It is my pleasure to update you on the progress that our Company has made during the third quarter of 2009. It is now evident that the nationwide recession has ended and our U.S. economy has entered into the recovery stage, although a fragile one. Despite the improving stock market and increasing manufacturing and residential construction, the credit markets, in general, and the megabanks, in particular, remain frozen providing the recovering economy with a real challenge to expanding the recovery. As noted in previous letters, the flow of post Katrina funds into our New Orleans area has helped our area avoid the economic crisis of most of the areas of our country and our outlook for the next five years looks very positive as we seriously begin the completion of the rebuilding of our infrastructure and of the construction of our hurricane protection system against a once in a hundred year storm. Also, as predicted, we are beginning to see the in-migration of businesses from outside our market seeking to share in the growth economy of our area. These new neighbors will contribute to our expanding economy by importing capital and skilled labor to assist us in our recovery and will also be a godsend to our hospitality industry which is challenged due to the recession-induced slowdown in travel in the U.S. and abroad.
With the combination of a good economy in our area and the credit freeze of the megabanks, our Company finds itself in a very unique position. As a result, our Company finished the third quarter at $1,072,000,000, an increase of $89,000,000 without the benefit of a deposit campaign or any aggressive marketing. As of September 30, 2009, our Company earned $3,717,000 for the nine months of 2009 with $3,211,000 available to common shareholders after paying the Federal government $505,000 on its preferred stock in the Company. These earnings are particularly impressive considering the fact that the Federal government got into our pockets in another way assessing us over $1,234,000 in assessments for our FDIC insurance for the nine months.
FIRST NBC BANK
Financial Position
First NBC Bank finished the third quarter of 2009 with total assets of $984,346,000, which reflects 9% growth over that of June 30, 2009 and 56% growth over that of the third quarter of 2008. The third quarter growth was somewhat surprising due to the absence of any special deposit campaigns and the fact that during September over $80,000,000 of CD’s from our February, 2008 eighteen month CD special matured. We retained close to 90% of these funds. An additional factor in the growth during the quarter was the increase in our Money Market accounts of $19,600,000 as a result of the spill-over from our MMA special advertising in May and June. Also the opening of our new permanent branch on Veterans Highway in Metairie resulted in $25,000,000 of deposit growth during the third quarter. This branch attained $134,000,000 of deposits while in a bank trailer which I believe must be some sort of a record.
The growth of our deposits by type for the quarter and for the past year is as follows (in thousands):
The continued strong growth of our NOW accounts reflects the success of our trade union initiative where we first focused on providing exceptional deposit services and products to the trade unions, their members and their employers. Our success in serving this niche with its large financial wallet is now starting to gain some momentum in moving their trust business where we are in the process of moving the custody of nearly $300 million of assets to our trust department. The growth in MMA’s and CD’s from the prior year reflects the success of our last deposit campaign carried out in May and June. The increase from the second quarter reflects the secondary effect of the deposit campaign, the opening of the new Veterans permanent site and the general turmoil in the market due to the credit freeze of the larger banks. This last factor has become more significant as 2009 progressed with customers coming to us concerned about their treatment by the larger banks and moving their entire relationship.
Our balance sheet as of September 30, 2009 has transitioned from the extremely short term orientation as of the end of our deposit campaign at June 30, 2009 with $167,000,000 of Federal Funds Sold to an intermediate stage with a mixture of investments and Federal Funds Sold. From the investment viewpoint we purchased a combination of commercial paper graded A-1 / P-1 yielding .5% to 1%, short term municipals yielding 3% to 4%, and high grade corporate bonds rated AAA and AA with 4% to 5% yields. We are taking advantage of the wide spreads in the market to ladder an investment portfolio with reasonable yield with maturities which allow us to fund our loan growth, which has generally been in the $15 million to $20 million range every month. In October, we continued the investment of our Federal Funds Sold to provide higher earnings on an intermediate basis awaiting the continued funding of our loan demand. A summary of the changes in our assets during the quarter and the past year is as follows (in thousands):
The changes in the first two categories are in line with our investment strategy previously discussed. Our loan growth has settled into a fairly regular pattern although our pipeline has continued to expand with the credit freeze still prevalent among the larger banks. Our asset quality statistics remain excellent with non-accruals at $5,447,000, or .76% of loans, and past due over 30 days at 1.08% of the loan portfolio. All of these ratios are in the top 20% of our 1200 bank peer group.
