Attached files

file filename
EX-32.0 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER - LOUISIANA BANCORP INCdex320.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - LOUISIANA BANCORP INCdex312.htm
EX-23.1 - CONSENT OF LAPORTE, SEHRT, ROMIG & HAND - LOUISIANA BANCORP INCdex231.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - LOUISIANA BANCORP INCdex311.htm
Table of Contents
Index to Financial Statements

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

x Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended: December 31, 2009

or

 

¨ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                     

Commission File Number: 001-33573

LOUISIANA BANCORP, INC.

(Exact name of Registrant as specified in its charter)

 

Louisiana   20-8715162
(State or Other Jurisdiction of
Incorporation or Organization)
  (I.R.S. Employer
Identification Number)
1600 Veterans Memorial Boulevard, Metairie, Louisiana   70005
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s telephone number, including area code: (504) 834-1190

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, $.01 par value per share   The Nasdaq Stock Market, LLC

Securities registered pursuant to Section 12(g) of the Act: none

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES  ¨    NO  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    YES  ¨    NO  x

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files).    YES  ¨    NO  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer     ¨     Accelerated filer  

  ¨ 

Non-accelerated filer     ¨     Smaller reporting company  

  x

(Do not check if a smaller reporting company)  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    YES  ¨    NO  x

The aggregate market value of the 4,337,466 shares of the Registrant’s common stock held by non-affiliates, based upon the closing price of $13.35 for the common stock on June 30, 2009, as reported by the Nasdaq Stock Market, was approximately $57.9 million. Shares of common stock held by executive officers, directors, the Company’s Employee Stock Ownership Plan and the 2007 Recognition and Retention Plan have been excluded since such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

Number of shares of common stock outstanding as of March 23, 2010: 4,572,329

DOCUMENTS INCORPORATED BY REFERENCE

Set forth below are the documents incorporated by reference and the part of the Form 10-K into which the document is incorporated:

Portions of the definitive Proxy Statement for the 2010 Annual Meeting of Stockholders are incorporated by reference into Part III, Items 10-14 of this Form 10-K.

 

 

 


Table of Contents
Index to Financial Statements

LOUISIANA BANCORP, INC.

2009 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

 

          Page
PART I

Item 1.

  

Business

   2

Item 1A.

  

Risk Factors

   31

Item 1B.

  

Unresolved Staff Comments

   33

Item 2.

  

Properties

   34

Item 3.

  

Legal Proceedings

   34

Item 4.

  

(Reserved)

   34
PART II

Item 5.

  

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

   35

Item 6.

  

Selected Financial Data

   36

Item 7.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   38

Item 7A.

  

Quantitative and Qualitative Disclosures about Market Risk

   52

Item 8.

  

Financial Statements and Supplementary Data

   53

Item 9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

   90

Item 9A(T).

  

Controls and Procedures

   90

Item 9B.

  

Other Information

   90
PART III

Item 10.

  

Directors, Executive Officers and Corporate Governance

   91

Item 11.

  

Executive Compensation

   91

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

   91

Item 13.

  

Certain Relationships and Related Transactions, and Director Independence

   91

Item 14.

  

Principal Accounting Fees and Services

   91
PART IV

Item 15.

  

Exhibits and Financial Statement Schedules

   92

SIGNATURES

   94

 

i


Table of Contents
Index to Financial Statements

Forward-Looking Statements

This Annual Report on Form 10-K contains certain forward looking statements (as defined in the Securities Exchange Act of 1934 and the regulations thereunder). Forward looking statements are not historical facts but instead represent only the beliefs, expectations or opinions of Louisiana Bancorp, Inc. and its management regarding future events, many of which, by their nature, are inherently uncertain. Forward looking statements may be identified by the use of such words as: “believe”, “expect”, “anticipate”, “intend”, “plan”, “estimate”, or words of similar meaning, or future or conditional terms such as “will”, “would”, “should”, “could”, “may”, “likely”, “probably”, or “possibly.” Forward looking statements include, but are not limited to, financial projections and estimates and their underlying assumptions; statements regarding plans, objectives and expectations with respect to future operations, products and services; and statements regarding future performance. Such statements are subject to certain risks, uncertainties and assumptions, many of which are difficult to predict and generally are beyond the control of Louisiana Bancorp, Inc. and its management, that could cause actual results to differ materially from those expressed in, or implied or projected by, forward looking statements. The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward looking statements: (1) economic and competitive conditions which could affect the volume of loan originations, deposit flows and real estate values; (2) the levels of non-interest income and expense and the amount of loan losses; (3) competitive pressure among depository institutions increasing significantly; (4) changes in the interest rate environment causing reduced interest margins; (5) general economic conditions, either nationally or in the markets in which Louisiana Bancorp, Inc. is or will be doing business, being less favorable than expected;(6) political and social unrest, including acts of war or terrorism; or (7) legislation or changes in regulatory requirements adversely affecting the business in which Louisiana Bancorp, Inc. is engaged. Louisiana Bancorp, Inc. undertakes no obligation to update these forward looking statements to reflect events or circumstances that occur after the date on which such statements were made.

As used in this report, unless the context otherwise requires, the terms “we,” “us,” or the “Company” refer to Louisiana Bancorp, Inc., a Louisiana corporation, and the term the “Bank” refers to Bank of New Orleans, a federally chartered savings bank and wholly owned subsidiary of the Company. In addition, unless the context otherwise requires, references to the operations of the Company include the operations of the Bank.

 

1


Table of Contents
Index to Financial Statements

PART I

 

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. During 2009, the Bank closed its loan production office located in Hammond, Louisiana in order to centralize our origination staff and focus our lending efforts in other markets. At December 31, 2009, the Bank had 64 full-time employees and four part-time employees. At December 31, 2009, 2008 and 2007, the Company had total assets of $329.8 million, $327.4 million, and $270.9 million, respectively. Net interest income during these periods was $10.6 million, $9.9 million and $7.9 million, and net income was $2.5 million, $2.7 million, and $2.6 million, respectively.

Since Hurricane Katrina made landfall on August 29, 2005, we, like every other business in metropolitan New Orleans, have expended considerable amounts of our time and resources in responding to the effects of Hurricane Katrina. The rebuilding and recovery efforts in metropolitan New Orleans are underway and are anticipated to continue for a considerable period of time. The effects of the national recession on our market have been tempered by these post-Katrina recovery projects, however, during 2009 the activity associated with the redevelopment of our residential areas peaked, and regional employment levels began to decline, as they have done nationally. The downturn in the national economy has led to job losses in both tourism and the petrochemical industries that form a significant part of our regional economy. Although the pace our recovery in our region has slowed due to local and national factors, the Bank believes there will continue to be significant long-term opportunities for it to participate in the rebuilding efforts in southern Louisiana through lending and other banking services.

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 $88.3 million at December 31, 2005, to $158.5 million at December 31, 2009. At December 31, 2009, our one-to four-family residential loans comprised 53.4% or $85.7 million of the total loan portfolio, while multi-family residential, commercial real estate and land loans comprised 36.5% or $58.4 million of total loans. Home equity loans and lines of credit were $14.4 million, or 9.0% of the total loan portfolio at December 31, 2009.

Deposits with the Bank are insured to the maximum extent provided by law through the Deposit Insurance Fund administered 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

 

2


Table of Contents
Index to Financial Statements

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”). The Bank’s market area was severely impacted by the devastation of Hurricane Katrina in August 2005. Floodwaters swept across 80% of Orleans Parish, and a significant portion of Jefferson Parish, causing property damage estimated 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 a dramatic decline in the population of our primary market. Estimates from the U.S. Census Bureau indicate the combined population of Jefferson and Orleans Parishes was 905,894 in July 2005, and 632,990 in July 2006, reflecting a population decrease of 30.1% in the year following the storm. The latest data available from the U.S. Census bureau indicates a combined population of 748,034 as of July 2008, which reflects a population decrease of 17.4% from the pre-Katrina estimate.

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. Government is a large employer in Orleans Parish due to substantial presence of U.S. Navy installations and other military operations. In addition, shipbuilding has been important to the economy of New Orleans. Service jobs represent the largest employment sector in both Jefferson and Orleans Parish. According to the Louisiana Department of Labor, the preliminary seasonally adjusted unemployment rate at December 31, 2009 for the state was 7.5%, an increase of 2.0% from December 31, 2008, while the national unemployment rate was 10.0%, reflecting an increase of 2.6% during the year. For the parishes of Jefferson and Orleans, the respective unemployment rates were 6.2% and 9.5% at December 31, 2009, and 4.9% and 7.7% at December 31, 2008. Employment levels in the state rose in the periods immediately following Hurricane Katrina due to the repopulation of the area, and the demand for labor created by the rebuilding efforts, and then leveled off in 2007 and 2008. In April of 2009, employment levels began to decline due to job losses in the petrochemical industries, tourism and construction.

The average price per square foot of single family residences sold in Orleans Parish during 2009 dropped by 9% from 2008, and prices in Jefferson Parish fell 4% during this same period. However, the average price per square foot of homes sold in the metropolitan area in 2009 remains higher than pre-Katrina levels, primarily due to the appreciation in price following the storm of the housing inventory that was quickly rebuilt or sustained minimal damage.

During 2009, there were 11,750 foreclosure actions filed in the state, reflecting an increase of 64.8% from 2008. In Orleans Parish there were 2,290 foreclosures filed in 2009 reflecting an increase of 20.6% from 2008, and 2,111 filings in Jefferson Parish reflecting an increase of 34.6% from 2008. On the nation level, there were 2.8 million foreclosure filings during 2009, an increase of 21.2% percent from 2008, and 119.0% from 2007.

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. Within our market area, more than 50 other banks, savings institutions and credit unions are operating. Many of the financial service providers operating in our market area are significantly larger, and have

 

3


Table of Contents
Index to Financial Statements

greater financial resources, than us. Based on the most recent data available through the FDIC, the Bank’s $179.0 million in deposits at June 30, 2009 represented a deposit market share of 0.90% for the parishes of Jefferson and Orleans, and a 0.67% market share for the seven parish New Orleans MSA. Of the 26 institutions operating in Jefferson and Orleans parishes, we rank 16th in terms of deposit market share. 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. 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, 2009, our net loan portfolio totaled $158.4 million or 48.1% 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.

 

4


Table of Contents
Index to Financial Statements

Loan Portfolio Composition. The following table shows the composition of our loan portfolio by type of loan at the dates indicated.

 

    December 31,  
    2009     2008     2007     2006     2005  
    Amount   %     Amount   %     Amount   %     Amount   %     Amount   %  
    (In Thousands)  

Real estate loans:

                   

One- to four-family residential(1)

  $ 85,726   53.4   $ 51,547   45.4   $ 46,437   46.8   $ 45,594   49.5   $ 44,178   46.2

Home equity loans and lines

    14,389   9.0        10,297   9.1        8,702   8.8        8,511   9.2        9,164   9.6   

Multi-family residential

    9,423   5.9        7,859   6.9        7,435   7.5        6,759   7.3        6,939   7.3   

Commercial real estate

    47,798   29.8        39,700   35.0        32,234   32.5        26,802   29.1        27,386   28.7   

Land loans

    1,213   0.8        1,095   1.0        546   0.5        434   0.5        584   0.6   
                                                           

Total real estate loans

    158,549   98.9        110,498   97.4        95,354   96.1        88,100   95.6        88,251   92.4   
                                                           

Consumer and other loans:

                   

Student loans

    485   0.3        1,398   1.2        2,133   2.1        2,654   2.9        5,682   5.9   

Loans secured by deposits

    478   0.3        283   0.2        530   0.5        520   0.6        428   0.5   

Other

    835   0.5        1,368   1.2        1,260   1.3        832   0.9        1,189   1.2   
                                                           

Total consumer loans

    1,798   1.1        3,049   2.6        3,923   3.9        4,006   4.4        7,299   7.6   
                                                           

Total loans

  $ 160,347   100.0   $ 113,547   100.0     99,277   100.0     92,106   100.0     95,550   100.0
                                                           

Less:

                   

Deferred loan fees

    240       359       376       390       341  

Allowance for loan losses

    1,661       1,952       1,999       2,292       2,760  
                                       

Net loans

  $ 158,446     $ 111,236     $ 96,902     $ 89,424     $ 92,449  
                                       

 

(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, 2009, 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.

 

     One- to
Four-Family
Residential
   Home Equity
Loans &
Lines
   Multi-family
Residential
   Commercial
Real Estate
     (In Thousands)

Amounts due after December 31, 2009 in:

           

One year or less

   $ 1,217    $ 46    $ 1,904    $ 1,954

After one year through two years

     162      102      —        563

After two years through three years

     1,687      634      329      —  

After three years through five years

     4,271      1,359      312      3,874

After five years through ten years

     9,087      8,750      1,352      15,347

After ten years through 15 years

     18,091      3,498      5,526      26,060

After 15 years

     51,211      —        —        —  
                           

Total

   $ 85,726    $ 14,389    $ 9,423    $ 47,798
                           

 

5


Table of Contents
Index to Financial Statements
     Land Loans    Consumer
and Other
   Total Loans
     (In Thousands)

Amounts due after December 31, 2009 in:

        

One year or less

   $ 271    $ 363    $ 5,755

After one year through two years

     —        525      1,352

After two years through three years

     292      293      3,235

After three years through five years

     —        129      9,945

After five years through ten years

     516      488      35,540

After ten years through 15 years

     134      —        53,309

After 15 years

     —        —        51,211
                    

Total

   $ 1,213    $ 1,798    $ 160,347
                    

The following table shows the dollar amount of our loans at December 31, 2009 due after December 31, 2010 as shown in the preceding table, which have fixed interest rates or which have floating or adjustable interest rates.

 

     Fixed-Rate    Floating or
Adjustable-
Rate
   Total
     (In Thousands)

Real Estate Loans:

  

One- to four-family residential

   $ 60,887    $ 23,622    $ 84,509

Home equity loans & lines

     5,510      8,833      14,343

Multi-family residential

     7,519      —        7,519

Commercial real estate

     45,844      —        45,844

Land loans

     942      —        942

Consumer and other

     872      563      1,435
                    

Total

   $ 121,574    $ 33,018    $ 154,592
                    

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

 

6


Table of Contents
Index to Financial Statements

copies of updated financial statements from the borrower. Bank of New Orleans’ largest potential exposure on a purchased participation interest at December 31, 2009 was an $864,000 participation interest in a $3.8 million loan secured by commercial real estate in the French Quarter of New Orleans. At December 31, 2009, 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 $8.9 million at December 31, 2009. At December 31, 2009, the Bank’s five largest borrowers, and their related entities, have loan balances of $4.0 million, $3.0 million, $2.6 million, $2.6 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.

 

     Year Ended December 31,  
     2009     2008     2007  
     (In thousands)  

Loan originations:

  

Real Estate Loans:

      

One- to four-family residential

   $ 59,089      $ 13,473      $ 8,981   

Home equity loans and lines

     8,666        4,737        4,399   

Multi-family residential

     2,546        2,811        2,217   

Commercial real estate

     14,660        12,199        12,554   

Land loans

     304        944        460   

Consumer and other

     724        1,394        2,799   
                        

Total loan originations

     85,989        35,558        31,410   
                        

Loans purchased(1)

     —          2,133        8,357   
                        

Loans sold

     (12,508     (1,281     (1,377

Loan principal repayments

     (25,108     (22,140     (31,219
                        

Total loans sold and principal repayments

     (37,616     (23,421     (32,596
                        

Transfer to Other real estate owned

     (1,573     —          —     

Increase due to other items, net(2)

     410        64        307   
                        

Net increase in total loans

   $ 47,210      $ 14,334      $ 7,478   
                        

 

(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, 2009, $85.7 million of our total loan portfolio consisted of single-family residential mortgage loans, an increase of $41.5 million from December 31, 2005. Originations of one- to four-family loans were $59.1 million, $13.5 million, and $9.0 million, respectively, for the years ended December, 31, 2009, 2008 and 2007. 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 53.4% at December 31, 2009. The growth in our originations during 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.

 

7


Table of Contents
Index to Financial Statements

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, 2009, $23.6 million, or 27.9%, of our one- to four-family residential loan portfolio maturing after December 31, 2010 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 closes and funds the loan.

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, 2009, our total home equity loans and lines of credit were $14.4 million, an increase of $4.1 million from December 31, 2008. 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, 2009, the unused portion of our home equity lines of credit was $8.1 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% of the loan’s outstanding balance.

Multi-Family Residential, Commercial Real Estate and Land Loans. At December 31, 2009, our multi-family residential, commercial real estate and land loans amounted to an aggregate of $58.4 million or 36.5% of our total loan portfolio. Our aggregate multi-family residential, commercial real estate and land loans increased by $9.8 million, from December 31, 2008 to December 31, 2009, and by $23.5 million from December 31, 2005 to December 31, 2009.

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, 2009, our multi-family residential real estate loans were $9.4 million or 5.9% of our total loan portfolio, and consist primarily of loans secured by properties with 20 or fewer rental units. The average

 

8


Table of Contents
Index to Financial Statements

outstanding balance of our multi-family residential loans was $410,000, with our largest multi-family residential loan having a balance of $2.3 million at December 31, 2009. Our commercial real estate loans comprised 29.8% of our total loan portfolio, and had an aggregate balance of $47.8 million at December 31, 2009. The five largest commercial real estate loans outstanding at year end 2009 were $2.6 million, $2.4 million, $2.3 million, $2.0 million and $1.3 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, 2009, 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 $1.8 million or 1.1% of our total loan portfolio at December 31, 2009. Our consumer loans include student loans, loans secured by deposit accounts, automobile loans, home improvement loans, and unsecured personal loans. Consumer loans

 

9


Table of Contents
Index to Financial Statements

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 commercial loans and lines of credit at December 31, 2009 amounted to $463,000.

