Item 1. Business.
General
Louisiana Bancorp, Inc. is a Louisiana corporation that became the holding company for Bank of New Orleans following the conversion of the Bank in July 2007 from a federally chartered mutual savings bank to a federally chartered stock savings bank. The Bank currently operates out of three traditional bank branches located in the New Orleans, Louisiana metropolitan area. A fourth branch location, which was significantly damaged in 2005 by Hurricane Katrina, remains closed and our ability to operate from this location in the future is uncertain. At December 31, 2010, the Bank had 63 full-time employees and two part-time employees. At December 31, 2010, 2009 and 2008, the Company had total assets of $320.9 million, $329.8 million, and $327.4 million, respectively. Net interest income during these periods was $10.3 million, $10.6 million and $9.9 million, and net income was $2.6 million, $2.5 million, and $2.7 million, respectively.
We are primarily engaged in attracting deposits from the general public and using those funds to invest in loans and securities. Our principal sources of funds are deposits, repayments of loans and mortgage-backed securities, maturities of investments and interest-bearing deposits, other funds provided from operations and funds borrowed from outside sources such as the Federal Home Loan Bank of Dallas, the Federal Reserve, and commercial banks. These funds are primarily used for the origination of various loan types including single-family residential mortgage loans, multi-family residential and commercial real estate mortgage loans, home equity loans and lines of credit and other consumer loans. The Bank derives its income principally from interest earned on loans, mortgage-backed and other securities and, to a lesser extent, from fees received in connection with the origination of loans and for other services. Bank of New Orleans’ primary expenses are interest expense on deposits and borrowings, and general operating expenses.
We are an active originator of residential home mortgage loans and commercial real estate loans in our market area. Our commercial real estate loans are primarily secured by multi-family residential collateral, non-residential collateral and vacant land. Our business plan is focused on developing a portfolio of residential home loans and commercial real estate loans that will benefit the residents and small to mid-sized businesses of the New Orleans metropolitan area. Our total real estate loan portfolio has grown from $88.1 million at December 31, 2006, to $179.7 million at December 31, 2010. At December 31, 2010, our one-to four-family residential loans comprised 54.5% or $98.6 million of the total loan portfolio, while multi-family residential, commercial real estate and land loans comprised 36.0% or $65.3 million of total loans. Home equity loans and lines of credit were $15.7 million, or 8.7% of the total loan portfolio at December 31, 2010.
Deposits with the Bank are insured to the maximum extent provided by law by the Federal Deposit Insurance Corporation. The Bank is subject to examination and comprehensive regulation by the Office of Thrift Supervision and the FDIC. The Company is a savings and loan holding company subject to examination and regulation by the Office of Thrift Supervision. The Bank is also a member of the Federal Home Loan Bank of Dallas, which is one of the 12 regional banks comprising the Federal Home Loan Bank System. The Bank is also subject to regulations of the Board of Governors of the Federal Reserve System governing reserves required to be maintained against deposits and certain other matters.
Our headquarters office is located at 1600 Veterans Memorial Boulevard, Metairie, Louisiana, and our telephone number is (504) 834-1190. We maintain a website at www.bankofneworleans.com, and we provide our customers with on-line banking and telephone banking services.
Market Area and Competition
Bank of New Orleans’ primary market area is southeastern Louisiana, in general and, more specifically, Jefferson Parish and neighboring Orleans Parish. Jefferson and Orleans Parishes are the two largest parishes in
the seven parish New Orleans Metropolitan Statistical Area (“MSA”). According to the 2010 U.S. Census, Jefferson and Orleans Parishes are ranked second and third, respectively, in total population within the state. In the ten years between U.S. Census measurements, the population of Jefferson Parish has decreased 5.0% to 432,552, and the population of Orleans Parish has declined by 29.1% to 343,829. The Orleans Parish market area was severely impacted by the devastation of Hurricane Katrina in August 2005. Floodwaters covered 80% of Orleans Parish, and a significant portion of Jefferson Parish, causing property damage estimated by the National Weather Service to be excess of $125 billion. The damage to housing and commercial real estate in our market area, in addition to the roads and public utilities, contributed to the dramatic decline in the population of the Orleans Parish market. Management and the Board of the Company remain optimistic that the city’s new political administration and $45 billion in federal investment will promote the city’s rebirth and repopulation during the next several years.
The local economy in southern Louisiana is reliant on a variety of sectors. Traditionally, the oil industry, the Port of New Orleans and tourism were the bellwethers of the local economy. The local economy has diversified, although oil, shipping and tourism remain important sectors of the economy. According to the U.S. Bureau of Labor Statistics, the trade, transportation and utilities sector represented 20.4% of the New Orleans MSA labor force at December 31, 2010, followed by government (15.8%), education and health services (14.5%) and leisure and hospitality (13.3%). During the second quarter of 2010, the Deepwater Horizon drilling platform exploded creating the largest environmental disaster in the United States. The economic impacts of the disaster were immediately felt by the coastal tourism and fisheries segments of the economy, but have expanded to affect the entire Gulf Coast. The spill closed a significant portion of the Gulf Coast fishery leading to a reduction in the nation’s seafood supply and a significant increase in the price of oysters, shrimp and other seafood. In addition, a drilling moratorium was enacted immediately following the spill, which has severely impacted the oil and gas producing sector of our economy, primary in the coastal portions of the state. The long-term impact of the spill on our economy and coastal ecosystem will need to be evaluated over the next several years.
Our local economy continues to benefit from several post-Katrina construction projects. In 2010, the budget for the top ten projects was $23.7 billion. These projects included expansion and repairs to interstate highways and surface streets, improvements to the international airport and expansion of a container terminal along the Mississippi River. In 2011, an estimated $23.8 billion will be spent on projects to improve drainage and levees, rebuild public housing, and construct a new Veterans Administration medical complex.
At December 31, 2010, the U.S. Bureau of Labor Statistics estimated that the seasonally adjusted unemployment rates for the state of Louisiana and the New Orleans MSA were 7.7% and 7.0%, respectively. These rates indicate an increase in unemployment of 0.6% for the state, and 0.1% for the New Orleans MSA.
The average sales price of existing homes in the New Orleans MSA increased by 3.0% during 2010 compared to a decrease of 3.4% in 2009. In Jefferson Parish, the average sales price of existing homes decreased from $187,095 to $184,286, or 1.5%, during 2010 compared to a decrease of 6.0% during 2009. In Orleans Parish, the average sales price for existing homes increased by 18.6% and 4.1% in 2010 and 2009, respectively.
During 2010, there were 15,753 foreclosure actions filed in the state, reflecting an increase of 34.1% from 2009. Foreclosure actions include default notices, auction sale notices, and bank repossessions. In Orleans Parish there were 2,449 foreclosure filings in 2010 reflecting an increase of 6.9% from 2009, and 3,056 filings in Jefferson Parish reflecting an increase of 44.7% from 2009. On the national level, there were 2.9 million foreclosure filings during 2010, an increase of 1.7% percent from 2009
We face significant competition in originating loans and attracting deposits. This competition stems primarily from commercial banks, other savings banks and savings associations and mortgage-banking companies. In the New Orleans MSA, there are 39 banks or savings institutions and numerous credit unions, which are competing for a share of the deposit market. Many of the financial service providers operating in our market area are significantly larger, and have greater financial resources, than us. Based on the most recent data
available through the FDIC, the Bank’s $189.0 million in deposits at June 30, 2010 represented a deposit market share of 0.89% for the parishes of Jefferson and Orleans, and a 0.68% market share for the seven parish New Orleans MSA. Of the 27 institutions operating in Jefferson and Orleans parishes, we rank 16th in terms of deposit market share. During the first quarter of 2011, two mergers were announced that would result in the consolidation of 23.3% of the Jefferson and Orleans Parish deposits, and 21.0% of the deposits in the New Orleans MSA. We face additional competition for deposits from short-term money market funds and other corporate and government securities funds, mutual funds and from other non-depository financial institutions such as brokerage firms and insurance companies. We believe that the presence of a local executive management team experienced with the challenges associated with the region’s rebuilding efforts provides the Bank with an advantage over the national banks in our market area, particularly as it relates to the credit approval process.
Lending Activities
General. At December 31, 2010, our net loan portfolio totaled $179.1 million or 55.8% of total assets. Our principal lending activity is the origination of first mortgage loans collateralized by one- to four-family, also known as “single-family,” residential real estate loans located in our market area. In addition, the Bank originates home equity loans and lines of credits secured by residential real estate. Over the past several years, we have increased our emphasis on originating multi-family (over four units) residential, commercial real estate and land loans. We also originate consumer loans, consisting of loans secured by deposits, auto loans, and unsecured home improvement loans, in addition to commercial and personal loans. We do not originate sub-prime, “alt-a”, no-interest, or “no-doc” loans, nor do we hold any such loans in our loan portfolio.
The types of loans that we may originate are subject to federal and state law and regulations. Interest rates charged by us on loans are affected principally by the demand for such loans and the supply of money available for lending purposes and the rates offered by our competitors. These factors are, in turn, affected by general and economic conditions, the monetary policy of the federal government, including the Federal Reserve Board, legislative tax policies and governmental budgetary matters.
Loan Portfolio Composition. The following table shows the composition of our loan portfolio by type of loan at the dates indicated.
(1) For purposes of this report on Form 10-K, the one- to four-family residential category consists of single-family residential mortgage loans secured by first mortgages. We typically have second mortgages on home equity loans and lines of credit.
Contractual Terms to Final Maturities. The following table shows the scheduled contractual maturities of our loans as of December 31, 2010, before giving effect to net items. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less. The amounts shown below do not take into account anticipated loan prepayments.
The following table shows the dollar amount of our loans at December 31, 2010 due after December 31, 2011 as shown in the preceding table, which have fixed interest rates or which have floating or adjustable interest rates.
Loan Originations. Our lending activities are subject to underwriting standards and loan origination procedures established by our board of directors and management. Loan originations are obtained through a variety of sources, primarily existing customers as well as new customers obtained from referrals and local advertising and promotional efforts. Single-family residential mortgage loan applications and consumer loan applications are taken at any Bank of New Orleans’ branch office. Applications for other loans typically are taken personally by our commercial loan officer or consumer loan officer, although they may be received by a branch office initially and then referred to our commercial loan officer or consumer loan officer. All loan applications are processed and underwritten centrally at our main office.
Our single-family residential mortgage loans are written on standardized documents used by the Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”) and Federal National Mortgage Association (“FNMA” or “Fannie Mae”). We also utilize an automated loan processing and underwriting software system for our new single-family residential mortgage loans. Property valuations of loans secured by real estate are undertaken by an independent third-party appraiser approved by our board of directors.
In addition to originating loans, we occasionally purchase participation interests in larger balance loans, typically commercial real estate and multi-family residential mortgage loans and construction loans, from other financial institutions in our market area or other markets in Louisiana. Such participations are reviewed for compliance with our underwriting criteria before they are purchased. Generally, we have purchased such loans without any recourse to the seller. However, we actively monitor the performance of such loans through the receipt of regular reports from the lead lender regarding the loan’s performance, physically inspecting the loan security property on a periodic basis, discussing the loan with the lead lender on a regular basis and receiving
copies of updated financial statements from the borrower. Bank of New Orleans’ largest potential exposure on a purchased participation interest at December 31, 2010 was an $850,000 participation interest in a $3.7 million loan secured by commercial real estate in the French Quarter of New Orleans. At December 31, 2010, our total purchased interest in participation loans was $2.5 million, all of which were performing in accordance with their contractual terms.
In addition, Bank of New Orleans also occasionally sells participation interests in loans it originates. We generally have sold participation interests when a loan would exceed our internal limitations for concentrations of credit, or exceeds our statutory loans-to-one borrower limit. Our loans-to-one borrower limit, with certain exceptions, generally is 15% of our unimpaired capital and surplus or $7.9 million at December 31, 2010. At December 31, 2010, the Bank’s five largest borrowers, and their related entities, have loan balances of $3.8 million, $3.4 million, $2.8 million, $2.5 million and $2.5 million, respectively, and all of such loans were performing in accordance with their terms.
The following table shows our total loans originated, purchased, sold and repaid during the periods indicated.
(1) Includes purchases of participation interests in loans.
(2) Other items consist of deferred fees and the allowance for loan losses.
One-to Four-Family Residential Mortgage Lending. One of our primary lending activities continues to be the origination of loans secured by first mortgages on one- to four-family residences in our market area. At December 31, 2010, $98.6 million of our total loan portfolio consisted of single-family residential mortgage loans, an increase of $12.9 million from December 31, 2009, and an increase of $53.0 from December 31, 2006. Originations of one- to four-family loans were $59.0 million, $59.1 million, and $13.5 million, respectively, for the years ended December, 31, 2010, 2009 and 2008. During this three year period, our single-family residential real estate loans as a percentage of total loans increased from 46.8% at December 31, 2007, to 54.5% at December 31, 2010. The growth in our originations during both 2010 and 2009 was primarily due to increased refinancing activity due to a decline in mortgage rates, the Bank’s hiring of experienced mortgage loan originators during the third quarter of 2008, and the exodus of several national secondary market originators following the mortgage crisis of 2008. Another significant factor contributing to the growth of our single-family originations is the continued repopulation of our market area associated with the Hurricane Katrina recovery.
Our single-family residential mortgage loan originations include loans that are underwritten on terms and documentation conforming to guidelines issued by Freddie Mac and Fannie Mae, and non-conforming “jumbo” loans, which have principal balances in excess of the Fannie Mae limit of $417,000. Applications for one-to four-family residential mortgage loans are accepted at any of our banking offices and are then referred to the Residential Lending Department at our main office in order to underwrite the creditworthiness of the loan. Once our underwriting process is completed, the loan package is submitted to our mortgage loan committee for approval. We currently originate fixed-rate, fully amortizing mortgage loans with maturities of 10, 15, 20 or 30 years. With the exception of those 30-year mortgage loans that are secondary market eligible, we generally retain a substantial portion of the single-family residential mortgage loans that we originate. During the current year, we have focused our origination efforts on increasing our production of adjustable rate mortgage (“ARM”) loans, where the interest rate either adjusts on an annual basis or is fixed for an initial period of three, five, or seven years and then adjusts annually. The retention of ARM loans helps management mitigate the risk that future interest rate increases may have on our portfolio. We do not originate ARM loans that would be considered “sub-prime”, interest-only, or those that provide for the negative amortization of principal. At December 31, 2010, $28.2 million, or 28.6%, of our one- to four-family residential loan portfolio maturing after December 31, 2011 consisted of ARM loans. In addition to traditional mortgage loan products offered by the Bank, we also offer reverse mortgages on an agency basis where we sell the origination to a third party that “table funds” the loan at closing.
We underwrite one- to four-family residential mortgage loans with loan-to-value ratios of up to 90%, provided that the borrower obtains private mortgage insurance on loans that exceed 80% of the appraised value or sales price, whichever is less, of the secured property. We also require that title insurance, hazard insurance and, if appropriate, flood insurance be maintained on all properties securing real estate loans. We require that a licensed appraiser from our list of approved appraisers perform and submit to us an appraisal on all properties securing one- to four-family first mortgage loans. Our mortgage loans generally include due-on-sale clauses which provide us with the contractual right to deem the loan immediately due and payable in the event the borrower transfers ownership of the property. Due-on-sale clauses are an important means of adjusting the yields of fixed-rate mortgage loans in portfolio and we generally exercise our rights under these clauses.
Home Equity Loans and Lines of Credit. In addition to the origination of first mortgage loans secured by single-family residences, the Bank also originates home equity loans and lines of credit, typically secured by second mortgages. At December 31, 2010, our total home equity loans and lines of credit were $15.7 million, an increase of $1.4 million from December 31, 2009. Our home equity loans have fixed rates of interest and final maturities of 5, 10 or 15 years. Our home equity lines of credit generally have floating interest rates tied to the Wall Street Journal prime index. In some cases, a fixed credit spread may be added to the index based on the creditworthiness of the borrower, as determined by our underwriting policies and procedures. At December 31, 2010, the unused portion of our home equity lines of credit was $9.6 million. In addition to the traditional equity loans offered by the Bank with maximum LTV limits of 80%, the Bank offers equity loans through the FHA Title 1 program that may exceed 100% of the property’s market value. These FHA Title 1 loans are limited to loans of $25,000 or less, and provide the lender with a guarantee of 90% from the FHA of the loan’s outstanding balance.
Multi-Family Residential, Commercial Real Estate and Land Loans. At December 31, 2010, our multi-family residential, commercial real estate and land loans amounted to an aggregate of $65.3 million or 36.0% of our total loan portfolio. Our aggregate multi-family residential, commercial real estate and land loans increased by $6.9 million, from December 31, 2009 to December 31, 2010, and by $31.3 million from December 31, 2006 to December 31, 2010.
Our commercial real estate and multi-family residential real estate loan portfolio consists primarily of loans secured by office buildings, retail and industrial use buildings, strip shopping centers, residential properties with five or more units and other properties used for commercial and multi-family purposes located in our market area. At December 31, 2010, our multi-family residential real estate loans were $11.8 million or 6.5% of our total
loan portfolio, and consist primarily of loans secured by properties with 20 or fewer rental units. The average outstanding balance of our multi-family residential loans was $357,000, with our largest multi-family residential loan having a balance of $2.2 million at December 31, 2010. Our commercial real estate loans comprised 29.0% of our total loan portfolio, and had an aggregate balance of $52.6 million at December 31, 2010. The five largest commercial real estate loans outstanding at year end 2010 were $2.4 million, $2.4 million, $2.2 million, $1.8 million and $1.7 million, and all of such loans were performing in accordance with all their terms.
Although terms for multi-family residential, commercial real estate and land loans vary, our underwriting standards generally allow for terms up to 15 years with monthly amortization over the life of the loan and loan-to-value ratios of not more than 80%. Interest rates are either fixed or, on occasion, adjustable, based upon designated market indices such as the prime rate or LIBOR, and fees of up to 2.0% are charged to the borrower at the origination of the loan. In light of local market demands, substantially all of our multi-family residential, commercial real estate and land loans originated in recent years have been fixed-rate loans with terms to maturity of 10 to 15 years. However, the actual lives of such loans generally are less due to prepayments and re-financings. In originating multi-family residential, commercial real estate and land loans we estimate what we expect will be the actual life of the loan to maturity and generally seek to originate loans which we expect will have an average maturity of 6-7 years. Generally, we obtain personal guarantees of the principals as additional collateral for multi-family residential, commercial real estate and land loans.
Multi-family residential, commercial real estate and land lending involves different risks than single-family residential lending. These risks include larger loans to individual borrowers and loan payments that are dependent upon the successful operation of the project or the borrower’s business. These risks can be affected by supply and demand conditions in the project’s market area of rental housing units, office and retail space, warehouses, and other commercial space. We attempt to minimize these risks for loans we originate by limiting loans to businesses with existing operating performance which can be analyzed or to borrowers with whom we are familiar and who have historical results that we can analyze. We also use conservative debt coverage ratios in our underwriting, and periodically monitor the operation of the business or project and the physical condition of the property.
Various aspects of multi-family residential and commercial real estate loan transactions are evaluated in an effort to mitigate the additional risk in these types of loans. In our underwriting procedures, consideration is given to the stability of the property’s cash flow history, future operating projections, current and projected occupancy levels, location and physical condition. Generally, we impose a debt service ratio (the ratio of net cash flows from operations before the payment of debt service to debt service) of not less than 125% in the case of multi-family residential, commercial real estate and land loans. We also evaluate the credit and financial condition of the borrower, and if applicable, the guarantor. Appraisal reports prepared by independent appraisers are obtained on each loan to substantiate the property’s market value, and are reviewed by us prior to the closing of the loan.
