It is with great pleasure that I provide you with an update on our Company as of year-end 2009. During 2009, the Company completed its three year probationary period required for new banks and left denovo status on May 19, 2009. At year-end, the Company had completed its first full 3 years of operations with $1,077,000,000 in assets moving it into fifth place in market share in the New Orleans area. During its brief 3 plus years in existence, our Company has become recognized as a preferred provider of banking services on the south shore of New Orleans. It has demonstrated the core capability of acquiring and successfully integrating other banks into its organization with minimal disruption, a skill which could be critical during the next phase of its existence. It has also displayed the ability to take on additional equity and to successfully deploy this capital to enhance shareholder value in terms of market share and earnings. As an example the Company received $17.8 million in TARP funds in late March of 2009 and has used that capital to increase assets by 302,000,000 and loans by $209,812,000 during the past 9 months. We are probably the poster child for banks which received the TARP funds; if all of those banks had done what our Company accomplished with its Federal equity, the last 9 months would have been the greatest expansion in the history of the U.S. economy. Moreover, we have reached break-even on the TARP funds after only the first 9 months and our earnings run rate has increased by $60,000 per month even after consideration of the TARP dividend; on a cumulative basis we should be anti-dilutive by the end of the first year of TARP.
The past year has seen a major collapse in the worldwide economy which resulted in a sharp drop in the U.S. economy in the first quarter which moderated in the second; by the third quarter the economy assisted by the huge governmental recovery package had turned positive and the fourth quarter economic data proved the recession was finished and the economy is once again expanding. Nationwide, real estate values, especially housing, have reflected significant declines and the combination of the recession, unemployment rates in excess of 10%, and business and household bankruptcies has taken its toll on the banking industry. As a result banks around the country, especially in prior high growth markets – Florida, California, Arizona and Nevada – have come under substantial pressure. Over 160 banks have failed and expectations are for more to come. Although the majority of these bank failures will be in the areas cited above, there are banks in most states including Louisiana which display the risk characteristics which may lead to failure. Our Company believes this offers a unique opportunity to grow the Company in a very cost beneficial manner. We believe we have the expertise, management team and operating systems to allow us to successfully acquire a failed bank, integrate it operationally and work through its asset quality issues in a highly effective manner. The good news on the economy is that south Louisiana for a variety of reasons has sat out this recession. In fact, the south Louisiana economy has advanced at a steady pace and frankly is on the verge of a major expansion. Unemployment has remained in the 5-6% range, and capital expenditures rebuilding our area have expanded three to four times. But, as we now understand, rebuilding an area with $150 billion plus in losses is not a short-term task. Government at every level – Federal, state and local – has not been prepared for the process and thus four plus years after the storm, the recovery still moves sluggishly ahead. FEMA, the Louisiana Recovery Authority (LRA), and the City of New Orleans ultimately must spend the billions they are holding and the floodgates look now to be opening. Assisted by a change in the FEMA approach under the Obama administration, a change in the company operating the LRA and the election of the lieutenant governor of the state as the new mayor of New Orleans with an overwhelming (65%) victory over seven major candidates in the first primary, the outlook for the City is as rosy as any place in the U.S. As a final indication that 2010 will be the year of the City of New Orleans, I will point to the recent Super Bowl victory of the New Orleans Saints’ after 43 years in the NFL. To borrow a phrase from the Saints lore, “Who dat says dey gonna beat dat City”.
Our Company ended 2009 with total assets of $1,077,000,000, an increase of $366,000,000 or 51% over that of 2008. Earnings for the year were $5,465,000 as compared to $2,579,000, an increase of 112%. Earnings per common share was $.71 as opposed to $.38 for the prior year, an 87% increase. The following commentary provides a discussion of the Company’s financial position and operating results for 2009.
FIRST NBC BANK
Financial Position
First NBC Bank closed 2009 with $994,322,000 in assets representing 4% growth for the fourth quarter and 55% for the full year. The source of our growth for the quarter and the year was as follows (in thousands):
The major source of growth for each period has been the increase in MMA accounts as a result of the special deposit campaign in May and June of 2009. Even after the campaign special was ended on June 15, 2009, the campaign momentum continued for the next six months. For the year, two other major sources have been the NOW accounts which reflect a significant increase in our penetration of the labor union segment and in the certificate of deposit area which also increased as a result of the May deposit campaign which offered a choice of CD and MMA account specials. The large decrease in the Repurchase Agreements represents several large class action suit settlements which were paid out in 2009. The balances of these type settlement accounts normally ebb and flow as new cases arrive and old cases are paid out. The equity increase represents the proceeds from the TARP funds invested in the Bank to sustain growth.