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 2009 we charged-off $10,000 in consumer loans, compared to $2,000 in 2008.

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

 

10


Table of Contents
Index to Financial Statements

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, 2009 and 2008, our recorded investment in impaired loans was $1.0 million and $520,000, 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 collectibility 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, 2009 and 2008, our recorded investment in assets classified as “substandard” was $580,000 and $71,000 respectively. At December 31, 2009, we had loss allowances of $90,000 established against these loans, compared to no allowances at December 31, 2008. We had $130,000 in assets designated as “special mention” at December 31, 2009, compared to $1.1 million in assets designated as “special mention” at December 31, 2008.

Delinquent Loans. At December 31, 2009, we had $379,000 in delinquent loans, compared to $2.2 million at December 31, 2008. Included in the $2.2 million of delinquent loans at December 31, 2008 were two loans to a single borrower with a combined balance of $1.2 million, which were transferred to other real estate owned during 2009 at a fair market value of $1.0 million. In addition, at December 31, 2008, we had one delinquent commercial real estate construction loan with a total funded balance of $950,000, which was classified as an “in-substance foreclosure” during 2009, and was included in other real estate owned at December 31, 2009 at a fair market value of $553,000. This loan represents our participation interest in a $170 million mixed-use property development in Baton Rouge, Louisiana.

 

11


Table of Contents
Index to Financial Statements

The following table shows the delinquencies in our loan portfolio as of the dates indicated.

 

     December 31, 2009     December 31, 2008  
   30-89
Days Overdue
    90 or More Days
Overdue
    30-89
Days Overdue
    90 or More Days
Overdue
 
   Number
of Loans
   Principal
Balance
    Number
of Loans
   Principal
Balance
    Number
of Loans
   Principal
Balance
    Number
of Loans
   Principal
Balance
 
     (Dollars in Thousands)  

Real Estate Loans:

                    

One- to four-family residential

   1    $ 228      —      $ —        2    $ 1,062      —      $ —     

Home equity loans and lines

   6      151           1      189        

Multi-family residential

   —        —        —        —        —        —        —        —     

Commercial real estate

   —        —             1      950        

Land

   —        —             —        —          

Consumer and other

   —        —        —        —        1      1      —        —     
                                                    

Total delinquent loans

   7    $ 379      —      $ —        5    $ 2,202      —      $ —     
                                                    

Delinquent loans to total net loans

        0.24        —          1.98        —  
                                            

Delinquent loans to total loans

        0.24        —          1.94        —  
                                            

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, 2009, the largest components of our non-performing loans were a single multi-family residential loan of $515,000, against which a $90,000 loss allowance was established, and an aggregate principal balance of $357,000 in sixteen loans that were placed in non-accrual status following Hurricane Katrina. These sixteen loans are primarily composed of home equity loans and lines of credit. At December 31, 2009, all sixteen of these accounts were current with respect to their contractual obligations; however, uncertainty remains with respect to the borrower’s ability to repay all amounts due over the life of the loan. Therefore, as per Bank policy, these loans remain in non-accrual status.

For the years ended December 31, 2009 and 2008, 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 $12,000 and $4,500, respectively.

 

12


Table of Contents
Index to Financial Statements

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.

 

     December 31,  
     2009     2008     2007     2006     2005  
     (Dollars in Thousands)  

Non-accruing loans:

          

Real Estate loans:

          

One- to four-family residential

   $ 36      $ 52      $ 46      $ 302      $ 1,481   

Home equity loans and lines

     378        389        353        542        579   

Multi-family residential

     515        —          —          —          —     

Commercial real estate

     —          —          299        12        —     

Land loans

     —          —          —          —          —     

Consumer and other

     74        79        144        19        53   
                                        

Total non-accruing loans

     1,003        520        842        875        2,113   
                                        

Accruing loans 90 days or more past due:

          

Real Estate loans:

          

One- to four-family residential

     —          —          —          —          908   

Home equity loans and lines

     —          —          —          —          614   

Multi-family residential

     —          —          —          —          —     

Commercial real estate

     —          —          —          —          660   

Land loans

     —          —          —          —          —     

Consumer and other

     —          —          —          —          193   

Total accruing loans 90 days or more past due

     —          —          —          —          2,375   
                                        

Total non-performing loans(1)

     1,003        520        842        875        4,488   
                                        

Real estate owned, net

     1,573        —          —          —          —     
                                        

Total non-performing assets

   $ 2,576      $ 520      $ 842      $ 875      $ 4,488   
                                        

Total non-performing loans as a percentage of loans, net

     0.63     0.47     0.87     0.98     4.85
                                        

Total non-performing loans as a percentage of total assets

     0.30     0.16     0.31     0.40     1.86
                                        

Total non-performing assets as a percentage of total assets

     0.78     0.16     0.31     0.40     1.86
                                        

 

(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

 

13


Table of Contents
Index to Financial Statements

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 have been repaid in full, in most cases upon the receipt of insurance proceeds.

The bank recorded charge-offs of $628,000 during 2009 compared to $4,000 during 2008. This increase is primarily attributed to two loan relationships that were transferred to other real estate owned during the year. The first of these relationships consists of a first mortgage loan and a home equity line secured by a single-family residence located in our market area. During 2009, $232,000 was charged off against our allowance for loan loss with respect to these loans. The second significant loan charge-off during 2009 pertains to our participation interest in a $170.0 million real estate construction loan secured by a mixed-use commercial and residential project located in Baton Rouge, Louisiana. We are participated in this loan as part of the Shared National Credit Program. This loan represents our only shared national credit. During the third quarter of 2009, this loan was determined to be an “in-substance” foreclosure and our investment was classified as other real estate owned with a fair market value of $553,000. At the time of reclassification, the Bank charged-off $396,000 against the allowance for loan losses allocated to this loan.

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.

 

     At or For the Year Ended December 31,  
     2009     2008     2007     2006     2005  
     (Dollars in Thousands)  

Total loans outstanding at end of period

   $ 160,347      $ 113,547      $ 99,277      $ 92,106      $ 95,550   

Allowance for loan losses, beginning of period

     1,952        1,999        2,292        2,760        515   

Provision (recovery) for loan losses

     337        (43     (268     (458     2,250   

Charge-offs:

          

Real Estate loans:

          

One- to four-family residential

     31        —          38        —          —     

Home equity loans and lines

     191        2        4        7        4   

Multi-family residential

     —          —          —          —          —     

Commercial real estate

     396        —          —          —          —     

Land loans

     —          —          —          —          —     

Consumer and other

     10        2        —          4        5   
                                        

Total charge-offs

     628        4        42        11        9   
                                        

Recoveries on loans previously charged off

     —          —          17        1        4   
                                        

Allowance for loan losses, end of period

   $ 1,661      $ 1,952      $ 1,999      $ 2,292      $ 2,760   
                                        

Allowance for loan losses as a percent of non-performing loans

     165.60     375.38     237.41     261.94     61.50
                                        

Allowance for loan losses as a percent of total loans

     1.04     1.72     2.01     2.49     2.89
                                        

Ratio of net charge-offs during the period to average loans outstanding during the period

     0.47     —       —       —       —  
                                        

 

14


Table of Contents
Index to Financial Statements

The following table shows how our allowance for loan losses is allocated by type of loan at each of the dates indicated.

 

    December 31,  
    2009     2008     2007     2006     2005  
    Amount
of
Allowance
  Loan
Category
as a %
of Total

Loans
    Amount
of
Allowance
  Loan
Category
as a %
of Total

Loans
    Amount
of
Allowance
  Loan
Category
as a %
of Total
Loans
    Amount
of
Allowance
  Loan
Category
as a %
of Total

Loans
    Amount
of
Allowance
  Loan
Category
as a %
of Total

Loans
 
    (Dollars in Thousands)  

Real estate loans:

                   

One-to four-family residential

  $ 726   53.4   $ 91   45.4   $ 106   46.8   $ 282   49.5   $ 736   46.3

Home equity loans and lines

    273   9.0        210   9.1        238   8.8        428   9.2        370   9.6   

Multi-family residential

    167   5.9        2   6.9        1   7.5        1   7.3        1   7.3   

Commercial real estate

    397   29.8        49   35.0        57   32.5        44   29.1        64   28.7   

Land loans

    10   0.8        2   1.0        1   0.5        1   0.5        1   0.5   

Consumer and other

    88   1.1        98   2.6        96   3.9        36   4.4        88   7.6   

Unallocated

    —     —          1,500   —          1,500   —          1,500   —          1,500   —     
                                                           

Total

  $ 1,661   100.0   $ 1,952   100.0   $ 1,999   100.0   $ 2,292   100.0   $ 2,760   100.0
                                                           

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, 2009, our investment and mortgage-backed securities amounted to $157.1 million in the aggregate or 47.6% of total assets at such date. The largest component of our securities portfolio in recent periods has been mortgage-backed securities, which amounted to $117.3 million or 74.7% of the securities portfolio at December 31, 2009. In addition, we invest in U.S. government and agency obligations, municipal securities, corporate debt obligations and other securities. Our agency debt securities often have call provisions which provide the agency with the ability to call the securities at specified dates.

At December 31, 2009, we had an aggregate of $188,000 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

 

15


Table of Contents
Index to Financial Statements

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, 2009.

Pursuant to FASB ASC 320-10, our securities are classified as available for sale, held to maturity, 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, 2009, we had $62.5 million of securities classified as available for sale, $94.5 million of securities classified as held to maturity and no securities classified as trading account. During the year ended December 31, 2009, we sold an aggregate of $13.4 million of available-for-sale securities at a gain of $406,000.

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, 2009, $77,000 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.

 

16


Table of Contents
Index to Financial Statements

The following table sets forth certain information relating to our investment and mortgage-backed securities portfolios at the dates indicated.

 

     December 31,
     2009    2008    2007
     Amortized
Cost
   Market
Value
   Amortized
Cost
   Market
Value
   Amortized
Cost
   Market
Value
     (In Thousands)

Securities Available-for-Sale:

                 

Mortgage-backed securities

   $ 25,864    $ 27,079    $ 52,660    $ 54,159    $ 32,040    $ 32,168

U.S. government and agency obligations

     35,267      35,445      25,405      25,932      40,138      40,468
                                         

Total Securities AFS

     61,131      62,524      78,065      80,091      72,178      72,636
                                         

Securities Held to Maturity:

                 

Mortgage-backed securities

     90,194      94,430      117,322      121,050      74,693      75,516

U.S. government and agency obligations

     3,000      2,985      3,000      3,001      3,500      3,534

Municipal obligations

     1,352      1,384      3,107      3,204      3,450      3,572
                                         

Total Securities HTM

     94,546      98,799      123,429      127,255      81,643      82,622
                                         

Total Mortgage-Backed and Investment Securities

   $ 155,677    $ 161,323    $ 201,494    $ 207,346    $ 153,821    $ 155,258
                                         

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, 2009. No tax-exempt yields have been adjusted to a tax-equivalent basis.

 

     Amounts at December 31, 2009 Which Mature In        
     One Year
or Less
    More than
One Year
to Five
Years
    More than
Five Years
to Ten
Years
    More
Than Ten
Years
    Total  
     (In Thousands)  

Available-for-Sale:

          

Mortgage-backed securities

   $ —        $ 7,270      $ 5,339      $ 14,470      $ 27,079   

U.S. government and agency obligations

     —          35,445        —          —          35,445   

Municipal obligations

     —          —          —          —          —     
                                        

Total

   $ —        $ 42,715      $ 5,339      $ 14,470      $ 62,524   
                                        

Weighted Average Yield

     —       2.54     5.18     5.09     3.36
                                        

Held to Maturity:

          

Mortgage-backed securities

   $ 10      $ 3,897      $ 12,875      $ 73,412      $ 90,194   

U.S. government and agency obligations

     —          3,000        —          —          3,000   

Municipal obligations

     —          1,352        —          —          1,352   
                                        

Total

   $ 10      $ 8,249      $ 12,875      $ 73,412      $ 94,546   
                                        

Weighted Average Yield

     7.03     3.86     4.98     4.97     4.88
                                        

Total Mortgage-Backed and Investment Securities:

          

Mortgage-backed securities

   $ 10      $ 11,167      $ 18,214      $ 87,882      $ 117,273   

U.S. government and agency obligations

     —          38,445        —          —          38,445   

Municipal obligations

     —          1,352        —          —          1,352   
                                        

Total

   $ 10      $ 50,964      $ 18,214      $ 87,882      $ 157,070   
                                        

Weighted Average Yield

     7.03     2.75     5.04     4.99     4.27
                                        

 

17


Table of Contents
Index to Financial Statements

The following table sets forth the composition of our mortgage-backed securities portfolio at each of the dates indicated.

 

     December 31,
     2009    2008    2007
     (In Thousands)

Fixed-rate:

        

Available for sale

   $ 27,079    $ 54,159    $ 32,168

Held to maturity

     74,446      100,555      66,139
                    

Total fixed-rate

     101,525      154,714      98,307
                    

Adjustable-rate:

        

Available for sale

     —        —        —  

Held to maturity

     15,748      16,767      8,554
                    

Total adjustable-rate

     15,748      16,767      8,554
                    

Total mortgage-backed securities

   $ 117,273    $ 171,481    $ 106,861
                    

Information regarding the contractual maturities and weighted average yield of our mortgage-backed securities portfolio at December 31, 2009 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.

 

     Amounts at December 31, 2009 Which Mature in  
     One Year
or Less
   Weighted
Average
Yield
    More
Than One
Year to
Five
Years
   Weighted
Average
Yield
    More
Than Five
Years to
Ten
Years
   Weighted
Average
Yield
    More
than 10
Years
   Weighted
Average
Yield
 
     (Dollars in Thousands)  

Fixed-rate:

                    

Available for sale

   $ —      0.00   $ 7,270    4.59   $ 5,339    5.18   $ 14,470    5.09

Held to maturity

     10    7.03     3,897    4.92     12,651    5.01     57,888    5.20
                                    

Total fixed-rate

     10    7.03     11,167    4.71     17,990    5.06     72,358    5.18
                                    

Adjustable-rate:

                    

Available for sale

     —          —          —      —          —     

Held to maturity

     —          —          224    3.21     15,524    4.14
                                    

Total adjustable-rate

     —          —          224    3.21     15,524    4.14
                                    

Total

   $ 10    7.03   $ 11,167    4.71   $ 18,214    5.04   $ 87,882    4.99
                                    

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, 2009, 28.1% 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 at December 31, 2009 were $135.6 million, an increase of $22.3 million, from December 31, 2008.

 

18


Table of Contents
Index to Financial Statements

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 in excess of $100,000, known as “jumbo CDs,” or use brokers to obtain deposits. At December 31, 2009, our jumbo CDs amounted to $43.0 million, of which $31.0 million are scheduled to mature within twelve months. During 2009, jumbo CDs increased by $13.7 million which we attribute to the FDIC temporarily raising their basic coverage limit to $250,000 through December 31, 2013.

The following table shows the distribution of, and certain other information relating to, our deposits by type of deposit, as of the dates indicated.

 

    December 31,  
    2009     2008     2007  
    Amount    %     Amount    %     Amount   %  
    (Dollars in Thousands)  

Certificate accounts:

             

Less than 1.00%

  $ 1,111    0.6     —      —         

1.00% – 1.99%

    55,776    29.6      $ 2,720    1.7   $ 2,061   1.4

2.00% – 2.99%

    32,870    17.4        38,311    23.9        746   0.5   

3.00% – 3.99%

    28,363    15.0        42,934    26.7        16,261   11.3   

4.00% – 4.99%

    17,273    9.2        29,014    18.1        64,834   45.1   

5.00% – 5.99%

    222    0.1        386    0.2        9,639   6.7   
                                     

Total certificate accounts

    135,615    71.9        113,365    70.6        93,541   65.0   
                                     

Savings accounts

    18,328    9.7        18,017    11.2        20,052   14.0   

Checking:

             

Interest bearing

    19,789    10.5        19,755    12.3        21,487   15.0   

Non-interest bearing

    7,893    4.2        4,219    2.6        3,099   2.2   

Money market

    6,997    3.7        5,233    3.3        5,450   3.8   
                                     

Total savings and transaction accounts

    53,007    28.1        47,224    29.4        50,088   35.0   
                                     

Total deposits

  $ 188,622    100.00   $ 160,589    100.00   $ 143,629   100.00
                                     

 

19


Table of Contents
Index to Financial Statements

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.

 

    Year Ended December 31,  
    2009     2008     2007  
    Average
Balance
  Interest
Expense
  Average
Rate
Paid
    Average
Balance
  Interest
Expense
  Average
Rate
Paid
    Average
Balance
  Interest
Expense
  Average
Rate
Paid
 
    (Dollars in Thousands)  

Passbook Savings Account

  $ 18,513   $ 93   0.50   $ 18,373   $ 92   0.50   $ 24,349   $ 123   0.51

Checking

    19,417     53   0.27        20,413     56   0.27        20,799     57   0.27   

Money market

    5,512     31   0.56        5,249     30   0.57        5,830     33   0.57   

Certificates of deposit

    125,862     3,537   2.81        100,478     3,751   3.73        95,611     3,953   4.13   
                                         

Total interest-bearing Deposits

  $ 169,304   $ 3,714   2.19   $ 144,513   $ 3,929   2.72   $ 146,589   $ 4,166   2.84
                                                     

The following table shows our savings flows during the periods indicated.