Construction financing is generally considered to involve a higher degree of credit risk than long-term financing on improved, owner-occupied real estate. At December 31, 2010, the Bank did not have any outstanding loans for the construction of multi-family residential properties or commercial properties. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property’s value at completion of construction compared to the estimated costs, including interest, of construction and other assumptions. Additionally, if the estimate of value proves to be inaccurate, we may be confronted with a project, when completed, having a value less than the loan amount. We have attempted to minimize these risks by generally concentrating on loans in our market area to borrowers who have established reputations and/or with whom we have established relationships.
Consumer and Other Lending Activities. In our efforts to provide a full range of financial services to our customers, we offer various types of consumer loans. Our consumer and other loans amounted to $1.4 million or 0.8% of our total loan portfolio at December 31, 2010. Our consumer loans include loans secured by deposit
accounts, automobile loans, home improvement loans, and unsecured personal loans. During the second quarter of 2010, the Bank sold the outstanding balance of its student loans to the Student Loan Marketing Association (“SLMA”). The Bank will no longer originate student loans under the SLMA program. Consumer loans are originated primarily through existing and walk-in customers and direct advertising.
In addition to consumer loans, the Bank offers secured and unsecured commercial loans and lines of credit. Our non-mortgage commercial loans and lines of credit at December 31, 2010 amounted to $511,000.
Consumer loans generally have higher interest rates and shorter terms than residential loans; however, they have additional credit risk due to the type of collateral securing the loan or in some cases the absence of collateral. During 2010 we had no charge-offs related to consumer loans, compared to $10,000 in 2009.
Loan Approval Procedures and Authority. Our Board of Directors establishes the Bank’s lending policies and procedures. Our Lending Policy Manual is reviewed on at least an annual basis by our management team in order to propose modifications as a result of market conditions, regulatory changes and other factors. All modifications must be approved by our Board of Directors.
Various officers or combinations of officers of Bank of New Orleans have the authority within specifically identified limits to approve new loans. Our Commercial Lending Committee (comprised of our President, Chief Financial Officer, Commercial Loan Manager and two outside directors) has authority to approve multi-family residential, commercial real estate and land loans in amounts up to $750,000. Our Loan Committee (comprised of our President, Chief Financial Officer, Residential Loan Manager and Consumer Loan Manager) has authority to approve single-family residential mortgage loans which conform to Fannie Mae or Freddie Mac guidelines, and consumer loans up to $100,000. All other loans must be approved by the Board of Directors of Bank of New Orleans.
Asset Quality
General. One of our key objectives has been, and continues to be, maintaining a high level of asset quality. In addition to maintaining credit standards for new originations which we believe are sound, we are proactive in our loan monitoring, collection and workout processes in dealing with delinquent or problem loans.
When a borrower fails to make a scheduled payment, we attempt to cure the deficiency by making personal contact with the borrower. Initial contacts are generally made within 10 to 15 days after the date the payment is due. In most cases, deficiencies are promptly resolved. If the delinquency continues, late charges are assessed and additional efforts are made to collect the deficiency. All loans with an outstanding balance of more than $100,000 which are delinquent 30 days or more are reported to the Board of Directors of Bank of New Orleans.
On loans where the collection of principal or interest payments is doubtful, the accrual of interest income ceases (“non-accrual” loans). It is our policy, with certain limited exceptions, to discontinue accruing additional interest and reverse any interest accrued on any loan which is 90 days or more past due. On occasion, this action may be taken earlier if the financial condition of the borrower raises significant concern with regard to his/her ability to service the debt in accordance with the terms of the loan agreement. Interest income is not accrued on these loans until the borrower’s financial condition and payment record demonstrate an ability to service the debt.
Real estate which is acquired as a result of foreclosure is classified as real estate owned until sold. Real estate owned is recorded at the lower of cost or fair value less estimated selling costs. Costs associated with acquiring and improving a foreclosed property are usually capitalized to the extent that the carrying value does not exceed fair value less estimated selling costs. Holding costs are charged to expense. Gains and losses on the sale of real estate owned are charged to operations, as incurred.
We account for our impaired loans under generally accepted accounting principles. An impaired loan generally is one for which it is probable, based on current information, that the lender will not collect all the amounts due under the contractual terms of the loan. Large groups of smaller balance, homogeneous loans are collectively evaluated for impairment. Loans collectively evaluated for impairment include smaller balance commercial real estate loans, residential real estate loans and consumer loans. These loans are evaluated as a group because they have similar characteristics and performance experience. Larger multi-family residential, commercial real estate and construction loans are individually evaluated for impairment. As of December 31, 2010 and 2009, our recorded investment in impaired loans was $908,000 and $1.0 million, respectively.
Federal regulations and our policies require that we utilize an internal asset classification system as a means of reporting problem and potential problem assets. We have incorporated an internal asset classification system, substantially consistent with Federal banking regulations, as a part of our credit monitoring system. Federal banking regulations set forth a classification scheme for problem and potential problem assets as “substandard,” “doubtful” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” We typically have not classified assets as “doubtful,” but have been more aggressive in classifying assets as “loss.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated “special mention.”
A savings institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by Federal bank regulators which can order the establishment of additional general or specific loss allowances. The Federal banking agencies, have adopted an interagency policy statement on the allowance for loan and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that institutions have effective systems and controls to identify, monitor and address asset quality problems; that management analyze all significant factors that affect the collectability of the portfolio in a reasonable manner; and that management establish acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. Our management believes that, based on information currently available, its allowance for loan losses is maintained at a level which covers all known and inherent losses that are both probable and reasonably estimable at each reporting date. However, actual losses are dependent upon future events and, as such, further additions to the level of allowances for loan losses may become necessary.
We review and classify assets on a monthly basis and the Board of Directors is provided with monthly reports on our classified assets. We classify assets in accordance with the management guidelines described above. At December 31, 2010 and 2009, our recorded investment in assets classified as “substandard” was $475,000 and $580,000 respectively. There were no loss allowances established against these loans at December 31, 2010, and $90,000 in loss allowances at December 31, 2009. At December 31, 2010, and 2009, we had $130,000 in assets designated as “special mention”.
Delinquent Loans. At December 31, 2010, we had $282,000 in loans delinquent 30 to 89 days, compared to $379,000 at December 31, 2009. Our loans delinquent 30 to 89 days as of December 31, 2010 were composed of five single family residential mortgage loans totaling $94,000, and nine home equity loans or lines of credit totaling $188,000.
The following table shows the delinquencies in our loan portfolio as of the dates indicated.
Non-Performing Loans and Real Estate Owned. Our general policy is to cease accruing interest on loans which are 90 days or more past due and to charge-off all accrued interest. At December 31, 2010, our non-performing loans totaled $908,000, a decrease of $95,000 from December 31, 2009. The largest component of our non-performing loans at December 31, 2010 was 23 home equity loans or lines of credit totaling $682,000. This total includes 14 loans with an aggregate balance of $248,000 that were determined to be significantly impaired following Hurricane Katrina. Loss allowances of $143,000 have been established against these loans. At December 31, 2010, all but one of these loans were performing in accordance with their contractual obligations; however, uncertainty remains with respect to the borrowers’ ability to repay all amounts due over the life of the respective loans.
For the years ended December 31, 2010 and 2009, the amount of additional interest income that would have been recognized on non-accrual loans if such loans had continued to perform in accordance with their contractual terms was $34,000 and $12,000, respectively.
Real estate owned increased by $100,000 to $1.7 million, during the year ended December 31, 2010. At that date, real estate owned was comprised of a single family residence with a fair value of $900,000, a multi-family residential property with a fair value of $350,000, and our 0.6% participation interest in a $170 million mixed-use property development in Baton Rouge, Louisiana having a fair value of $446,000.
The following table shows the amounts of our non-performing assets (defined as non-accruing loans, accruing loans 90 days or more past due and real estate owned) at the dates indicated. The Bank had no troubled debt restructurings as of the dates indicated below.
(1) Non-performing loans consist of non-accruing loans plus accruing loans 90 days or more past due.
Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses. We maintain the allowance at a level believed, to the best of management’s knowledge, to cover all known and inherent losses in the portfolio that are both probable and reasonable to estimate at each reporting date. Management reviews the allowance for loan losses on a monthly basis in order to identify those inherent losses and to assess the overall collection probability for the loan portfolio. Our evaluation process includes, among other things, an analysis of delinquency trends, non-performing loan trends, the level of charge-offs and recoveries, prior loss experience, total loans outstanding, the volume of loan originations, the type, size and geographic concentration of our loans, the value of collateral securing the loan, the borrower’s ability to repay and repayment performance, the number of loans requiring heightened management oversight, local economic conditions and industry experience. Such risk ratings are periodically reviewed by management and revised as deemed appropriate. The establishment of the allowance for loan losses is significantly affected by management judgment and uncertainties and there is a likelihood that different amounts would be reported under different conditions or assumptions. Various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. Such agencies may require it to make additional provisions for estimated loan losses based upon judgments different from those of management.
During the year ended December 31, 2005, we made a substantial provision for loan losses due to the unprecedented damage caused by Hurricane Katrina. This provision was based on management’s assessment of the estimated level of losses in our loan portfolio. Given the significant uncertainties regarding the performance of the loan portfolio, $1.2 million of the provision was applied to the general allowance for loan losses and was not allocated to any identified type or class of loans. In the years ended December 31, 2008, 2007, and 2006, we recorded an aggregate of $769,000 in recoveries to our allowance for loan losses. These recoveries were due to loans on which we had made a provision in 2005 which subsequently were repaid in full, in most cases upon the receipt of insurance proceeds.
The Bank recorded charge-offs of $174,000 during 2010 compared to $628,000 during 2009. Our charge-offs during 2010 were primarily attributed to a $515,000 multi-family residential loan that was foreclosed upon resulting in a write-down of $171,000 at the time of acquisition. This property was subsequently sold during the first quarter of 2011 for $350,000. During 2009, the Bank’s recorded a $232,000 charge-off on a single family residential loan that was transferred to real estate owned during the year, and a $396,000 charge-off related to our 0.6% participation interest in a $170 million construction loan on a multi-purpose property located in Baton Rouge, Louisiana, which also was transferred to real estate owned. We participated in this loan as part of the Shared National Credit Program. This loan represents our only shared national credit.
We will continue to monitor and modify our allowances for loan losses as conditions dictate. No assurances can be given that our level of allowance for loan losses will cover all of the inherent losses on our loans or that future adjustments to the allowance for loan losses will not be necessary if economic and other conditions differ substantially from the economic and other conditions used by management to determine the current level of the allowance for loan losses.
The following table shows changes in our allowance for loan losses during the periods presented.
The following table shows how our allowance for loan losses is allocated by type of loan at each of the dates indicated.
Investment Activities
General. We invest in securities pursuant to our Investment Policy, which has been approved by our board of directors. The Board’s ALCO/Investment Committee monitors our investment activity and ensures that the Bank’s investments are consistent with the Investment Policy. The respective Boards of Directors of the Bank and Company review all investment activity at their regular scheduled meetings.
Our investment policy is designed primarily to manage the interest rate sensitivity of our assets and liabilities, to generate a favorable return without incurring undue interest rate and credit risk, to complement our lending activities and to provide and maintain liquidity. On occasion, we also have used a leveraged investment strategy for the purpose of enhancing returns. Pursuant to this strategy, we have utilized borrowings from the Federal Home Loan Bank (“FHLB”) of Dallas as well as other sources to purchase additional investment securities. We attempt to match the advances with the securities purchased in order to obtain a favorable difference, or “spread,” between the interest paid on the advance against the yield received on the security purchased.
At December 31, 2010, our investment and mortgage-backed securities amounted to $126.0 million in the aggregate or 39.3% of total assets at such date. The largest component of our securities portfolio in recent periods has been mortgage-backed securities, which amounted to $77.6 million or 61.5% of the securities portfolio at December 31, 2010. The second largest component of our securities portfolio at December 31, 2010 was U.S. government and agency securities which amounted to $47.1 million or 37.4% of the securities portfolio. Our agency debt securities often have call provisions which provide the agency with the ability to call the securities at specified dates. In addition, we invest in municipal securities, corporate debt obligations and other securities.
At December 31, 2010, we had an aggregate of $125,000 in gross unrealized losses on our investment and mortgage-backed securities portfolio. Such unrealized losses reflect a decline in market value of securities as a result of changes in market rates of interest. Because the decline in market value is not attributable to credit
quality and because we have the ability and intent to hold these investments until a recovery of fair value occurs, which may be at maturity, we did not consider these investments to be other-than-temporarily impaired at December 31, 2010.
Pursuant to FASB ASC 320-10, our securities are classified as available for sale (“AFS”), held to maturity (“HTM), or trading, at the time of acquisition. Securities classified as held to maturity must be purchased with the intent and ability to hold that security until its final maturity, and can be sold prior to maturity only under rare circumstances. Held to maturity securities are accounted for based upon the historical cost of the security. Available for sale securities can be sold at any time based upon needs or market conditions. Available for sale securities are accounted for at fair value, with unrealized gains and losses on these securities, net of income tax provisions, reflected in retained earnings as accumulated other comprehensive income. At December 31, 2010, we had $62.5 million of securities classified as available for sale, $63.5 million of securities classified as held to maturity and no securities classified as trading account. During the year ended December 31, 2010, we sold an aggregate of $5.6 million of available-for-sale securities at a gain of $194,000. In addition, the Bank sold $125,000 of held-to-maturity securities at a gain of $10,000 during 2010. On the date of sale, these securities had outstanding principal balances that were less than 15% of the principal balance at the date of acquisition and were considered to have effectively matured under FASB ASC 320-10-25.
We do not purchase mortgage-backed derivative instruments that would be characterized “high-risk” under Federal banking regulations at the time of purchase, nor do we purchase corporate obligations which are not rated investment grade or better.
Our mortgage-backed securities consist primarily of mortgage pass-through certificates issued by the Government National Mortgage Association (“GNMA” or “Ginnie Mae”), Fannie Mae or Freddie Mac. Our mortgage-backed securities also include collateralized mortgage obligations (“CMOs”) issued by such agencies. At December 31, 2010, $63,000 of our mortgage-backed securities were CMOs. At such date, all of our mortgage-backed securities were issued by the GNMA, FNMA or FHLMC and we held no mortgage-backed securities from private issuers.
Investments in mortgage-backed securities involve a risk that actual prepayments will be greater than estimated prepayments over the life of the security, which may require adjustments to the amortization of any premium or accretion of any discount relating to such instruments, thereby changing the net yield on such securities. There is also reinvestment risk associated with the cash flows from such securities or in the event such securities are redeemed by the issuer. In addition, the market value of such securities may be adversely affected by changes in interest rates.
Ginnie Mae is a government agency within the Department of Housing and Urban Development which is intended to help finance government-assisted housing programs. Ginnie Mae securities are backed by loans insured by the Federal Housing Administration, or guaranteed by the Veterans Administration. The timely payment of principal and interest on Ginnie Mae securities is guaranteed by Ginnie Mae and backed by the full faith and credit of the U.S. Government. Freddie Mac is a private corporation chartered by the U.S. Government. Freddie Mac issues participation certificates backed principally by conventional mortgage loans. Freddie Mac guarantees the timely payment of interest and the ultimate return of principal on participation certificates. Fannie Mae is a private corporation chartered by the U.S. Congress with a mandate to establish a secondary market for mortgage loans. Fannie Mae guarantees the timely payment of principal and interest on Fannie Mae securities. Freddie Mac and Fannie Mae securities are not backed by the full faith and credit of the U.S. Government, but because Freddie Mac and Fannie Mae are U.S. Government-sponsored enterprises, these securities are considered to be among the highest quality investments with minimal credit risks.
Collateralized mortgage obligations are typically issued by a special-purpose entity, in our case, by government agencies, which may be organized in a variety of legal forms, such as a trust, a corporation, or a partnership. Substantially all of the collateralized mortgage obligations held in our portfolio consist of senior sequential tranches. By purchasing senior sequential tranches, management attempts to ensure the cash flow associated with such an investment.
The following table sets forth certain information relating to our investment and mortgage-backed securities portfolios at the dates indicated.
The following table sets forth the amount of investment and mortgage-backed securities which mature during each of the periods indicated and the weighted average yields for each range of maturities at December 31, 2010. No tax-exempt yields have been adjusted to a tax-equivalent basis.
The following table sets forth the composition of our mortgage-backed securities portfolio at each of the dates indicated.
Information regarding the contractual maturities and weighted average yield of our mortgage-backed securities portfolio at December 31, 2010 is presented below. Due to repayments of the underlying loans, the actual maturities of mortgage-backed securities generally are substantially less than the scheduled maturities.
Sources of Funds
General. Deposits, loan repayments and prepayments, proceeds from sales of loans, cash flows generated from operations and FHLB advances are the primary sources of our funds for use in lending, investing and for other general purposes.
Deposits. We offer a variety of deposit accounts with a range of interest rates and terms. Our deposits consist of checking, both interest-bearing and non-interest-bearing, money market, savings and certificate of deposit accounts. At December 31, 2010, 28.5% of the funds deposited with Bank of New Orleans were in non-maturity deposits, which are commonly referred to as “core deposits”. Total certificates of deposit were $134.8 million at December 31, 2010 compared to $135.6 million at December 31, 2009.
The flow of deposits is influenced significantly by general economic conditions, changes in money market rates, prevailing interest rates and competition. Our deposits are obtained predominantly from the areas where our branch offices are located. We have historically relied primarily on customer service and long-standing relationships with customers to attract and retain these deposits; however, market interest rates and rates offered by competing financial institutions significantly affect our ability to attract and retain deposits.
Bank of New Orleans uses traditional means of advertising its deposit products, including broadcast and print media and we generally do not solicit deposits from outside our market area. In recent years, we have emphasized the origination of core deposits.
We do not actively solicit certificate accounts of $100,000 or more, known as “jumbo CDs,” or use brokers to obtain deposits. At December 31, 2010, our jumbo CDs amounted to $53.9 million, of which $38.3 million are scheduled to mature within twelve months.
The following table shows the distribution of, and certain other information relating to, our deposits by type of deposit, as of the dates indicated.
The following table shows the average balance of each type of deposit and the average rate paid on each type of deposit for the periods indicated.
The following table shows our savings flows during the periods indicated.
The following table presents, by various interest rate categories and maturities, the amount of certificates of deposit at December 31, 2010.
The following table shows the maturities of our certificates of deposit of $100,000 or more at December 31, 2010 by time remaining to maturity.
Borrowings. We utilize advances from the Federal Home Loan Bank of Dallas as an alternative to retail deposits to fund our operations as part of our operating strategy. These FHLB advances are collateralized primarily by certain mortgage loans and mortgage-backed securities and other investment securities held in safekeeping at the Federal Home Loan Bank. FHLB advances are made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. The maximum amount that the Federal Home Loan Bank of Dallas will advance to member institutions, including Bank of New Orleans, fluctuates from time to time in accordance with the policies of the Federal Home Loan Bank. At December 31, 2010, we had $42.2 million in outstanding FHLB advances and $138.4 million of additional FHLB advances available. At such date, $11.6 million of our FHLB advances mature within one year. In addition, the Bank periodically accesses other borrowing sources as a source of liquidity and term funding. These sources include regional or national commercial banks that structure the borrowings as reverse repurchase agreements with terms ranging from 30 days to 5 years. These borrowings are secured by the pledge of US Government or US Agency debt
instruments. At December 31, 2010, the Bank had other borrowings of $26.0 million. Finally, as a member bank, we have access to borrowings from the Federal Reserve Bank. At December 31, 2010, we had no borrowings from the Federal Reserve Bank.
The following table shows certain information regarding our borrowings at or for the dates indicated:
Subsidiaries
Bank of New Orleans has one subsidiary, First Louisiana Mortgage, LLC, a Louisiana limited liability corporation, which has been inactive since its inception.
Employees
At December 31, 2010, we had 63 full-time and 2 part-time employees. None of such employees are represented by a collective bargaining group, and we believe that our relationship with our employees is excellent.
