It is my pleasure to provide you with an update of the progress of our Company for the second quarter of 2010. During that period, the country and the world have seen the economic recovery slow substantially and have also seen perhaps the greatest environmental catastrophe in U.S. history with the Horizon deepwater oil well explosion and the resulting oil spill which is unprecedented in world history in size and intensity (I will provide an analysis of the impact of the spill on our region and on our Company later in this letter). Despite the slowdown in the U.S. and world economy during the first and second quarters of 2010, the south Louisiana economy has continued its expansion and is poised for a period of very strong economic expansion even after consideration of the impact of the oil spill and the six month Federal moratorium on deepwater drilling in the Gulf.
Our Company had a strong quarter with assets increasing to $1,236,000,000, an increase of $93,000,000, over that of March 31, 2010 and of $253,000,000 over that of June 30, 2009. These represent growth rates of 33% for the quarter and 26% for the year. For the first six months of 2010 our Company earned $4,003,000, an increase of $1,934,000, or 93%, over the first six months of 2009. Earnings per common share were $.49, an increase of 69%, over that of the 2009 similar period. The following provides more detailed information regarding these results.
FIRST NBC BANK
Financial Position
First NBC Bank ended the quarter with total assets of $1,154,000,000, an increase of $160,000,000 over that at December 31, 2009 and $252,000,000 over that at June 30, 2009. This growth was achieved as follows (in thousands; growth rates annualized):
Our deposit trend at First NBC reflects a strong shift in our growth from CD’s to transaction accounts. As we have discussed in prior letters, our initial rapid growth was of necessity funded through certificates of deposit due to our lack of a convenient branch network (retail customers generally bank at a location close to their home for convenience reasons, the primary decision variable for their bank selection). Over the past three years, we have steadily expanded our branch network, by first placing banking trailers followed by our trademark look permanent facilities on key transportation routes throughout our city. We have now reached the point where we have a competitive, although not complete, branch network and we are therefore able to capture transaction accounts. The mix of our deposits is continually shifting and has now reached a 40/60 split of transaction accounts and CD’s which will continue to shift as we continue our expansion. Also noteworthy is the fact that we have grown substantially in the last year without any deposit campaigns or specials. We will continue to use the special campaign approach in the future as required but the “growth at almost no cost” of the last year is strong evidence of the value of the First NBC image in the New Orleans area.
Our demand deposit growth, which has been extraordinary in the last quarter, primarily reflects our commercial loan expansion and the related commercial deposits which follow our lending. Our Board, in particular, places great emphasis on our obtaining full deposit relationships when we provide commercial credit and our lenders are doing a good job of carrying out this philosophy. The growth in our NOW accounts, also impressive, relates especially to the growth of our institutional and labor union business, both of which have very large financial wallets and are eligible to receive interest on their transaction accounts. Our MMA growth is primarily retail oriented due to our branch expansion and a follow-up to our highly successful summer deposit campaign of 2009 in which we opened 1,030 MMA accounts. The moderation of our CD growth reflects the shift in our competitive approach as we now have a competitive branch system.
Our asset growth during the quarter and the past year has been as follows (in thousands):
The increase in assets such as cash, securities and property for both the quarter and the year reflect our general branch expansion and growth in overall business. The decrease in the short-term investments from last year reflects the repositioning of the funds from the summer of 2009 deposit campaigns into loans and longer-term investments. Our investment strategy has been to keep a significant portion of our portfolio in the less than one year category to ensure adequate liquidity since this is a primary focus of the regulators given the large number of banking failures around the country. The remainder of our investments are placed in two to three year duration product with better than average spreads. Currently, that product is the GNMA mortgage backed product. With the fall of the 10 year treasury to below 3% over the past several months, our strategy has produced 3.5% to 4.5% yields and a profit of $2.2 million in our portfolio as of July 31, 2010.