The Bank has deployed these resources as follows (in thousands):
With respect to the full year, the above analysis reflects the repositioning of the balance sheet after the large deposit campaign in May of 2009. The Bank’s loan growth reflects the sustained loan demand in the New Orleans area as it rebuilds from Katrina. With over 80% of the structures in Orleans Parish under water during Katrina and with 30,000 homes damaged by water in Jefferson Parish, the rebuilding task is enormous and will continue for the next 5 or more years. A summary of loans by type at December 31, 2009 and 2008 is as follows:
Increase <Decrease> 12/31/0912/31/08 $ %
Commercial Real Estate - Construction 74,664 59,330 15,334 26
Commercial Real Estate - 1 to 4 Family 82,173 58,411 23,762 41
Commercial Real Estate - Multifamily 29,862 22,260 7,602 34
Commercial Real Estate - Non Farm, Non Residential 289,452 167,459 121,993 73
Consumer Real Estate 35,973 29,5906,38322
Total Real Estate 512,124 337,050 175,074 52
Commercial 263,667 188,035 75,632 40
Consumer 5,949 3,852 2,097 54
Other (loans in process) 9,25214,437<5,185>36 790,992543,374247,61846
The mix and growth of our loans reflects the demand in our market area where the real estate of all types was substantially damaged by Hurricane Katrina and is being repaired by the original occupants or by new purchasers availing themselves of special governmental incentives in the forms of tax credits, CDBG funds, special depreciation write-offs, etc. Unlike the challenges to real estate in the rest of the country – rapidly falling residential prices, high foreclosure levels, high unemployment rates, high business failure rates, major problems in retail and hospitality industries and the related real estate – New Orleans remains in a growth mode as damaged real estate is replaced. There are pockets of weakness such as upscale residential problems on the North Shore due to overbuilding after Katrina and hotels which are under stress due to the slowdown in hospitality travel countrywide due to the recession. The Bank has no real exposure to these higher risk areas. The regulatory focus has turned to the commercial real estate (CRE) area in general and to construction and development (C&D) loans in particular as having high risk in this time of recession. The good news is that our Bank has limited exposure to C&D loans and that all of these loans are performing well with no significant delinquencies. Also, most of these loans have very low loan to values due to the governmental incentives given the borrower to rebuild. In fact, the Bank has invested in the tax credits on some of these projects due to the outstanding returns in the tax credit market due to the absence of buyers. The Bank has offset its tax liabilities while at the same time investing in the rebuilding of our City. In addition, the Bank’s CRE portfolio at December 31, 2009 include $205,766,828 owner occupied real estate which includes no market risk since it is not held for resale or rental but rather occupied by successful operating business, in effect a commercial loan secured by the real estate of the business.
Despite the very rapid growth, our asset quality has remained well above average. A few key ratios reflect this:
Peer BankPeer Bank RatioAverage(1)Percentile(1)
Past Due Loans (30-89 days) / Total Loans .37% 1.28% 15
Past Due Loans - Non accrual / Total Loans .63% 3.58% 9
Loan Charge-off’s (2009) / Total Loans .01% 1.47% 1
Loan Loss Reserve Coverage of Charge-offs 184.38 x’s 2.33 x’s 99
Loan Loss Reserve Coverage of Past Due (30-89 days) 212% 59.00% 19
Loan Loss Reserve to Non accruals 125% 88.00% 6
(1) Peer group is all banks $1 billion to $3 billion
The final use of our funding has been to continue our branch expansion to improve our convenience for our customers. We completed our Veterans at Aris branch in 2009 and began construction on our branches at Harrison Avenue (Lakeview area), St. Charles Avenue and Louisiana (Uptown / Garden District area) and Veterans at Transcontinental (western Jefferson Parish area). Our branches average in excess of $99MM in deposits currently which makes them very efficient and we expect to continue this style in the future as we continue to add relationships in those branches.
Results of Operations
For the year ended December 31, 2009 the Bank reported net income of $5,266,000, an increase of $2,288,000, or 77%, over that of 2008. The increase reflects the results of the strong balance sheet growth and the resulting increase in net interest income offset by the increase in operating expenses due to the higher FDIC charges and the general need to add to expense as the Bank volume grows in order to retain high customer service levels. The Bank’s net interest margin has been hurt by the very low interest rates in the economy which provide almost no return for liquidity while requiring almost no return be given to deposit customers to maintain margins. We take a more long-term view of our customer relationships and price them on the basis of their long-term value. An analysis of the results of operations for 2009 is as follows:
Interest income increased to $40,048,000, an increase of $9,568,000, or 31%, over that of 2008. This increase resulted from the following (in thousands):
Average Average Increase <Decrease> CategoryBalance Change Rate Changein Interest Income
Short-term Investments $ 18,236 <2.10%> $ < 628 >
Investments 35,453 <1.06%> 400
Loans 230,431 < .90%> 9,796 $ 9,568
As can be seen from the above analysis, the growth in interest income is due to the balance increases described earlier in this discussion. The smaller decline in the loan yield reflects our fixed rate portfolio and our use of floors on prime based loans. The average rates have fallen significantly as the Federal Reserve dropped rates to practically zero in the short end of the yield curve in order to stimulate the economy in the fall of 2008 as the nation absorbed some of the worst economic news since the great depression. The lower reduction in investments resulted from our identification of some abnormal spreads which the economic crisis produced in the mortgage-backed and corporate bond sector which allowed us to mitigate the overall drop in rates by investing very carefully in these sectors in high quality or governmental guaranteed paper.