REGULATION
Set forth below is a brief description of certain laws relating to the regulation of Louisiana Bancorp and Bank of New Orleans. This description does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations.
General
Louisiana Bancorp is a savings and loan holding company registered under the Home Owners’ Loan Act, as amended. Bank of New Orleans is a federally chartered savings bank subject to federal regulation and oversight by the Office of Thrift Supervision extending to all aspects of its operations. Bank of New Orleans also is subject to regulation and examination by the Federal Deposit Insurance Corporation, which insures the deposits of Bank of New Orleans to the maximum extent permitted by law, and requirements established by the Federal Reserve Board. Federally chartered savings institutions are required to file periodic reports with the Office of Thrift Supervision and are subject to periodic examinations by the Office of Thrift Supervision and the Federal Deposit Insurance Corporation. The investment and lending authority of savings institutions are prescribed by federal laws and regulations, and such institutions are prohibited from engaging in any activities not permitted by such laws and regulations. Such regulation and supervision primarily is intended for the protection of depositors and not for the purpose of protecting shareholders. Under the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act, the powers of the OTS will be transferred to other financial institution regulatory agencies on July 21, 2011, unless extended by up to an additional six months. See “-Recently Enacted Regulatory Reform,” below.
Federal law provides the federal banking regulators, including the Office of Thrift Supervision and Federal Deposit Insurance Corporation, with substantial enforcement powers. The Office of Thrift Supervision’s
enforcement authority over all savings institutions and their holding companies includes, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to initiate injunctive actions. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with the Office of Thrift Supervision. Any change in such regulations, whether by the Federal Deposit Insurance Corporation, Office of Thrift Supervision or Congress, could have a material adverse impact on Louisiana Bancorp and Bank of New Orleans and their operations.
Recently Enacted Regulatory Reform
On July 21, 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. The financial reform and consumer protection act imposes new restrictions and an expanded framework of regulatory oversight for financial institutions, including depository institutions. In addition, the new law changes the jurisdictions of existing bank regulatory agencies and in particular transfers the regulation of federal savings associations, such as the Bank, from the OTS to the Office of the Comptroller of the Currency (“OCC”), effective one year from the effective date of the legislation, with a potential extension up to six months. Savings and loan holding companies, such as the Company, will be regulated by the Federal Reserve Board. The new law also establishes an independent federal consumer protection bureau within the Federal Reserve Board. The following discussion summarizes significant aspects of the new law that may affect the Company and the Bank. Regulations implementing these changes have not been promulgated, so we cannot determine the full impact on our business and operations at this time.
The following aspects of the financial reform and consumer protection act are related to the operations of the Bank:
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A new independent consumer financial protection bureau will be established within the Federal Reserve Board, empowered to exercise broad regulatory, supervisory and enforcement authority with respect to both new and existing consumer financial protection laws. Smaller financial institutions, like the Bank, will be subject to the supervision and enforcement of their primary federal banking regulator with respect to the federal consumer financial protection laws.
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Tier 1 capital treatment for “hybrid” capital items like trust preferred securities is eliminated subject to various grandfathering and transition rules.
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The current prohibition on payment of interest on demand deposits was repealed, effective July 21, 2011.
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Deposit insurance is permanently increased to $250,000 and unlimited deposit insurance for noninterest-bearing transaction accounts is provided through the end of 2012.
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The deposit insurance assessment base calculation will equal the depository institution’s total assets minus the sum of its average tangible equity during the assessment period.
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The minimum reserve ratio of the Deposit Insurance Fund increased to 1.35 percent of estimated annual insured deposits or assessment base; however, the Federal Deposit Insurance Corporation is directed to “offset the effect” of the increased reserve ratio for insured depository institutions with total consolidated assets of less than $10 billion.
The following aspects of the financial reform and consumer protection act are related to the operations of the Company:
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Authority over savings and loan holding companies will transfer to the Federal Reserve Board.
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Leverage capital requirements and risk based capital requirements applicable to depository institutions and bank holding companies will be extended to thrift holding companies.
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The Federal Deposit Insurance Act was amended to direct federal regulators to require depository institution holding companies to serve as a source of strength for their depository institution subsidiaries.
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The Securities and Exchange Commission is authorized to adopt rules requiring public companies to make their proxy materials available to shareholders for nomination of their own candidates for election to the board of directors.
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Public companies will be required to provide their shareholders with a non-binding vote: (i) at least once every three years on the compensation paid to executive officers, and (ii) at least once every six years on whether they should have a “say on pay” vote every one, two or three years.
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A separate, non-binding shareholder vote will be required regarding golden parachutes for named executive officers when a shareholder vote takes place on mergers, acquisitions, dispositions or other transactions that would trigger the parachute payments.
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Securities exchanges will be required to prohibit brokers from using their own discretion to vote shares not beneficially owned by them for certain “significant” matters, which include votes on the election of directors, executive compensation matters, and any other matter determined to be significant.
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Stock exchanges will be prohibited from listing the securities of any issuer that does not have a policy providing for (i) disclosure of its policy on incentive compensation payable on the basis of financial information reportable under the securities laws, and (ii) the recovery from current or former executive officers, following an accounting restatement triggered by material noncompliance with securities law reporting requirements, of any incentive compensation paid erroneously during the three-year period preceding the date on which the restatement was required that exceeds the amount that would have been paid on the basis of the restated financial information.
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Disclosure in annual proxy materials will be required concerning the relationship between the executive compensation paid and the financial performance of the issuer.
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Item 402 of Regulation S-K will be amended to require companies to disclose the ratio of the Chief Executive Officer’s annual total compensation to the median annual total compensation of all other employees.
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Smaller reporting companies are exempt from complying with the internal control auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act.
Regulation of Louisiana Bancorp, Inc.
Holding Company Acquisitions. Federal law generally prohibits a savings and loan holding company, without prior Office of Thrift Supervision approval, from acquiring the ownership or control of any other savings institution or savings and loan holding company, or all, or substantially all, of the assets or more than 5% of the voting shares of the savings institution or savings and loan holding company. These provisions also prohibit, among other things, any director or officer of a savings and loan holding company, or any individual who owns or controls more than 25% of the voting shares of such holding company, from acquiring control of any savings institution not a subsidiary of such savings and loan holding company, unless the acquisition is approved by the Office of Thrift Supervision.
The Office of Thrift Supervision may not approve any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions: (1) the approval of interstate supervisory acquisitions by savings and loan holding companies; and (2) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.
Holding Company Activities. Louisiana Bancorp operates as a unitary savings and loan holding company and is permitted to engage only in the activities permitted for financial holding companies under Federal Reserve Board regulations or for multiple savings and loan holding companies. Multiple savings and loan holding companies are permitted to engage in the following activities: (i) activities permitted for a bank holding company under section 4(c) of the Bank Holding Company Act (unless the Director of the OTS prohibits or limits such 4(c) activities); (ii) furnishing or performing management services for a subsidiary savings association; (iii) conducting any insurance agency or escrow business; (iv) holding, managing, or liquidating assets owned by or acquired from a subsidiary savings association; (v) holding or managing properties used or occupied by a subsidiary savings association; (vi) acting as trustee under deeds of trust; or (vii) activities authorized by regulation as of March 5, 1987, to be engaged in by multiple savings and loan holding companies. Although savings and loan holding companies are not subject to specific capital requirements or specific restrictions on the payment of dividends or other capital distributions, federal regulations do prescribe such restrictions on subsidiary savings institutions, as described below. Bank of New Orleans is required to notify the Office of Thrift Supervision 30 days before declaring any dividend to the Company. In addition, the financial impact of a holding company on its subsidiary institution is a matter that is evaluated by the Office of Thrift Supervision and the agency has authority to order cessation of activities or divestiture of subsidiaries deemed to pose a threat to the safety and soundness of the institution.
Federal Securities Laws. Our common stock is registered with the Securities and Exchange Commission under Section 12(b) of the Securities Exchange Act of 1934. We are subject to the proxy and tender offer rules, insider trading reporting requirements and restrictions, and certain other requirements under the Securities Exchange Act of 1934. Pursuant to Office of Thrift Supervision regulations and the Bank’s plan of conversion, we have agreed to maintain such registration for a minimum of three years following our conversion to stock form.
The Sarbanes-Oxley Act. As a public company, the Company is subject to the Sarbanes-Oxley Act of 2002 which addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. As directed by the Sarbanes-Oxley Act, our principal executive officer and principal financial officer are required to certify that our quarterly and annual reports do not contain any untrue statement of a material fact. The rules adopted by the SEC under the Sarbanes-Oxley Act have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of our internal control over financial reporting; they have made certain disclosures to our auditors and the audit committee of the Board of Directors about our internal control over financial reporting; and they have included information in our quarterly and annual reports about their evaluation and whether there have been changes in our internal control over financial reporting or in other factors that could materially affect internal control over financial reporting.
Bank of New Orleans
General. Bank of New Orleans is a federally chartered stock savings bank subject to examination and regulation by the Office of Thrift Supervision which has extensive authority over the operations of federally-chartered savings institutions. As part of this authority, Bank of New Orleans is required to file periodic reports with the Office of Thrift Supervision and is subject to periodic examinations by the Office of Thrift Supervision and the Federal Deposit Insurance Corporation. The investment and lending authority of savings institutions are prescribed by federal laws and regulations, and such institutions are prohibited from engaging in any activities not permitted by such laws and regulations. Such regulation and supervision is primarily intended for the protection of depositors and the Deposit Insurance Fund (“DIF”) administered by the Federal Deposit Insurance Corporation. As previously indicated, the jurisdiction of the OTS with respect to the Bank currently is scheduled to transfer to the OCC on July 21, 2011.
Insurance of Accounts. The deposits of Bank of New Orleans are insured to the maximum extent permitted by the DIF and are backed by the full faith and credit of the U.S. Government. As insurer, the Federal Deposit
Insurance Corporation is authorized to conduct examinations of, and to require reporting by, insured institutions. It also may prohibit any insured institution from engaging in any activity determined by regulation or order to pose a serious threat to the Federal Deposit Insurance Corporation. The Federal Deposit Insurance Corporation also has the authority to initiate enforcement actions against savings institutions, after giving the Office of Thrift Supervision an opportunity to take such action.
The recently enacted financial institution reform legislation permanently increased deposit insurance on most accounts to $250,000. In addition, pursuant to Section 13(c)(4)(G) of the Federal Deposit Insurance Act, the Federal Deposit Insurance Corporation has implemented two temporary programs to provide deposit insurance for the full amount of most non-interest bearing transaction deposit accounts and to guarantee certain unsecured debt of financial institutions and their holding companies. Under the unsecured debt program, the FDIC’s guarantee expires on the earlier of the maturity date of the debt or December 31, 2012. The unlimited deposit insurance for noninterest-bearing transaction accounts was extended by the Dodd-Frank Act through the end of 2012 for all insured institutions without a separate insurance assessment (but the cost of the additional insurance coverage will be considered under the risk-based assessment system).
The Federal Deposit Insurance Corporation’s risk-based premium system provides for quarterly assessments. Each insured institution is placed in one of four risk categories depending on supervisory and capital considerations. Within its risk category, an institution is assigned to an initial base assessment rate which is then adjusted to determine its final assessment rate based on its brokered deposits, secured liabilities and unsecured debt. Assessment rates range from seven to 77.5 basis points, with less risky institutions paying lower assessments. The Federal Deposit Insurance Corporation recently amended its deposit insurance regulations (1) to change the assessment base for insurance from domestic deposits to average assets minus average tangible equity and (2) to lower overall assessment rates. The revised assessments rates are between 2.5 to 9 basis points for banks in the lowest risk category and between 30 to 45 basis points for banks in the highest risk category. The amendments will become effective for the quarter beginning April 1, 2011 with the new assessment methodology being reflected in the premium invoices due September 30, 2011.
In addition, all institutions with deposits insured by the Federal Deposit Insurance Corporation are required to pay assessments to fund interest payments on bonds issued by the Financing Corporation (“FICO”), a mixed-ownership government corporation established to recapitalize a predecessor to the DIF. The FICO assessment rate for the fourth quarter of 2010 was 0.0025% of insured deposits and is adjusted quarterly. These assessments will continue until the FICO bonds mature in 2019.
The Federal Deposit Insurance Corporation may terminate the deposit insurance of any insured depository institution, including Bank of New Orleans, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the Federal Deposit Insurance Corporation. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the Federal Deposit Insurance Corporation. Management is aware of no existing circumstances which would result in termination of Bank of New Orleans’ deposit insurance.
On November 12, 2009, the FDIC adopted regulations that required insured depository institutions to prepay on December 30, 2009 their estimated assessments for the fourth calendar quarter of 2009 through the fourth quarter of 2012. Under the prepaid assessment rule, we made a payment of $646,000 to the FDIC on December 30, 2009, of which $37,000 was expensed as our fourth quarter 2009 deposit insurance premium, and the remaining $609,000 was recorded as a prepaid expense, which will be amortized over the next two years.
Regulatory Capital Requirements. OTS regulated savings associations are required to maintain minimum levels of regulatory capital. The Office of Thrift Supervision has established capital standards consisting of a “tangible capital requirement,” a “leverage capital requirement” and “a risk-based capital requirement.” The Office of Thrift Supervision also is authorized to impose capital requirements in excess of these standards on individual institutions on a case-by-case basis.
Current Office of Thrift Supervision capital standards require savings institutions to satisfy the following capital requirements:
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tangible capital requirement-“tangible” capital equal to at least 1.5% of adjusted total assets;
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leverage capital requirement-“core” capital equal to at least 3.0% of adjusted total assets; and
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risk-based capital requirement-“total” capital (a combination of core and “supplementary” capital) equal to at least 8.0% of “risk-weighted” assets.
Core capital generally consists of common stockholders’ equity (including retained earnings). Tangible capital generally equals core capital minus intangible assets, with only a limited exception for purchased mortgage servicing rights. Bank of New Orleans had no intangible assets at December 31, 2009. Both core and tangible capital are further reduced by an amount equal to a savings institution’s debt and equity investments in subsidiaries engaged in activities not permissible to national banks (other than subsidiaries engaged in activities undertaken as agent for customers or in mortgage banking activities and subsidiary depository institutions or their holding companies). These adjustments do not affect Bank of New Orleans’ regulatory capital.
In determining compliance with the risk-based capital requirement, a savings institution is allowed to include both core capital and supplementary capital in its total capital, provided that the amount of supplementary capital included does not exceed the savings institution’s core capital. Supplementary capital generally consists of general allowances for loan losses up to a maximum of 1.25% of risk-weighted assets, together with certain other items. In determining the required amount of risk-based capital, total assets, including certain off-balance sheet items, are multiplied by a risk weight based on the risks inherent in the type of assets. The risk weights range from 0% for cash and securities issued by the U.S. Government or unconditionally backed by the full faith and credit of the U.S. Government to 100% for loans (other than qualifying residential loans weighted at 50%) and repossessed assets.
Savings institutions must value securities available for sale at amortized cost for regulatory capital purposes. This means that in computing regulatory capital, savings institutions should add back any unrealized losses and deduct any unrealized gains, net of income taxes, on debt securities reported as a separate component of GAAP capital.
At December 31, 2010, Bank of New Orleans exceeded all of its regulatory capital requirements, with tangible, core and total risk-based capital ratios of 16.0%, 16.0% and 34.7%, respectively.
Any savings institution that fails any of the capital requirements is subject to possible enforcement actions by the Office of Thrift Supervision or the Federal Deposit Insurance Corporation. Such actions could include a capital directive, a cease and desist order, civil money penalties, the establishment of restrictions on the institution’s operations, termination of federal deposit insurance and the appointment of a conservator or receiver. The Office of Thrift Supervision’s capital regulation provides that such actions, through enforcement proceedings or otherwise, could require one or more of a variety of corrective actions.
Prompt Corrective Action. In addition to the regulatory capital requirements for OTS-regulated savings associations discussed above, each federal banking agency has implemented a system of prompt corrective action. The following table shows the amount of capital associated with the different capital categories set forth in the prompt corrective action regulations of the Office of Thrift Supervision.
In addition, an institution is “critically undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. Under specified circumstances, a federal banking agency may reclassify a well capitalized institution as adequately capitalized and may require an adequately capitalized institution or an undercapitalized institution to comply with supervisory actions as if it were in the next lower category (except that the Federal Deposit Insurance Corporation may not reclassify a significantly undercapitalized institution as critically undercapitalized).
An institution generally must file a written capital restoration plan which meets specified requirements within 45 days of the date that the institution receives notice or is deemed to have notice that it is undercapitalized, significantly undercapitalized or critically undercapitalized. A federal banking agency must provide the institution with written notice of approval or disapproval within 60 days after receiving a capital restoration plan, subject to extensions by the agency. An institution which is required to submit a capital restoration plan must concurrently submit a performance guaranty by each company that controls the institution. In addition, undercapitalized institutions are subject to various regulatory restrictions, and the appropriate federal banking agency also may take any number of discretionary supervisory actions.
At December 31, 2010, Bank of New Orleans was deemed a well capitalized institution for purposes of the prompt corrective regulations and as such is not subject to the above mentioned restrictions.
The table below sets forth Bank of New Orleans’ capital position relative to its regulatory capital requirements at December 31, 2010.
Capital Distributions. Office of Thrift Supervision regulations govern capital distributions by savings institutions, which include cash dividends, stock repurchases and other transactions charged to the capital account of a savings institution to make capital distributions. A savings institution must file an application for Office of Thrift Supervision approval of the capital distribution if (1) the total capital distributions for the applicable calendar year exceed the sum of the institution’s net income for that year to date plus the institution’s retained net income for the preceding two years, (2) the institution would not be at least adequately capitalized following the distribution, (3) the distribution would violate any applicable statute, regulation, agreement or Office of Thrift Supervision-imposed condition, or (4) the institution is not eligible for expedited treatment of its filings. If an application is not required to be filed, savings institutions which are a subsidiary of a savings and loan holding company (as well as certain other institutions) must still file a notice with the Office of Thrift Supervision at least 30 days before the board of directors declares a dividend or approves a capital distribution.
Qualified Thrift Lender Test. All savings institutions are required to meet a qualified thrift lender, or QTL, test to avoid certain restrictions on their operations. A savings institution can comply with the QTL test by either qualifying as a domestic building and loan association as defined in the Internal Revenue Code or meeting the Office of Thrift Supervision QTL test.
Currently, the Office of Thrift Supervision QTL test requires that 65% of an institution’s “portfolio assets” (as defined) consist of certain housing and consumer-related assets on a monthly average basis in nine out of every 12 months. To be a qualified thrift lender under the IRS test, the savings institution must meet a “business operations test” and a “60 percent assets test,” each defined in the Internal Revenue Code.
If the savings institution fails to maintain its QTL status, the holding company’s activities are restricted. In addition, it must discontinue any non-permissible business, although the Office of Thrift Supervision may grant a grace period up to two years for good cause. Nonetheless, any company that controls a savings institution that is not a qualified thrift lender must register as a bank holding company within one year of the savings institution’s failure to meet the QTL test.
Statutory penalty provisions require an institution that fails to remain a QTL to either become a national bank or be prohibited from the following:
•
Making any new investments or engaging in any new activity not allowed for both a national bank and a savings association;
•
Establishing any new branch office unless allowable for a national bank; and
•
Paying dividends unless allowable for a national bank.
Three years from the date a savings association should have become or ceases to be a QTL, by failing to meet either QTL test, the institution must comply with the following restriction:
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Dispose of any investment or not engage in any activity unless the investment or activity is allowed for both a national bank and a savings association.
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, a savings institution not in compliance with the QTL test also is prohibited from paying dividends and is subject to an enforcement action for violation of the Home Owners’ Loan Act, as amended. At December 31, 2010, Bank of New Orleans met the QTL test.