 

     Year Ended December 31,  
     2009    2008    2007  
     (In Thousands)  

Beginning balance

   $ 160,589    $ 143,629    $ 150,335   
                      

Net increase (decrease) before interest credited

     25,092      13,934      (9,935

Interest credited

     2,941      3,026      3,229   
                      

Net increase (decrease) in deposits

     28,033      16,960      (6,706
                      

Ending balance

   $ 188,622    $ 160,589    $ 143,629   
                      

The following table presents, by various interest rate categories and maturities, the amount of certificates of deposit at December 31, 2009.

 

     Balance at December 31, 2009
Maturing in the 12 Months Ending December 31,

Certificates of Deposit

   2010    2011    2012    Thereafter    Total
     (In Thousands)

Less than 1.00%

   $ 1,111    $ —      $ —      $ —      $ 1,111

1.00% – 1.99%

     55,040      736      —        —        55,776

2.00% – 2.99%

     22,982      6,915      2,954      19      32,870

3.00% – 3.99%

     3,894      6,016      267      18,186      28,363

4.00% – 4.99%

     5,829      3,631      7,297      516      17,273

5.00% – 5.99%

     214      8      —        —        222
                                  

Total certificate accounts

   $ 89,070    $ 17,306    $ 10,518    $ 18,721    $ 135,615
                                  

 

20


Table of Contents
Index to Financial Statements

The following table shows the maturities of our certificates of deposit of $100,000 or more at December 31, 2009 by time remaining to maturity.

 

Quarter Ending:

   Amount    Weighted
Average Rate
 
     (Dollars in Thousands)  

March 31, 2010

   $ 23,771    1.69

June 30, 2010

     4,905    1.80   

September 30, 2010

     4,185    1.95   

December 31, 2010

     2,320    2.27   

After December 31, 2010

     14,728    3.54   
             

Total certificates of deposit with balances of $100,000 or more

   $ 49,909    2.30
             

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, 2009, we had $37.8 million in outstanding FHLB advances and $151.1 million of additional FHLB advances available. At such date, $2.6 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, 2009, 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, 2009, we had no borrowings from the Federal Reserve Bank.

The following table shows certain information regarding our borrowings at or for the dates indicated:

 

     At or For the Year Ended December 31,  
          2009               2008               2007       
     (Dollars in Thousands)  

FHLB advances and other borrowings:

      

Average balance outstanding

   $ 65,061      $ 51,790      $ 31,218   

Maximum amount outstanding at any month-end during the period

     70,049        77,171        35,443   

Balance outstanding at end of period

     63,810        76,660        34,416   

Average interest rate during the period

     3.94     3.93     4.45

Weighted average interest rate at end of period

     3.85     3.40     4.55

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, 2009, we had 64 full-time and 4 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.

 

21


Table of Contents
Index to Financial Statements

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.

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.

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

 

22


Table of Contents
Index to Financial Statements

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 of 2002. As a public company, Louisiana Bancorp is subject to the Sarbanes-Oxley Act of 2002, which implements a broad range of corporate governance and accounting measures for public companies designed to promote honesty and transparency in corporate America and better protect investors from corporate wrongdoing. The Sarbanes-Oxley Act’s principal legislation and the derivative regulation and rule-making promulgated by the SEC includes:

 

   

the creation of an independent accounting oversight board;

 

   

auditor independence provisions that restrict non-audit services that accountants may provide to their audit clients;

 

   

additional corporate governance and responsibility measures, including the requirement that the chief executive officer and chief financial officer certify financial statements;

 

   

a requirement that companies establish and maintain a system of internal control over financial reporting and that a company’s management provide an annual report regarding its assessment of the effectiveness of such internal control over financial reporting to the company’s independent accountants and that such accountants provide an attestation report with respect to management’s assessment of the effectiveness of the company’s internal control over financial reporting;

 

   

the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer’s securities by directors and senior officers in the twelve month period following initial publication of any financial statements that later require restatement;

 

   

an increase in the oversight of, and enhancement of certain requirements relating to audit committees of public companies and how they interact with the company’s independent auditors;

 

   

the requirement that audit committee members must be independent and are absolutely barred from accepting consulting, advisory or other compensatory fees from the issuer;

 

   

the requirement that companies disclose whether at least one member of the committee is a “financial expert” (as such term is defined by the SEC) and if not, why not;

 

   

expanded disclosure requirements for corporate insiders, including accelerated reporting of stock transactions by insiders and a prohibition on insider trading during pension blackout periods;

 

23


Table of Contents
Index to Financial Statements
   

a prohibition on personal loans to directors and officers, except certain loans made by insured financial institutions;

 

   

disclosure of a code of ethics and the requirement of filing a Form 8-K for a change or waiver of such code;

 

   

mandatory disclosure by analysts of potential conflicts of interest; and

 

   

a range of enhanced penalties for fraud and other violations.

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.

Emergency Economic Stabilization Act of 2008. The U.S. Congress adopted, and on October 3, 2008, President George W. Bush signed, the Emergency Economic Stabilization Act of 2008 (“EESA”) which authorizes the United States Department of the Treasury, to purchase from financial institutions and their holding companies up to $700 billion in mortgage loans, mortgage-related securities and certain other financial instruments, including debt and equity securities issued by financial institutions and their holding companies in a troubled asset relief program. Under the capital purchase program, the Treasury Department will purchase debt or equity securities from participating institutions. We have elected not to participate in the capital purchase program.

In addition, the ESSA provided for a temporary increase in the Federal Deposit Insurance Corporation’s coverage limits on most accounts from $100,000 to $250,000, until the end of 2009. On May 20, 2009, this temporary increase was extended by President Barack Obama through December 31, 2013. 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 through the June 30, 2010, and to guarantee certain unsecured debt of financial institutions and their holding companies through December 31, 2012. The Transaction Account Guarantee Program (“TAGP”) provides unlimited coverage for non-interest bearing transaction deposit accounts, including accounts swept from a non-interest bearing transaction account into a non-interest bearing savings deposit account, a 15 basis point annual rate surcharge will be applied to deposit amounts in excess of $250,000. The Bank has opted to participate in the TAGP. The Debt Guarantee Program (“DGP”) temporarily guarantees certain newly issued unsecured debt through June 30, 2012. The Bank does not participate in the DGP.

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.

 

24


Table of Contents
Index to Financial Statements

The FDIC has implemented a risk-based premium system that provides for quarterly assessments based on an insured institution’s ranking in one of four risk categories based upon supervisory and capital evaluations. The assessment rate for an individual institution is determined according to a formula based on a weighted of the institution’s individual CAMELS component rating plus either five financial ratios or, in the case of an institution with assets of $10.0 billion of more, the average ratings of its long-term debt. In February 2009, the FDIC adopted a final regulation that provided for the replenishment of the Deposit Insurance Fund over a period of seven years. The restoration plan changed the FDIC’s base assessment rates and the risk based assessment system. Well capitalized institutions (generally those with CAMELS composite ratings of 1 or 2) are grouped in Risk Category I and assessed for deposit insurance at an annual rate of between 12 and 14 basis points. Institutions in Risk Categories II, III, and IV are assessed at annual rates of 17, 35 and 50 basis points, respectively. Changes to the risk based assessment system include higher premiums for institutions that rely significantly on excessive amounts of brokered deposits, including CDARS, higher premiums for excessive use of secured liabilities, including Federal Home Loan Bank advances, lower premiums for smaller institutions with very high capital levels, and adding financial ratios and debt issuer ratings to the premium calculations for banks with over $10 billion in assets, while providing a reduction for their unsecured debt.

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 2009 was 0.00265% 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 May 22, 2009, the FDIC adopted a final rule imposing a five basis point special assessment on each insured depository’s total assets less Tier 1 capital, as of June 30, 2009. The FDIC collected this special assessment on September 30, 2009. Based on our assets and Tier 1 capital at June 30, 2009, the impact of the special assessment was $126,000, which was expensed in the third quarter of fiscal 2009.

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. The new regulations base the assessment rate for the fourth quarter of 2009 and for 2010 on each institution’s total base assessment rate for the third quarter of 2009, modified to assume that the assessment rate in effect on September 30, 2009 had been in effect for the entire third quarter, and the assessment rate for 2011 and 2012 on the modified third quarter assessment base, adjusted quarterly for an estimated 5% annual growth rate in the assessment base through the end 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 three 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.

 

25


Table of Contents
Index to Financial Statements

Current Office of Thrift Supervision capital standards require savings institutions to satisfy the following capital requirements:

 

   

tangible capital requirement—“tangible” capital equal to at least 1.5% of adjusted total assets;

 

   

leverage capital requirement—“core” capital equal to at least 3.0% of adjusted total assets; and

 

   

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, 2009, Bank of New Orleans exceeded all of its regulatory capital requirements, with tangible, core and risk-based capital ratios of 18.2%, 18.2% and 41.5%, 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.

 

Capital Category

  

Total Risk-Based
Capital

  

Tier 1 Risk-Based
Capital

  

Tier 1 Leverage
Capital

Well capitalized

   10% or more    6% or more    5% or more

Adequately capitalized

   8% or more    4% or more    4% or more

Undercapitalized

   Less than 8%    Less than 4%    Less than 4%

Significantly undercapitalized

   Less than 6%    Less than 3%    Less than 3%

 

26


Table of Contents
Index to Financial Statements

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, 2009, 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, 2009.

 

     Actual     Required for Capital
Adequacy Purposes
    To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
    Excess Over Well-
Capitalized
Provisions
 
     Amount    Ratio     Amount    Ratio     Amount    Ratio     Amount    Ratio  
     (Dollars in Thousands)  

Total risk-based capital

   $ 59,589    41.47   $ 11,495    8.00   $ 14,369    10.00   $ 45,220    31.47

Tier 1 risk-based capital

     58,261    40.55        5,748    4.00        8,622    6.00        49,639    34.55   

Tier 1 leverage Capital

     58,322    18.20        9,615    3.00        16,026    5.00        42,296    13.20   

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.

 

27


Table of Contents
Index to Financial Statements

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:

 

   

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.

At December 31, 2009, 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 place 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. At December 31, 2009, Bank of New Orleans was in compliance with the above restrictions.

 

28


Table of Contents
Index to Financial Statements

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, 2009, Bank of New Orleans had $37.8 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, 2009, 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, 2009, 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, 2005 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.

 

29


Table of Contents
Index to Financial Statements

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, 2009, the total federal pre-1988 reserve was approximately $1.4 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, 2009, 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.

 

30


Table of Contents
Index to Financial Statements

Various items may also be subtracted in calculating a company’s capitalized earnings. For the fiscal year 2009, the Company’s Louisiana Shares Tax expense was $211,000.

 

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 originate loans for the construction of residential and commercial use properties, although at December 31, 2009 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, 2009, our 10 largest commercial real estate, multi-family residential and land loans had an aggregate outstanding balance of $17.8 million, or 30.5% of total commercial real estate, multi-family residential and land loans and 11.1% 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. See Item 1, “Business—Asset Quality—Delinquent Loans”, for additional information.

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

 

31


Table of Contents
Index to Financial Statements

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 2.62% for the year ended December 31, 2009 compared to 2.50% for the year ended December 31, 2008. During 2009, 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 are subject to extensive regulation which could adversely affect our business and operations.

We are subject to extensive federal governmental supervision and regulation, which are intended primarily for the protection of depositors. In addition, we are subject to changes in federal and state laws, as well as changes in regulations, governmental policies and accounting principles. The effects of any such potential changes cannot be predicted but could adversely affect the business and our operations in the future.

 

32


Table of Contents
Index to Financial Statements

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.

Any future Federal Deposit Insurance Corporation insurance premiums or special assessments will adversely impact our earnings.

On May 22, 2009, the Federal Deposit Insurance Corporation adopted a final rule levying a five basis point special assessment on each insured depository institution’s assets minus Tier 1 capital as of June 30, 2009. We recorded an expense of $126,000 during the year ended December 31, 2009, to reflect the special assessment. Any further special assessments that the Federal Deposit Insurance Corporation levies will be recorded as an expense during the appropriate period. In addition, the Federal Deposit Insurance Corporation increased the general assessment rate and, therefore, our Federal Deposit Insurance Corporation general insurance premium expense will increase compared to prior periods.

On November 12, 2009, the FDIC adopted regulations that require insured depository institutions to prepay on December 31, 2009 their estimated assessments for the fourth calendar quarter of 2009, and for all of 2010, 2011 and 2012. The new regulations base the assessment rate for the fourth quarter of 2009 and for 2010 on each institution’s total base assessment rate for the third quarter of 2009, modified to assume that the assessment rate in effect on September 30, 2009 had been in effect for the entire third quarter, and the assessment rate for 2011 and 2012 on the modified third quarter assessment base, adjusted quarterly for an estimated 5% annual growth rate in the assessment base through the end 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 three years.

 

Item 1B. Unresolved Staff Comments.

Not applicable.

 

33


Table of Contents
Index to Financial Statements
Item 2. Properties.

As of December 31, 2009, 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, 2009. We maintain automated teller machines (“ATMs”) at each of our branch offices.

 

Description/Address

   Leased/Owned     Date of
Lease
Expiration
   Net Book
Value of
Property
   Amount of
Deposits
 
                (Dollars In Thousands)  

Main Office:

       

1600 Veterans Boulevard

          

Metairie, Louisiana 70005

   Owned      n/a    $ 1,276    $ 110,979 (1) 

Branch Offices:

          

4401 Transcontinental Drive

          

Metairie, Louisiana 70006

   Owned (2)    3/31/2016      201      39,815   

5435 Magazine Street

          

New Orleans, Louisiana 70115

   Owned      n/a      226      23,411   

1522 Robert E. Lee Boulevard

          

New Orleans, Louisiana 70122

   Leased      6/30/2009      —        14,417 (3) 

1510 Robert E. Lee Boulevard

          

New Orleans, Louisiana

   Owned (4)    n/a      94      —     
                    

Total

        $ 1,797    $ 188,622   
                    

 

(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 temporarily 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. 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. (Reserved)

 

34


Table of Contents
Index to Financial Statements

PART II

 

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, 2009, there were 4,764,322 shares of common stock outstanding, held by approximately 280 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.

 

For The Quarter Ended

   High    Low    Cash Dividends
Declared

December 31, 2009

   $ 14.95    14.00    $ —  

September 30, 2009

     14.25    13.25      —  

June 30, 2009

     14.25    12.75      —  

March 31, 2009

     12.93    12.05      —  

December 31, 2008

     12.88    11.61      —  

September 30, 2008

     13.06    12.15      —  

June 30, 2008

     13.15    11.45      —  

March 31, 2008

     11.73    9.98      —  

The Company did not sell any of its equity securities during 2009 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, 2009 are set forth in the table below:

 

Period

   Total
Number of
Shares

Purchased
   Average
Price Paid
per Share
   Total Number of
Shares
Purchased as
Part of Publicly
Announced Plans
or Programs
   Maximum
Number of Shares
that May Yet Be
Purchased Under
the Plans or
Programs (1)(2)(3)

October 1, 2009 – October 31, 2009

   23,478    $ 14.23    23,478    8,147

November 1, 2009 – November 30, 2009

   228,621      14.19    228,621    37,934

December 1, 2009 – December 31, 2009

   183,369      14.41    183,369    100,052
                   

Total

   435,468    $ 14.28    435,468   
                   

 

Notes to table above:

 

(1) On March 17, 2009, the Company announced a stock repurchase program to acquire 5%, or 272,008 shares of its common stock over a six month period. On September 16, 2009, the Company announced it would extend the duration of repurchase program by three months to December 17, 2009. The repurchase program was completed on November 9, 2009.
(2) On October 29, 2009, the Company announced a fifth stock repurchase program to acquire 258,408 shares, or 5% of its outstanding common stock over a six-month period, commencing with the conclusion of the Company’s previously announced fourth repurchase program.
(3) On December 8, 2009, the Company announced a sixth stock repurchase program to acquire 245,487 shares, or 5% of its outstanding common stock over a six-month period.

 

35


Table of Contents
Index to Financial Statements
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.