The following is a comparison of the rate environment covering the two year period:
12/31/0712/31/0812/31/09
Federal Funds 4.25% 0% - 0.25% 0% - 0.25%
Prime Rate 7.25% 3.25% 3.25%
1 Year Treasury 3.26% 0.49% 0.37%
5 Year Treasury 3.49% 1.52% 2.34%
30 Year Treasury 4.53% 2.87% 4.49%
Total interest expense for 2009 was $20,982,000, an increase of $4,079,000, or 24%, over that for 2008. The increase of interest expense results also from the growth in deposits as described below (in thousands):
The variances in the balances track the balance sheet analysis previously given – the large positive balance variances arising from the deposit campaign.
As a result, net interest income for 2009 was $19,065,000, an increase of $5,488,000, or 40%, over that for 2008. The provision for loan losses for 2009 was $2,466,000, an increase of $891,000, or 57%, over that for 2008, reflecting our loan growth and our intent to move to a 1% reserve by year-end 2011 despite our top of the range coverage ratios and very low historical loss ratios with charge-offs of $35,000 or .01% of average loans for the year.
Non-interest income was $1,748,000 for 2009, an increase of $700,000 or 67% over that of 2008. Primarily responsible was an increase in service charges of $270,000 due to a much greater number of deposit accounts in 2009 and a $471,000 increase in security gains as a result of active management of our short-term oriented investment portfolio. Generally, we only take gains when we can totally replace the yield with an equal yield in a different product. The anomalies in the spreads during 2009 allowed us to do this and still end the year with over $1.2 million in gains in our portfolio.
Non-interest expense increased to $14,273,000, an increase of $4,703,000, or 49%, over that of 2008. This increase was heavily impacted by the major increase in FDIC charges (including the one-time 7% special assessment) of $1,229,000 between the two years as the FDIC sought to strengthen its reserve for losses on failed banks in light of current economic conditions. In addition to the increased FDIC charges, non-interest expenses increased in the following areas: 1) additional personnel costs of $1,032,000 due to the staffing for new branches and for operational personnel to handle the increased volume of accounts and transactions; 2) an increase in rent of $750,000 due to the new branches and main office space expansion to support operations; 3) an increase in data processing costs of $345,000 due to increased volume; 4) an increase of $644,000 in occupancy costs due to the larger branch network increasing maintenance, utilities, property taxes, etc.
Pretax income for the Bank for 2009 was $4,075,000, an increase of $595,000, or 17%, over 2008. The 2009 tax provision was a credit of $1,192,000 due to increased investment in tax credit projects as part of the recovery of New Orleans which produced a $2,353,000 credit provision which was reduced by the positive provision of $1,161,000 on taxable income (which excludes municipal income and earnings on our bank owned life insurance plan).
DRYADES SAVINGS BANK
Dryades is making good progress in achieving the goals we developed for it. First we along with the Dryades Board and management attacked the large non-performing balance of $2,272,000 at Dryades at acquisition. I can now inform you that that has been totally achieved with the two largest non-performing loans collected in full (principle and interest) and non-performing loans now at a very low level at $236,000 at December 31, 2009. The Dryades integration is now fully complete operationally and we should begin branch sharing in the near future. The Dryades balance sheet has displayed strong growth with total assets increasing to $82,675,000 from $69,684,000 in 2008, an increase of 19%. Dryades has increased their loans by $15,116,000 which helps increase their interest income. For the year, Dryades produced a profit of $192,000 as opposed to a $344,000 loss in 2008. The profit is the result of non-recurring recovery of prior year interest on the two large non-performing loans and a gain on the sale of certain securities to reinvest the funds in loans.
Despite significant challenges in the form of huge increases in FDIC costs and a squeeze on the net interest margin due to interest rates not seen since the depression, our Company managed to produce a reasonable profit ending the year with a very strong run rate. In fact, we have just changed our peer group to all banks with assets of $1B to $3B and our 2009 returns were in the 65th percentile of that group, comparing to banks with long histories, stable operations and much less growth. We look forward to the next year where the current environment will give us continuing as well as new opportunities. 2010 is indeed the year of the City of New Orleans.