Limitations on Transactions with Affiliates. Transactions between savings institutions and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a savings institution is any company or entity which controls, is controlled by or is under common control with the savings institution. In a holding company context, the parent holding company of a savings institution (such as Louisiana Bancorp) and any companies which are controlled by such parent holding company are affiliates of the savings institution. Generally, Section 23A limits the extent to which the savings institution or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such institution’s capital stock and surplus, and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus. Section 23B applies to “covered transactions” as well as certain other transactions and requires that all transactions be on terms substantially the same, or at least as favorable, to the savings institution as those provided to a non-affiliate. The term “covered transaction” includes the making of loans to, purchase of assets from and issuance of a guarantee to an affiliate and similar transactions. Section 23B transactions also include the provision of services and the sale of assets by a savings institution to an affiliate. In addition to the restrictions imposed by Sections 23A and 23B, a savings institution is prohibited from (i) making a loan or other extension of credit to an affiliate, except for any affiliate which engages only in certain activities which are permissible for bank holding companies, or (ii) purchasing or investing in any stocks, bonds, debentures, notes or similar obligations of any affiliate, except for affiliates which are subsidiaries of the savings institution.
In addition, Sections 22(g) and (h) of the Federal Reserve Act placed restrictions on loans to executive officers, directors and principal stockholders. Under Section 22(h), loans to a director, an executive officer and to a greater than 10% stockholder of a savings institution, and certain affiliated interests of either, may not exceed, together with all other outstanding loans to such person and affiliated interests, the savings institution’s loans to one borrower limit (generally equal to 15% of the institution’s unimpaired capital and surplus). Section 22(h) also requires that loans to directors, executive officers and principal stockholders be made on terms substantially the same as offered in comparable transactions to other persons unless the loans are made pursuant to a benefit or compensation program that (i) is widely available to employees of the institution and (ii) does not give preference to any director, executive officer or principal stockholder, or certain affiliated interests of either, over other employees of the savings institution. Section 22(h) also requires prior board approval for certain loans. In addition, the aggregate amount of extensions of credit by a savings institution to all insiders cannot exceed the institution’s unimpaired capital and surplus. Furthermore, Section 22(g) places additional restrictions on loans to executive officers.
Anti-Money Laundering. On October 26, 2001, in response to the events of September 11, 2001, the President of the United States signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (referred to as the USA PATRIOT Act). The USA PATRIOT Act significantly expands the responsibilities of financial institutions, including savings and loan associations, in preventing the use of the U.S. financial system to fund terrorist activities. Title III of the USA PATRIOT Act provides for a significant overhaul of the U.S. anti-money laundering regime. Among other provisions, it requires financial institutions operating in the United States to develop new anti-money laundering compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering. Such compliance programs are intended to supplement existing compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control Regulations. We have established policies and procedures to ensure compliance with the USA PATRIOT Act’s provisions, and the impact of the USA PATRIOT Act on our operations has not been material.
Federal Home Loan Bank System. Bank of New Orleans is a member of the Federal Home Loan Bank of Dallas, which is one of 12 regional Federal Home Loan Banks that administers the home financing credit function of savings institutions. Each Federal Home Loan Bank serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the Federal Home Loan Bank System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the Board of Directors of the Federal Home Loan Bank. At December 31, 2010, Bank of New Orleans had $42.2 million of Federal Home Loan Bank advances.
As a member, Bank of New Orleans is required to purchase and maintain stock in the Federal Home Loan Bank of Dallas in an amount equal to at least 1% of its aggregate unpaid residential mortgage loans or similar obligations at the beginning of each year. At December 31, 2010, Bank of New Orleans had $2.0 million in Federal Home Loan Bank stock, which was in compliance with this requirement.
The Federal Home Loan Banks are required to provide funds for the resolution of troubled savings institutions and to contribute to affordable housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have adversely affected the level of Federal Home Loan Bank dividends paid in the past and could do so in the future. These contributions also could have an adverse effect on the value of Federal Home Loan Bank stock in the future.
Federal Reserve System. The Federal Reserve Board requires all depository institutions to maintain reserves against their transaction accounts (primarily NOW and Super NOW checking accounts) and non-personal time deposits. Because required reserves must be maintained in the form of vault cash or a noninterest-bearing account at a Federal Reserve Bank, the effect of this reserve requirement is to reduce an institution’s earning assets. At December 31, 2010, Bank of New Orleans met its reserve requirement.
TAXATION
Federal Taxation
General. Louisiana Bancorp and Bank of New Orleans are subject to federal income taxation in the same general manner as other corporations with some exceptions listed below. The following discussion of federal, state and local income taxation is only intended to summarize certain pertinent income tax matters and is not a comprehensive description of the applicable tax rules. Bank of New Orleans’ federal and state income tax returns for taxable years through December 31, 2006 have been closed for purposes of examination by the Internal Revenue Service. As a result, all tax returns through that date may no longer be audited by either tax authority.
Louisiana Bancorp will file consolidated federal income tax returns with Bank of New Orleans. Accordingly, it is anticipated that any cash distributions made by Louisiana Bancorp to its shareholders would be treated as cash dividends and not as a non-taxable return of capital to shareholders for federal and state tax purposes.
Method of Accounting. For federal income tax purposes, Louisiana Bancorp and Bank of New Orleans report income and expenses on the accrual method of accounting and use a December 31 tax year for filing its federal income tax return.
Bad Debt Reserves. The Small Business Job Protection Act of 1996 eliminated the use of the unique reserve method of accounting for bad debt reserves by savings associations, effective for taxable years beginning after 1995. Prior to that time, Bank of New Orleans was permitted to establish a reserve for bad debts and to make additions to the reserve. These additions could, within specified formula limits, be deducted in arriving at taxable income. As a result of the Small Business Job Protection Act of 1996, savings associations must use the same service method as banks in computing their bad debt deduction beginning with their 1996 federal tax return. In addition, federal legislation required the recapture over a six year period of the excess of tax bad debt reserves at December 31, 1995 over those established as of December 31, 1987.
Taxable Distributions and Recapture. Prior to the Small Business Job Protection Act of 1996, bad debt reserves created prior to January 1, 1988 were subject to recapture into taxable income if Bank of New Orleans failed to meet certain thrift asset and definitional tests. New federal legislation eliminated these savings association related recapture rules. However, under current law, pre-1988 reserves remain subject to recapture should Bank of New Orleans make certain non-dividend distributions or cease to maintain a bank charter.
At December 31, 2010, the total federal pre-1988 reserve was approximately $1.3 million. The reserve reflects the cumulative effects of federal tax deductions by Bank of New Orleans for which no federal income tax provisions have been made.
Alternative Minimum Tax. The Internal Revenue Code imposes an alternative minimum tax at a rate of 20% on a base of regular taxable income plus certain tax preferences. The alternative minimum tax is payable to the extent such alternative minimum tax income is in excess of the regular income tax. Net operating losses, of which Bank of New Orleans has none, can offset no more than 90% of alternative minimum taxable income. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. Bank of New Orleans has not been subject to the alternative minimum tax or any such amounts available as credits for carryover.
Net Operating Loss Carryovers. For net operating losses in years beginning after August 5, 1997, net operating losses can be carried back to the two years preceding the loss year and forward to the 20 years following the loss year. At December 31, 2010, Bank of New Orleans had no net operating loss carry forwards for federal income tax purposes.
Corporate Dividends-Received Deduction. Louisiana Bancorp is able to exclude from its income 100% of dividends received from Bank of New Orleans as a member of the same affiliated group of corporations. The corporate dividends received deduction is 80% in the case of dividends received from corporations which a corporate recipient owns less than 80%, but at least 20% of the distribution corporation. Corporations which own less than 20% of the stock of a corporation distributing a dividend may deduct only 70% of dividends received.
State Taxation
Louisiana Bancorp is subject to the Louisiana Corporation Income Tax based on our Louisiana taxable income. The Corporation Income Tax applies at graduated rates from 4% upon the first $25,000 of Louisiana taxable income to 8% on all Louisiana taxable income in excess of $200,000. For these purposes, “Louisiana taxable income” means net income which is earned by us within or derived from sources within the State of Louisiana, after adjustments permitted under Louisiana law, including a federal income tax deduction. In addition, Bank of New Orleans will be subject to the Louisiana Shares Tax which is imposed on the assessed value of a company’s stock. The formula for deriving the assessed value is to calculate 15% of the sum of:
(a) 20% of our capitalized earnings, plus
(b) 80% of our taxable stockholders’ equity, minus
(c) 50% of our real and personal property assessment.
Various items may also be subtracted in calculating a company’s capitalized earnings. For the fiscal year 2010, the Company’s Louisiana Shares Tax expense was $214,000.
Item 1A.
Item 1A. Risk Factors.
In analyzing whether to make or to continue an investment in our securities, investors should consider, among other factors, the following risk factors.
There are increased risks involved with commercial real estate and construction lending activities.
Our lending activities include loans secured by commercial real estate and multi-family residential mortgage loans. In addition, we periodically originate loans for the construction of residential and commercial use properties, although at December 31, 2010 there were no construction loans in our loan portfolio. Commercial real estate, multi-family residential and construction lending generally is considered to involve a higher degree of risk than single-family residential lending due to a variety of factors, including generally larger loan balances, the dependency on successful completion or operation of the project for repayment, the difficulties in estimating construction costs and loan terms which often do not require full amortization of the loan over its term and, instead, provide for a balloon payment at stated maturity. As a result of the larger loan balances typically involved in these loans, an adverse development with respect to one loan or one credit relationship can expose us to greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan. As of December 31, 2010, our 10 largest commercial real estate, multi-family residential and land loans had an aggregate outstanding balance of $17.9 million, or 27.4% of total commercial real estate, multi-family residential and land loans and 9.9% of our total loan portfolio at such date. In addition, our portfolio of these loans is significantly weighted with loans which have been originated relatively recently and are not well seasoned, and thus, are generally perceived to be more susceptible to adverse economic conditions than older loans. Construction loans generally have a higher risk of loss than single-family residential mortgage loans due primarily to the critical nature of the initial estimates of a property’s value upon completion of construction compared to the estimated costs, including interest, of construction as well as other assumptions. If the estimates upon which construction loans are made prove to be inaccurate, we may be confronted with projects that, upon completion, have values which are below the loan amounts. During 2009, we had a $1.0 million participation interest in a $170.0 million construction loan for a mixed-use development located in Baton Rouge, Louisiana
that was deemed to be an “in substance” foreclosure and transferred to other real estate owned. At the time of transfer the Bank recorded a $396,000 charge-off against its recorded investment in the asset. During 2010, the Bank charged-off its investment in this property by an additional $107,000, following the receipt of a Shared National Credit review of the project. This project was the Bank’s only asset covered by the Shared National Credit review program.
The loss of our President and Chief Executive Officer or Chief Financial Officer could hurt our operations.
We rely heavily on our President and Chief Executive Officer, Lawrence J. LeBon, III, and our Chief Financial Officer, John LeBlanc. The loss of either of these executive officers could have an adverse effect on us. Mr. LeBon is central to virtually all aspects of our business operations and management. Mr. LeBlanc is critical to our financial reporting function, and he also works closely with Mr. LeBon on virtually all other aspects of our operations. In addition, as a small community bank, we have fewer management-level personnel who are in position to succeed and assume the responsibilities of either Messrs. LeBon or LeBlanc. However, we have entered into three-year employment agreements with Messrs. LeBon and LeBlanc. We do not maintain key man life insurance on either Mr. LeBon or Mr. LeBlanc.
Our business is geographically concentrated in southern Louisiana, which makes us vulnerable to downturns in the local economy.
Most of our loans are to individuals and businesses located generally in southern Louisiana and, more particularly, metropolitan New Orleans. Regional economic conditions affect the demand for our products and services as well as the ability of our customers to repay loans. The concentration of our business operations in southern Louisiana makes us vulnerable to downturns in the local economy. Declines in local real estate values could adversely affect the value of property used as collateral for the loans we make. The regional economic outlook remains uncertain after Hurricane Katrina and no assurance can be given that, given the geographic concentration of our business, we will not suffer from future adverse developments in the region. The region is susceptible to hurricanes and tropical storms. Any new hurricanes or storms could severely test the infrastructure of the markets we operate in, negatively affect the local economy or disrupt our operations, which would have an adverse effect on our business and results of operations.
Changes in interest rates could have a material adverse effect on our operations.
The operations of financial institutions such as us are dependent to a large extent on net interest income, which is the difference between the interest income earned on interest-earning assets such as loans and investment securities and the interest expense paid on interest-bearing liabilities such as deposits and borrowings. Changes in the general level of interest rates can affect our net interest income by affecting the difference between the weighted average yield earned on our interest-earning assets and the weighted average rate paid on our interest-bearing liabilities, or interest rate spread, and the average life of our interest-earning assets and interest-bearing liabilities. Our net interest spread was 2.70% for the year ended December 31, 2010 compared to 2.62% for the year ended December 31, 2009. During 2010, the rate at which our weighted average rate paid on interest-bearing liabilities declined outpaced the decrease in the weighted average yield of our interest-earning assets, resulting in an increase in the net interest spread. We may not be able to further decrease the weighted average rate paid on interest-bearing liabilities in a rising rate environment. Changes in interest rates also can affect our ability to originate loans; the value of our interest-earning assets and our ability to realize gains from the sale of such assets; our ability to obtain and retain deposits in competition with other available investment alternatives; and the ability of our borrowers to repay adjustable or variable rate loans. Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control.
Our results of operations are significantly dependent on economic conditions and related uncertainties.
The operations of savings associations are affected, directly and indirectly, by domestic and international economic and political conditions and by governmental monetary and fiscal policies. Conditions such as inflation, recession, unemployment, volatile interest rates, real estate values, government monetary policy, international conflicts, the actions of terrorists and other factors beyond our control may adversely affect our results of operations. Changes in interest rates, in particular, could adversely affect our net interest income and have a number of other adverse effects on our operations. Adverse economic conditions also could result in an increase in loan delinquencies, foreclosures and nonperforming assets and a decrease in the value of the property or other collateral which secures our loans, all of which could adversely affect our results of operations. We are particularly sensitive to changes in economic conditions and related uncertainties in the metropolitan New Orleans area because we derive the vast majority of our loans, deposits and other business from this area. Accordingly, we remain subject to the risks associated with prolonged declines in our local economy.
Our allowance for losses on loans may not be adequate to cover probable losses.
We have established an allowance for loan losses which we believe is adequate to offset probable losses on our existing loans. There can be no assurance that any future declines in real estate market conditions, general economic conditions or changes in regulatory policies will not require us to increase our allowance for loan losses, which would adversely affect our results of operations.
We face strong competition which may adversely affect our profitability.
We are subject to vigorous competition in all aspects and areas of our business from banks and other financial institutions, including savings and loan associations, savings banks, finance companies, credit unions and other providers of financial services, such as money market mutual funds, brokerage firms, consumer finance companies and insurance companies. We also compete with non-financial institutions, including retail stores that maintain their own credit programs and governmental agencies that make available low cost or guaranteed loans to certain borrowers. Certain of our competitors are larger financial institutions with substantially greater resources, lending limits, larger branch systems and a wider array of commercial banking services. Competition from both bank and non-bank organizations will continue.
Increased and/or Special Federal Deposit Insurance Corporation Assessments Will Hurt Our Earnings
The recent economic recession has caused a high level of bank failures, which has dramatically increased Federal Deposit Insurance Corporation resolution costs and led to a significant reduction in the balance of the Deposit Insurance Fund. As a result, the Federal Deposit Insurance Corporation has significantly increased the initial base assessment rates paid by financial institutions for deposit insurance. Increases in the base assessment rate have increased our deposit insurance costs and negatively impacted our earnings. In addition, in May 2009, the Federal Deposit Insurance Corporation imposed a special assessment on all insured institutions. Our special assessment, which was reflected in earnings for the year ended December 31, 2009, was $126,000. In lieu of imposing an additional special assessment, the Federal Deposit Insurance Corporation required all institutions to prepay their assessments for the fourth quarter of 2009 and all of 2010, 2011 and 2012. Additional increases in the base assessment rate or special assessments would negatively impact our earnings.
We Operate In a Highly Regulated Environment and We May Be Adversely Affected By Changes in Laws and Regulations
We are subject to extensive regulation, supervision and examination by the Office of Thrift Supervision, our primary federal regulator, and by the Federal Deposit Insurance Corporation, as insurer of our deposits. Such regulation and supervision governs the activities in which an institution and its holding company may engage and are intended primarily for the protection of the insurance fund and the depositors and borrowers of the Bank rather than for holders of our common stock. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for loan losses. Any change in such regulation and
oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations.
Recently Enacted Regulatory Reform May Have a Material Impact on Our Operations
On July 21, 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act that, among other things, imposes new restrictions and an expanded framework of regulatory oversight for financial institutions and their holding companies, including the Bank and the Company. Under the new law, the Company’s and the Bank’s primary regulator, the Office of Thrift Supervision, will be eliminated and existing federal thrifts will be subject to regulation and supervision by the Office of Comptroller of the Currency, which currently supervises and regulates all national banks. Savings and loan holding companies will be regulated by the Federal Reserve Board, which will have the authority to promulgate new regulations governing the Company that will impose additional capital requirements and may result in additional restrictions on investments and other holding company activities. The law also creates a new consumer financial protection bureau that will have the authority to promulgate rules intended to protect consumers in the financial products and services market. The creation of this independent bureau could result in new regulatory requirements and raise the cost of regulatory compliance. The federal preemption of state laws currently accorded federally chartered financial institutions will be reduced. In addition, regulation mandated by the new law could require changes in regulatory capital requirements, loan loss provisioning practices, and compensation practices which may have a material impact on our operations. Because the regulations under the new law have not been promulgated, we cannot determine the full impact on our business and operations at this time. See “Regulation-Recently Enacted Regulatory Reform.”
Item 1B.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2.
Item 2. Properties.
As of December 31, 2010, we conducted business from our main office and two full-service banking offices. Our fourth banking office, located on Robert E. Lee Boulevard in New Orleans, remains closed due to flood damage incurred during Hurricane Katrina, and it is uncertain whether we will re-open this office. The following table sets forth the net book value of the land, building and leasehold improvements and certain other information with respect to the our offices at December 31, 2010. We maintain automated teller machines (“ATMs”) at each of our branch offices.
(Footnotes on next page)
(1) All IRA deposits are assigned to the Main office.
(2) The branch site is located on three lots. The Bank owns two of the lots. The third lot (parking lot) is leased.
(3) The deposits for the Robert E. Lee office have been temporarily re-assigned to the main office for regulatory reporting purposes as the Robert E. Lee office has been closed since August 2005 due to flood damage from Hurricane Katrina.
(4) During 2009, we acquired the property adjacent to our branch office in order to provide additional parking.
Item 3.
Item 3. Legal Proceedings.
We are not presently involved in any legal proceedings of a material nature. From time to time, we are a party to legal proceedings incidental to our business to enforce our security interest in collateral pledged to secure loans made by Bank of New Orleans.
Item 4.
Item 4. (Reserved)
PART II
Item 5.
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
(a) Louisiana Bancorp, Inc.’s common stock is listed on the NASDAQ Global Market under the symbol “LABC”. The common stock was issued at a price of $10.00 per share in connection with the Company’s initial public offering and the Bank’s conversion from mutual to stock form. The common stock commenced trading on the NASDAQ Stock Market on July 10, 2007. As of the close of business on December 31, 2010, there were 3,640,918 shares of common stock outstanding, held by approximately 261 stockholders of record, not including the number of persons or entities whose stock is held in nominee or “street” name through various brokerage firms and banks.
The following table sets forth the high and low prices of the Company’s common stock as reported by the Nasdaq Stock Market and cash dividends declared per share for the periods indicated.
The Company did not sell any of its equity securities during 2010 that were not registered under the Securities Act of 1933. For information regarding the Company’s equity compensation plans, see Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
(b) Not applicable.
(c) The Company’s repurchases of its common stock made during the quarter ended December 31, 2010 are set forth in the table below:
Notes to table above:
(1) On November 1, 2010, the Company announced a stock repurchase program to acquire 5%, or 189,891 shares of its common stock over a six month period.