Results of Operations
For the nine months ended September 30, 2009, First NBC Bank reported net profits of $3,612,000, an increase of $1,553,000, or 75%, over that of the same period in 2008. The increase reflects the results of the strong balance sheet growth offset by an unusual increase in operating expenses due to the increased FDIC charges as the FDIC continues to attempt to build the reserves necessary to resolve the banks damaged severely by the economic slowdown. Year to date FDIC charges, including the “one-time” special assessment as of June 30, 2009, were $931,000 in excess of those for the same period of 2008. An analysis of the results of operations for the nine month period of 2009 is as follows:
Interest income increased to $28,147,000 for the nine months, an increase of $5,765,000, or 26%, from the first nine months of 2008. This increase resulted from the following (in thousands):
Average Average Increase < decrease> CategoryBalance Change Rate Changein Interest Income
Federal Funds Sold $ 19,473 <2.2%> $ < 595 >
Investment 10,520 < .8%> < 61 >
Loans 225,008 <1.1%> 6,421
$ 5,765
The primary driver of the increase in the interest income has been the increase in the loans outstanding offset by a 1% plus drop in the average yield on those loans and on all asset categories. The Federal Reserve has done everything it can to minimize the recession and to restart the economy and has pushed rates down to 1930’s levels with the target Federal Funds rate at 25 basis points. The U.S. Treasury securities yield curve as of September 30, 2009 and 2008 was as follows:
September 30, 2009September 30, 2008
Federal Funds .25% 2.00%
Prime Rate 3.25% 5.00%
1 Year Treasury .40% 1.91%
5 Year Treasury 2.37% 2.88%
30 Year Treasury 4.19% 4.27%
However, the recession has led to credit concerns that are providing much wider spreads for municipal securities and high quality corporate bonds. We are taking advantage of these spreads, so that our drop in investment yields is much less than the drop in short-term rates. We have held our pricing pretty much constant since the recession began and have even tightened by introducing floors, in the 5% to 5.5% range, into our new and renewing floating rate loans. Our loan fees year to date are $1,379,000.
Total interest expense for the nine months of 2009 was $15,035,000, an increase of $2,320,000, or 18%, over the same period of 2008. The following provides an analysis of the changes in interest expense (in thousands):
As previously discussed, the major deposit balance changes relate to the deposit campaign which targeted MMA and CD’s with a 3% rate and which attracted in excess of $200,000,000 in new deposits. This campaign resulted in the average rate on MMA’s increasing by 31 basis points. The CD’s were sold with maturities between 6 months and one year.
As a result, net interest income for the nine months of 2009 was $13,112,000, an increase of $3,445,000, or 36%, over that of the same period in 2008. The provision for loan losses for 2009 year to date was $1,679,000, an increase of $360,000, or 27%, over that of 2008. Charge-offs for the year amount to $35,000 and the reserve increase is a result of the growth in loans and of our raising our target for the reserve from 75 basis points to 83 basis points on loans on our way to achieving a reserve of 1% on loans.
Non-interest income was $1,443,000 for the nine months of 2009, an increase of $643,000, or 80%, over that of 2008. Primarily responsible for this increase was an increase of $472,000 in securities gains as market spreads tightening gave us the opportunity to take securities gains of $510,000 and the return of the SBA market providing gains of $123,000 on the sale of SBA loans. The remainder of the non-interest increase was due to higher deposit fees and charges of $218,000 with the increased deposit levels and activity.
Non-interest expense increased to $10,138,000, an increase of $3,553,000, or 54%, over that of 2008. This increase, as discussed before, was heavily impacted by the increased FDIC charges of $931,000. Other factors contributing to the increase were 1) additional personnel costs related to the branch expansion and the need for additional support personnel due to the overall growth in bank volumes ($490,000); 2) an increase in occupancy costs of $1,007,000 due to the build-out of our 210 Baronne Main Office and of two permanent branch facilities increasing a large range of occupancy costs and 3) increases in a number of other non-interest expenses of $1,126,000 due primarily to increased data processing expenses ($194,000), communications expenses ($88,000), advertising and public relations ($108,000), legal and professional fees ($311,000), and taxes and assessments ($131,000).
Pretax income for the Bank was $2,738,000, an increase of $176,000. During 2009 the Bank has taken advantage of the combination of the available tax credits in the Go-Zone (affordable housing, employment, and new market tax credit) and the disappearance of the traditional buyers of such credits, FNMA and the megabanks, to step in and support the rebuilding of New Orleans by becoming a purchaser of such credits yielding an IRR of 18% to 30%. These credits have produced a credit provision of $874,000 as opposed to a positive tax provision of $503,000 in 2008.
Thus net income for the nine months of 2009 was $3,612,000, an increase of $1,553,000 or 75%, over that for the same period of 2008.
DRYADES SAVINGS BANK
The news at Dryades Savings Bank is very good with Dryades collecting its two large non-accruals during the first nine months of 2009 with full recovery of principle and interest. This resulted in a year-to-date profit of $37,000 versus a loss of $204,000 for the same period last year. The Dryades balance sheet, enhanced by the new capital injected after the acquisition, has shown solid growth in deposits of $6,663,000 and loans of $15,148,000. In addition, the Dryades mortgage origination operation has now been moved to a joint venture between the two banks in order to serve the needs of the customers of both banks and we have hired a new executive with significant mortgage experience to lead this effort. We are confident that this new venture will return Dryades to its former presence as the primary originator of mortgages to the New Orleans African American community as well as allow First NBC Bank to move significantly into the mortgage origination business which was a major strength of the old First NBC.
Again, we are proud of the results our Company has achieved from its inception in May of 2006.