 

    At December 31,  
    2009     2008     2007     2006     2005  
    (Dollars in thousands)  

Selected Financial and Other Data:

         

Total assets

  $ 329,779      $ 327,449      $ 270,944      $ 219,726      $ 240,904   

Cash and cash equivalents

    4,735        4,974        11,648        3,825        17,967   

Investment securities:

         

Available-for-sale

    35,445        25,932        40,468        21,676        19,753   

Held-to-maturity

    4,352        6,107        6,950        3,744        3,946   

Mortgage-backed securities:

         

Available-for-sale

    27,079        54,159        32,168        34,015        43,568   

Held-to-maturity

    90,194        117,322        74,693        57,545        55,243   

Loans receivable, net

    158,446        111,236        96,902        89,424        92,449   

Deposits

    188,622        160,589        143,629        150,335        157,245   

Borrowings

    63,810        76,660        34,416        35,242        50,313   

Shareholders’ equity

    73,348        85,727        89,870        29,198        26,912   

Banking offices(1)

    4        5        4        4        4   
    For the Year Ended December 31,  
    2009     2008     2007     2006     2005  
    (Dollars in thousands, except per share data)  

Selected Operating Data:

         

Total interest income

  $ 16,832      $ 15,837      $ 13,423      $ 12,249      $ 11,215   

Total interest expense

    6,277        5,963        5,556        5,334        4,915   
                                       

Net interest income

    10,555        9,874        7,867        6,915        6,300   

Provision (recovery) for loan losses

    337        (43     (268     (458     2,250   
                                       

Net interest income after provision (recovery) for loan losses

    10,218        9,917        8,135        7,373        4,050   

Total non-interest income

    836        526        501        513        611   

Total non-interest expense

    7,090        6,402        4,867        4,887        4,423   
                                       

Income before income taxes

    3,964        4,041        3,769        2,999        238   

Income taxes

    1,430        1,297        1,128        976        36   
                                       

Net income

  $ 2,534      $ 2,744      $ 2,641      $ 2,023      $ 202   
                                       

Earnings per share (basic)(2)

  $ 0.54      $ 0.49      $ 0.94        N/A        N/A   

Earnings per share (diluted)(2)

  $ 0.54      $ 0.49      $ 0.94        N/A        N/A   

Selected Operating Ratios(3):

         

Average yield on interest-earning assets

    5.30     5.53     5.69     5.44     4.97

Average rate on interest-bearing liabilities

    2.68        3.04        3.12        2.74        2.46   

Average interest rate spread(4)

    2.62        2.50        2.56        2.70        2.51   

Net interest margin(4)

    3.32        3.43        3.33        3.07        2.79   

Average interest-earning assets to average interest-bearing liabilities

    135.63        145.81        132.71        115.83        112.84   

Net interest income after provision for loan losses to non-interest expense

    144.12        154.90        167.84        153.76        91.57   

Total non-interest expense to average assets

    2.18        2.19        2.00        2.06        1.90   

Efficiency ratio(5)

    62.24        61.56        58.06        65.36        64.00   

Return on average assets

    0.78        0.94        1.09        0.87        0.09   

Return on average equity

    3.16        3.09        4.65        7.21        0.73   

Average equity to average assets

    24.71     30.27     23.40     12.04     11.82

(Footnotes on next page)

 

36


Table of Contents
Index to Financial Statements
     At or For the Year Ended December 31,  
     2009     2008     2007     2006     2005  

Asset Quality Ratios(6):

          

Non-performing loans as a percent of total loans receivable(7)

   0.63   0.47   0.87   0.98   4.85

Non-performing assets as a percent of total assets(7)

   0.78      0.16      0.31      0.40      1.86   

Non-performing assets and troubled debt restructurings as a percent of total assets(7)

   0.78      0.16      0.31      0.40      1.86   

Allowance for loan losses as a percent of non-performing loans

   165.60      375.38      237.41      261.94      61.50   

Allowance for loan losses as a percent of total loans

   1.04      1.72      2.01      2.49      2.89   

Net charge-offs to average loans receivable

   0.47      —        —        —        —     

Capital Ratios(6):

          

Tier 1 leverage ratio

   18.20      18.35      23.52      13.51      11.47   

Tier 1 risk-based capital ratio

   40.55      47.99      57.72      32.80      28.86   

Total risk-based capital ratio

   41.47   49.24   58.97   34.06   30.12

 

(1) Our branch on Robert E. Lee Boulevard in New Orleans has been temporarily closed since Hurricane Katrina hit on August 29, 2005. At December 31, 2008, total banking offices includes 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.

 

37


Table of Contents
Index to Financial Statements
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. During 2009, our loan production office located in Hammond, Louisiana was closed. 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, 2009, we had total assets of $329.8 million, including $158.4 million in net loans and $157.1 million of mortgage-backed and other investment securities, total deposits of $188.6 million and shareholders’ equity of $73.3 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 2009, 2008 and 2007, our originations of single-family residential mortgage loans totaled $59.1 million, $13.5 million, and $9.0 million, respectively. The growth in our originations during 2009 was due primarily 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.

Approximately six years ago, we determined to revise our lending strategy in order to increase our originations of multi-family residential, commercial real estate and land loans. In the aggregate, our originations of these types of loans were $17.5 million, $16.0 million, and $15.2 million, respectively, for the periods ended December 31, 2009, 2008 and 2007. 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, 2009, we had seven loans with an aggregate principal balance of $379,000 that were 30 to 89 days delinquent, compared to five loans with an aggregate principal balance of $2.2 million at December 31, 2008. During 2009, the three largest delinquent loans at December 31, 2008, in the amount of $2.2 million, were transferred to other real estate owned. We anticipate that the current national economic crisis 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 $1.0 million, $520,000 and $842,000, respectively, at December 31, 2009, 2008 and 2007. Total non-performing assets were $2.6 million, $520,000 and $842,000, respectively, at such dates. The increase in non-performing assets between December 31, 2009 and December 31, 2008 was due solely to the additions to other real estate owned referenced earlier in this paragraph.

Our total mortgage-backed securities and investment securities portfolio was $157.1 million or 47.6% of our total assets at December 31, 2009. 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.

At December 31, 2009, our total deposits were $188.6 million, an increase of $28.0 million from December 31, 2008, and $45.0 million from December 31, 2007. We attribute these increases to our advertising efforts which have emphasized the strength of our institution, as measured in terms of total capital, and the FDIC’s temporary increase in their maximum deposit insurance coverage limits to $250,000 through December 2013. The Bank does participate in the FDIC’s Transaction Account Guarantee Program which provides

 

38


Table of Contents
Index to Financial Statements

unlimited coverage to non-interest bearing demand deposits through June 30, 2010. We do not believe the expiration of this program will have a material negative effect on our total deposits. We have elected to not participate in the FDIC’s Debt Guarantee Program, which temporarily guarantees certain newly issued unsecured debt through June 30, 2012, due to the liquidity available to us through the deposit market.

Our total equity capital at December 31, 2009, was $73.3 million. Our average equity to average assets ratio was 24.7% for the period ended December 31, 2009. The Bank’s capital ratios exceed all regulatory guidelines, and the Bank was deemed to be “well-capitalized” as of December 31, 2009. Due to the level of capital supporting our balance sheet, the Bank elected to not participate in the US Treasury’s Troubled Asset Relief Program.

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, 2009, 2008 and 2007, the cost of our Employee Stock Ownership Plan was $343,000, $307,000, and $136,000, respectively. The ESOP did not exist in periods prior to July 2007. Compensation expense related to our stock option plan and recognition and retention awards were $751,000 and $626,000, during 2009 and 2008. 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:

 

   

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.

 

   

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 contiguous markets to the west of Jefferson Parish and on the north shore of Lake Pontchartrain.

 

   

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. While the ratio of our non-performing assets to total assets increased during 2009, it was only 0.78% at December 31, 2009.

 

39


Table of Contents
Index to Financial Statements
   

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 collectibility 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 collectibility 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.

 

40


Table of Contents
Index to Financial Statements

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:

 

   

we have increased our originations of shorter term loans particularly multi-family residential, commercial real estate and land loans;

 

   

we have attempted to match fund a portion of our loan portfolio with borrowings having similar expected lives;

 

   

on occasion, we have sold long-term (30-year) fixed-rate mortgage loans which had been classified as held-for-sale;

 

   

we have attempted, where possible, to extend the maturities of our deposits and borrowings; and

 

   

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 1.05% at December 31, 2009.

 

41


Table of Contents
Index to Financial Statements

The following table sets forth the amounts of the Bank’s interest-earning assets and interest-bearing liabilities outstanding at December 31, 2009, 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, 2009, 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.

 

    3 Months
or Less
    More than
3 Months
to 6 Months
    More than
6 Months
to 1 Year
    More than
1 Year
to 3 Years
    More than
3 Years
to 5 Years
    More than
5 Years
    Total
Amount
    (Dollars in Thousands)

Interest-earning assets(1):

             

Loans receivable(2)

  $ 20,951      $ 7,920      $ 15,619      $ 44,952      $ 34,315      $ 36,552      $ 160,309

Investment securities

    2,846        10,496        7,725        13,245        1,909        —          36,221

Mortgage-backed securities

    8,137        10,087        14,676        40,438        19,685        19,118        112,141

Other interest-earning assets

    4,512        198        99        198        —          —          5,007
                                                     

Total interest-earning assets

    36,446        28,701        38,119        98,833        55,909        55,670        313,678
                                                     

Interest-bearing liabilities:

             

Passbook accounts

  $ —        $ —        $ —        $ —        $ —        $ 18,328      $ 18,328

Checking accounts

    —          —          —          —          —          19,789        19,789

Money market accounts

    6,997        —          —          —          —          —          6,997

Certificate accounts

    48,113        21,616        19,341        27,822        18,723        —          135,615

Borrowings

    2,384        386        1,049        32,100        20,546        12,135        68,600
                                                     

Total interest-bearing Liabilities

    57,494        22,002        20,390        59,922        39,269        50,252        249,329
                                                     

Interest-earning assets less interest-bearing liabilities

  $ (21,048   $ 6,699      $ 17,729      $ 38,911      $ 16,640      $ 5,418      $ 64,349
                                                     

Cumulative interest-rate sensitivity gap(3)

  $ (21,048   $ (14,349   $ 3,380      $ 42,291      $ 58,931      $ 64,349     

Cumulative interest-rate gap as a percentage of total assets at December 31, 2009

    (6.55 )%      (4.47 )%      1.05     13.17     18,35     20.03  

Cumulative interest-earning assets as a percentage of cumulative interest-bearing liabilities at December 31, 2009

    63.39     81.95     103.38     126.46     129.60     125.81  

 

(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.

 

42


Table of Contents
Index to Financial Statements

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, 2009, 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.

 

Change in Interest Rates In
Basis Points (Rate Shock)

   Net Portfolio Value     NPV as % of Portfolio
Value of Assets
 
   Amount    $ Change      % Change     NPV Ratio     Change  
     (Dollars in Thousands)  

300bp

   $ 52,204    $ (21,612    (29 )%    16.78   (5.00 )% 

200

     60,525      (13,291    (18   18.86      (2.92

100

     67,843      (5,973    (8   20.53      (1.26

Static

     73,816      —           21.78      —     

(100)

     77,707      3,891       5      22.52      0.74   

Based on the guidelines found in OTS Thrift Bulletin 13a (“TB-13a”), the interest rate risk sensitivity measure for the Bank was 292 basis points at December 31, 2009. This sensitivity measure is considered in conjunction with the Bank’s post-shock capital ratio of 18.86%, 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 our NII model as of December 31, 2009.

 

Change in Interest Rates in
Basis Points (Rate Shock)

   Net Interest Income    $ Change      % Change  
     (Dollars in Thousands)  

200bp

   $ 9,512    $ (52    (0.54 )% 

Static

     9,564      

(100)

     9,406      (158    (1.65

The above table indicates that as of December 31, 2009, in the event of an immediate and sustained 200 basis point increase in interest rates, our net interest income for the 12 months ending December 31, 2010 would be expected to decrease by $52,000 or 0.54% to $9.5 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

 

43


Table of Contents
Index to Financial Statements

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.

 

    Year Ended December 31,  
    2009     2008     2007  
    Average
Balance
  Interest   Average
Yield/
Rate(1)
    Average
Balance
  Interest   Average
Yield/
Rate
    Average
Balance
  Interest   Average
Yield/
Rate
 
    (Dollars in Thousands)  

Interest-earning assets:

                 

Loans receivable(1)

  $ 133,498   $ 8,400   6.29   $ 103,512   $ 7,010   6.77   $ 93,098   $ 6,421   6.90

Mortgage-backed securities

    146,962     7,637   5.20        129,669     6,591   5.08        91,478     4,376   4.78   

Investment securities

    26,384     723   2.74        42,436     1,924   4.53        33,745     1,689   5.01   

Other interest-earning assets

    11,033     72   0.65        10,619     312   2.94        17,647     937   5.31   
                                         

Total interest-earning assets

    317,877     16,832   5.30     286,236     15,837   5.53     235,968     13,423   5.69
                                                     

Non-interest-earning assets

    6,636         6,715         6,843    
                             

Total assets

  $ 324,513       $ 292,951       $ 242,811    
                             

Interest-bearing liabilities:

                 

Passbook, checking and money market accounts

    43,442     177   0.41        44,035     178   0.40        50,978     213   0.42   

Certificate accounts

    125,862     3,537   2.81        100,478     3,751   3.73        95,611     3,953   4.13   
                                         

Total deposits

    169,304     3,714   2.19        144,513     3,929   2.72        146,589     4,166   2.84   

Borrowings

    65,061     2,563   3.94        51,790     2,034   3.93        31,218     1,390   4.45   
                                         

Total interest-bearing liabilities

    234,365     6,277   2.68     196,303     5,963   3.04     177,807     5,556   3.12
                                                     

Non-interest-bearing liabilities

    9,954         7,972         8,178    
                             

Total liabilities

    244,319         204,275         185,985    

Stockholders’ Equity

    80,194         88,676         56,826    
                             

Total liabilities and Stockholders’ Equity

  $ 324,513       $ 292,951       $ 242,811    
                             

Net interest-earning assets

  $ 83,512       $ 89,933       $ 58,161    
                             

Net interest income; average interest rate spread

    $ 10,555   2.62     $ 9,874   2.50     $ 7,867   2.56
                                         

Net interest margin(2)

      3.32       3.45       3.33
                             

Average interest-earning assets to average interest-bearing liabilities

      135.63       145.81       132.71
                             

 

(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.

 

44


Table of Contents
Index to Financial Statements

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.

 

     2009 vs. 2008     2008 vs. 2007  
     Increase (Decrease) Due to     Increase (Decrease) Due to  
     Rate     Volume     Total
Increase
(Decrease)
    Rate     Volume     Total
Increase
(Decrease)
 
     (In Thousands)     (In Thousands)  

Interest income:

            

Loans receivable

   $ (641   $ 2,031      $ 1,390      $ (129   $ 718      $ 589   

Mortgage-backed securities

     167        879        1,046        388        1,827        2,215   

Investment securities

     (473     (728     (1,201     (200     435        235   

Other interest-earning assets

     (252     12        (240     (252     (373     (625
                                                

Total interest income

     (1,199     2,194        995        (193     2,607        2,414   
                                                

Interest expense:

          

Passbook, NOW and money market accounts

     1        (2     (1     (6     (29     (35

Certificate accounts

     (1,162     948        (214     (403     201        (202
                                                

Total deposits

     (1,161     946        (215     (409     172        (237

Borrowings

     8        521        529        (272     916        644   
                                                

Total interest expense

     (1,153     1,467        314        (681     1,088        407   
                                                

Increase (decrease) in net interest income

   $ (46   $ 727      $ 681      $ 488      $ 1,519      $ 2,007   
                                                

Comparison of Financial Condition at December 31, 2009 and December 31, 2008

Total assets were $329.8 million at December 31, 2009, an increase of $2.3 million from December 31, 2008. Cash and cash equivalents were $4.7 million and $5.0 million, respectively at December 31, 2009 and December 31, 2008. In the aggregate, our available-for-sale and held-to-maturity investment securities were $39.8 million at December 31, 2009, an increase of $7.8 million from December 31, 2008. During the year ended December 31, 2009, our available-for-sale and held-to-maturity mortgage-backed securities decreased by an aggregate of $54.2 million, to $117.3 million. This decrease was due to increased prepayments on our mortgage-backed securities portfolio, and the sale during the year of $6.6 million of mortgage-backed securities secured by 30-year mortgage loans. Total loans receivable were $158.4 million at December 31, 2009, an increase of $47.2 million, or 42.4%, from December 31, 2008. The growth in our loans receivable was due primarily to a $34.2 million increase in our portfolio of first mortgage loans secured by one-to-four family residences, a $9.7 million increase in loans secured by multifamily and non-residential real estate, and a $4.1 million increase in our home equity loans and lines of credit.

Total deposits were $188.6 million at December 31, 2009, an increase of $28.0 million from December 31, 2008. During 2009, non-interest bearing checking accounts increased by $3.7 million, interest bearing checking and money market accounts increased by an aggregate $1.8 million, and our certificates of deposit increased by $22.3 million. Total borrowings were $63.8 million at December 31, 2009, a decrease of $12.9 million from December 31, 2008. This decrease in total borrowings was primarily due to the repayment of $15.5 million in short-term FHLB advances in 2009 that were used to fund the purchase of mortgage-backed securities during the fourth quarter of 2008.

 

45


Table of Contents
Index to Financial Statements

Total shareholders’ equity was $73.3 million at December 31, 2009, a decrease of $12.4 million from December 31, 2008. This decrease was primarily due to the Company’s acquisition of shares pursuant to its publicly announced stock repurchase plans. During 2009, the Company repurchased a total of 1,167,170 shares at an aggregate cost of $15.6 million. In addition, 25,382 shares held by the ESOP trust, with a cost basis of $254,000, were released for allocation to Plan participants, and 44,741 shares held by the Company’s Recognition and Retention Plan Trust, with a cost basis of $564,000, became vested and were released to participants. Net income of $2.5 million increased retained earnings to $37.7 million at December 31, 2009. Accumulated other comprehensive income was $920,000 at December 31, 2009, a decrease of $417,000 from December 31, 2008.

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 Bank 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 Bank 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 Bank 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.