Item 6.
Item 6. Selected Financial Data.
Set forth below is selected financial and other data of Louisiana Bancorp, Inc. You should read the financial statements and related notes contained in Item 8 hereof which provide more detailed information.
(Footnotes on next page)
(1) Our branch on Robert E. Lee Boulevard in New Orleans has been closed since Hurricane Katrina hit on August 29, 2005. At December 31, 2008, total banking offices included a loan production office in Hammond, Louisiana which was closed in 2009.
(2) Earnings per share data for 2007 is elevated because the denominator was reduced due to the abbreviated period.
(3) With the exception of end of period ratios, all ratios are based on average monthly balances during the indicated periods.
(4) Average interest rate spread represents the difference between the average yield on interest-earning assets and the average rate paid on interest-bearing liabilities, and net interest margin represents net interest income as a percentage of average interest-earning assets.
(5) The efficiency ratio represents the ratio of non-interest expense divided by the sum of net interest income and non-interest income.
(6) Asset quality ratios and capital ratios are end of period ratios, except for net charge-offs to average loans receivable. Capital ratios are for the Bank only.
(7) Non-performing assets consist of non-performing loans and other real estate owned. Non-performing loans consist of all loans 90 days or more past due. It is our policy to cease accruing interest on all loans 90 days or more past due.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
Louisiana Bancorp, Inc. is a Louisiana corporation that became the holding company for Bank of New Orleans in connection with the conversion of the Bank in July 2007 from a federally chartered mutual savings bank to a federally chartered stock savings bank. Bank of New Orleans is a community oriented savings bank headquartered in Metairie, Louisiana. We currently operate three banking offices in Jefferson and Orleans Parishes. Our fourth banking office has been closed since Hurricane Katrina in August 2005, and it is uncertain whether we will re-open this office in the future. Our primary business consists of attracting deposits from the general public and using those funds together with funds we borrow to originate loans to our customers and invest in mortgage-backed and other securities. At December 31, 2010, we had total assets of $320.9 million, including $179.1 million in net loans and $126.0 million of mortgage-backed and other investment securities, total deposits of $188.4 million and shareholders’ equity of $60.3 million.
Historically, we have operated as a traditional thrift relying primarily on long-term, fixed rate single-family residential mortgage loans to generate interest income. During 2010, 2009 and 2008, our originations of single-family residential mortgage loans totaled $59.0 million, $59.1 million, and $13.5 million, respectively. The growth in our originations during 2009 and 2010 was due primarily to increased refinancing activity due to a decline in mortgage rates, and the Bank’s hiring of experienced mortgage loan originators during the third quarter of 2008. Another significant factor contributing to the growth of our single-family originations is the continued repopulation of our market area associated with the Hurricane Katrina recovery.
In order to serve the financial needs of our business community, the Bank offers mortgage products secured by multi-family residential properties, commercial real estate and land. In the aggregate, our originations of these types of loans were $17.3 million, $17.5 million, and $16.0 million, respectively, for the periods ended December 31, 2010, 2009 and 2008. Multi-family residential, commercial real estate and land loans generate higher levels of interest income than single-family residential loans, but are subject to higher levels of risk.
As of December 31, 2010, we had 14 loans with an aggregate principal balance of $282,000 that were 30 to 89 days delinquent, compared to seven loans with an aggregate principal balance of $379,000 at December 31, 2009. We anticipate that the current economic recession will lead to additional job losses in our market area in the next twelve months, and will likely create additional delinquencies. Our non-performing loans were $908,000, $1.0 million and $520,000, respectively, at December 31, 2010, 2009 and 2008. Total real estate owned was $1.7 million and $1.6 million, respectively, at December 31, 2010, and 2009. We had no real estate owned at December 31, 2008. At December 31, 2010, real estate owned was comprised of a single family residence with a fair value of $900,000, a multi-family residential property with a fair value of $350,000, and our 0.6% participation interest in a $170 million mixed-use property development in Baton Rouge, Louisiana having a fair value of $446,000. Total non-performing assets were $2.6 million, $2.6 million and $520,000, respectively, at December 31, 2010, 2009 and 2008.
Our total mortgage-backed securities and investment securities portfolio was $126.0 million or 39.3% of our total assets at December 31, 2010. These securities are comprised of US agency issued obligations and do not include “private label” securities. Our mortgage-backed securities are collateralized by conventional mortgage loans and do not include “Alt-A”, “sub-prime”, or other non-conforming collateral. The market value of our securities may decline in the future due to an increase in the level of interest rates. However, our securities are generally purchased as long-term investments, therefore changes in market value during the holding period due to fluctuations in interest rates is expected. We do not purchase securities for speculative or trading purposes.
Our total deposits were $188.4 million and $188.6 million at December 31, 2010 and 2009, respectively. Management anticipates that the FDIC’s permanent increase in their maximum deposit insurance coverage to $250,000, and our efforts to grow corresponding deposits relationships with our new loan customers, will lead to future growth in our deposit base.
Our total equity capital at December 31, 2010, was $60.3 million. Our average equity to average assets ratio was 20.7% for the period ended December 31, 2010. The Bank’s capital ratios exceed all regulatory guidelines, and the Bank was deemed to be “well-capitalized” as of December 31, 2010.
Our results of operations depend, to a large extent, on net interest income, which is the difference between the income earned on our loan and investment portfolios and interest expense on deposits and borrowings. Our net interest income is largely determined by our net interest spread, which is the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities, and the relative amounts of interest-earning assets and interest-bearing liabilities. Results of operations are also affected by our provisions for loan losses, fee income and other non-interest income and non-interest expense. Non-interest expense principally consists of compensation and employee benefits, office occupancy and equipment expense, data processing, advertising and business promotion and other expense. We expect that our non-interest expenses will increase as we continue to grow and expand our operations. In addition, our salaries and benefits expense have increased in recent years due to the stock benefit plans that we implemented following the Bank’s conversion to the stock form. For the years ended December 31, 2010, 2009 and 2008, the cost of our Employee Stock Ownership Plan was $371,000, $343,000, and $307,000, respectively. Compensation expense related to our stock option plan and recognition and retention awards were $741,000, $751,000 and $626,000, during 2010, 2009 and 2008, respectively. These equity compensation plans were approved by our shareholders in February 2008. Our results of operations are also significantly affected by general economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities. Future changes in applicable law, regulations or government policies may materially impact our financial conditions and results of operations.
Business Strategy
Our business strategy is focused on operating a growing and profitable community-oriented financial institution. Below are certain highlights of our business strategy:
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Growing Our Loan Portfolio. We intend to grow our loan portfolio by increasing our originations of residential and commercial mortgage loans through referrals from our branch network and existing customers, increased use of media advertising, and recruiting highly qualified, experienced loan originators. We may consider the purchase of additional participation interests in loans that meet our underwriting standards. In addition to facilitating loan growth, such purchases may lessen the geographic concentration of our loans.
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Expanding our Market Area. We intend to pursue opportunities to expand our market area by opening additional banking offices, including loan production offices. We may consider acquisitions of other financial institutions (although we have no current plans, understandings or agreements with respect to any specific acquisitions). We expect to focus our expansion efforts on certain areas within Jefferson and Orleans Parishes, as well as, markets on the north shore of Lake Pontchartrain.
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Maintaining Asset Quality. Despite the negative effects of Hurricane Katrina, and more recently, the national recession, we remain committed to our prudent and conservative underwriting practices, and we intend to vigorously review our portfolio for potential problem assets in order to mitigate potential losses. Our ratio of non-performing assets to total assets was 0.81% at December 31, 2010 and 0.78% at December 31, 2009.
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Continuing to Provide Exceptional Customer Service. As a community oriented savings bank, we take pride in providing exceptional customer service as a means to attract and retain customers. We deliver personalized service to our customers that distinguishes us from the large regional banks operating in our market area. Our management team has strong ties to, and deep roots in, the community. We believe that we know our customers’ banking needs and can respond quickly to address them.
The information contained in this section should be read in conjunction with our financial statements and the accompanying notes to the financial statements and other sections contained in this report.
Critical Accounting Policies
In reviewing and understanding financial information for Louisiana Bancorp, you are encouraged to read and understand the significant accounting policies used in preparing our financial statements. These policies are described in Note A of the notes to our financial statements, which are included in Item 8 of this Annual Report on Form 10-K. The accounting and financial reporting policies of Louisiana Bancorp conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. Accordingly, the financial statements require certain estimates, judgments, and assumptions, which are believed to be reasonable, based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented. The following accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results. These policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the period or in future periods.
Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely. Subsequent recoveries are added to the allowance. The allowance is an amount that represents the amount of probable and reasonably estimable known and inherent losses in the loan portfolio, based on evaluations of the collectability of loans. The evaluations take into consideration such factors as changes in the types and amount of loans in the loan portfolio, historical loss experience, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, estimated losses relating to specifically identified loans, and current economic conditions. This evaluation is inherently subjective as it requires material estimates including, among others, exposure at default, the amount and timing of expected future cash flows on impacted loans, value of collateral, estimated losses on our commercial and residential loan portfolios and general amounts for historical loss experience. All of these estimates may be susceptible to significant change.
While management uses the best information available to make loan loss allowance evaluations, adjustments to the allowance may be necessary based on changes in economic and other conditions or changes in accounting guidance. Historically, our estimates of the allowance for loan loss have not required significant adjustments from management’s initial estimates. In addition, the Office of Thrift Supervision, as an integral part of its examination processes, periodically reviews our allowance for loan losses. The Office of Thrift Supervision may require the recognition of adjustments to the allowance for loan losses based on their judgment of information available to them at the time of their examinations. To the extent that actual outcomes differ from management’s estimates, additional provisions to the allowance for loan losses may be required that would adversely impact earnings in future periods.
Income Taxes. We make estimates and judgments to calculate some of our tax liabilities and determine the recoverability of some of our deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenues and expenses. We also estimate a reserve for deferred tax assets if, based on the available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. These estimates and judgments are inherently subjective. Historically, our estimates and judgments to calculate our deferred tax accounts have not required significant revision to our initial estimates.
In evaluating our ability to recover deferred tax assets, we consider all available positive and negative evidence, including our past operating results, recent cumulative losses and our forecast of future taxable income. In determining future taxable income, we make assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require us to make judgments about our future taxable income and are consistent with the plans and estimates we use to manage our business. Any reduction in estimated future taxable income may require us to record a
valuation allowance against our deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings.
How We Manage Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk arises primarily from the interest rate risk which is inherent in our lending and deposit taking activities. To that end, management actively monitors and manages interest rate risk exposure. In addition to market risk, our primary risk is credit risk on our loan portfolio. We attempt to manage credit risk through our loan underwriting and oversight policies.
The principal objective of our interest rate risk management function is to evaluate the interest rate risk embedded in certain balance sheet accounts, determine the level of risk appropriate given our business strategy, operating environment, capital and liquidity requirements and performance objectives, and manage the risk consistent with approved guidelines. We seek to manage our exposure to risks from changes in interest rates while at the same time trying to improve our net interest spread. We monitor interest rate risk as such risk relates to our operating strategies. We have established an Asset Liability Committee (“ALCO”)/Investment Committee, which is comprised of our President and Chief Executive Officer, Chief Financial Officer, Controller and two outside directors, and which is responsible for reviewing our asset/liability and investment policies and interest rate risk position. The ALCO/Investment Committee meets on a regular basis. The extent of the movement of interest rates is an uncertainty that could have a negative impact on future earnings.
In recent years, we primarily have utilized the following strategies in our efforts to manage interest rate risk:
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we have increased our originations of shorter term loans particularly multi-family residential, commercial real estate and land loans;
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we have attempted to match fund a portion of our loan portfolio with borrowings having similar expected lives;
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on occasion, we have sold long-term (30-year) fixed-rate mortgage loans which had been classified as held-for-sale;
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we have attempted, where possible, to extend the maturities of our deposits and borrowings; and
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we have invested in securities with relatively short anticipated lives, generally three to five years, and we hold significant amounts of liquid assets.
Gap Analysis. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive” and by monitoring a bank’s interest rate sensitivity “gap.” An asset and liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that same time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to affect adversely net interest income while a positive gap would tend to result in an increase in net interest income. Conversely, during a period of falling interest rates, a negative gap would tend to result in an increase in net interest income while a positive gap would tend to affect adversely net interest income. Our one-year cumulative gap was a positive 2.02% at December 31, 2010.
The following table sets forth the amounts of the Bank’s interest-earning assets and interest-bearing liabilities outstanding at December 31, 2010, which we expect, based upon certain assumptions, to reprice or mature in each of the future time periods shown (the “GAP Table”). Except as stated below, the amount of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with the earlier of term to repricing or the contractual maturity of the asset or liability. The table sets forth an approximation of the projected repricing of assets and liabilities of the Bank at December 31, 2010, on the basis
of contractual maturities, anticipated prepayments, and scheduled rate adjustments within a three-month period and subsequent selected time intervals. The loan amounts in the table reflect principal balances expected to be redeployed and/or repriced as a result of contractual amortization and anticipated prepayments of adjustable-rate loans and fixed-rate loans, and as a result of contractual rate adjustments on adjustable-rate loans.
(1) Interest-earning assets are included in the period in which the balances are expected to be redeployed and/or repriced as a result of anticipated prepayments, scheduled rate adjustments and contractual maturities.
(2) For purposes of the gap analysis, loans receivable includes non-performing loans gross of the allowance for loan losses, undisbursed loan funds, unamortized discounts and deferred loan fees.
(3) Interest-rate sensitivity gap represents the difference between net interest-earning assets and interest-bearing liabilities.
Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Additionally, certain assets, such as adjustable-rate loans, have features which restrict changes in interest rates both on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Finally, the ability of many borrowers to service their adjustable-rate loans may decrease in the event of an interest rate increase.
Net Portfolio Value and Net Interest Income Analysis. Our interest rate sensitivity also is monitored by management through the use of models which generate estimates of the change in its net portfolio value (“NPV”) and net interest income (“NII”) over a range of interest rate scenarios. NPV is the present value of expected cash flows from assets, liabilities, and off-balance sheet contracts. The NPV ratio, under any interest rate scenario, is defined as the NPV in that scenario divided by the market value of assets in the same scenario. We prepare these models in collaboration with a third party Asset/Liability Management consultant, and present them to the Board of Directors on a quarterly basis. In addition to our internal NPV calculation, the Office of Thrift Supervision (“OTS”) prepares a quarterly calculation based on certain repricing and prepayments assumptions that may differ from our internal expectations. Therefore, the results of the OTS NPV calculation, and our internal calculation, may differ with respect to the magnitude of the change in NPV for a given interest rate scenario. The following table sets forth the NPV as of December 31, 2010, as calculated by the OTS model, which reflects the changes to NPV as a result of immediate and sustained changes in interest rates as indicated.
Based on the guidelines found in OTS Thrift Bulletin 13a (“TB-13a”), the interest rate risk sensitivity measure for the Bank was 212 basis points at December 31, 2010. This sensitivity measure is considered in conjunction with the Bank’s post-shock capital ratio of 17.77%, in arriving at a minimal level of interest rate risk as per TB13a.
In addition to modeling changes in NPV, we also analyze potential changes to NII for a twelve-month period under rising and falling interest rate scenarios. The following table shows the results of our NII model as of December 31, 2010.
The above table indicates that as of December 31, 2010, in the event of an immediate and sustained 200 basis point increases in interest rates, our net interest income for the 12 months ending December 31, 2010 would be expected to decrease by $118,000 or 1.3% to $8.9 million.
As is the case with the GAP Table, certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV and NII require the making of certain assumptions which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the models presented assume that the composition of our interest sensitive assets and
liabilities existing at the beginning of a period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Accordingly, although the NPV measurements and net interest income models provide an indication of interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on net interest income and will differ from actual results.
Average Balances, Net Interest Income, and Yields Earned and Rates Paid. The following table shows for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. Tax-exempt income and yields have not been adjusted to a tax-equivalent basis. All average balances are based on monthly balances. Management does not believe that the monthly averages differ significantly from what the daily averages would be.
(1) Includes nonaccrual loans during the respective periods. Calculated net of deferred fees and discounts and allowance for loan losses.
(2) Equals net interest income divided by average interest-earning assets.
Rate/Volume Analysis. The following table shows the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities affected our interest income and expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in rate, which is the change in rate multiplied by prior year volume, and (2) changes in volume, which is the change in volume multiplied by prior year rate. The combined effect of changes in both rate and volume has been allocated proportionately to the change due to rate and the change due to volume.
Comparison of Financial Condition at December 31, 2010 and December 31, 2009
Total assets were $320.9 million at December 31, 2010, a decrease of $8.9 million from December 31, 2009. Cash and cash equivalents were $6.6 million and $4.7 million at December 31, 2010 and December 31, 2009, respectively. Total investment securities were $48.5 million at December 31, 2010, an increase of $8.7 million compared to December 31, 2009. This increase incurred primarily in US Agency debt securities with maturities of three years or less. During 2010, total mortgage-backed securities decreased by $39.7 million, to $77.6 million. This decrease in the balance of our mortgage-backed securities was due to the receipt of scheduled principal reductions in addition to accelerated prepayments of the underlying mortgage loans. Net loans receivable were $179.1 million at December 31, 2010, an increase of $20.7 million, or 13.0%, from December 31, 2009. During 2010, first mortgage loans secured by single family residences increased by $12.9 million, home equity loans and lines increased by $1.4 million, multi-family residential loans increased by $2.4 million, and non-residential real estate loans increased by $4.8 million.
Total deposits were $188.4 million at December 31, 2010, and $188.6 million at December 31, 2009. Non-interest bearing deposits were $8.1 million and $7.9 million at December 31, 2010 and 2009, respectively. Total Federal Home Loan Bank advances and other borrowings were $68.3 million at December 31, 2010, an increase of $4.4 million from December 31, 2009. During 2010, we increased our total borrowings in the form of Federal Home Loan Bank advances, with maturities ranging from five years to ten years, which will provide long-term funding for the growth in our loan portfolio.
Total shareholders’ equity was $60.3 million at December 31, 2010, a decrease of $13.1 million from December 31, 2009. During 2010, the Company increased its treasury stock by 1,123,404 shares, which were
purchased at an aggregate cost of $16.5 million, pursuant to its publicly announced repurchase plans. In addition, 25,383 shares held by the ESOP trust, with a cost basis of $254,000, were released for allocation to plan participants, and 44,584 vested shares held by the Company’s Recognition and Retention Plan Trust, with a cost basis of $562,200, were released to participants during 2010. Net income of $2.6 million increased retained earnings to $40.2 million at December 31, 2010. Our average equity to assets ratio for 2010 was 20.72%, compared to 24.71% for 2009. The Bank’s tier 1 capital ratio was 16.02% at December 31, 2010, which was well in excess of well-capitalized regulatory standards at such date. The Bank’s tier 1 capital was reduced by capital distributions of $9.9 million made by the Bank to the Company during the year ended December 31, 2010. These distributions were made to provide liquidity to the Company’s capital management initiatives, which include, but are not limited to, its stock repurchase plans.
Comparison of Operating Results for the Years Ended December 31, 2010 and December 31, 2009
Net interest income for the year ended December 31, 2010 was $10.3 million, a decrease of $279,000 from the year ended December 31, 2009. Interest income was $16.1 million and $16.8 million for the respective twelve month periods ended December 31, 2010 and 2009. The average yield on our interest-earning assets for 2010 was 5.07%, compared to 5.30% for 2009. Interest income on loans receivable was $10.4 million and $8.4 million, respectively, for the years ended December 31, 2010 and 2009. The increase in interest income earned on loans receivable was primarily due to a $37.0 million increase in the average balance during 2010. Interest income on mortgage-backed securities was $4.9 million during 2010, a decrease of $2.7 million from 2009. The average balance of our mortgage-backed securities during 2010 was $97.7 million, which earned an average yield of 5.01% compared to an average balance of $147.0 million during 2009, at an average yield of 5.20%. The decline in the balance of our mortgage-backed securities during 2010 was due to accelerated prepayments of principal associated with the refinancing of the underlying mortgage loans. Interest income on investment securities increased by $94,000 during 2010 compared to 2009, due primarily to a $13.6 million increase in average balance, which was partially offset by a 70 basis point decline in our average yield.