Our loan growth has remained relatively constant in the 35% range for the last two years. Our pipeline remains strong in the $400MM range providing us with the ability to continue our loan growth for the foreseeable future. As of June 30, 2010, the mix of our loan portfolio, by type, was as follows:
Balance (000’s) Balance (000’s) June 30, 2010June 30, 2009
Construction and Development $ 64,895 $ 67,216
1 to 4 Family Residential 80,724 68,016
Multi-family Residential 40,104 31,711
Other Commercial 339,496 216,812
Home Equity 36,412 30,163
Total Real Estate $ 561,631 $ 413,918
Commercial 311,120 233,815
Consumer 5,760 5,061
Other 21,276 3,976 $ 899,787 $ 656,770
In reviewing the mix of loans, it is important to note the following: 1) Approximately $237,634,000 of our commercial real estate is owner occupied real estate as opposed to real estate which is at risk due to market conditions; 2) in a city in which 80% of the land was under Katrina’s flood waters, it is expected that the recovery would require extensive real estate investment/rebuilding during the next five to ten years; 3) as noted previously, the Federal government allocated an additional $2.1B of tax credits and several hundred million of CDBG funds to insure the reconstruction of affordable housing in New Orleans and we have been able to take advantage of these Federally assisted transactions to generate construction loans with very low loan to value and very high debt service coverage ratios. Our C&D loans have a high average quality rating and a low risk profile; we have no residential subdivision loans which have been a problem nationwide and on the North shore of our area. Our asset quality remains strong with past dues at .89% of loans at June 30, 2010 and non-performing assets at .72% of loans at that date. Our reserve to loans at June 30, 2010 was .89% and covered our non-performing assets by 127%. Our year-to-date charge-offs are $59,000 through June 30th.
The increase in other assets reflects the proceeds of the stock sale through June 30th which were held in the Company and transferred to the Bank after June 30th ($9MM) and increased investment by our CDC in rebuilding New Orleans residential real estate ($5MM).
Results of Operations
For the six months ended June 30, 2010, the Bank reported net income of $4,254,000, an increase of $2,085,000, or 96%, over the same period of 2009. This substantial increase is the result of the following: 1) our higher level of earning assets; 2) our increasing net interest margin driven by our strong loan pricing and our declining costs of funds as our CD’s reprice as they mature; 3) our return to a strong level of non-interest income due to SBA gains and investment securities gains; and 4) our increased efficiency as our asset growth spread our fixed costs over a higher revenue base.
Our interest income increased to $25,232,000 for the first half of 2010, an increase of $7,706,000, or 31%, over that of the same period of last year. A summary of our interest income is as follows (in thousands except for rates):
Average Average Increase <Decrease> CategoryBalance Change Rate Changein Interest Income
Short-term Investments $ 7,206 .05% $ 14
Investments 92,898 <1.76%> 753
Loans 236,185 < .06%> 6,939 $ 7,706
Thus, the increase in interest income is almost totally due to the increase in the balance of all types of interest earning assets offset by the reduction in the average yield on investments. This significant decline in the investment rate is the result of our low duration investments maturing and being re-invested at the lower rates prevalent in the economy. Despite the overall lower rates in the economy, we have been able to maintain our loan rates and to aggressively collect fees ($1,413,000 loan fees collected in the first half of 2010).
Total interest expense for the first six months of 2010 was $11,283,000, an increase of $2,437,000, or 27%, over that of the same period in 2009. An analysis of the causes for this increase is as follows (in thousands except for rates):
The increases in the average balances have already been discussed in the balance sheet change discussion. The reductions in the average rate on all deposits except MMA reflect the overall lower rates in the economy. The small increase in the MMA rate reflects the impact of the 3% MMA special campaign which raised in excess of $100MM in May/June of 2009 and therefore had a greater impact in 2010 (six months) as opposed to 2009 (one month). The Repurchase Agreement change reflects a different mix of customers between the two years.
As a result, net interest income was $13,950,000 for the first half of the year, an increase of $5,270,000, or 61%, over that of the corresponding period of 2009. Our provision for loan losses for 2010 to date was $1,834,000, an increase of $758,000, or 70%, over the $1,076,000 for 2009. This increase represents the result of our commitment to reach 1% ratio of reserve to loans by year-end. Our original time frame for achievement of this regulatory guideline was December, 2011 but was accelerated to December, 2010 in line with current regulatory guidance.
Non-interest income was very strong at $1,890,000, an increase of $1,245,000, or 193%, over that of 2009. The increase is the result of an increase of $708,000 in securities gains, $334,000 in SBA loan sale gains, $110,000 increase in service charges as our transaction actions grow, and $90,000 in our other non-interest income. This area will continue to grow as our CDC and trust income will become major contributors over the next six months.
Non-interest expense was $9,609,000, an increase of $2,913,000, or 44%, over that of 2009. Salaries and wages increased $1,022,000, or 46%, due to expansion of the branch system, expansion of our operations staff to handle the significant new volumes and higher bonus accruals due to increased profitability. Occupancy expense increased $686,000, or 45%, again due to the increased number of branches and higher depreciation and property taxes on our new locations. Other non-interest expense increased $1,204,000, or 41%, over that of 2009 due to the higher overall level of assets and activity; in particular, the increase was the result of the following: data processing ($205,000) due to increased volume; advertising and marketing ($86,000); professional fees ($473,000) related to merger and acquisition due diligence, investment management fees, and audit fees; taxes and FDIC premiums ($159,000); security services ($100,000) due to increased number of branches; and tax credit payment amortization ($300,000) as a result of our investment in tax credits starting in 2009 and accelerating in 2010.