 

46


Table of Contents
Index to Financial Statements

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.

Comparison of Operating Results for the Years Ended December 31, 2008 and December 31, 2007

General. For the year ended December 31, 2008, the Company reported net income of $2.7 million, an increase of $103,000 from the year ended December 31, 2007. The increase in net income for the year ended December 31, 2008 compared to the year ended December 31, 2007 was primarily attributable to an increase in net interest income of $2.0 million resulting primarily from higher average balances of interest-earning assets following the Company’s initial public offering in July 2007, and the wholesale leverage strategies implemented during 2008. The impact of the increase in net interest income was partially offset by higher levels of non-interest expense related to our ESOP and our other equity-based compensation plans.

Interest Income. For the year ended December 31, 2008, interest income was $15.8 million, an increase of $2.4 million from the year ended December 31, 2007. During 2008, interest income on loans increased by $589,000 compared to 2007 due to an increase in the average balance of loans receivable of $10.4 million. Interest income on mortgage-backed securities increased by $2.2 million in 2008 compared to 2007 due to an increase in the average balance of mortgage-backed securities of $38.2 million and an increase in average yield of 30 basis points. During 2008, interest income on investment securities increased by $235,000 over 2007 due to an increase in average balance of $8.7 million, despite a decrease in average yield of 48 basis points. Interest on other interest earning assets declined by $625,000 during the year ended December 31, 2008 compared to the year ended December 31, 2007, due to a reduction in the average balance of $7.0 million.

Interest Expense. For the year ended December 31, 2008, total interest expense increased by $407,000 to $6.0 million, compared to $5.6 million for the year ended December 31, 2007. Total average interest-bearing deposits decreased by $2.1 million to $144.5 million for the year ended December 31, 2008 compared to $146.6 million for the year ended December 31, 2007. Interest paid on deposits declined by $237,000 due to the decline in average deposit balance and a reduction in average interest paid of 0.12%. Interest expense on total borrowings was $2.0 million for the year ended December 31, 2008, an increase of $644,000 from the year ended December 31, 2007. The average balance of our total borrowings increased by $20.6 million during 2008, as the Bank increased the leverage in its balance sheet to acquire additional mortgage-backed securities. The average interest rate paid on our borrowings was 3.93% during 2008, a decline of 52 basis points from the prior year.

 

47


Table of Contents
Index to Financial Statements

Provision for Loan Losses. The Bank recorded net recoveries on its allowance for loan losses of $43,000 and $268,000, respectively, for the years ended December 31, 2008 and 2007. The recoveries in both 2008 and 2007 are reversals of provisions for loan losses made in prior years on loans secured by properties damaged by Hurricane Katrina in 2005 that were subsequently paid off by the borrowers in the respective periods during which the recoveries were recorded. These recoveries are net of the loan loss provisions established during the respective periods. Our allowance for loan losses as a percentage of total loans receivable was 1.72% at December 31, 2008, a decline of 29 basis points from December 31, 2007.

Non-interest Income. Non-interest income for the years ended December 31, 2008 and 2007 was $526,000 and $501,000, respectively. Customer service fees were $396,000 for 2008, an increase of $62,000 from the prior year. Included in customer service fees are commissions earned on reverse mortgage loan originations, which increased by $82,000 during 2008. Other non-interest income was $127,000 for 2008, a decrease of $40,000 from 2007.

Non-interest Expense. For the years ended December 31, 2008 and 2007, non-interest expense was $6.4 million and $4.9 million, respectively. Salary and benefit expenses increased by $1.0 million and other non-interest expense increased by $465,000 during the year ending December 31, 2008, over 2007. The increased level of salaries and benefits expense for 2008 compared to 2007 was due to an increase of $256,000 in salaries and wages, a $140,000 increase in benefit plan expenses, and $625,000 in expense from our new equity-based compensation plans. Our equity-based compensation plans were approved by our shareholders in February 2008, and therefore was a new component of non-interest expense in 2008. The increase in other noninterest expense during the year ended December 31, 2008 compared to the year ended December 31, 2007 was due primarily to the Louisiana bank shares tax and the Louisiana corporate franchise tax, which were not applicable prior to our mutual-to-stock conversion and initial public offering. The Louisiana bank shares tax was $240,000 and the Louisiana corporate franchise tax was $90,000 for the year ended December 31, 2008. The remaining increase in other non-interest expense in 2008 compared to 2007 was due to increased public reporting expenditures and higher levels of professional fees due to our status as a publicly traded company for the entire year in 2008.

Income Tax Expense. Income tax expense for the year ended December 31, 2008 amounted to $1.3 million compared to $1.1 million for the year ended December 31, 2007. The increase in income tax expense during the year ended December 31, 2008 compared to the year ended December 31, 2007 was due to the $272,000 increase in pre-tax income between the periods, as well as an adjustment to our deferred tax liability of $110,000 in the fourth quarter of 2007, which lowered our 2007 effective tax rate.

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, 2009, our cash and cash equivalents amounted to $4.7 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, 2009, we had certificates of deposit maturing within the next 12 months amounting to $89.1 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, 2009, the average balance of our outstanding FHLB advances and other borrowings was $65.1 million. At December 31, 2009, we had $37.8 million in outstanding FHLB advances and we had $151.1 million in additional FHLB advances available to us.

 

48


Table of Contents
Index to Financial Statements

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, 2009. 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, 2009.

 

     Total
Amounts
Committed
   Amount of Commitment Expiration—Per Period
        To
One Year
   More Than
One Year to
Three Years
   More than
Three Years to
Five Years
   More Than
Five Years
     (In Thousands)

Letters of credit

   $ —      $ —      $ —      $ —      $ —  

Lines of credit

     8,384      215      602      673      6,894

Undisbursed portion of loans in process

     24      —        —        —        24

Commitments to originate loans

     2,321      2,083      238      —        —  
                                  

Total commitments

   $ 10,729    $ 2,298    $ 840    $ 673    $ 6,918
                                  

Contractual Cash Obligations

The following table summarizes our contractual cash obligations at December 31, 2009.

 

     Total    Payments Due By Period
      To
One Year
   More Than
One Year to
Three Years
   More than
Three Years
to Five Years
   More Than
Five Years
   (In Thousands)

Certificates of deposit

   $ 135,615    $ 89,070    $ 27,824    $ 18,721    $ —  

FHLB advances and other borrowings

     63,810      3,720      21,872      30,278      7,940
                                  

Total long-term debt

     199,425      92,790      49,696      48,999      7,940

Operating lease obligations

     195      32      62      62      39
                                  

Total contractual obligations

   $ 199,620    $ 92,822    $ 49,758    $ 49,061    $ 7,979
                                  

We anticipate that we will continue to have sufficient funds and alternative funding sources to meet our current commitments.

 

49


Table of Contents
Index to Financial Statements

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 FASB replaced The Hierarchy of Generally Accepted Accounting Principles, with the FASB Accounting Standards CodificationTM (The Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the Securities and Exchange Commission under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification was effective for financial statements issued for periods ending after September 15, 2009.

In December 2007, the FASB issued guidance that establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination. The guidance is effective for fiscal years beginning on or after December 15, 2008. There was no impact from adoption of this guidance, as the Company did not have an acquisition during 2009.

On January 1, 2009, the Company adopted new guidance that related to accounting for noncontrolling interests in consolidated financial statements. The new accounting guidance states for entities to provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners separately within the consolidated statement of financial condition within equity, but separate from the parent’s equity and separately on the face of the consolidated statement of operations. Further, the new guidance states that changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary should be accounted for consistently and when a subsidiary is deconsolidated, any retained non-controlling equity investment in the former subsidiary should be initially measured at fair value. The adoption of this guidance had no impact on the Company.

In March 2008, the FASB issued guidance that amended and expanded the disclosure requirements for derivative instruments and hedging activities. The guidance requires qualitative disclosure about objectives and strategies for using derivative and hedging instruments, quantitative disclosures about fair value amounts of the instruments and gains and losses on such instruments, as well as disclosures about credit-risk features in derivative agreements. The guidance was effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of this guidance had no impact on the Company.

In June 2008, the FASB issued guidance which addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, included in the earnings allocation in computing earnings per common share (EPS) under the two-class method. Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS pursuant to the two-class method. This guidance was effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior-period EPS data presented were to be adjusted retrospectively (including interim financial statements, summaries of earnings, and selected financial data) to conform to the provisions of this guidance. Since the Company’s unvested restricted stock awards do not contain nonforfeitable rights to dividends, they are not included under the scope of this pronouncement, and therefore, the adoption of this guidance had no impact on the Company.

 

50


Table of Contents
Index to Financial Statements

In May 2009, FASB issued new guidance relating to subsequent events and established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The new guidance sets forth:

 

   

the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements;

 

   

the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and

 

   

the disclosures that an entity should make about events or transactions that occurred after the balance sheet date.

The Company has adopted the new guidance that was effective for financial statements issued for interim and annual periods ending after June 15, 2009.

In April 2009, the FASB amended existing guidance for determining whether impairment is other-than-temporary for debt securities. The guidance requires an entity to assess whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of these criteria are met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) other-than-temporary impairment (OTTI) related to other factors, which is recognized in other comprehensive income and 2) OTTI related to credit loss, which must be recognized in the income statement. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. Additionally, disclosures about other-than-temporary impairments for debt and equity securities were expanded. This guidance was effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this guidance had no impact on the Company.

In August 2009, the FASB issues Accounting Standards Update (“ASU”) 2009-05, Fair Value Measurements and Disclosures, which updates ASC 820, Fair Value Measurements and Disclosures. The updated guidance affirms that the objective of fair value when the market for an asset is not active is the price that would be received to sell the asset in an orderly transaction and clarifies and includes additional factors for determining whether there has been a significant decrease in market activity for an asset when the market for that asset is not active. It also requires an entity to base its conclusion about whether a transaction was not orderly on the weight of the evidence. This guidance was effective October 1, 2009. The adoption of the new guidance had no impact on the Company.

In June 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 166, Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140 (“SFAS 166”). This statement is not yet included in the codification, but will impact ASC 860, Transfers and Servicing. This statement prescribes the information that a reporting entity must provide in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance and cash flows; and a transferor’s continuing involvement in transferred financial assets. Specifically, among other aspects, SFAS 166 amends Statement of Financial Standard No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, or SFAS 140, by removing the concept of a qualifying special-purpose entity from SFAS 140 and removes the exception from applying FIN 46(R) to variable interest entities that are qualifying special-purpose entities. It also modifies the financial-components approach used in SFAS 140. SFAS 166 is effective for fiscal years beginning after November 15, 2009. This pronouncement is not expected to have an impact on our consolidated financial position and results of operations.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS 167”). This statement is not yet included in the codification, but will impact ASC 810, Consolidation. This statement amends FASB Interpretation No. 46, Consolidation of Variable Interest Entities (revised

 

51


Table of Contents
Index to Financial Statements

December 2003)—an interpretation of ARB No. 51, or FIN 46(R), to require an enterprise to determine whether its variable interest or interests give it a controlling financial interest in a variable interest entity. The primary beneficiary of a variable interest entity is the enterprise that has both (1) the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (2) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. SFAS 167 also amends FIN 46(R) to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. SFAS 167 is effective for fiscal years beginning after November 15, 2009. This pronouncement is not expected to have an impact on our consolidated financial position and results of operations.

 

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.

 

52


Table of Contents
Index to Financial Statements
Item 8. Financial Statements and Supplementary Data

Contents

 

Report of Independent Registered Public Accounting Firm

   54

Basic Financial Statements

  

Consolidated Balance Sheets

   55

Consolidated Statements of Income

   56

Consolidated Statements of Comprehensive Income

   57

Consolidated Statements of Changes in Shareholders’ Equity

   58

Consolidated Statements of Cash Flows

   59

Notes to Consolidated Financial Statements

   60 – 89

 

53


Table of Contents
Index to Financial Statements

LOGO

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, 2009 and 2008, 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, 2009. 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.

We were not engaged to examine management’s assessment of the effectiveness of Louisiana Bancorp, Inc. and Subsidiary’s internal control over financial reporting as of December 31, 2009, included in the Company’s 10-K filing with the Securities and Exchange Commission. Accordingly, we do not express an opinion thereon.

/s/ LaPorte, Sehrt, Romig and Hand

A Professional Accounting Corporation

Metairie, Louisiana

March 15, 2010

LOGO

 

54


Table of Contents
Index to Financial Statements

LOUISIANA BANCORP, INC.

Consolidated Balance Sheets

December 31, 2009 and 2008

 

     2009     2008  
     (In Thousands)  

Assets

  

Cash and Due from Banks

   $ 2,317      $ 3,308   

Short-Term Interest-Bearing Deposits

     2,418        1,666   
                

Total Cash and Cash Equivalents

     4,735        4,974   

Certificates of Deposit

     1,525        1,425   

Securities Available-for-Sale, at Fair Value (Amortized Cost of $61,131 in 2009 and $78,065 in 2008)

     62,524        80,091   

Securities Held-to-Maturity, at Amortized Cost (Estimated Fair Value of $98,799 in 2009 and $127,255 in 2008)

     94,546        123,429   

Loans, Net of Allowance for Loan Losses of $1,661 in 2009 and $1,952 in 2008

     158,446        111,236   

Accrued Interest Receivable

     1,326        1,649   

Other Real Estate Owned

     1,573        —     

Stock in Federal Home Loan Bank

     1,995        2,293   

Premises and Equipment, Net

     1,797        1,804   

Other Assets

     1,312        548   
                

Total Assets

   $ 329,779      $ 327,449   
                

Liabilities and Shareholders’ Equity

    

Deposits

    

Non-Interest-Bearing

   $ 7,893      $ 4,219   

Interest-Bearing

     180,729        156,370   
                

Total Deposits

     188,622        160,589   

Borrowings

     63,810        76,660   

Advance Payments by Borrowers for Taxes and Insurance

     1,914        1,639   

Accrued Interest Payable

     597        664   

Other Liabilities

     1,488        2,170   
                

Total Liabilities

     256,431        241,722   
                

Commitments and Contingencies

     —          —     

Shareholders’ Equity

    

Common Stock, $.01 Par Value, 40,000,000 Shares Authorized; 6,345,732 Shares Issued; 4,764,322 and 5,931,312 Shares Outstanding in 2009 and 2008, Respectively

     63        63   

Additional Paid-in-Capital

     62,586        62,305   

Unearned ESOP Shares

     (4,442     (4,696

Unearned Recognition and Retention Plan Shares

     (2,636     (3,200

Treasury Stock, at Cost (1,581,410 and 414,420 Shares in 2009 and 2008, Respectively)

     (20,803     (5,208

Retained Earnings

     37,660        35,126   

Accumulated Other Comprehensive Income

     920        1,337   
                

Total Shareholders’ Equity

     73,348        85,727   
                

Total Liabilities and Shareholders’ Equity

   $ 329,779      $ 327,449   
                

The accompanying notes are an integral part of these consolidated financial statements.

 

55


Table of Contents
Index to Financial Statements

LOUISIANA BANCORP, INC.

Consolidated Statements of Income

For the Years Ended December 31, 2009, 2008 and 2007

 

           2009                2008                 2007        
     (In Thousands, Except per Share data)  

Interest and Dividend Income

       

Loans, Including Fees

   $ 8,400    $ 7,010      $ 6,421   

Mortgage Backed Securities

     7,637      6,591        4,376   

Investment Securities

     723      1,924        1,689   

Other Interest-Bearing Deposits

     72      312        937   
                       

Total Interest and Dividend Income

     16,832      15,837        13,423   
                       

Interest Expense

       

Deposits

     3,714      3,929        4,166   

Borrowings

     2,563      2,034        1,390   
                       

Total Interest Expense

     6,277      5,963        5,556   
                       

Net Interest Income

     10,555      9,874        7,867   

Provision (Recovery) for Loan Losses

     337      (43     (268
                       

Net Interest Income after Provision (Recovery) for Loan Losses

     10,218      9,917        8,135   
                       

Non-Interest Income

       

Customer Service Fees

     324      396        334   

Gain on Sale of Securities

     406      3        —     

Other Income

     106      127        167   
                       

Total Non-Interest Income

     836      526        501   
                       

Non-Interest Expense

       

Salaries and Employee Benefits

     4,404      4,044        2,995   

Occupancy Expense

     1,155      1,063        1,022   

Loss on Sale of Securities

     —        —          20   

Other Expenses

     1,531      1,295        830   
                       

Total Non-Interest Expense

     7,090      6,402        4,867   
                       

Income Before Income Tax Expense

     3,964      4,041        3,769   

Income Tax Expense

     1,430      1,297        1,128   
                       

Net Income

   $ 2,534    $ 2,744      $ 2,641   
                       

Earnings Per Share

       

Basic

   $ 0.54    $ 0.49      $ 0.94   

Diluted

   $ 0.54    $ 0.49      $ 0.94   

The accompanying notes are an integral part of these consolidated financial statements.

 

56


Table of Contents
Index to Financial Statements

LOUISIANA BANCORP, INC.

Consolidated Statements of Comprehensive Income

For the Years Ended December 31, 2009, 2008 and 2007

 

     2009     2008     2007
     (In Thousands)

Net Income

   $ 2,534      $ 2,744      $ 2,641

Other Comprehensive (Loss) Income,

      

Net of Tax

      

Unrealized Holding (Losses) Gains Arising During the Period

     (149     1,037        832

Reclassification Adjustment for (Gains) Losses Included in Net Income

     (268     (2     13
                      

Total Other Comprehensive (Loss) Income

     (417     1,035        845
                      

Comprehensive Income

   $ 2,117      $ 3,779      $ 3,486
                      

The accompanying notes are an integral part of these consolidated financial statements.