For the year ended December 31, 2010, total interest expense was $5.9 million, a decrease of $413,000 compared to the year ended December 31, 2009. The average interest rate paid on interest-bearing liabilities was 2.37% during 2010, a decrease of 31 basis points from 2009. The average interest rate spread for the year ended December 31, 2010 and 2009 was 2.70% and 2.62%, respectively. Our net interest margin for the year ended December 31, 2010 was 3.23%, a decrease of nine basis points from the year ended December 31, 2009.
For the year ended December 31, 2010, the Company recorded provisions for loan losses of $269,000, a decrease of $68,000 compared to the year ended December 31, 2009. Our allowance for loan losses was $1.8 million at December 31, 2010, or 193.72% of our non-performing loans at such date. During the 2010, the Company recorded charge-offs of $174,000, of which $171,000 pertained to a loan secured by a multi-family residential building which was placed in foreclosure. This property was subsequently sold in January 2011. Stated as a percentage of total loans receivable, our allowance for loan losses was 0.98% and 1.04% at December 31, 2010 and December 31, 2009, respectively.
Non-interest income for the years ended December 31, 2010 and 2009 was $990,000 and $836,000, respectively. Customer service fees increased by $70,000 during 2010 compared to 2009, primarily due to a $77,000 increase in fees earned in connection with the sale of reverse mortgage loans. In the aggregate, the Company sold $5.7 million in securities during 2010 at a $204,000 gain, compared to the sale of $13.8 million in securities during 2009 resulting in gains of $406,000. Gains on the sale of mortgage loans were $245,000 and $30,000, respectively for the years ended December 31, 2010 and 2009. The $215,000 increase in gains on loan sales is primarily due to an increase in refinancing activity during 2010, as a result of the decrease in average mortgage rates during the period. In addition, during the 2010, the Bank realized a gain of $64,000 on its equity investment in a small business investment company (“SBIC”). The SBIC was formed in 2001 under the guidelines of the Small Business Administration to leverage private equity and SBA funding in order to promote growth, expansion, and modernization of small businesses. There was no such gain recorded in 2009.
Non-interest expense for the year ended December 31, 2010 was $7.3 million, an increase of $182,000 compared to the year ended December 31, 2009. Salaries and benefits expense increased by $153,000, to $ 4.6 million, during the twelve months ended December 31, 2010 compared to the twelve months ended December 30, 2009. This increase is primarily attributed to higher levels of base compensation and increased employee stock ownership plan expenses, which were due to an increase in the average market price of our common stock during the year. Occupancy expenses were $1.1 million and $1.2 million, respectively, for the years ended December 31, 2010 and 2009. The Louisiana bank shares tax is an ad-valorem tax assessed by the parishes in which our branches are located based on market value of the Bank. The market value is calculated using a formula devised by the state that determines value based on an income component and an equity component. The calculated market value is then allocated to each branch location based on its respective pro-rata share of deposits. Our Louisiana bank shares tax was $214.000 for the year ended December 31, 2010, and $211,000 for the year ended December 31, 2009. The Bank’s FDIC deposit insurance premium for 2010 was $180,000, a decrease of $53,000 compared to 2009. The reduction in the 2010 FDIC deposit insurance premium compared to the 2009 premium was due to a one-time assessment imposed on all insured institutions during 2009. The Bank’s share of this one-time assessment was $126,000. During 2010, the Bank recorded losses of $235,000 with respect to the valuation of its OREO. The largest write-down during 2010 followed the receipt of an OTS Shared National Credit report, which pertained to a $170 million construction loan on a multi-use development in Baton Rouge, Louisiana, in which the Bank has a 0.6% participation interest and which was placed in other real estate owned in 2009. The Bank’s original investment in this project was $1.0 million. As a result of this report’s valuation, our investment in OREO was reduced by $107,000. In the aggregate, the Bank has made write-downs of $503,000 with respect to its interest in this Shared National Credit. At December 31, 2010, our OREO consisted of three properties: a single family residence with a carrying value of $900,000, our participation interest in the above-described multi-use development in Baton Rouge, Louisiana with a carrying value of $446,000 and a multi-family residential building with a carrying value of $350,000. The latter property was sold in January 2011. Other non-interest expense for 2010 was $973,000, a decrease of $114,000 compared to 2009. The primary factors affecting this decrease were a $41,000 reduction in the Company’s Louisiana franchise tax as well as reductions in its advertising costs and legal fees associated with collection activities.
For the years ended December 31, 2010 and 2009, income tax expense was $1.2 million and $1.4 million, respectively. The reduction in our income tax expense for the year was due to an increase in the Company’s deferred tax assets.
Comparison of Operating Results for the Years Ended December 31, 2009 and December 31, 2008
For the year ended December 31, 2009, net interest income was $10.6 million, an increase of $681,000 from the year ended December 31, 2008. The net interest rate spread between our interest-earning assets and our interest-bearing liabilities was 2.62% for 2009, an increase of 12 basis points from 2008. Our net interest margin for the years ended December 31, 2009 and December 31, 2008 were 3.32% and 3.45%, respectively. Total interest income increased by $1.0 million, to $16.8 million, for the year ended December 31, 2009 compared to the year ended December 31, 2008. During 2009, our average interest-earning assets increased by $31.6 million due primarily to growth in our loans receivable and mortgage-backed securities portfolio. The average yield of our interest-earning assets was 5.30% for the year ended December 31, 2009, a decrease of 23 basis points from the year ended December 31, 2008.
Total interest expense for the year ended December 31, 2009 was $6.3 million, an increase of $314,000 from the year ended December 31, 2008. The average balance of our total interest-bearing deposits increased by $24.8 million during 2009, however, the interest expense associated with these deposits decreased by $215,000 due to a 53 basis point decrease in the average rate paid on interest-bearing deposits. The growth in our average interest-bearing deposits in 2009 was due to a $25.4 million increase in the average balance of our certificates of deposit. Interest expense on borrowings was $2.6 million for the year ended December 31, 2009, an increase of $529,000 from the year ended December 31, 2008. This increase in interest expense was due to an increase in the average balance of our total borrowings of $13.3 million during 2009.
During the year ended December 31, 2009, the Company recorded provisions for loan losses of $337,000 compared to net recoveries of $43,000 for the year ended December 31, 2008. The recoveries recorded in the 2008 period were primarily attributed to reductions in the allowance for loan losses due to reversals of provisions previously established in 2005 with respect to loans secured by properties damaged by Hurricane Katrina. During the fourth quarter of 2009, the Company charged-off $232,000 of its allowance for loan losses previously established against a first mortgage loan and home equity line of credit secured by a single family residence. In the third quarter of 2009, the Company charged-off $396,000 of its allowance for loan losses established against its participation interest in a non-performing construction loan secured by mixed-use commercial real estate. Total charge-offs for the year-ended December 31, 2009 were $628,000. Our total allowance for loan losses at December 31, 2009 was $1.7 million, or 165.60% of our non-performing loans. Expressed as a percentage of total loans receivable, our allowance for loan losses was 1.04% at December 31, 2009. At December 31, 2009 our total non-performing loans and total non-performing assets amounted to $1.0 million and $2.6 million, respectively.
Non-interest income for the years ended December 31, 2009 and 2008 was $836,000 and $526,000, respectively. Customer service fees were $324,000 for 2009, a decrease of $72,000, or 18.2% from 2008. Our customer service fees consist primarily of service charges on our deposits accounts and broker commissions earned in connection with the origination of reverse mortgage loans. During 2009, our reverse mortgage commissions declined by $82,000 due to a reduction in the number of loans originated. During the year ended December 31, 2009, the Bank recorded $406,000 in gains from the sale $13.8 million of available-for-sale securities, compared to $3,000 in gains from the sale of $350,000 in available-for-sale securities recorded in 2008. Other non-interest income was $106,000 and $127,000, respectively, for 2009 and 2008.
For the year ended December 31, 2009, non-interest expense was $7.1 million, an increase of $688,000 from the year ended December 31, 2008. During 2009, our annual salaries and benefits expense increased by $360,000 or 8.9%. The average number of full-time equivalent employees for 2009 was 66, an increase of 4 full-time equivalent employees from 2008. This increase in staffing combined with an increase in our health insurance premiums resulted in an increase of $182,000 in 2009 compensation expense compared to 2008. The cost of employee stock ownership plan (“ESOP”) and our other equity based compensation plans increased by $161,000 during 2009. The $36,000 increase in the cost of our ESOP in 2009 compared to 2008 was due to an increase during the year in our stock price, and the $125,000 increase in the cost of our equity compensation plans was due to additional awards made during the year. Occupancy expenses for 2009 were $1.2 million, an increase of $92,000 from 2008, primarily due to a $47,000 increase in our data processing cost, and $25,000 in non-routine maintenance at our main office. Other non-interest expense for the year ended December 31, 2009 was $1.5 million, an increase of $236,000 from the year ended December 31, 2008. During 2009, our FDIC insurance expense increased by $212,000. This increase was due to an industry-wide second quarter 2009 special assessment, which in our case amounted to $126,000, and increases associated with our participation in the FDIC’s Temporary Liquidity Guarantee Program and the FICO component of our FDIC assessment. In addition, a one-time FDIC assessment credit established in December of 2006 was depleted in the second quarter of 2009.
Income tax expense for the years ended December 31, 2009 and December 31, 2008, was $1.4 million and $1.3 million, respectively. Although pre-tax income for 2009 was $77,000 less than pre-tax income for 2008, our income tax expense increased during the year due to the adjustment in our deferred tax items associated with our equity based compensation plans.
Liquidity and Capital Resources
Our primary sources of funds are from deposits, amortization of loans, loan prepayments and the maturity of loans, mortgage-backed securities and other investments, and other funds provided from operations. While scheduled payments from the amortization of loans and mortgage-backed securities and maturing investment securities are relatively predictable sources of funds, deposit flows and loan prepayments can be greatly influenced by general interest rates, economic conditions and competition. We also maintain excess funds in
short-term, interest-bearing assets that provide additional liquidity. At December 31, 2010, our cash and cash equivalents amounted to $6.6 million. In addition, at such date our available for sale investment and mortgage-backed securities amounted to an aggregate of $62.5 million.
We use our liquidity to fund existing and future loan commitments, to fund maturing certificates of deposit and demand deposit withdrawals, to invest in other interest-earning assets, and to meet operating expenses. At December 31, 2010, we had certificates of deposit maturing within the next 12 months amounting to $86.4 million. Based upon historical experience, we anticipate that a significant portion of the maturing certificates of deposit will be redeposited with us. For the year ended December 31, 2010, the average balance of our outstanding FHLB advances and other borrowings was $68.1 million. At December 31, 2010, we had $42.2 million in outstanding FHLB advances and we had $138.4 million in additional FHLB advances available to us.
In addition to cash flow from loan and securities payments and prepayments as well as from sales of available for sale securities, we have significant borrowing capacity available to fund liquidity needs. In recent years we have utilized borrowings as a cost efficient addition to deposits as a source of funds. Our borrowings consist primarily of advances from the Federal Home Loan Bank of Dallas, of which we are a member. Under terms of the collateral agreement with the Federal Home Loan Bank, we pledge residential mortgage loans and mortgage-backed securities as well as our stock in the Federal Home Loan Bank as collateral for such advances. We also access funds through reverse repurchase agreements with commercial banks. These borrowings are typically used to fund purchases of mortgage-backed securities at terms more favorable than those available through the Federal Home Loan Bank. Our borrowings from reverse repurchase agreements amounted to $26.0 million at December 31, 2010. Furthermore, we have the ability to borrow from the Federal Reserve Bank discount window on an overnight or other short-term basis. Borrowings from the Federal Reserve discount window are typically collateralized U.S. government or agency issued investment or mortgage-backed securities.
Commitments
The following table summarizes our outstanding commitments to originate loans and to advance additional amounts pursuant to outstanding letters of credit, lines of credit and undisbursed construction loans at December 31, 2010.
Contractual Cash Obligations
The following table summarizes our contractual cash obligations at December 31, 2010.
We anticipate that we will continue to have sufficient funds and alternative funding sources to meet our current commitments.
Impact of Inflation and Changing Prices
The financial statements, accompanying notes, and related financial data of Louisiana Bancorp presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of operations. Most of our assets and liabilities are monetary in nature; therefore, the impact of interest rates has a greater impact on its performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance that requires an acquirer in a business combination, upon initially obtaining control of another entity, to recognize the assets, liabilities and any non-controlling interest in the acquiree at fair value as of the acquisition date. Any contingent consideration is also required to be recognized and measured at fair value on the date of acquisition. Acquisition related costs are to be expensed as incurred. Assets acquired and liabilities assumed in a business combination that arise from contingencies are to be recognized at fair value if fair value can be reasonably estimated. This authoritative guidance became effective for business combinations closing on or after January 1, 2009.
In June 2009, the FASB changed the accounting guidance for the consolidation of variable interest entities. The current quantitative-based risks and rewards calculation for determining which enterprise is the primary beneficiary of the variable interest entity will be replaced with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity and the obligation to absorb losses of the entity or the right to receive benefits from the entity. The new guidance became effective for the Company on January 1, 2010 with no impact on its financial statements.
In June 2009, the FASB changed the accounting guidance for transfers of financial assets. The new guidance increases the information that a reporting entity provides in its financial reports about a transfer of financial assets; the effects of a transfer on its statement of financial condition, financial performance and cash flows; and a continuing interest in transferred financial assets. In addition, the guidance amends various concepts associated with the accounting for transfers and servicing of financial assets and extinguishments of liabilities including removing the concept of qualified special purpose entities. This new guidance was adopted by the Company on January 1, 2010 with no impact on its financial statements.
In January 2010, the FASB issued authoritative guidance expanding disclosures related to fair value measurements including (i) the amounts of significant transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy and the reasons for the transfers, (ii) the reasons for transfers of assets or liabilities in or out of Level 3 of the fair value hierarchy, with significant transfers disclosed separately, (iii) the policy for determining when transfers between levels of the fair value hierarchy are recognized and (iv) for recurring fair value measurements of assets and liabilities in Level 3 of the fair value hierarchy, a gross presentation of information about purchases, sales, issuances and settlements. The new guidance further clarifies that (i) fair value measurement disclosures should be provided for each class of assets and liabilities (rather than major category), which would generally be a subset of assets or liabilities within a line item in the statement of financial position and (ii) disclosures should be provided about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for each class of assets and liabilities included in Levels 2 and 3 of the fair value hierarchy. The disclosures related to the gross presentation of purchases, sales, issuances and settlements of assets and liabilities included in Level 3 of the fair value hierarchy is effective for the Company on January 1, 2011. The remaining disclosure requirements and clarifications made by the new guidance became effective January 1, 2010 with no impact on the Company’s financial statements.
In July 2010, the FASB issued authoritative guidance that requires entities to provide enhanced disclosures in the financial statements about their loans including credit risk exposures and the allowance for loan losses. Included in the new guidance are a roll forward of the allowance for loan losses as well as credit quality information, impaired loan, nonaccrual and past due information. Disclosures must be disaggregated by portfolio segment, the level at which an entity develops and documents a systematic method for determining its allowance for loan losses, and class of loans. The Company adopted this guidance on December 31, 2010, with no impact on its financial statements except for additional financial statement disclosures.
In December 2010, the FASB issued authoritative guidance that modified Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist such as if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. This new authoritative guidance will be effective on January 1, 2011 and is not expected to have an impact on the Company’s financial statements.
In January 2011, the FASB issued authoritative guidance that deferred the effective date of disclosure requirements for public entities about troubled debt restructurings to be concurrent with the effective date of the guidance for determining what constitutes a troubled debt restructuring, which is concurrently being addressed by the FASB. The guidance is anticipated to be effective for interim and annual reporting periods ending after June 15, 2011.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
The information contained in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations-How We Manage Market Risk” in Item 7 hereof is incorporated herein by reference.
Item 8.
Item 8. Financial Statements and Supplementary Data
Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors
Louisiana Bancorp, Inc.
Metairie, Louisiana
We have audited the accompanying consolidated balance sheets of Louisiana Bancorp, Inc. (the Company) and its wholly owned subsidiary, Bank of New Orleans (the Bank), as of December 31, 2010 and 2009, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Louisiana Bancorp, Inc. as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.
/s/ LaPorte, Sehrt, Romig and Hand
A Professional Accounting Corporation
Metairie, Louisiana
March 16, 2011
LOUISIANA BANCORP, INC.
Consolidated Balance Sheets
December 31, 2010 and 2009
The accompanying notes are an integral part of these consolidated financial statements.
LOUISIANA BANCORP, INC.
Consolidated Statements of Income
For the Years Ended December 31, 2010, 2009 and 2008
The accompanying notes are an integral part of these consolidated financial statements.
LOUISIANA BANCORP, INC.
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 2010, 2009 and 2008
The accompanying notes are an integral part of these consolidated financial statements.
LOUISIANA BANCORP, INC.
Consolidated Statements of Changes in Shareholders’ Equity
For the Years Ended December 31, 2010, 2009 and 2008
The accompanying notes are an integral part of these consolidated financial statements.
LOUISIANA BANCORP, INC.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2010, 2009 and 2008
The accompanying notes are an integral part of these consolidated financial statements.
LOUISIANA BANCORP, INC.
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
Louisiana Bancorp, Inc. (the “Company”) was organized as a Louisiana corporation on March 16, 2007, for the purpose of becoming the holding company of Bank of New Orleans (the “Bank”) in anticipation of converting the Bank from a federally chartered mutual savings and loan association to a federally chartered stock savings and loan association. In July 2007, the Company completed the conversion. The Bank operates in the banking/savings and loan industry and, as such, attracts deposits from the general public and uses such deposits primarily to originate loans secured by first mortgages on owner-occupied, family residences and other properties.
The Bank is subject to competition from other financial institutions, and is also subject to the regulations of certain Federal and State agencies and undergoes periodic examinations by those regulatory authorities.
Basis of Presentation and Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Bank of New Orleans. All significant inter-company balances and transactions have been eliminated in consolidation.
Significant Group Concentrations of Credit Risk
Most of the Bank’s activities are with customers located within the greater New Orleans area in Louisiana. Note 2 discusses the types of securities in which the Bank invests. Note 3 discusses the types of lending in which the Bank engages. The Bank does not have any significant concentrations in any one industry or to any one customer.
Cash and Cash Equivalents
For the purposes of the Statements of Cash Flows, cash and cash equivalents include cash and balances due from banks, federal funds sold and securities purchased under agreements to resell, all of which mature within ninety days.
For 2010, the Bank is required to maintain cash in reserve accounts with the Federal Reserve Bank of Atlanta. For the reserve maintenance period ended December 31, 2010, the reserve requirement was $444,000.
Investment Securities
Securities are being accounted for in accordance with FASB Accounting Standards Codification (“ASC”) 320, Investments-Debt and Equity Securities. ASC 320 requires the classification of securities into one of three categories: Trading, Available-for-Sale, or Held-to-Maturity. Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates this classification periodically.
Available-for-sale securities are stated at market value, with unrealized gains and losses, net of income taxes, reported as a separate component of accumulated other comprehensive income until realized. The amortized cost of available-for-sale debt securities is adjusted for amortization of premiums and accretion of discounts to maturity or, in the case of mortgage-backed securities, over the estimated life of the security.
Securities designated as held-to-maturity are stated at cost adjusted for amortization of the related premiums and accretion of discounts, using the interest method. The Company has the positive intent and ability to hold these securities to maturity.
