It is with great pleasure that I report on the progress our Company has achieved during the first quarter of 2010. The national economy has now begun the recovery from the deepest recession it has seen since the Great Depression although the recovery remains somewhat fragile with unemployment remaining stubbornly high. Interest rates remain at historically low levels squeezing bank interest margins and bank profitability. Bank failures, the normal result of a severe economic turndown, are at significant levels with 126 in 2009 and 68 in 2010 to date. The failures have been substantially in the states with the highest residential real estate expansion during the period since the year 2000. The economy in south Louisiana has remained one of the strongest in the U.S. with unemployment peaking at 7% compared to 10% for the nation. Even our hospitality business, although damaged by the impact of the recession on tourism throughout the country, has been buoyed by the business travel associated with the business opportunities and jobs created by the huge recovery spending in New Orleans.
Our Company has continued its pace of growth with total assets at the end of the first quarter of $1,142,521,000, an increase of $148,202,000 over that of December 31, 2009, an annual growth rate of 60%. For the quarter, our Company earned $1,700,000, an increase of $430,000 over that of the first quarter of the prior year, a growth rate of 33%. Earnings per common share were $.22 per share for the first quarter of 2010 as compared to $.19 per share in 2009. The following provides a summary of the changes in financial position and results of operations for our two banks.
FIRST NBC BANK
Financial Position
First NBC Bank finished the first quarter with assets of $1,060,164,000, an increase of $65,842,000 over that at December 31, 2009 and $356,938,000 over that at March 31, 2009. These represent growth rates of 26% for the quarter and 51% for the year. The growth was achieved as follows (in thousands):
On a year to year basis, we have achieved strong growth rates in all deposit account types except savings which has declined due to the extremely low rates on this product. The strongest growth has been in our NOW accounts reflecting the success of our Union business focus and of our institutional segment. Our very strong growth in MMA’s and CD’s is attributable to the success of our deposit campaign in May and June of 2009 which produced growth in excess of $200 million. The drop in the repurchase agreements reflects a change in Bank philosophy. The repos primarily are used for investment of class action settlement funds awaiting distribution. Beginning in 2009, we began placing these funds in our Trust department as opposed to on our balance sheet in.
The above described funding sources were employed as follows (in thousands):
The increase in cash reflects the increase in the number of branches and the increase in overall bank activity. The very large increase in short-term investments is the result of the Bank shifting its investment strategy to achieve a much higher liquidity ratio and lower dependency ratio. We have substantially increased our short-term investments (and given up substantial yield) to improve these two key ratios which are the focus of the new regulatory environment. Our loan growth moderated during the first quarter of 2010 due primarily to seasonal trends enhanced by the disruption in our activity due to the Saint’s Super Bowl run. The first quarter included the Mardi Gras and Easter seasons as well as the Saint’s Super Bowl phenomena and as a result all forms of business slowed downs (note, this is consistent with the first quarter of 2009 when loan growth was 9% with no Saints impact). The loan pipeline remains strong and should allow for strong growth throughout 2010. The Property balance continues to increase as we continue our branch expansion as we had 3 locations under construction during the first quarter – Lakeview, St. Charles Avenue and Veterans at Lemon near Transcontinental and we also built out the fourth floor of our Main Office. The large increase in other assets represents the prepayment required of all banks by the FDIC of the insurance charges for the next two years. This prepayment in the amount of $4,857,322 was made on December 30, 2009 and will be amortized over the period from January 1, 2010 to December 31, 2012.
A summary of the Bank’s loans by type is as follows:
Increase <Decrease> 3/31/103/31/09 $ %
Commercial Real Estate - Construction $ 64,631 $ 59,677 4,954 8
Commercial Real Estate - 1 to 4 Family 83,038 63,976 19,062 30
Commercial Real Estate - Multifamily 32,363 25,813 6,550 25
Increase <Decrease> 3/31/103/31/09 $ %
Commercial Real Estate - Non Farm, Non Residential 318,424 190,317 128,107 67
Consumer Real Estate 37,581 31,197 6,38420
Total Real Estate 536,037 370,980 165,057 44
Commercial 280,903 212,855 68,048 32
Consumer 5,601 4,433 1,168 26
Other 6,243 5,403 84016 $828,784 $593,671235,11340
The strong growth in the real estate category reflects the conditions in New Orleans where so much real estate was destroyed by Hurricane Katrina and also reflects the fact that we usually take our commercial customers’ real estate as collateral for our commercial loans; we have $212,760,000 of owner occupied loans in our real estate portfolio. Our exposure to real estate development loans is limited and to residential real estate development is extremely small. Our asset quality information as of March 31, 2010 is as follows:
Peer BankPeer Bank RatioAverage(1)Percentile(1)
Past Due Loans (30-89 days) / Total Loans .36 1.41 11
Non accrual Loans / Total Loans .55 3.65 9
Net Charge-offs / Total Loans 0 1.04 7
Loan Loss Reserve Coverage of Charge-offs 175 4.10 98
Loan Loss Reserve Coverage of Non accruals 1.53 .88 84
(1) Peer group is all banks $1 billion to $3 billion
The Bank’s loan loss reserve at March 31, 2010 was $6,997,000 as we continue to build our reserve to 1% by the end of 2011. As can be seen from the above statistics, the reserve is extremely sound based upon the key coverage and asset quality ratios.
