase of $1,187,000, or 121%, over the $982,000 for the first six months of 2008. Without the “one-time” FDIC charge, net income would have been $2,591,000, an increase of 164% over 2008’s same period.
DRYADES SAVINGS BANK
Dryades continued to make progress during the second quarter of 2009. It reached $79,000,000 in total assets, an increase of $5,894,000 in the quarter. Dryades reported a net loss of $162,000 for the first six months of the year compared to $31,000 for the first quarter of 2009 primarily due to the $36,000 special FDIC assessment and $48,000 of legal fees in connection with the workout of several large loans. The excellent news is that during the second quarter, one of its two large non-performing loans was collected in full (interest and principal) and that in July of 2009 the other large non-performing loan was also collected providing a substantial profit for July and approximate break even for the seven month period. Dryades re-opened its New Orleans East branch in June and is in the process of moving its General De Gaulle branch to a much better facility. Both of these moves should significantly enhance the Bank’s market presence and community image. Its overall growth and loan growth in particular should provide Dryades the ability to contribute to the Company’s success beginning this year.
Despite one of the worst economies in American history, our company has grown and increased profits. The outlook for the future offers significant opportunities and we shall do our best to take advantage of these opportunities without increasing risk. Have a great fall and pray that the current non-existent hurricane season continues that trend for the rest of the season. Go El Nino.