Pre-tax income for the first six months of 2010 was $4,397,000, an increase of $2,844,000, or 183%, over that of 2009. The income tax provision increased to $142,000 from a credit provision of $616,000 in the prior year due to the higher level of pre-tax income and a relatively flat tax credit investment. As we have pointed out, we have played a significant role in the rebuilding of New Orleans by buying at a discount from normal levels Federal income tax credits. Without these purchases, a number of major rebuilding projects would not have occurred. The traditional buyers of these credits were the financial giants – Merrill Lynch, Bank of America, FNMA, FHLMC, AIG - who all either disappeared permanently or disappeared from the market temporarily due to having huge tax losses. Our returns on these credits have been in the 20-30% range and we believe it is highly attractive to use the money we would normally send to the IRS to invest in New Orleans projects. These tax credit investments are not non-recurring as they spread over 10 years (low income housing tax credits) or 7 years (New Market Tax Credits).
Our net income for the six months was $4,254,000, an increase of $2,085,000, or 96%, over that of 2009.
DRYADES SAVINGS BANK
For the first six months of 2010, Dryades has improved its net loss from $162,000 in 2009 to $118,000 in 2010. In June of 2010, Dryades completed its back-room consolidation into First NBC which should turn it profitable over the next three months. Dryades mortgage operations have really turned up their efforts and are also contributing to turning Dryades into a profitable operation.
OTHER MATTERS
The oil spill has clearly placed New Orleans back in the national media. After 100 plus days, I can assure you that the impact of this tragedy has been, is and will be positive on our economy. The Horizon oil well has now been capped and is no longer spewing oil into the Gulf. Although this is a terrible environmental disaster, the loss of economics in our area due to the moratorium on seafood harvesting and deep-water oil and gas drilling has been overwhelmed by the massive B.P. spending on clean-up. B.P. has hired over 5,000 workers in the coastal area of the Gulf to perform the shoreline clean-up and have hired a vast armada of boats to lay boom to keep the oil from reaching the shore and to spot oil in the Gulf and remove it from the water. Almost every boat with deep water capability has been chartered at rates well in excess of normal day rates. The Federal government estimates 220 million gallons of oil were spilled in the Gulf to be picked up. However, the good news is that the Gulf has microbes in it which digest oil and expel water and over time the oil should be eliminated. There is a need for perspective and I recently read a comment from a scientist who did just that by pointing out that the total oil spilled in relation to the size of the Gulf is captured by comparing it to an eyedropper of oil spilled into an Olympic size swimming pool. I by no means underestimate the effects the spill may have on the estuaries of the south Louisiana marshes but the short term economic effects have been very positive to the area’s economy. B.P. has already spent $3 billion on the clean-up and has delivered $5 billion to the Federal government claim settlement czar. B.P.’s agreement is to commit $5 billion per year for 4 years to continue the clean-up and to settle claims for losses caused by the spill. The Federal class action judiciary panel made the decision that all claims on the spill will be tried in New Orleans, a major benefit to our hospitality industry. In summary, environmental impact bad, economic impact good.
There is a palpable level of excitement in the air at First NBC. Our national competitors remain frozen. Our local competitors are awash in nonperforming assets and are running good business out of the bank. Our Bank is the current market leader and everyday new business seeks us out. We intend to take advantage of this great opportunity. Second, the City has elected a new Mayor who won a first primary victory over 7 qualified opponents with a 67% victory. He is competent, well-liked by all races, and his first 100 days have shown a commitment to overcome the lethargy of the former City administration. The money flow for recovery has gone from the trickle of the past five years to a tsunami. Over the next five years, we will receive $15B for flood protection, $4-5B for “Road Home” residential construction, $1B for new schools, $1B for new sewerage and water infrastructure, $1.5B for drainage, $800M for airport additions, $400MM for road repair, $400MM for our Federal City project, $200MM for the new National Guard armory at Jackson Barracks, $180MM for the new Hyatt, etc.
Finally, fall is in the air (hyperbole at its worst) as the NFL football preseason has begun. GO First NBC; GO New Orleans; GO Saints!!