 

57


Table of Contents
Index to Financial Statements

LOUISIANA BANCORP, INC.

Consolidated Statements of Changes in Shareholders’ Equity

For the Years Ended December 31, 2009, 2008 and 2007

 

    Common
Stock
  Additional
Paid-in
Capital
    Unearned
ESOP
Stock
    Unearned
RRP
Stock
    Treasury
Stock
    Retained
Earnings
  Accumulated
Other
Comprehensive
Income (Loss)
    Total
Shareholders’
Equity
 
    (In Thousands)  

Balances at December 31, 2006

  $ —     $ —        $ —        $ —        $ —        $ 29,741   $ (543   $ 29,198   

Net Income—Year Ended December 31, 2007

    —       —          —          —          —          2,641     —          2,641   

Other Comprehensive Income, Net of Applicable Deferred Income Taxes

    —       —          —          —          —          —       845        845   

Issuance of Common Stock for Initial Public Offering, Net of $1.3 Million of Expenses

    63     62,063        —          —          —          —       —          62,126   

Stock Purchased for ESOP

    —       —          (5,077     —          —          —       —          (5,077

ESOP Shares Released for Allocation (12,691 Shares)

    —       10        127        —          —          —       —          137   
                                                           

Balances at December 31, 2007

    63     62,073        (4,950     —          —          32,382     302        89,870   

Net Income—Year Ended December 31, 2008

    —       —          —          —          —          2,744     —          2,744   

Other Comprehensive Income, Net of Applicable Deferred Income Taxes

    —       —          —          —          —          —       1,035        1,035   

Stock Purchased for Recognition and Retention Plan

    —       —          —          (3,200     —          —       —          (3,200

Stock Purchased for Treasury

    —       —          —          —          (5,208     —       —          (5,208

ESOP Shares Released for Allocation (25,382 Shares)

    —       53        254        —          —          —       —          307   

Stock Option Expense

    —       179        —          —          —          —       —          179   
                                                           

Balances at December 31, 2008

    63     62,305        (4,696     (3,200     (5,208     35,126     1,337        85,727   

Net Income—Year Ended December 31, 2009

    —       —          —          —          —          2,534     —          2,534   

Other Comprehensive Loss, Net of Applicable Deferred Income Taxes

    —       —          —          —          —          —       (417     (417

Stock Purchased for Treasury

    —       —          —          —          (15,595     —       —          (15,595

ESOP Shares Released for Allocation (25,382 Shares)

    —       89        254        —          —          —       —          343   

RRP Shares Earned

    —       (48     —          564        —          —       —          516   

Stock Option Expense

    —       240        —          —          —          —       —          240   
                                                           

Balances at December 31, 2009

  $ 63   $ 62,586      $ (4,442   $ (2,636   $ (20,803   $ 37,660   $ 920      $ 73,348   
                                                           

The accompanying notes are an integral part of these consolidated financial statements.

 

58


Table of Contents
Index to Financial Statements

LOUISIANA BANCORP, INC.

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2009, 2008 and 2007

 

     2009     2008     2007  
     (In Thousands)  

Cash Flows from Operating Activities

      

Net Income

   $ 2,534      $ 2,744      $ 2,641   

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:

      

Depreciation

     239        230        242   

Provision (Recovery) for Loan Losses

     337        (43     (268

Net Increase in ESOP Shares Earned

     343        307        137   

Net Increase in RRP Shares Earned

     516        —          —     

Stock Option Plan Expense

     240        179        —     

Discount Accretion Net of Premium Amortization

     (319     (155     93   

Gain on Insurance Settlement

     (2     —          —     

Deferred Income Tax (Benefit) Expense

     (133     70        (640

(Gain) Loss on Sale of Securities

     (406     (3     20   

Gain on Sale of Loans

     (36     (31     (37

Gain on Sale of Property and Equipment

     (4     (7     —     

Originations of Loans Held-for-Sale

     (12,509     (1,281     (1,377

Proceeds from Sales of Loans Held-for-Sale

     12,478        1,269        1,397   

Decrease (Increase) in Accrued Interest Receivable

     323        26        (416

(Increase) Decrease in Other Assets

     (652     164        481   

(Decrease) Increase in Accrued Interest Payable

     (67     89        102   

(Decrease) Increase in Other Liabilities

     (446     1,062        (219
                        

Net Cash Provided by Operating Activities

     2,436        4,620        2,156   
                        

Cash Flows from Investing Activities

      

Investment in Certificates of Deposit

     (1,676     (1,811     (1,219

Purchase of Securities Available-for-Sale

     (37,455     (56,116     (31,555

Purchase of Securities Held-to-Maturity

     (8,601     (61,092     (35,491

Proceeds from Maturities of Certificates of Deposit

     1,576        2,496        1,733   

Proceeds from Maturities of Securities Available-for-Sale

     42,772        50,154        13,693   

Proceeds from Maturities of Securities Held-to-Maturity

     36,046        19,189        15,241   

Proceeds from Sales of Securities Available-for-Sale

     13,781        350        1,980   

Net Increase in Loans Receivable

     (49,967     (15,632     (9,190

Proceeds from Sales of Loans Held for Investing

     914        1,384        1,998   

Insurance Proceeds—Property Damage

     42        —          —     

Purchase of Property and Equipment

     (272     (165     (181

Proceeds from Sale of Property and Equipment

     4        15        —     

Net Decrease (Increase) in Investment in Federal Home Loan Bank Stock

     298        (919     828   
                        

Net Cash Used in Investing Activities

     (2,538     (62,147     (42,163
                        

Cash Flows from Financing Activities

      

Increase (Decrease) in Deposits

     28,033        16,960        (6,706

Increase (Decrease) in Advances by Borrowers for Taxes and Insurance

     275        57        (1,687

Proceeds from Stock Issuance

     —          —          62,126   

(Decrease) Increase in Borrowings

     (12,850     42,244        (826

Stock Purchased for ESOP

     —          —          (5,077

Stock Purchased for RRP

     —          (3,200     —     

Purchase of Treasury stock

     (15,595     (5,208     —     
                        

Net Cash (Used in) Provided by Financing Activities

     (137     50,853        47,830   
                        

Net (Decrease) Increase in Cash and Cash Equivalents

     (239     (6,674     7,823   

Cash and Cash Equivalents, Beginning of Year

     4,974        11,648        3,825   
                        

Cash and Cash Equivalents, End of Year

   $ 4,735      $ 4,974      $ 11,648   
                        

Supplemental Disclosure of Cash Flow Information

      

Cash Paid During the Year for:

      

Interest

   $ 6,344      $ 5,874      $ 5,454   
                        

Income Taxes

   $ 2,498      $ 654      $ 1,044   
                        

Loans Transferred to Other Real Estate Owned

   $ 1,573      $ —        $ —     
                        

The accompanying notes are an integral part of these consolidated financial statements.

 

59


Table of Contents
Index to 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.

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.

The Company held no trading securities as of December 31, 2009 or 2008.

 

60


Table of Contents
Index to Financial Statements

LOUISIANA BANCORP, INC.

Notes to Consolidated Financial Statements—(Continued)

 

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 Bank considers a loan to be impaired when, based upon current information and events, it believes it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Bank’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 Bank 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.

It should be understood that estimates of future loan losses involve an exercise of judgment. While it is possible that in particular periods, the Bank may sustain losses, which are substantial relative to the allowance for

 

61


Table of Contents
Index to Financial Statements

LOUISIANA BANCORP, INC.

Notes to Consolidated Financial Statements—(Continued)

 

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 Bank’s interest rate risk strategy. In addition, the Bank 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.

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 Bank 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:

 

Buildings

   20 – 40 Years

Furniture, Fixtures and Equipment

   3 – 10 Years

Automobiles

   5 Years

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.

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.

 

62


Table of Contents
Index to Financial Statements

LOUISIANA BANCORP, INC.

Notes to Consolidated Financial Statements—(Continued)

 

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 $163,000, $223,000, and $200,000 for the years ended December 31, 2009, 2008 and 2007, 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 FASB replaced The Hierarchy of Generally Accepted Accounting Principles, with the FASB Accounting Standards Codification (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the Securities and Exchange Commission under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification was effective for financial statements issued for periods ending after September 15, 2009.

In December 2007, the FASB issued guidance that establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities

 

63


Table of Contents
Index to Financial Statements

LOUISIANA BANCORP, INC.

Notes to Consolidated Financial Statements—(Continued)

 

assumed, and any noncontrolling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination. The guidance is effective for fiscal years beginning on or after December 15, 2008. There was no impact from adoption of this guidance, as the Company did not have an acquisition during 2009.

On January 1, 2009, the Company adopted new guidance that related to accounting for noncontrolling interests in consolidated financial statements. The new accounting guidance states for entities to provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners separately within the consolidated statement of financial condition within equity, but separate from the parent’s equity and separately on the face of the consolidated statement of operations. Further, the new guidance states that changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary should be accounted for consistently and when a subsidiary is deconsolidated, any retained non-controlling equity investment in the former subsidiary should be initially measured at fair value. The adoption of this guidance had no impact on the Company.

In March 2008, the FASB issued guidance that amended and expanded the disclosure requirements for derivative instruments and hedging activities. The guidance requires qualitative disclosure about objectives and strategies for using derivative and hedging instruments, quantitative disclosures about fair value amounts of the instruments and gains and losses on such instruments, as well as disclosures about credit-risk features in derivative agreements. The guidance was effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of this guidance had no impact on the Company.

In June 2008, the FASB issued guidance which addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, included in the earnings allocation in computing earnings per common share (“EPS”) under the two-class method. Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS pursuant to the two-class method. This guidance was effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior-period EPS data presented were to be adjusted retrospectively (including interim financial statements, summaries of earnings, and selected financial data) to conform to the provisions of this guidance. Since the Company’s unvested restricted stock awards do not contain nonforfeitable rights to dividends, they are not included under the scope of this pronouncement, and therefore, the adoption of this guidance had no impact on the Company.

In May 2009, FASB issued new guidance relating to subsequent events and established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The new guidance sets forth:

 

   

the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements;

 

   

the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and

 

   

the disclosures that an entity should make about events or transactions that occurred after the balance sheet date.

The Company has adopted the new guidance that was effective for financial statements issued for interim and annual periods ending after June 15, 2009.

 

64


Table of Contents
Index to Financial Statements

LOUISIANA BANCORP, INC.

Notes to Consolidated Financial Statements—(Continued)

 

In April 2009, the FASB amended existing guidance for determining whether impairment is other-than-temporary for debt securities. The guidance requires an entity to assess whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of these criteria are met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) other-than-temporary impairment (“OTTI”) related to other factors, which is recognized in other comprehensive income and 2) OTTI related to credit loss, which must be recognized in the income statement. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. Additionally, disclosures about other-than-temporary impairments for debt and equity securities were expanded. This guidance was effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this guidance had no impact on the Company.

In August 2009, the FASB issues Accounting Standards Update (“ASU”) 2009-05, Fair Value Measurements and Disclosures, which updates ASC 820, Fair Value Measurements and Disclosures. The updated guidance affirms that the objective of fair value when the market for an asset is not active is the price that would be received to sell the asset in an orderly transaction and clarifies and includes additional factors for determining whether there has been a significant decrease in market activity for an asset when the market for that asset is not active. It also requires an entity to base its conclusion about whether a transaction was not orderly on the weight of the evidence. This guidance was effective October 1, 2009. The adoption of the new guidance had no impact on the Company.

In June 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 166, Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140 (“SFAS 166”). This statement is not yet included in the Codification, but will impact ASC 860, Transfers and Servicing. This statement prescribes the information that a reporting entity must provide in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance and cash flows; and a transferor’s continuing involvement in transferred financial assets. Specifically, among other aspects, SFAS 166 amends Statement of Financial Standard No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, or SFAS 140, by removing the concept of a qualifying special-purpose entity from SFAS 140 and removes the exception from applying FIN 46(R) to variable interest entities that are qualifying special-purpose entities. It also modifies the financial-components approach used in SFAS 140. SFAS 166 is effective for fiscal years beginning after November 15, 2009. This pronouncement is not expected to have an impact on our consolidated financial position and results of operations.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS 167”). This statement is not yet included in the Codification, but will impact ASC 810, Consolidation. This statement amends FASB Interpretation No. 46, Consolidation of Variable Interest Entities (revised December 2003)—an interpretation of ARB No. 51, or FIN 46(R), to require an enterprise to determine whether its variable interest or interests give it a controlling financial interest in a variable interest entity. The primary beneficiary of a variable interest entity is the enterprise that has both (1) the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (2) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. SFAS 167 also amends FIN 46(R) to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. SFAS 167 is effective for fiscal years beginning after November 15, 2009. This pronouncement is not expected to have an impact on our consolidated financial position and results of operations.

 

65


Table of Contents
Index to Financial Statements

LOUISIANA BANCORP, INC.

Notes to Consolidated Financial Statements—(Continued)

 

Note 2. Securities

A summary of securities classified as available-for-sale at December 31, 2009 and 2008, with gross unrealized gains and losses, is as follows:

 

     December 31, 2009
     Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Estimated
Fair Value
     (In Thousands)

Securities Available-for-Sale

          

Mortgage-Backed Securities

          

GNMA

   $ 508    $ 40    $ —        $ 548

FNMA

     17,330      770      —          18,100

FHLMC

     8,026      405      —          8,431
                            
     25,864      1,215      —          27,079

U.S. Government and Agency Obligations

     35,267      348      (170     35,445
                            

Total

   $ 61,131    $ 1,563    $ (170   $ 62,524
                            
     December 31, 2008
     Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Estimated
Fair Value
     (In Thousands)

Securities Available-for-Sale

          

Mortgage-Backed Securities

          

GNMA

   $ 15,682    $ 427    $ —        $ 16,109

FNMA

     25,750      727      —          26,477

FHLMC

     11,228      345      —          11,573
                            
     52,660      1,499      —          54,159

U.S. Government and Agency Obligations

     25,405      527      —          25,932
                            

Total

   $ 78,065    $ 2,026    $ —        $ 80,091
                            

 

66


Table of Contents
Index to Financial Statements

LOUISIANA BANCORP, INC.

Notes to Consolidated Financial Statements—(Continued)

 

A summary of securities classified as held-to-maturity at December 31, 2009 and 2008, with gross unrealized gains and losses, is as follows:

 

     December 31, 2009
     Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Estimated
Fair Value
     (In Thousands)

Securities Held-to-Maturity

          

Mortgage-Backed Securities

          

GNMA

   $ 12,386    $ 376    $ —        $ 12,762

FNMA

     49,211      2,263      (2     51,472

FHLMC

     28,597      1,600      (1     30,196
                            
     90,194      4,239      (3     94,430

U.S. Government and Agency Obligations

     3,000      —        (15     2,985

Municipal Bonds

          

Revenue Bonds

     286      14      —          300

General Obligation Bonds

     1,066      18      —          1,084
                            
     1,352      32      —          1,384
                            

Total

   $ 94,546    $ 4,271    $ (18   $ 98,799
                            
     December 31, 2008
     Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Estimated
Fair Value
     (In Thousands)

Securities Held-to-Maturity

          

Mortgage-Backed Securities

          

GNMA

   $ 11,695    $ 220    $ (7   $ 11,908

FNMA

     65,818      2,052      (17     67,853

FHLMC

     39,809      1,487      (7     41,289
                            
     117,322      3,759      (31     121,050

U.S. Government and Agency Obligations

     3,000      1      —          3,001

Municipal Bonds

          

Revenue Bonds

     550      23      —          573

General Obligation Bonds

     2,557      74      —          2,631
                            
     3,107      97      —          3,204
                            

Total

   $ 123,429    $ 3,857    $ (31   $ 127,255
                            

 

67


Table of Contents
Index to Financial Statements

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, 2009, 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.

 

     Available-for-Sale
Securities
   Held-to-Maturity
Securities
     Amortized
Cost
   Estimated
Fair
Value
   Amortized
Cost
   Estimated
Fair
Value
     (In Thousands)

Amounts Maturing in:

           

Less than One Year

   $ —      $ —      $ 10    $ 10

One to Five Years

     42,335      42,715      8,248      8,419

Five to Ten Years

     5,054      5,339      12,875      13,521

Over Ten Years

     13,742      14,470      73,413      76,849
                           

Total

   $ 61,131    $ 62,524    $ 94,546    $ 98,799
                           

During the year ended December 31, 2009, the Company sold available-for-sale securities for $13,781,000, resulting in realized gains of $406,000. During the years ended December 31, 2008 and December 31, 2007, the Company sold available-for-sale investment securities for $350,000 and $1,980,000, respectively. In 2008, the Company realized gains on the sale of available-for-sale securities of $3,000, and in 2007, the Company realized losses on the sale of available-for sale securities of $20,000.

