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North Atlanta National Bank's Stakeholders'
Report
1st Quarter 2007
Chairman's Letter
Shelter From the Storm
A tornado recently swept through my hometown,
Americus, Ga. As children, whenever we heard
about a tornado - our only frame of reference being
the fear we felt watching the tornado in "The
Wizard of Oz" - older folks would assure us that
we were safe because a local Indian myth said tornadoes
would never hit Americus.
Looking at first-quarter earnings reports from the
banking industry, it appears that some banks may
have been caught up in the myth that ready borrowers
and easy money during the last several years
would never end. These banks failed to prepare for
the ever-present possibility of an economic storm.
In the first quarter of 2007, North Atlanta National
Bank was not among this group of banks. Our first
quarter financial report reflects some disappointment
but many positive developments.
The disappointment stems from the Bank's quarterly
net income being less than the same period
last year, and its return on equity dropping below
our double-digit goal. The setback in earnings is
primarily attributable to two factors. One, during
the first quarter, expense growth exceeded revenue
growth. Our expense growth was in part the result
of a plan to expand staff, with the objective of
improving the effectiveness of the Bank's business
development and lending efforts. NANB is also
continuing to invest in core deposit marketing initiatives
that were not in place during the first quarter
of 2006. Moving into the second quarter, our
core revenues already have caught up with those
new expenses.
The second factor is the continued pressure on the
Bank's net interest margin. This is not a challenge
unique to NANB; the current interest rate environment
is a testy management issue for the entire
industry. Consequently, while the Bank continues
to grow earning assets, it does not derive the same
revenue impact that would normally result from
such growth. Going forward, our balance sheet is
positioned so that if the rate environment remains
the same, our net interest margin will stabilize and
should begin expanding from its current level.
In the face of the foregoing challenges, the Bank
continues to experience a number of positive
achievements. During the quarter, NANB sold
its most significant foreclosed property for a small
loss, allowing us to redeploy the proceeds into earning
assets and bring an end to the cost associated
with ownership of the property. During the first
quarter, the Bank also disposed of low yielding
fixed-income securities, covering the loss from that
sale with a gain from the sale of equity securities.
As a result of marketing and the efforts of individual
bankers, another positive development is that
deposits continue to grow, with a shift away from
wholesale deposits toward local retail deposits.
Based on anecdotal reports, North Atlanta National
Bank is successfully exceeding its peers in obtaining
new, and converting existing, commercial customers
to remote deposit services. The Bankˇ¦s other
retail deposit promotions, communicated through
direct mail targeted toward local neighborhoods, is
also contributing to deposit growth, plus providing
many opportunities to cross-sell multiple services
to our new clients.
The Bank also continues to grow its diverse loan
portfolio, which is a clear positive because the diversity
mitigates concerns expressed by economists
and the media regarding the deterioration in housing
markets. Additionally, banking regulators have
become very concerned about banks with high
concentrations of commercial real estate loans and
have issued new guidelines related to these fears.
New FDIC reporting requirements will reflect that
77% of North Atlanta National Bank's commercial
real estate loans are secured by "owner-occupied"
properties. This is important because loans secured
by owner-occupied properties historically have exhibited
less risk than loans secured by investment
properties. The banking industry's first-quarter
earnings announcements reflect that many banks
are experiencing significant growth in non-accrual
loans, credit losses, and foreclosures related to commercial
real estate loans.
Like a tornado, which strikes a limited area while
other nearby locations are unaffected, if a bank's
assets are concentrated in the one segment of commerce
in which economic weakness strikes, then
that bank will face disproportionate damage to its
overall financial condition. How do you prepare
for economic bad weather? Since our inception,
North Atlanta National Bank's bedrock operating
principles have been "Service, Soundness, and
Community." NANB does not claim immunity to
economic stress; however, the Bank is cautiously
optimistic that its sound underwriting practices
and the fortitude of its clients will provide shelter
from the storm.
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