LOUISIANA BANCORP, INC.
Notes to Consolidated Financial Statements-(Continued)
The Company held no trading securities as of December 31, 2010 or 2009.
Amortization, accretion and accrued interest are included in interest income on securities. Realized gains and losses, and declines in value judged to be other than temporary, are included in net securities gains or losses. Gains and losses on the sale of securities available-for-sale are determined using the specific-identification method.
Loans
The Bank grants one-to four-family, multi-family residential, commercial, and land mortgage loans, and consumer and construction loans, and lines of credit to customers. Certain first mortgage loans are originated and sold under loan sales agreements. A substantial portion of the loan portfolio is represented by mortgage loans throughout the greater New Orleans area. The ability of the Bank’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in this area.
Loans are reported at their outstanding unpaid principal balance adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance.
When the payment of principal or interest on a loan is delinquent for more than 90 days, or earlier in some cases, the loan is placed on non-accrual status, unless the loan is in the process of collection and the underlying collateral fully supports the carrying value of the loan. If the decision is made to continue accruing interest on the loan, periodic reviews are made to confirm the accruing status of the loan. All interest accrued but not collected for loans that are placed on non-accrual or loans charged-off is reversed against income. The interest on these loans is accounted for on the cash basis or cost-recovery method, until qualifying for return to accrual basis. Loans are returned to the accrual status when all of the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
The Company considers a loan to be impaired when, based upon current information and events, it believes it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company’s impaired loans include troubled debt restructurings, and performing and non-performing loans in which full payment of principal or interest is not expected. The Company calculates an allowance required for impaired loans based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or at the loan’s observable market price or the fair value of its collateral.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance available for losses incurred on loans. All losses are charged to the allowance for loan losses when the loss actually occurs or when a determination is made that a loss is likely to occur. Recoveries are credited to the allowance at the time of recovery.
The allowance is an amount that represents the amount of probable and reasonably estimable known and inherent losses in the loan portfolio, based on evaluations of the collectability of loans. The evaluations take into consideration such factors as changes in the types and amount of loans in the loan portfolio, historical loss experience, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, estimated losses relating to specifically identified loans, and current economic conditions. This evaluation is inherently subjective as it requires material estimates including, among others, exposure at default, the amount and timing of expected future cash flows on impacted loans, value of collateral, estimated losses on our commercial and residential loan portfolios and general amounts for historical loss experience. All of these estimates may be susceptible to significant change.
LOUISIANA BANCORP, INC.
Notes to Consolidated Financial Statements-(Continued)
It should be understood that estimates of future loan losses involve an exercise of judgment. While it is possible that in particular periods, the Company may sustain losses, which are substantial relative to the allowance for loan losses, it is the judgment of management that the allowance for loan losses reflected in the accompanying statements of condition is adequate to absorb possible losses in the existing loan portfolio.
Loans Held-for-Sale
Loans held-for-sale include originated mortgage loans intended for sale in the secondary market, which are carried at the lower of cost or estimated market value. Loans held-for-sale are identified at the time of origination, in accordance with the Company’s interest rate risk strategy. In addition, the Company occasionally sells loans that it originates, but cannot hold, due to regulatory limitations on loans to one borrower, concentrations of credit in a particular property type or industry.
Student loans are held for investment purposes as long as the student is still in school. In accordance with the Bank’s agreement with Student Loan Marketing Association (“SLMA”), these loans are transferred to the held-for-sale category and are sold, once the student has gone into repayment status. During the second quarter of 2010, the Company sold the outstanding balance of its student loans to SLMA. The Company will no longer originate student loans under the SLMA agreement.
Loan Fees, Loan Costs, Discounts and Premiums
Loan origination and commitment fees and certain direct loan origination costs are deferred and amortized as an adjustment to the related loan’s yield using the interest method over the contractual life of the loan.
Discounts received in connection with mortgage loans purchased are amortized to income over the term of the loan using the interest method. Premiums on purchased loans are amortized over the term of the loan using the interest method.
Premises and Equipment
Premises and equipment are carried at cost, less accumulated depreciation. The Company computes depreciation and amortization generally on the straight-line method for both financial reporting and Federal income tax purposes. Estimated useful lives of premises and equipment range as follows:
Real Estate Owned
Real estate acquired through, or in lieu of, loan foreclosure is initially recorded at fair value, less estimated cost to sell, at the date of foreclosure and any related write-down is charged to the allowance for loan losses. Management periodically performs valuations, and an allowance for losses will be established when any significant and permanent decline reduces the fair value to less than the carrying value. The ability of the Company to recover the carrying value of real estate is based upon future sales of the real estate owned. The ability to effect such sales is subject to market conditions and other factors, many of which are beyond the Company’s control. Operating income of such properties, net of related expenses, and gains and losses on their disposition are included in the accompanying statements of income.
LOUISIANA BANCORP, INC.
Notes to Consolidated Financial Statements-(Continued)
Income Taxes
Deferred income tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any.
Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above would be reflected as a liability for unrecognized tax benefits in the consolidated balance sheets along with any associated interest or penalties that would be payable to the taxing authorities upon examination. Interest and/or penalties associated with unrecognized tax benefits, if any, would be classified as additional income taxes in the statements of income.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs were $132,000, $163,000, and $223,000 for the years ended December 31, 2010, 2009 and 2008, respectively.
Comprehensive Earnings
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheets, such items, along with net earnings, are components of comprehensive earnings.
Use of Estimates
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheets and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on loans and deferred taxes.
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued authoritative guidance that requires an acquirer in a business combination, upon initially obtaining control of another entity, to recognize the assets, liabilities and any non-controlling interest in the acquiree at fair value as of the acquisition date. Any contingent consideration is also required to be recognized and measured at fair value on the date of acquisition. Acquisition
LOUISIANA BANCORP, INC.
Notes to Consolidated Financial Statements-(Continued)
related costs are to be expensed as incurred. Assets acquired and liabilities assumed in a business combination that arise from contingencies are to be recognized at fair value if fair value can be reasonably estimated. This authoritative guidance became effective for business combinations closing on or after January 1, 2009.
In June 2009, the FASB changed the accounting guidance for the consolidation of variable interest entities. The current quantitative-based risks and rewards calculation for determining which enterprise is the primary beneficiary of the variable interest entity will be replaced with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity and the obligation to absorb losses of the entity or the right to receive benefits from the entity. The new guidance became effective for the Company on January 1, 2010 with no impact on its financial statements.
In June 2009, the FASB changed the accounting guidance for transfers of financial assets. The new guidance increases the information that a reporting entity provides in its financial reports about a transfer of financial assets; the effects of a transfer on its statement of financial condition, financial performance and cash flows; and a continuing interest in transferred financial assets. In addition, the guidance amends various concepts associated with the accounting for transfers and servicing of financial assets and extinguishments of liabilities including removing the concept of qualified special purpose entities. This new guidance was adopted by the Company on January 1, 2010 with no impact on its financial statements.
In January 2010, the FASB issued authoritative guidance expanding disclosures related to fair value measurements including (i) the amounts of significant transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy and the reasons for the transfers, (ii) the reasons for transfers of assets or liabilities in or out of Level 3 of the fair value hierarchy, with significant transfers disclosed separately, (iii) the policy for determining when transfers between levels of the fair value hierarchy are recognized and (iv) for recurring fair value measurements of assets and liabilities in Level 3 of the fair value hierarchy, a gross presentation of information about purchases, sales, issuances and settlements. The new guidance further clarifies that (i) fair value measurement disclosures should be provided for each class of assets and liabilities (rather than major category), which would generally be a subset of assets or liabilities within a line item in the statement of financial position and (ii) disclosures should be provided about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for each class of assets and liabilities included in Levels 2 and 3 of the fair value hierarchy. The disclosures related to the gross presentation of purchases, sales, issuances and settlements of assets and liabilities included in Level 3 of the fair value hierarchy is effective for the Company on January 1, 2011. The remaining disclosure requirements and clarifications made by the new guidance became effective January 1, 2010 with no impact on the Company’s financial statements.
In July 2010, the FASB issued authoritative guidance that requires entities to provide enhanced disclosures in the financial statements about their loans including credit risk exposures and the allowance for loan losses. Included in the new guidance are a roll forward of the allowance for loan losses as well as credit quality information, impaired loan, nonaccrual and past due information. Disclosures must be disaggregated by portfolio segment, the level at which an entity develops and documents a systematic method for determining its allowance for loan losses, and class of loans. The Company adopted this guidance on December 31, 2010, with no impact on its financial statements except for additional financial statement disclosures.
In December 2010, the FASB issued authoritative guidance that modified Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist such as if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its
LOUISIANA BANCORP, INC.
Notes to Consolidated Financial Statements-(Continued)
carrying amount. This new authoritative guidance will be effective on January 1, 2011 and is not expected to have an impact on the Company’s financial statements.
In January 2011, the FASB issued authoritative guidance that deferred the effective date of disclosure requirements for public entities about troubled debt restructurings to be concurrent with the effective date of the guidance for determining what constitutes a troubled debt restructuring, which is concurrently being addressed by the FASB. The guidance is anticipated to be effective for interim and annual reporting periods ending after June 15, 2011.
Note 2. Securities
A summary of securities classified as available-for-sale at December 31, 2010 and 2009, with gross unrealized gains and losses, is as follows:
LOUISIANA BANCORP, INC.
Notes to Consolidated Financial Statements-(Continued)
A summary of securities classified as held-to-maturity at December 31, 2010 and 2009, with gross unrealized gains and losses, is as follows:
LOUISIANA BANCORP, INC.
Notes to Consolidated Financial Statements-(Continued)
The amortized cost and fair value of available-for-sale and held-to-maturity securities by contractual maturity at December 31, 2010, are as follows. Actual maturities will differ from contractual maturities because borrowers may have the right to put or prepay obligations with or without call or prepayment penalties.
During the year ended December 31, 2010, the Company sold available-for-sale securities for $5,635,000, resulting in realized gains of $194,000. During the year ended December 31, 2009, the Company sold available-for-sale investment securities for $13,781,000, resulting in realized gains of $406,000.
During the year ended December 31, 2010, the Company sold certain investments from the held-to-maturity category for proceeds of $125,000, resulting in a realized gain of $10,000. These securities were sold in accordance with the limited exceptions as provided by ASC 320, Investments-Debt and Equity Securities. There were no sales of held-to-maturity securities during the year ended December 31, 2009.
Information pertaining to securities with gross unrealized losses at December 31, 2010 and 2009, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:
LOUISIANA BANCORP, INC.
Notes to Consolidated Financial Statements-(Continued)
The unrealized losses on the Company’s investments were caused by interest rate increases. The Company purchased these investments at a premium relative to their face amount in anticipation of a continuing stable interest rate environment. Because the decline in market value is attributable to changes in interest rates and not credit quality and because the Company has the ability and intent to hold these investments until a recovery of fair value, which may be maturity, the Company did not consider these investments to be other-than-temporarily impaired at December 31, 2010 or 2009.
During 2009, the Company transferred certain municipal bonds from the held-to-maturity category to the available-for-sale category. The amortized costs of the securities transferred during 2009 were $1,758,000 with an unrealized gain of $2,000. These securities were transferred to available-for-sale due to a decline in their respective credit ratings caused by decreased credit support, as provided by the securities’ guarantors. ASC 320, Investments-Debt and Equity Securities, provides that a security may be reclassified from held-to-maturity to available-for-sale in the event of a decline in the issuer’s creditworthiness. There were no such transfers between held-to-maturity and available-for-sale during 2010.
LOUISIANA BANCORP, INC.
Notes to Consolidated Financial Statements-(Continued)
Note 3. Loans
A summary of the balances of loans follows as of December 31, 2010 and 2009:
A summary of our current, past due and nonaccrual loans as of December 31, 2010 follows:
For the years ended December 31, 2010 and 2009, approximately $34,000 and $12,000, respectively, of interest was foregone on non-accrual loans.
LOUISIANA BANCORP, INC.
Notes to Consolidated Financial Statements-(Continued)
In the ordinary course of business, the Company has granted loans to directors, executive officers and their affiliates. In the opinion of management, such transactions were on substantially the same terms, including interest rates and collateral, as those prevailing at the time of comparable transactions with other persons and did not involve more than a normal risk of collectability or present any other unfavorable features to the Company. An analysis of the changes in loans to such borrowers follows:
An analysis of the allowance for loan losses is as follows for the years ended December 31st:
The following table details the activity in the allowance for loan losses by portfolio segment for the year ended December 31, 2010.
LOUISIANA BANCORP, INC.
Notes to Consolidated Financial Statements-(Continued)
A summary of the loans evaluated for possible impairment follows:
At December 31, 2010 and 2009, all impaired loans were in nonaccrual status. As of December 31, 2010, and 2009, the Company did not hold any renegotiated loans.
The following table provides additional information with respect to impaired loans by portfolio segment and the impairment methodology used to analyze the credit. The recorded investment is presented gross of any specific valuation allowance.
LOUISIANA BANCORP, INC.
Notes to Consolidated Financial Statements-(Continued)
The Bank uses the following criteria to assess risk ratings with respect to its loan portfolio, which are consistent with regulatory guidelines.
Special Mention-Loans designated as “special mention” exhibit some weakness or risk that deserves management’s close attention, but do not contain the level of risk associated with an adverse classification. If left unresolved this weakness may develop into a material deficiency in the credit quality of the loan.
Substandard-Loans classified as “substandard” have a well-defined material weakness or weaknesses based on objective evidence and are further characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
Loss-Loans classified as “loss” are considered uncollectible, in whole or in part, and should not be carried on the books as an asset without the establishment of a specific valuation allowance or charge-off. This classification does not mean that an asset has no salvage value, but there is much doubt about how much, or when, the recovery will occur.
The following table summarizes the credit grades assigned to our loan portfolio as of December 31, 2010:
Note 4. Accrued Interest Receivable
Accrued interest receivable at December 31, 2010 and 2009, consisted of the following:
LOUISIANA BANCORP, INC.
Notes to Consolidated Financial Statements-(Continued)
Note 5. Premises and Equipment
A summary of the cost and accumulated depreciation of premises and equipment follows as of December 31st:
Depreciation expense for the years ended December 31, 2010, 2009 and 2008, was approximately $218,000, $239,000, and $230,000, respectively.
Note 6. Deposits
Interest-bearing deposit account balances at December 31, 2010 and 2009, are summarized as follows:
The aggregate amount of time deposits in denominations of $100,000 or more at December 31, 2010 and 2009, was $53,925,000 and $49,909,000, respectively. On October 3, 2008, President George W. Bush signed the Emergency Economic Stabilization Act of 2008, which temporarily increased the basic FDIC coverage limits from $100,000 to $250,000 per depositor, through December 31, 2009. On May 20, 2009, President Barack Obama passed legislation that extended the $250,000 coverage limit through December 31, 2013. This temporary increase was made permanent effective July 22, 2010, by the FDIC.
Certificates of deposit at December 31, 2010, mature as follows (in thousands):
LOUISIANA BANCORP, INC.
Notes to Consolidated Financial Statements-(Continued)
Interest expense by deposit type for each of the following periods was as follows:
The Bank held deposits of approximately $13,781,000 and $13,200,000, for related parties at December 31, 2010 and 2009, respectively.
Note 7. Borrowings
Federal Home Loan Bank Advances
Pursuant to collateral agreements with the Federal Home Loan Bank of Dallas (“FHLB”), advances issued by the Federal Home Loan Bank are secured by a blanket floating lien on first mortgage loans. Total interest expense recognized on FHLB advances in 2010, 2009 and 2008, was $1,648,000, $1,542,000, and $1,164,000, respectively.
Advances consisted of the following at December 31, 2010 and 2009, respectively.
Maturities of FHLB Advances at December 31, 2010, were as follows:
LOUISIANA BANCORP, INC.
Notes to Consolidated Financial Statements-(Continued)
Reverse Repurchase Agreements
Periodically, the Company accesses other borrowing sources as a source of liquidity and term funding. These borrowings are structured as reverse repurchase agreements and are secured by US Government or US Agency securities. Reverse repurchase agreements totaled $26,000,000 at both December 31, 2010 and 2009.
Reverse Repurchase Agreements consisted of the following at December 31, 2010 and 2009, respectively:
Maturities of Reverse Repurchase Agreements at December 31, 2010, are as follows:
Interest expense on reverse repurchase agreements totaled $1,021,000, $1,021,000 and $870,000 for the years ended December 31, 2010, 2009 and 2008, respectively.
Note 8. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2010 and 2009, were as follows:
LOUISIANA BANCORP, INC.
Notes to Consolidated Financial Statements-(Continued)
Generally accepted accounting principles do not require that deferred income taxes be provided on certain portions of the allowance for loan losses that existed as of December 31, 1987. At December 31, 2010, retained earnings included approximately $1,300,000 representing such bad debt deductions for which the related deferred income taxes of approximately $442,000 have not been provided.
The provision for income taxes for 2010, 2009 and 2008, consisted of the following for the years ended December 31st:
The provision for Federal income taxes differs from that computed by applying Federal statutory rates to income before Federal income tax expense, as indicated in the following analysis:
The Company had no amount of interest and/or penalties related to tax positions recognized in the consolidated statements of income for the years ended December 31, 2010, 2009, or 2008, nor any amount of interest and/or penalties payable related to tax positions that were recognized in the consolidated balance sheets as of December 31, 2010 or 2009.
As of December 31, 2010 and 2009, the Company had no uncertain tax positions. As of December 31, 2010, the tax years that remain open for examination by tax jurisdictions include 2009, 2008 and 2007.
Note 9. Comprehensive Income
Comprehensive income was comprised of changes in the Bank’s unrealized holding gains or losses on securities available-for-sale during 2010, 2009 and 2008. The components of comprehensive income and related tax effects were as follows for the years indicated:
LOUISIANA BANCORP, INC.
Notes to Consolidated Financial Statements-(Continued)
Note 10. Regulatory Matters
The Bank is subject to various regulatory capital requirements administered by its primary federal regulator, the Office of Thrift Supervision (“OTS”). Failure to meet the minimum regulatory capital requirements can result in certain mandatory, and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank and the financial statements. Under the regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines involving quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification under the prompt corrective action guidelines are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of: total risk-based capital and Tier I capital to risk-weighted assets (as defined in the regulations), Tier I capital to adjusted total assets (as defined), tangible capital to adjusted total assets (as defined), and tangible equity to adjusted total assets (as defined). As of December 31, 2010, the Bank met all of the capital requirements to which it is subject and was deemed to be well capitalized. There have been no subsequent conditions or events which management believes have changed the Bank’s status.
The actual and required capital amounts and ratios applicable to the Bank for the years ended December 31, 2010 and 2009 are presented in the following tables:
The Bank’s capital under generally accepted accounting principles (“GAAP”) is reconciled as follows:
LOUISIANA BANCORP, INC.
Notes to Consolidated Financial Statements-(Continued)
Note 11. Financial Instruments with Off-Balance Sheet Risk
The Company has entered into certain credit related commitments with off-balance sheet risk in the normal course of business in order to meet the financing needs of its customers. The financial instruments include commitments to extend credit and commitments to sell loans. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. The contract amounts of those instruments reflect the extent of the involvement the Company has in particular classes of financial instruments. The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitment. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer.
As of December 31, 2010 and 2009, the Company had made various commitments to extend credit totaling approximately $17,398,000 and $10,729,000, respectively, and had no commitments to sell loans at a loss. Of the $17,398,000 in outstanding commitments at December 31, 2010, approximately $5,992,000 were for fixed rate loans with interest rates ranging from 4.75% to 7.65% and approximately $11,406,000 were for variable rate loans with interest ranging from 3.50% to 9.50%. No material losses or gains are anticipated as a result of these transactions.