Information pertaining to securities with gross unrealized losses at December 31, 2009 and 2008, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:

 

     Available-for-Sale
     Losses Less Than 12 Months    Losses Greater Than 12 Months
     Gross
  Unrealized  
Losses
   Estimated
Fair
Value
   Gross
  Unrealized  
Losses
   Estimated
Fair
Value
     (In Thousands)

December 31, 2009

           

Mortgage-Backed Securities

           

GNMA

   $ —      $ —      $ —      $ —  

FNMA

     —        —        —        —  

FHLMC

     —        —        —        —  
                           
     —        —        —        —  

U.S. Government and Agency Obligations

     170      15,295      —        —  
                           

Total

   $ 170    $ 15,295    $ —      $ —  
                           

December 31, 2008

           

Mortgage-Backed Securities

           

GNMA

   $ —      $ —      $ —      $ —  

FNMA

     —        —        —        —  

FHLMC

     —        —        —        —  
                           
     —        —        —        —  

U.S. Government and Agency Obligations

     —        —        —        —  
                           

Total

   $ —      $ —      $ —      $ —  
                           

 

68


Table of Contents
Index to Financial Statements

LOUISIANA BANCORP, INC.

Notes to Consolidated Financial Statements—(Continued)

 

     Held-to-Maturity
     Losses Less Than 12 Months    Losses Greater Than 12 Months
     Gross
    Unrealized    
Losses
   Estimated
Fair
Value
   Gross
    Unrealized    
Losses
   Estimated
Fair
Value
     (In Thousands)

December 31, 2009

           

Mortgage-Backed Securities

           

GNMA

   $ —      $ —      $ —      $ —  

FNMA

     2      477      —        —  

FHLMC

     —        —        1      43
                           
     2      477      1      43

U.S. Government and Agency Obligations

     15      2,985      —        —  
                           

Total

   $ 17    $ 3,462    $ 1    $ 43
                           

December 31, 2008

           

Mortgage-Backed Securities

           

GNMA

   $ 7    $ 325    $ —      $ —  

FNMA

     17      1,874      —        —  

FHLMC

     7      996      —        —  
                           
     31      3,195      —        —  

U.S. Government and Agency Obligations

     —        —        —        —  
                           

Total

   $ 31    $ 3,195    $ —      $ —  
                           

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, 2009 or 2008.

During 2009 and 2008, 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. The amortized costs of the securities transferred during 2008 were $347,000 and the related unrealized gain was $3,000. 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.

 

69


Table of Contents
Index to Financial Statements

LOUISIANA BANCORP, INC.

Notes to Consolidated Financial Statements—(Continued)

 

Note 3. Loans

A summary of the balances of loans follows as of December 31, 2009 and 2008:

 

     2009     2008  
     (In Thousands)  

Loans Secured by Mortgages on Real Estate

    

1-4 Family Residential

   $ 85,726      $ 51,547   

Home Equity Loans and Lines

     14,389        10,297   

Multi-family Residential

     9,423        7,859   

Commercial Real Estate

     47,798        39,700   

Land

     1,213        1,095   
                

Total Loans Secured by Real Estate

     158,549        110,498   
                

Consumer and Other Loans

    

Student Loan

     485        1,398   

Loans Secured by Deposits

     478        283   

Other

     835        1,368   
                

Total Consumer and Other Loans

     1,798        3,049   
                

Less:

    

Allowance for Loan Losses

     (1,661     (1,952

Net Deferred Loan Origination Fess/Costs

     (240     (359
                

Total Loans, Net

   $ 158,446      $ 111,236   
                

An analysis of the allowance for loan losses is as follows for the years ended December 31st:

 

     2009     2008     2007  
     (In Thousands)  

Balance, Beginning of Year

   $ 1,952      $ 1,999      $ 2,292   

Provision (Recovery) for Loan Losses

     337        (43     (268

Loans Charged-Off

     (628     (4     (25
                        

Balance, End of Year

   $ 1,661      $ 1,952      $ 1,999   
                        

A summary of the loans evaluated for possible impairment follows:

 

     2009    2008
     (In Thousands)

Impaired Loans Requiring a Loss Allowance

   $ 937    $ 450

Impaired Loans not Requiring a Loss Allowance

     66      70
             

Total Impaired Loans

   $ 1,003    $ 520
             

Loss Allowance on Impaired Loans

   $ 332    $ 281
             

At December 31, 2009 and 2008, all impaired loans were in nonaccrual status. As of December 31, 2009, and 2008, the Bank did not hold any renegotiated loans.

At December 31, 2009 and 2008, approximately $11,647 and $4,500 of interest was foregone on non-accrual loans.

 

70


Table of Contents
Index to Financial Statements

LOUISIANA BANCORP, INC.

Notes to Consolidated Financial Statements—(Continued)

 

In the ordinary course of business, the Bank 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 Bank. An analysis of the changes in loans to such borrowers follows:

 

     2009     2008  
     (In Thousands)  

Balance, Beginning of Year

   $ 2,799      $ 2,564   

Additions

     2,758        461   

Payments and Renewals

     (1,041     (226
                

Balance, End of Year

   $ 4,516      $ 2,799   
                

 

Note 4. Accrued Interest Receivable

Accrued interest receivable at December 31, 2009 and 2008, consists of the following:

 

     2009    2008
     (In Thousands)

Loans

   $ 671    $ 561

Investments

     170      352

Mortgage-Backed Securities

     485      736
             

Total Accrued Interest

   $ 1,326    $ 1,649
             

 

Note 5. Premises and Equipment

A summary of the cost and accumulated depreciation of premises and equipment follows as of December 31st:

 

     2009     2008  
     (In Thousands)  

Land, Buildings and Improvements

   $ 3,932      $ 3,829   

Furniture and Fixtures

     1,792        1,711   

Automobiles

     94        93   
                
     5,818        5,633   

Accumulated Depreciation and Amortization

     (4,021     (3,829
                

Total

   $ 1,797      $ 1,804   
                

Depreciation expense for the years ended December 31, 2009, 2008 and 2007, was approximately $239,000, $230,000, and $242,000, respectively.

 

71


Table of Contents
Index to Financial Statements

LOUISIANA BANCORP, INC.

Notes to Consolidated Financial Statements—(Continued)

 

Note 6. Deposits

Interest bearing deposit account balances at December 31, 2009 and 2008, are summarized as follows:

 

     Weighted Average
Rate at December 31,
    Account Balances at December 31,  
     2009     2008  
     2009     2008     Amount    Percent     Amount    Percent  
     (In Thousands)  

NOW and MMDA

   0.29   0.34   $ 26,786    14.82   $ 24,988    15.98

Savings Accounts

   0.50   0.50     18,328    10.14     18,017    11.52

Certificates of Deposit

   2.51   3.34     135,615    75.04     113,365    72.50
                              

Total

       $ 180,729    100.00   $ 156,370    100.00
                              

The aggregate amount of time deposits in denominations of $100,000 or more at December 31, 2009 and 2008, was $49,909,000 and $35,674,000, 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.

In addition, the Bank of New Orleans has elected to participate in the Transaction Account Guarantee Program offered through the FDIC’s Temporary Liquidity Guarantee Program. The Transaction Account Guarantee Program provides unlimited FDIC coverage of non-interest bearing transaction accounts, and certain interest-bearing transaction accounts through June 30, 2010.

Certificates of deposit at December 31, 2009, mature as follows (in thousands):

 

Certificate Accounts Maturing

     

One Year or Less

   $ 89,070    65.68

One to Two Years

     17,306    12.76

Two to Three Years

     10,518    7.76

Three to Five Years

     18,721    13.80
             

Total

   $ 135,615    100.00
             

Interest expense by deposit type for each of the following periods is as follows:

 

     2009    2008    2007
     (In Thousands)

Certificates of Deposit

   $ 3,537    $ 3,751    $ 3,953

Interest Bearing Demand Deposits

     84      86      90

Savings Accounts

     93      92      123
                    

Total

   $ 3,714    $ 3,929    $ 4,166
                    

The Bank held deposits of approximately $13,200,000 and $12,379,000, for related parties at December 31, 2009 and 2008, respectively.

 

72


Table of Contents
Index to Financial Statements

LOUISIANA BANCORP, INC.

Notes to Consolidated Financial Statements—(Continued)

 

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 2009, 2008 and 2007, was $1,542,000, $1,164,000, and $1,335,000, respectively.

Advances consisted of the following at December 31, 2009 and 2008, respectively.

 

     FHLB Advance Total

Contract Rate

   2009    2008
     (In Thousands)

0% – 0.99%

   $ 2,000    $ 15,500

1% – 1.99%

     —        —  

2% – 2.99%

     —        —  

3% – 3.99%

     14,974      10,420

4% – 4.99%

     18,500      18,353

5% – 5.99%

     2,336      6,387
             
   $ 37,810    $ 50,660
             

Maturities of FHLB Advances at December 31, 2009, are as follows:

 

Year Ending

December 31,

   Amount
Maturing
     (In Thousands)

2010

   $ 2,561

2011

     11,999

2012

     9,427

2013

     4,559

2014

     80

Thereafter

     9,184
      

Total

   $ 37,810
      

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, 2009 and 2008.

Reverse Repurchase Agreements consisted of the following at December 31, 2009 and 2008, respectively:

 

     Repurchase Agreement Total

Contract Rate

       2009            2008    
     (In Thousands)

3% – 3.99%

   $ 16,000    $ 16,000

4% – 4.99%

     10,000      10,000
             
   $ 26,000    $ 26,000
             

 

73


Table of Contents
Index to Financial Statements

LOUISIANA BANCORP, INC.

Notes to Consolidated Financial Statements—(Continued)

 

Maturities of Reverse Repurchase Agreements at December 31, 2009, are as follows:

 

Year Ending
December 31,

   Amount
Maturing
     (In Thousands)

2012

   $ 10,000

2013

     16,000
      

Total

   $ 26,000
      

Interest expense on reverse repurchase agreements totaled $1,021,000, $870,000 and $55,000 for the years ended December 31, 2009, 2008 and 2007, 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, 2009 and 2008, are as follows:

 

     2009     2008  
     (In Thousands)  

Deferred Tax Assets

    

Allowance for Loan Losses

   $ 448      $ 364   

Deferred Loan Fees

     81        122   

Deferred Compensation

     498        154   

Stock Options

     101        47   
                

Total Deferred Tax Assets

     1,128        687   
                

Deferred Tax Liabilities

    

Market Value Adjustment to Available-for-Sale Securities

     (474     (689

FHLB Stock Dividends

     (130     (147

Other

     (21     (88
                

Total Deferred Tax Liabilities

     (625     (924
                

Net Deferred Tax Asset (Liability)

   $ 503      $ (237
                

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, 2009, 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 2009, 2008 and 2007, consists of the following for the years ended December 31st:

 

     2009     2008    2007  
     (In Thousands)  

Current Expense

   $ 1,773      $ 1,227    $ 1,768   

Deferred Tax Expense (Benefit)

     (343     70      (640
                       

Total

   $ 1,430      $ 1,297    $ 1,128   
                       

 

74


Table of Contents
Index to Financial Statements

LOUISIANA BANCORP, INC.

Notes to Consolidated Financial Statements—(Continued)

 

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:

 

     2009     2008     2007  
     (In Thousands)  

Expected Tax Provision

   $ 1,348      34.0   $ 1,374      34.0   $ 1,281      34.0

Non-Deductible Expenses

     4      0.1        4      0.1        4      0.1   

Effect of Tax Exempt Income

     (19   (0.5     (46   (1.2     (46   (1.2

Other

     97      2.4        (35   (0.4     (111   (2.9
                                          

Total

   $ 1,430      36.0      $ 1,297      32.5      $ 1,128      30.0   
                                          

The Company had no amount of interest and/or penalties recognized in the consolidated statements of income for the years ended December 31, 2009, 2008, or 2007, nor any amount of interest and/or penalties payable that were recognized in the consolidated balance sheets as of December 31, 2009 or 2008.

As of December 31, 2009 and 2008, the Company had no uncertain tax positions. As of December 31, 2009, the tax years that remain open for examination by tax jurisdictions include 2008, 2007 and 2006.

 

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 2009, 2008 and 2007. The components of comprehensive income and related tax effects are as follows:

 

     2009     2008     2007  
     (In Thousands)  

Gross Unrealized Holding (Losses)

      

Gains Arising During the Period

   $ (226   $ 1,570      $ 1,261   

Tax Benefit (Expense)

     77        (533     (429
                        

Total

     (149     1,037        832   
                        

Reclassification Adjustment for (Gains)

      

Losses Included in Net Income

     (406     (3     20   

Tax Expense (Benefit)

     138        1        (7
                        

Total

     (268     (2     13   
                        

Net Unrealized Holding (Losses) Gains Arising During the Period

   $ (417   $ 1,035      $ 845   
                        

 

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.

 

75


Table of Contents
Index to Financial Statements

LOUISIANA BANCORP, INC.

Notes to Consolidated Financial Statements—(Continued)

 

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, 2009, 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, 2009 and 2008 are presented in the following tables:

 

     Actual     Minimum for Adequacy
Purposes
    Minimum to be Well
Capitalized Under
Prompt Corrective
Action Provisions
 
     Amount    Ratio     Amount    Ratio       Amount        Ratio    
     (Dollars in Thousands)  

December 31, 2009

               

Tangible Capital

   $ 58,322    18.20   $ 4,808    1.50     N/A    N/A   

Core/Leverage Capital

     58,322    18.20     9,615    3.00   $ 16,026    5.00

Tier 1 Risk-Based Capital

     58,261    40.55     5,748    4.00     8,622    6.00

Total Risk-Based Capital

     59,589    41.47     11,495    8.00     14,369    10.00

December 31, 2008

               

Tangible Capital

   $ 55,816    18.35   $ 4,562    1.50     N/A    N/A   

Core/Leverage Capital

     55,816    18.35     9,124    3.00   $ 15,207    5.00

Tier 1 Risk-Based Capital

     55,755    47.99     4,647    4.00     6,970    6.00

Total Risk-Based Capital

     57,209    49.24     9,294    8.00     11,617    10.00

The Bank’s capital under generally accepted accounting principles (“GAAP”) is reconciled as follows:

 

     2009     2008  
     (In Thousands)  

Capital Under GAAP

   $ 59,043      $ 56,884   

Unrealized Gains on Available-for-Sale Securities

     (721     (1,068
                

Tier 1 Capital

     58,322        55,816   

Allowance for Loan Losses

     1,328        1,454   

Recourse Obligations

     (61     (61
                

Total Risk-Based Capital

   $ 59,589      $ 57,209   
                

 

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.

 

76


Table of Contents
Index to Financial Statements

LOUISIANA BANCORP, INC.

Notes to Consolidated Financial Statements—(Continued)

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. 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 Bank, is based on management’s credit evaluation of the customer.

As of December 31, 2009 and 2008, the Company had made various commitments to extend credit totaling approximately $10,729,000 and $10,875,000, respectively, and had no commitments to sell loans at a loss. Of the $10,729,000 in outstanding commitments at December 31, 2009, approximately $1,488,000 were for fixed rate loans with interest rates ranging from 5.95% to 7.65% and approximately $9,241,000 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, 2009, minimum rental commitments under non-cancelable operating leases were as follows (in thousands):

 

Years Ending
December 31,

   Amount

2010

   $ 31

2011

     31

2012

     31

2013

     31

2014

     31

Thereafter

     40
      

Total

   $ 195
      

Total rent expense incurred by the Company under leases amounted to $72,000, $61,000 and $57,000 for each of the years ended December 31, 2009, 2008, and 2007, respectively.

It is expected that in the normal course of business, expiring leases will be renewed or replaced by leases on other property.

The Company is the lessor 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, 2009, are as follows:

 

Years Ending

December 31,

   Amount

2010

   $ 19,688

2011

     19,688

2012

     19,688

2013

     19,688

2014

     4,922
      

Total

   $ 83,674
      

 

77


Table of Contents
Index to Financial Statements

LOUISIANA BANCORP, INC.

Notes to Consolidated Financial Statements—(Continued)

 

Total rental income from this lease amounted to $19,000, $17,000 and $17,000 for each of the years ended December 31, 2009, 2008 and 2007, respectively.

Employment Contracts

The Company has entered into employment contracts with key employees. These compensation commitments expire as follows:

 

Years Ending

December 31,

   Amount

2010

   $ 346,500

2011

     346,500

2012

     346,500
      

Total

   $ 1,039,500
      

 

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.

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 approximate fair values.

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.

 

78


Table of Contents
Index to Financial Statements

LOUISIANA BANCORP, INC.

Notes to Consolidated Financial Statements—(Continued)

 

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.

The estimated fair values of the Company’s financial instruments are as follows:

 

     December 31, 2009     December 31, 2008  
     Carrying
Amount
    Fair Value     Carrying
Amount
    Fair Value  
     (In Thousands)  

Financial Assets

        

Cash and Cash Equivalents

   $ 4,735      $ 4,735      $ 4,974      $ 4,974   

Certificates of Deposit

     1,525        1,425        1,425        1,425   

Securities

     157,070        161,323        203,520        207,346   

Loans

     160,107        162,246        113,188        115,041   

Less Allowance for Loan Losses

     (1,661     (1,661     (1,952     (1,952
                                

Loans, Net of Allowance

     158,446        160,585        111,236        113,089   

Federal Home Loan Bank Stock

     1,995        1,995        2,293        2,293   

Financial Liabilities

        

Deposits

   $ 188,622      $ 190,684      $ 160,589      $ 162,696   

Borrowings

     63,810        67,163        76,660        80,070   

Unrecognized Financial Instruments Commitments to Extend Credit

   $ 10,729      $ 10,727      $ 10,875      $ 10,973   

 

79


Table of Contents
Index to Financial Statements

LOUISIANA BANCORP, INC.