Results of Operations
For the quarter ended March 31, 2010 the Bank reported net income of $1,814,000, an increase of $482,000, or 36% over the same period of 2009. The increase is the result of our balance sheet growth which allowed us to improve our net interest income and our increasing efficiency as we expand – our costs obviously increase with our size but not at the same speed. Our net interest margin remains compressed due to the extremely low interest rates orchestrated by the Federal Reserve to encourage economic expansion and to end the deep recession of 2008 and 2009. With the prime rate at 3.25% and with Federal Funds and short-term treasury bills rates below 20 – 30 basis points, banks cannot achieve their normal spreads. Interest income increased to $12,239,000, an increase of $4,016,000 or 49%, over the first quarter of 2009. The following provides an analysis of our interest income and interest expense for the quarter (in thousands except rates):
Average Average Increase <Decrease> CategoryBalance Change Rate Changein Interest Income
Short-term Investments $ 20,763 < .12%> $ 8
Investments 82,982 <1.25%> 481
Loans 240,918 < .08%> 3,527 $ 4,016
As can be seen, the increase in interest income is totally due to the increased volumes as the average rates continued to fall in 2010 from 2009, primarily due to maturities of loans and investments with re-investment at lower rates. We are especially proud of our loan pricing which has remained substantially flat over the whole portfolio despite the generally lower rates in the economy. Also significant is our fee generation with $445,000 in loan fees collected in the first quarter of 2010.
Total interest expense for the quarter was $5,611,000, an increase of $1,584,000, or 39%, over that of the first quarter of 2009. The following provides a rate/volume analysis of the increase (in thousands):
The increases in the average balances were the result of the deposit campaign in May and June of 2009 which generated $200 million, almost equally split between MMA and CD’s, along with the continued branch expansion providing more convenient access to our former First NBC customers. The decrease in rates in every category except MMA is the result of lower rates in the economy; the increase in the MMA average rate is a result of the special MMA rate included in the May deposit special.
As a result, net interest income was $6,629,000, an increase of $2,433,000, or 58%, over that for the first quarter of 2009. The provision for loan losses was $738,000 for the first quarter of 2010, an increase of $238,000, or 48%, over that of the first quarter of 2009 reflecting our commitment to build our loan loss reserve.
Non-interest income increased to $588,000, an increase of $352,000, or 149%, over the same period for 2009 due primarily to $259,000 of securities gains in the first quarter and due to $41,000 of increased service charges on our higher deposit account volume and income of $20,000 from our CDC activities. To date, our CDC and Trust activities have lagged our expectations but we see strong progress in these operations which should provide significant income over the rest of 2010.
Non-interest expense was $4,781,000 for the first quarter of 2010, an increase of $2,005,000, or 72% over that of the same period in 2009. Salaries and benefits accounted for $649,000 of the increase with our work force expanding to meet the demands of increased volume and our new branches. Occupancy expenses increased $375,000 due to the branch expansion causing increases in rent, insurance, taxes and utilities. Other non-interest expense increased by $981,000 due primarily to the new FDIC rates ($352,000), amortization of tax credit costs ($111,000), increased shareholder taxes ($45,000), additional advertising and marketing ($49,000) and increased professional fees ($204,000) associated with our size and complexity of operation.
Pretax income for the Bank for the first quarter was $1,698,000, an increase of $542,000, or 47%, over that of 2009. The tax provision for 2010 was a credit of $116,000 due to our tax credits generated exceeding the tax provision on the $1,698,000 of pretax income. The same was true for 2009 as the $176,000 credit provision occurred for the same reason.
Net income for the first quarter was $1,814,000, an increase of $482,000, or 36%, over that of the first quarter of 2009. For the record, the Bank was the most profitable bank of its 2006 class of newly chartered banks (176 banks) for the year 2009. During 2009, our denovo peer group lost an average of .82% on assets and 6.5% on equity; their average size was $121 million.
DRYADES SAVINGS BANK
For the first quarter, Dryades lost $56,000 as compared to a $31,000 loss in 2009. The loss in 2009 was buoyed by a large interest recovery on a non-accrual loan for 2 plus years ($116,166.33). Net interest income increased slightly from $905,000 to $939,000 due primarily to an increase in average earning assets as Dryades has begun to expand its customer base. It has entered into a comprehensive sales training program and is now launching an aggressive call program. It has re-opened its Read Road branch in New Orleans East, formerly its largest branch prior to Katrina. This new market focus has resulted, as usual, in increased non-interest expenses of $137,000 as we have had to build the team necessary to achieve success prior to receiving the results. Dryades completed the consolidation of its support operations into First NBC during April of 2010 and should achieve break-even status in the second quarter of 2010. Of particular strength has been its mortgage origination business which is thriving under new leadership and an increased origination staff.
In conclusion, let me add a comment regarding the recent oil spill. Although this event is indeed a significant concern currently with its ultimate effect on our fisheries and wildlife not yet known, I can tell you that your Bank has almost no exposure to the businesses directly impacted by the spill. Of course, the ultimate impact of the spill is yet to be seen as the remediation team has not yet even been able to shut off the oil leak, much less clean up the oil already in the Gulf.