Note 12. Commitments and Contingencies
Operating Leases
The Company conducts certain of its operations in leased facilities. At December 31, 2010, minimum rental commitments under non-cancelable operating leases were as follows (in thousands):
Total rent expense incurred by the Company under leases amounted to $60,000, $72,000 and $61,000 for each of the years ended December 31, 2010, 2009, and 2008, respectively.
It is expected that in the normal course of business, expiring leases will be renewed or replaced by leases on other property.
LOUISIANA BANCORP, INC.
Notes to Consolidated Financial Statements-(Continued)
The Company is the lesser of office space to a director of the Company, under an operating lease expiring in 2014. Terms of the lease are on current market conditions and rates. Minimum future rentals to be received on non-cancelable leases as of December 31, 2010, are as follows:
Total rental income from this lease amounted to $20,000, $19,000 and $17,000 for each of the years ended December 31, 2010, 2009 and 2008, respectively.
Employment Contracts
The Company has entered into employment contracts with key employees. These compensation commitments expire as follows:
Note 13. Concentration of Credit Risk
In accordance with industry practices, the Company has deposits in other financial institutions for more than the insured limit. These deposits in other institutions do not represent more than the normal industry credit risk.
Note 14. Estimated Fair Value of Financial Instruments
The following disclosure is made in accordance with the requirements of ASC 825, Financial Instruments. Financial instruments are defined as cash and contractual rights and obligations that require settlement, directly or indirectly, in cash. In cases where quoted market prices are not available, fair values have been estimated using the present value of future cash flows or other valuation techniques. The results of these techniques are highly sensitive to the assumptions used, such as those concerning appropriate discount rates and estimates of future cash flows, which require considerable judgment. Accordingly, estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current settlement of the underlying financial instruments. ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. These disclosures should not be interpreted as representing an aggregate measure of the underlying value of the Company.
LOUISIANA BANCORP, INC.
Notes to Consolidated Financial Statements-(Continued)
The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments.
Cash and Cash Equivalents
The carrying amount of cash and due from financial institutions, federal funds sold and short-term investments approximates fair value.
Certificates of Deposit
The fair values for certificates of deposit are estimated through discounted cash flow analysis, using current rates at which certificates of deposit with similar terms could be obtained.
Securities
Fair values for securities, excluding Federal Home Loan Bank stock, are based on quoted market prices. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.
Loans Receivable, Net
The fair values of loans are estimated through discounted cash flow analysis, using current rates at which loans with similar terms would be made to borrowers with similar credit quality. Appropriate adjustments are made to reflect probable credit losses. The carrying amount of accrued interest on loans approximated its fair value.
Federal Home Loan Bank Stock
The carrying value of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank.
Deposit Liabilities
ASC 825 specifies that the fair value of deposit liabilities with no defined maturity is the amount payable on demand at the reporting date, i.e., their carrying or book value. These deposits include interest and non-interest bearing checking, passbook, and money market accounts. The fair value of fixed rate certificates of deposit is estimated using a discounted cash flow calculation that applies interest rates currently offered on certificates of similar remaining maturities to a schedule of aggregate expected cash flows on time deposits.
Borrowings
The fair value of fixed rate borrowings is estimated using discounted cash flows, based on current incremental borrowing rates for similar types of borrowing arrangements.
Off-Balance Sheet Instruments
Off-balance sheet financial instruments include commitments to extend credit and undisbursed lines of credit. The fair value of such instruments is estimated using fees currently charged for similar arrangements in the marketplace, adjusted for changes in terms and credit risk as appropriate.
LOUISIANA BANCORP, INC.
Notes to Consolidated Financial Statements-(Continued)
The estimated fair values of the Company’s financial instruments are as follows:
The Company adopted ASC 820, Fair Value Measurements, on January 1, 2008 for all financial assets and liabilities and nonfinancial assets and liabilities that are recognized at fair value in the financial statements on a recurring basis (at least annually). ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.
ASC 820 defines fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk including our own credit risk.
In addition to defining fair value, ASC 820 expands the disclosure requirements around fair value and establishes a fair value hierarchy for valuation inputs. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of the three levels which is determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are:
•
Level 1-Inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.
•
Level 2-Inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market date for substantially the full term of the assets or liabilities.
•
Level 3-Inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.
The preceding methods described may produce a fair value calculation that may not be indicative of the net realizable value or reflective of future fair values. Furthermore, although the Company believes its valuation
LOUISIANA BANCORP, INC.
Notes to Consolidated Financial Statements-(Continued)
methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. There have been no changes in the methodologies used during the year ended December 31, 2010.
The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, 2010 and 2009:
The Company did not record any liabilities at fair market value for which measurement of the fair value was made on a recurring basis at December 31, 2010 or 2009.
The following table presents the Company’s assets and liabilities measured at fair value on a non-recurring basis at December 31, 2010 and 2009:
LOUISIANA BANCORP, INC.
Notes to Consolidated Financial Statements-(Continued)
Note 15. Employee Benefits
The Bank has a 401(k) plan covering all employees who meet certain age and service requirements. Contributions to the plan are made at the discretion of the Board of Directors. The 401(k) expense amounted to approximately $14,000, $13,000 and $12,000 for the years ended December 31, 2010, 2009, and 2008, respectively. The plan contains profit sharing provisions, with employer contributions to the plan based on a percentage of wages, net of forfeitures. There was no profit sharing contribution during 2010, 2009 or 2008.
The Bank adopted a Supplemental Executive Retirement Plan (“SERP”) during 2006 for its Chief Executive Officer. The agreement requires the Bank’s Chief Executive Officer to remain employed by the Bank through January 15, 2013 in exchange for retirement benefits payable in equal quarterly installments of $25,000 for ten consecutive years. In the event of disability, the Bank’s Chief Executive Officer is entitled to receive equal quarterly installments of $25,000 for ten consecutive years. In the event of termination, other than for disability, the Bank’s Chief Executive Officer is entitled to benefits accrued through that period. In the event of death, benefits will be payable to the Chief Executive Officer’s designated beneficiary. For the years ended December 31, 2010, 2009 and 2008, the Bank accrued $91,000, $86,000 and $82,000 in accordance with this agreement. The Bank’s future compensation expense under this plan is $64,000 per year.
In March 2007, the Bank implemented a SERP for the benefit of the Bank’s Chief Financial Officer. The Plan provides for annual credits to an accumulation account at the rate of 10% of the Executive’s annual base pay. The account is credited with earnings on an annual basis at a rate determined by the Board of Directors. The Executive will be fully vested (100%) in his Accumulation Account at age 65. The Plan provides for partial vesting when the Executive reaches the “Early Retirement Age” of 55 and remains in the employ of the Bank. Upon reaching the Early Retirement Age, the Executive will be vested 75% in the Accumulation Account. Additional vesting will be credited at the rate of 2.5% per annum for years of service after attaining the Early Retirement Age. Notwithstanding, the other provisions of the agreement, the Executive will be 100% vested in the Accumulation Account in the event of death, permanent disability, termination without cause, or termination following a change of control. For the years ended December 31, 2010, 2009 and 2008, the Bank accrued $10,100, $9,700 and $8,600 in accordance with this agreement in the respective periods.
Note 16. Related Party Transactions
The Bank purchased insurance policies through an insurance agency of which one of its directors is an executive officer. Premiums for such policies totaled $535,000, $414,000 and $306,000 for the years ended December 31, 2010, 2009, and 2008, respectively.
Note 17. Employee Stock Ownership Plan
During 2007, Louisiana Bancorp, Inc. instituted an employee stock ownership plan. The Louisiana Bancorp Employee Stock Ownership Plan (“ESOP”) enables all eligible employees of the Bank to share in the growth of the Company through the acquisition of stock. Employees are generally eligible to participate in the ESOP after completion of one year of service and attaining age 21.
The ESOP purchased eight percent of the shares offered in the initial public offering of the Company (507,659 shares). This purchase was facilitated by a loan from the Company to the ESOP in the amount of $5,077,000. The loan is secured by a pledge of the ESOP shares. The shares pledged as collateral are reported as unearned ESOP shares in the consolidated balance sheets. The corresponding note is being paid back in 80 equal quarterly payments of $130,000 on the last business day of each quarter, beginning September 30, 2007, at the rate of 8.25%. The note payable and the corresponding note receivable have been eliminated for consolidation purposes.
LOUISIANA BANCORP, INC.
Notes to Consolidated Financial Statements-(Continued)
The Company may contribute to the plan, in the form of debt service, at the discretion of its Board of Directors. Dividends received on the ESOP shares are utilized to service the debt. Shares are released for allocation to plan participants based on principal and interest payments of the note. Compensation expense is recognized based on the number of shares allocated to plan participants each year and the average market price of the stock for the current year. Released ESOP shares become outstanding for earnings per share computations.
As compensation expense is incurred, the Unearned ESOP Shares account is reduced based on the original cost of the stock. The difference between the cost and average market price of shares released for allocation is applied to Additional Paid-In Capital. ESOP compensation expense was approximately $371,000, $343,000, and $307,000 for the years ended December 31, 2010, 2009 and 2008, respectively.
The ESOP shares as of December 31, 2010 and 2009 were as follows:
Note 18. Recognition and Retention Plan
On February 14, 2008, the shareholders of Louisiana Bancorp approved the Company’s 2007 Recognition and Retention Plan. The 2007 Recognition and Retention Plan provides the Company’s directors and key employees with an equity interest in the Company as compensation for their contributions to the success of the Company, and as an incentive for future such contributions. The Compensation Committee of the Company makes grants under the 2007 Recognition and Retention Plan to eligible participants based on these factors. Plan participants vest in their share awards at a rate of 20% per year over a five year period, beginning on the date of the plan share award. If service to the Company is terminated for any reason other than death, disability or change in control, the unvested shares awards shall be forfeited.
The Recognition and Retention Plan Trust (the “Trust”) has been established to acquire, hold, administer, invest, and make distributions from the Trust in accordance with provisions of the Plan and Trust. The Trust acquired 4%, or 253,829 shares, of the then issued and outstanding shares of the Company, which are held pursuant to the Plan’s vesting requirements. The Recognition and Retention Plan provides that grants to each officer or employee and non-employee director shall not exceed 25% and 5%, respectively. Shares awarded to non-employee directors in the aggregate shall not exceed 30% of the shares available under the Plan. As of December 31, 2010, 230,677 shares had been awarded under the provisions of the Plan to directors, officers and employees of the Company.
The Company recognized compensation expense during 2010 at a weighted average per-share vesting date fair value of $11.54. Compensation expense related to the Recognition and Retention Plan was $500,000, $512,000, and $446,000 for the years ended December 31, 2010, 2009, and 2008, respectively. At December 31, 2010, there were 29,752 shares available for future grants under the Plan, which includes 6,600 shares that were forfeited by former participants in the Plan.
LOUISIANA BANCORP, INC.
Notes to Consolidated Financial Statements-(Continued)
A summary of the changes in the Company’s granted, but nonvested shares, as of December 31, 2010 follows:
Note 19. Stock Option Plan
On February 14, 2008, the shareholders of Louisiana Bancorp also approved the Company’s 2007 Stock Option Plan. The 2007 Stock Option Plan provides the Company’s directors and key employees with an equity interest in the Company as compensation for their contributions to the success of the Company, and as an incentive for future such contributions. The Compensation Committee of the Company grants options to eligible participants based on these factors. Plan participants vest in their options at a rate of 20% per year over a five year period, beginning on the grant date of the option. Vested options have an exercise period of ten years commencing on the date of grant. If service to the Company is terminated for any reason other than death, disability or change in control, the unvested options shall be forfeited.
Pursuant to the terms of the Option plan, 634,573 shares, or 10%, of common stock of the Company at the time of the plan’s adoption have been reserved for future issuance. The Stock Option Plan provides that grants to each officer or employee and non-employee director shall not exceed 25% and 5%, respectively. Options granted to non-employee directors in the aggregate shall not exceed 30% of the shares available under the Plan.
As of December 31, 2010, options to acquire 567,197 shares of common stock had been granted under the provisions of the Plan to directors, officers and employees of the Company, net of options forfeited and vested by former participants in the Plan, at a weighted average exercise price of $11.79.
The Company recognizes compensation expense during the vesting period based on the fair value of the option on the date of grant. The Company awarded 6,000 options during the year ended December 31, 2010 having an estimated fair value on their grant date of $2.49, as determined by use of the Black-Scholes Option Pricing Model with the following assumptions:
The dividend yield is reflective of the Company’s expectations regarding future periods. Actual dividend yields may vary from this assumption. The risk-free interest rate reflects the interpolated rate for a U.S. Treasury security with a term equivalent to the expected life of the options.
LOUISIANA BANCORP, INC.
Notes to Consolidated Financial Statements-(Continued)
A summary of the activity in the Stock Option Plan is as follows:
A summary of the status of the Company’s nonvested options as of December 31, 2010, and changes during the year ended December 31, 2010, is as follows:
As of December 31, 2010, there was $567,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 2.5 years. Compensation expense related to the Stock Option Plan was $241,000, $239,000 and $179,000, respectively, for the years ended December 31, 2010, 2009 and 2008.
LOUISIANA BANCORP, INC.
Notes to Consolidated Financial Statements-(Continued)
Note 20. Earnings per Common Share
The Company computes earnings per share in accordance with FASB ASC 260-10, Earnings per Share. Net income is divided by the weighted average number of shares outstanding during the year to calculate basic net earnings per common share. Diluted earnings per common share are calculated to give effect to stock options.
The following table presents the components of average outstanding shares for purposes of calculating earnings per share:
LOUISIANA BANCORP, INC.
Notes to Consolidated Financial Statements-(Continued)
Note 21. Condensed Financial Information-Parent Company Only
Financial information pertaining only to Louisiana Bancorp, Inc. is as follows:
LOUISIANA BANCORP, INC.
Condensed Balance Sheets
As of December 31, 2010 and 2009
(Dollars in Thousands)
LOUISIANA BANCORP, INC.
Notes to Consolidated Financial Statements-(Continued)
LOUISIANA BANCORP, INC.
Statements of Operations
For the Years Ending December 31, 2010, 2009 and 2008
(Dollars in Thousands)
LOUISIANA BANCORP, INC.
Notes to Consolidated Financial Statements-(Continued)
LOUISIANA BANCORP, INC.
Statements of Cash Flows
For the Years Ending December 31, 2010, 2009 and 2008
(Dollars in Thousands)
LOUISIANA BANCORP, INC.
Notes to Consolidated Financial Statements-(Continued)
Note 22. Plan of Reorganization and Stock Issuance
As disclosed in Note 1, on March 16, 2007, Bank of New Orleans completed its reorganization to a federally-chartered stock savings bank and formed Louisiana Bancorp, Inc. to serve as the stock holding company for the Bank. In connection with the reorganization, the Company sold 6,345,732 shares of its common stock at $10.00 per share. The Company’s ESOP purchased 507,659 shares, financed by a loan from the Company. The net proceeds from the sale of this stock were approximately $62,126,000, and the cost associated with the stock conversion was approximately $1,300,000.
As part of the Conversion, the Bank established a liquidation account in an amount equal to the net worth of the Bank as of the date of the latest consolidated balance sheet distributed in connection with the Conversion. The liquidation account is maintained for the benefit of eligible account holders and supplemental eligible account holders who maintain their accounts at the Bank after the Conversion. The liquidation account will be reduced annually to the extent that such account holders have reduced their qualifying deposits as of each anniversary date. Subsequent increases will not restore an account holder’s interest in the liquidation account. In the event of a complete liquidation, each eligible account holder will be entitled to receive balances for accounts then held.
Note 23. Subsequent Events
In accordance with FASB ASC 855, Subsequent Events, the Company evaluates events and transactions that occur after the balance sheet date for potential recognition in the financial statements. The effect of all subsequent events that provide additional evidence of conditions that existed at the balance sheet date are recognized in the financial statements as of December 31, 2010. In preparing these financial statements, the Company evaluated the events and transactions that occurred through the date these financial statements were issued. There were no material subsequent events that required recognition or additional disclosure in these financial statements.
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Not Applicable.
Item 9A(T).
Item 9A(T). Controls and Procedures.
Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of December 31, 2010. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations and are operating in an effective manner.
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934) occurred during the fourth fiscal quarter of 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Annual Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Securities and Exchange Act of 1934 Rules 13(a)-15(f). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles (“GAAP”). An adequate system of internal control encompasses the processes and procedures that have been established by management to, among other things:
•
Maintain records that accurately reflect the Company’s transactions;
•
Prepare financial statements and footnote disclosures in accordance with GAAP that can be relied upon by external users;
•
Prevent and detect unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect of the financial statements.
Management, including the chief executive officer and chief financial officer, conducted an evaluation of the effectiveness of the Company’s controls over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our evaluation under the framework in Internal Control-Integrated Framework, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2010.
This annual report on Form 10-K does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report is not required to be subject to attestation by the Company’s registered public accounting firm.
Item 9B.
Item 9B. Other Information.
Not applicable.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance.
The information required herein is incorporated by reference from the information contained in the sections captioned “Information with Respect to Nominees for Director, Continuing Directors and Executive Officers” and “Beneficial Ownership of Common Stock by Certain Beneficial Owners and Management - Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s definitive proxy statement for the 2011 Annual Meeting of Stockholders to be held in May 2011 (the “Proxy Statement”).
The Company has adopted a Code of Conduct and Ethics that applies to its principal executive officer and principal financial officer, as well as other officers and employees of the Company and the Bank. A copy of the Code of Ethics is available on the Company’s website at www.bankofneworleans.com.
Item 11.
Item 11. Executive Compensation.
The information required herein is incorporated by reference from the information contained in the sections captioned “Management Compensation” in the Proxy Statement.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required herein regarding the Security Ownership of Certain Beneficial Owners and Management is incorporated by reference from the information contained in the section captioned “Beneficial Ownership of Common Stock by Certain Beneficial Owners and Management” in the Proxy Statement.
Equity Compensation Plan Information. The following table provides information as of December 31, 2010 with respect to shares of common stock that may be issued under our existing equity compensation plans, which consist of the 2007 Stock Option Plan and 2007 Recognition and Retention Plan, both of which were approved by our shareholders.
(1) Includes 134,752 shares subject to restricted stock grants which were not vested as of December 31, 2010.
(2) The weighted-average exercise price excludes such restricted stock grants.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required herein is incorporated by reference from the information contained in the sections captioned “Management Compensation-Related Party Transactions” and “Information with Respect to Nominees for Director, Continuing Directors and Executive Officers” in the Proxy Statement.
Item 14.
Item 14. Principal Accounting Fees and Services.
The information required herein is incorporated by reference from the information contained in the section captioned “Ratification of Appointment of Independent Registered Public Accounting Firm (Proposal Two)-Audit Fees” in the Proxy Statement.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules.
(a) (1) The following financial statements are incorporated by reference from Item 8 hereof:
Consolidated Statements of Financial Condition as of December 31, 2010 and
Consolidated Statements of Income for the Years Ended December 31, 2010, 2009 and
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2010, 2009 and 2008
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2010, 2009 and
Consolidated Statements of Cash Flows for the Years Ended December 31, 2010, 2009 and
Notes to Consolidated Financial Statements
(2) All schedules are omitted because they are not required or applicable, or the required information is shown in the consolidated financial statements or the notes thereto.
(3) Exhibits
The following exhibits are filed as part of this Form 10-K and this list includes the Exhibit Index.
* Denotes management compensation plan or arrangement.
(1) Incorporated by reference from the Company’s Registration Statement on Form S-1, filed with the SEC on March 21, 2007, as amended, and declared effective on May 14, 2007 (File No. 333-141465).
(2) Incorporated by reference from the Company’s Current Report on Form 8-K, dated as of October 28, 2008.
(3) Incorporated by reference from the Company’s definitive proxy statement for the special meeting of stockholders to be held on February 14, 2008, filed with the SEC on December 28, 2007.
(b) Exhibits
The exhibits listed under (a)(3) of this Item 15 are filed herewith.
(c) Reference is made to (a)(2) of this Item 15.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.