Notes to Consolidated Financial Statements—(Continued)

 

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 following table presents the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, 2009 and 2008:

 

      Fair Value Measurements

December 31, 2009

   Total    (Level 1)    (Level 2)    (Level 3)
     (In Thousands)

Assets:

  

Available-for-Sale Securities

           

Mortgage-Backed Securities

   $ 27,079    $ —      $ 27,079    $ —  

US Government and Agency Obligations

     35,445      —        35,445      —  
                           

Total

   $ 62,524    $ —      $ 62,524    $ —  
                           
     Fair Value Measurements

December 31, 2008

   Total    (Level 1)    (Level 2)    (Level 3)
     (In Thousands)

Assets:

  

Available-for-Sale Securities

           

Mortgage-Backed Securities

   $ 54,159    $ —      $ 54,159    $ —  

US Government and Agency Obligations

     25,932      —        25,932      —  
                           

Total

   $ 80,091    $ —      $ 80,091    $ —  
                           

 

80


Table of Contents
Index to Financial Statements

LOUISIANA BANCORP, INC.

Notes to Consolidated Financial Statements—(Continued)

 

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, 2009 or 2008.

The following table presents the Company’s assets and liabilities measured at fair value on a non-recurring basis at December 31, 2009 and 2008:

 

     Fair Value Measurements

December 31, 2009

   Total    (Level 1)    (Level 2)    (Level 3)
     (In Thousands)

Assets:

  

Impaired Loans

   $ 605    $ —      $ 425    $ 180

Other Real Estate Owned

     1,573      —        1,573      —  
                           

Total

   $ 2,178    $ —      $ 1,998    $  180
                           
     Fair Value Measurements

December 31, 2008

   Total    (Level 1)    (Level 2)    (Level 3)
     (In Thousands)

Assets:

  

Impaired Loans

   $ 169    $ —      $ —      $ 169

Other Real Estate Owned

     —        —        —        —  
                           

Total

   $ 169    $ —      $ —      $ 169
                           

 

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 $13,000, $12,000 and $13,000 for the years ended December 31, 2009, 2008, and 2007, respectively. The plan contains profit sharing provisions, with employer contributions to the plan based on a percentage of wages, net of forfeitures. The most recent profit sharing contribution occurred in 2007 in the amount of $28,000.

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, 2009, 2008 and 2007, the Bank accrued $86,000, $82,000 and $78,000 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 receives 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

 

81


Table of Contents
Index to Financial Statements

LOUISIANA BANCORP, INC.

Notes to Consolidated Financial Statements—(Continued)

 

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, 2009, 2008 and 2007, the Bank accrued $9,700, $8,600 and $7,900 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 the Bank’s directors is an executive officer. Premiums for such policies totaled $57,000, $42,000 and $132,000 for the years ended December 31, 2009, 2008, and 2007, respectively. In addition, during the fiscal years ended December 31, 2009, 2008 and 2007, the Bank paid premiums in the amount of $386,000, $264,000 and $251,000, respectively, directly to our health insurance provider. All of the above-described premiums were gross of any commissions which we understand may have been earned by the insurance agency.

 

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.

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 $343,000, $307,000, and $137,000 for the years ended December 31, 2009, 2008 and 2007, respectively.

The ESOP shares as of December 31, 2009 and 2008 were as follows:

 

     2009    2008

Allocated Shares

     38,073      12,691

Shares Released for Allocation

     25,382      25,382

Unreleased Shares

     444,204      469,586
             

Total ESOP Shares

     507,659      507,659
             

Fair Value of Unreleased Shares

   $ 6,440,958    $ 6,010,701
             

Stock Price at December 31

   $ 14.50    $ 12.80
             

 

82


Table of Contents
Index to Financial Statements

LOUISIANA BANCORP, INC.

Notes to Consolidated Financial Statements—(Continued)

 

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, 2009, 225,177 shares had been awarded under the provisions of the Plan to directors, officers and employees of the Company.

The Company recognized compensation expense during 2009 at a weighted average per-share vesting date fair value of $11.54. Compensation expense related to the Recognition and Retention Plan was $512,000 for the year ended December 31, 2009, and $446,000 for the year ended December 31, 2008. At December 31, 2009, there were 30,752 shares available for future grants under the Plan.

A summary of the changes in the Company’s granted, but nonvested shares, as of December 31, 2009 follows:

 

     Nonvested Shares
     Shares     Weighted-Average
Grant Date
Fair Value

Balance—December 31, 2008

   225,177      $ 11.54

Granted

   —          —  

Vested

   (44,741     11.54

Forfeited

   (2,100     11.52
            

Balance—December 31, 2009

   178,336      $ 11.54
            

 

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.

 

83


Table of Contents
Index to Financial Statements

LOUISIANA BANCORP, INC.

Notes to Consolidated Financial Statements—(Continued)

 

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, 2009, options to acquire 561,197 shares of common stock had been granted under the provisions of the Plan to directors, officers and employees of the Company, at a weighted average exercise price of $11.81.

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 options during the year ended December 31, 2009 having estimated fair values on their respective dates of grant that ranged from $2.41 to $2.69, as determined by use of the Black-Scholes Option Pricing Model with the following assumptions:

 

     Range of Values  

For Options Granted During 2009

    

Expected Dividend Yield

     1.11     1.19

Expected Volatility

     12.26     12.66

Risk-Free Interest Rate

     2.94     2.96

Expected Life of Option

     7.5 Years        7.5 Years   

Weighted-Average Grant Date Fair Value

   $ 2.41      $ 2.69   

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.

A summary of the activity in the Stock Option Plan is as follows:

 

     Shares    Weighted
Average
Exercise
Price
   Weighted
Average
Remaining
Contract
Term
   Aggregate
Intrinsic
Value

Outstanding, December 31, 2008

   512,197    $ 11.61      

Options Granted

   49,000      13.93      

Options Exercised

   —        —        

Options Forfeited

   —        —        
                 

Outstanding, December 31, 2009

   561,197    $ 11.81    8.35 Years    $ 1,507,687
                       

Options Exercisable at December 31, 2009

   102,439    $ 11.61    8.21 Years    $ 295,917
                       

 

84


Table of Contents
Index to Financial Statements

LOUISIANA BANCORP, INC.

Notes to Consolidated Financial Statements—(Continued)

 

A summary of the status of the Company’s nonvested options as of December 31, 2009, and changes during the year ended December 31, 2009, is as follows:

 

     Shares     Weighted
Average
Grant-Date
Fair Value

Nonvested at December 31, 2008

   512,197      $ 11.61

Options Granted

   49,000        13.93

Options Vested

   (102,439     11.61

Options Forfeited

   —          —  
            

Nonvested at December 31, 2009

   458,758      $ 11.86
            

As of December 31, 2009, there was $821,000 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 3.4 years. Compensation expense related to the Stock Option Plan was $239,000 and $179,000, respectively, for the years ended December 31, 2009 and 2008.

 

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.

 

              2009                    2008                    2007        
     (Dollars in Thousands, Except Per Share Data)

Numerator

        

Net Income

   $ 2,534    $ 2,744    $ 2,641

Effect of Dilutive Securities

     —        —        —  
                    

Numerator for Diluted Earnings Per Share

   $ 2,534    $ 2,744    $ 2,641
                    

Denominator

        

Weighted-Average Shares Outstanding

     4,659,328      5,632,733      2,815,101

Effect of Potentially Dilutive Securities

     72,559      25,352      —  
                    

Denominator for Diluted Earnings Per Share

     4,731,887      5,658,085      2,815,101
                    

Earnings Per Share

        

Basic

   $ 0.54    $ 0.49    $ 0.94
                    

Diluted

   $ 0.54    $ 0.49    $ 0.94
                    

The following table presents the components of average outstanding shares for purposes of calculating earnings per share:

 

     2009     2008     2007  

Average Common Shares Issued

   6,345,732      6,345,732      3,059,855   

Average Unearned ESOP Shares

   (469,516   (494,899   (244,754

Average Unearned RRP Shares

   (215,150   (123,534   —     

Average Treasury Shares

   (1,001,738   (94,566   —     
                  
   4,659,328      5,632,733      2,815,101   
                  

Due to the abbreviated year during 2007, the denominator used in the earnings per share calculation is lower than would have been presented if the Company had been public for a full year.

 

85


Table of Contents
Index to Financial Statements

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, 2009 and 2008

(Dollars in Thousands)

 

     2009    2008

Assets

     

Cash and Cash Equivalents

   $ 1,091    $ 2,632

Certificates of Deposits

     931      633

Securities Available for Sale, at Fair Value

     7,613      20,812

Investment in Subsidiary

     63,485      61,580

Loan to ESOP

     4,790      4,908

Accrued Interest Receivable

     58      147

Other Assets

     23      1
             

Total Assets

   $ 77,991    $ 90,713
             

Liabilities and Shareholders’ Equity

     

Due to Subsidiary

   $ 102    $ 8

Other Liabilities

     99      282
             

Total Liabilities

     201      290
             

Total Shareholders’ Equity

     77,790      90,423
             

Total Liabilities and Shareholders’ Equity

   $ 77,991    $ 90,713
             

 

86


Table of Contents
Index to Financial Statements

LOUISIANA BANCORP, INC.

Notes to Consolidated Financial Statements—(Continued)

 

LOUISIANA BANCORP, INC.

Statements of Operations

For the Years Ending December 31, 2009, 2008 and 2007

(Dollars in Thousands)

 

     2009     2008     2007  

Income

      

Interest Income ESOP Loan

   $ 401      $ 410      $ 200   

Interest Income Investment Securities

     510        890        402   

Dividend Income from Subsidiary

     —          4,711        —     

Other Interest Income

     39        65        167   
                        

Total Income

     950        6,076        769   
                        

Operating Expenses

     385        444        132   
                        

Income Before Income Taxes and

      

Undistributed Earnings of Subsidiary

     565        5,632        637   

Federal Income Tax Expense

     (194     (313     (216

Equity in Undistributed Earnings of Subsidiary

     2,163        (2,575     1,469   
                        

Net Income

   $ 2,534      $ 2,744      $ 1,890   
                        

 

87


Table of Contents
Index to Financial Statements

LOUISIANA BANCORP, INC.

Notes to Consolidated Financial Statements—(Continued)

 

LOUISIANA BANCORP, INC.

Statements of Cash Flows

For the Years Ending December 31, 2009 and 2008

(Dollars in Thousands)

 

     2009     2008  

Cash Flows from Operating Activities

    

Net Income

   $ 2,534      $ 2,744   

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:

    

Equity in Undistributed Income of Subsidiaries

     (2,163     2,575   

Net Increase in Recognition and Retention Plan Shares Earned

     516        —     

Stock Option Plan Expense

     239        179   

Discount Accretion Net of Premium Amortization

     (24     (32

Deferred Income Tax Expense (Benefit)

     (18     —     

Loss (Gain) on Sale of Securities

     (7     —     

Decrease (Increase) in Accrued Interest Receivable

     90        55   

Decrease (Increase) in Other Assets

     (22     21   

Increase (Decrease) in Due to Subsidiary

     95        (3

Increase (Decrease) in Other Liabilities

     (128     106   
                

Net Cash Provided by Operating Activities

     1,112        5,645   
                

Cash Flows from Investing Activities

    

Purchases of Certificates of Deposit

     (1,280     (633

Purchases of Investment Securities—Available-for-Sale

     (3,997     (22,069

Proceeds from Maturities of Certificates of Deposit

     982        130   

Proceeds from Maturities of Securities Available-for-Sale

     12,112        21,985   

Proceeds for Sales of Securities Available-for-Sale

     5,007        —     

Repayments of ESOP Loan by Subsidiary

     118        109   
                

Net Cash Provided by (Used in) Investing Activities

     12,942        (478
                

Cash Flows from Financing Activities

    

Stock Purchased for RRP

     —          (3,200

Purchase of Treasury Stock

     (15,595     (5,208
                

Net Cash Used in Financing Activities

     (15,595     (8,408
                

Net Decrease in Cash and Cash Equivalents

     (1,541     (3,241

Cash and Cash Equivalents, Beginning of Year

     2,632        5,873   
                

Cash and Cash Equivalents, End of Year

   $ 1,091      $ 2,632   
                

 

88


Table of Contents
Index to Financial Statements

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, 2009. In preparing these financial statements, the Company evaluated the events and transactions that occurred from December 31, 2009 through March 15, 2010, the date these financial statements were available to be issued.

On December 14, 2009, the Bank submitted a Capital Distribution Request to the Office of Thrift Supervision, in connection with a proposed dividend from the Bank of New Orleans to Louisiana Bancorp, Inc., which holds 100% of the issued and outstanding stock of the Bank. The amount of the proposed dividend was $3.24 million. Following the payment of the proposed dividend, the Bank would remain well capitalized with Tier 1 capital of 17.19%, and Total Risk Based Capital of 39.22%. On January 5, 2010, the Office of Thrift Supervision approved the request.

 

89


Table of Contents
Index to Financial Statements
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

Not Applicable.

 

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, 2009. 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 2009 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, 2009.

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 was not subject to attestation by the Company’s registered public accounting firm pursuant to a temporary rule of the Securities and Exchange Commission that permits the Company to provide only management’s report in this annual report on Form 10-K.

 

Item 9B. Other Information.

Not applicable.

 

90


Table of Contents
Index to Financial Statements

PART III

 

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 2010 Annual Meeting of Stockholders to be held in May 2010 (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. 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. 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, 2009 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.

 

Plan Category

   Number of securities to be
issued upon exercise of
outstanding options, warrants

and rights
(a)
    Weighted-average
exercise price of
outstanding options,

warrants and rights
(b)
    Number of securities remaining
available for future issuance
under equity compensation
plans (excluding securities
reflected in column (a))

(c)

Equity compensation plans approved by security holders

   739,533 (1)    $ 11.81 (2)    104,128

Equity compensation plans not approved by security holders

   —          —        —  
                  

Total

   739,533     $ 11.81      104,128
                  

 

(1) Includes 178,336 shares subject to restricted stock grants which were not vested as of December 31, 2009.
(2) The weighted-average exercise price excludes such restricted stock grants.

 

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. 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.

 

91


Table of Contents
Index to Financial Statements

PART IV

 

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, 2009 and 2008

Consolidated Statements of Income for the Years Ended December 31, 2009, 2008 and 2007

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2009, 2008 and 2007

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2009, 2008 and 2007

Consolidated Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and 2007

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.

 

No.   

Description

  

Location

  3.1    Articles of Incorporation of Louisiana Bancorp, Inc.    (1)
  3.2    Bylaws of Louisiana Bancorp, Inc.    (1)
  4.0    Form of Common Stock Certificate of Louisiana Bancorp, Inc.    (1)
10.1    Amended and Restated Supplemental Executive Retirement Plan with Lawrence J. LeBon, III*    (2)
10.2    Amended and Restated Supplement Executive Retirement Plan with John LeBlanc*    (2)
10.3    Amended and Restated Directors Deferred Compensation Plan*    (2)
10.4    Amended and Restated Employment Agreement between Louisiana Bancorp, Inc. and Lawrence J. LeBon, III*    (2)
10.5    Amended and Restated Employment Agreement between Bank of New Orleans and Lawrence J. LeBon, III*    (2)
10.6    Amended and Restated Employment Agreement between Louisiana Bancorp, Inc. and John LeBlanc*    (2)
10.7    Amended and Restated Employment Agreement between Bank of New Orleans and John LeBlanc*    (2)
10.8    2007 Stock Option Plan*    (3)
10.9    2007 Recognition and Retention Plan and Trust Agreement*    (3)
22.0    Subsidiaries of the Registrant—Reference is made to “Item 1. Business—Subsidiaries” of this Form 10-K for the required information    —  
23.1    Consent of LaPorte, Sehrt, Romig & Hand    Filed herewith
31.1    Certification of Chief Executive Officer    Filed herewith
31.2    Certification of Chief Financial Officer    Filed herewith
32.0    Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer    Filed herewith

 

 * Denotes management compensation plan or arrangement.

 

92


Table of Contents
Index to Financial Statements
(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.

 

93


Table of Contents
Index to Financial Statements

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.

 

    LOUISIANA BANCORP, INC.
March 23, 2010     By:    /S/    LAWRENCE J. LEBON, III        
        Lawrence J. LeBon, III
        Chairman of the Board, President and
Chief Executive Officer

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.

 

Name

  

Title

 

Date

/S/    LAWRENCE J. LEBON, III        

Lawrence J. LeBon, III

  

Chairman of the Board, President

and Chief Executive Officer

(principal executive officer)

  March 23, 2010

/S/    JOHN LEBLANC        

John LeBlanc

  

Senior Vice President and

Chief Financial Officer

(principal financial and

principal accounting officer)

  March 23, 2010

/S/    MAURICE F. EAGAN, JR.        

Maurice F. Eagan, Jr.

   Director   March 23, 2010

/S/    MICHAEL E. GUARISCO        

Michael E. Guarisco

   Director   March 23, 2010

/S/    GORDON K. KONRAD        

Gordon K. Konrad

   Director   March 23, 2010

/S/    BRIAN G. LEBON, SR.        

Brian G. LeBon, Sr.

   Director   March 23, 2010

/S/    IVAN J. MIESTCHOVICH        

Ivan J. Miestchovich

   Director   March 23, 2010

 

94