General
Algiers Bancorp, Inc. (the "Company") is a Louisiana corporation organized in February 1996 by Algiers Bank and Trust, formerly Algiers Homestead Association, ("Algiers" or the "Bank") for the purpose of becoming a unitary holding company of the Bank. The only significant assets of the Company are the capital stock of the Bank, the Company's loan to its Employee Stock Ownership Plan (the "ESOP"), and the remainder of the net proceeds retained by the Company in connection with the conversion of the Bank from mutual to stock form on July 8, 1996 (the "Conversion"). The business and management of the Company primarily consists of the business and management of the Bank. The Company neither owns nor leases any property, but instead uses the premises, equipment and furniture of the Bank. The Company does not employ any persons other than officers of the Bank, and the Company utilizes the support staff of the Bank from time to time. Additional employees will be hired as appropriate to the extent the Company expands or changes its business in the future.
The Bank is a Louisiana-chartered stock savings and loan association that was originally formed in 1926. The Bank currently conducts business from its main office in New Orleans, Louisiana, a branch office in Terrytown, Louisiana, and a third branch in New Orleans, Louisiana that was opened during the first quarter of 1999. At December 31, 2000, the Company had $48.9 million of total assets, $41.9 million of total liabilities, including $38.7 million of deposits, and $7.0 million of total stockholders' equity (representing 14.8% of total assets).
The Bank is primarily engaged in attracting deposits from the general public through its branches and using those and other available sources of funds to originate loans throughout the Greater New Orleans, Louisiana metropolitan area. The Bank originates commercial, construction, home improvement, consumer and one-to-four family residential mortgage loans. The Bank sells the majority of its fixed rate residential mortgage loans in the secondary market. At December 31, 2000, the Company's net loans receivable totaled $17.2 million or 35.2% of the Company's total assets. Conventional first mortgage, one- to four-family residential loans (excluding construction loans) amounted to $8.7 million or 49.5% of the Company's total loan portfolio at December 31, 2000. To a lesser extent, the Company also originates consumer loans, construction loans and commercial real estate loans. The Company had $22.0 million of mortgage-backed securities at December 31, 2000, representing 45.0% of the Company's total assets. The Company had $5.2 million of investment securities (excluding FHLB stock) at December 31, 2000, representing 10.6% of total assets. Of the $5.2 million of investment securities, $1.5 million or 29.6% mature within five years of December 31, 2000.
The Bank is a community-oriented savings institution which emphasizes customer service and convenience. It generally has sought to enhance its net income by, among other things, maintaining strong asset quality. In pursuit of these goals, the Bank has adopted a new business strategy that emphasizes lending and deposit products and services traditionally offered by commercial banks, and is less reliant on purchasing mortgage-backed securities. The start-up costs associated with this new strategy are reflected in the loss briefly noted below.
o Capital Position. As of December 31, 2000, the Bank had total stockholder's equity of $6.6 million and exceeded all of its regulatory capital requirements, with tangible, core and risk-based capital ratios of 13.8%, 13.8% and 38.1%, respectively, as compared to the minimum requirements of 1.5%, 3.0% and 8.0%, respectively.
o Profitability. The Company had a net loss for the years ended December 31, 2000 and 1999, but was profitable in the year ended December 31, 1998. Net loss increased from $367,000 in 1999 to a net loss of $568,000 in 2000, including a net loss of $417,000 sustained by the Company's subsidiary, Algiers Bank and Trust and a $100,000 loss
sustained by the Company's subsidiary Algiers.Com. Net income decreased from $161,000 in 1998 to a net loss of $367,000 in 1999. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
o Asset Quality. Management believes that good asset quality is important to the Company's long-term profitability. The Company's total non-performing assets, which consist of non-accruing loans and net real estate owned ("REO"), together with troubled debt restructurings, amounted to $462,000 or .9% of total assets at December 31, 2000, compared to $428,000 or .9% of total assets at December 31, 1999. See "-Asset Quality-Classified Assets." At December 31, 2000, the Company's allowance for loan losses amounted to $262,000 or 1.5% of the total loan portfolio.
o Interest Rate Risk. The Company attempts to manage its exposure to interest rate risk by maintaining a high percentage of its assets in adjustable-rate mortgages ("ARMs") and adjustable-rate mortgage-backed securities. At December 31, 2000, ARMs amounted to $8.6 million or 48.7% of the total loan portfolio. In addition, of the $22.0 million of mortgage-backed securities at December 31, 2000, $20.2 million or 91.7% have adjustable interest rates.
o Community Orientation. The Bank is committed to meeting the financial needs of the communities in which it operates. Management believes the Bank is large enough to provide a full range of personal financial services, yet small enough to be able to provide services on a personalized and efficient basis. At December 31, 2000, most of the Bank's loans were located in its primary market area. The Bank intends to continue its practice of investing in loans in its primary market area in accordance with its underwriting standards, subject to economic conditions and the availability of reasonable investment alternatives.
The Bank is subject to examination and comprehensive regulation by the Louisiana Office of Financial Institutions ("OFI"), which is the Bank's chartering authority, and by the Office of Thrift Supervision ("OTS"), which is the Bank's primary federal regulator. The Bank is also regulated by the Federal Deposit Insurance Corporation ("FDIC"), the administrator of the Savings Association Insurance Fund ("SAIF"). The Bank is also subject to certain reserve requirements established by the Board of Governors of the Federal Reserve System ("FRB") and is a member of the Federal Home Loan Bank ("FHLB") of Dallas, which is one of the 12 regional banks comprising the FHLB System.
The executive office for the Company and the Bank is located at 1 Westbank Expressway, New Orleans, Louisiana 70114, and its telephone number is (504) 367-8221.
Market Area
The Company's market area consists of seven parishes in the Greater New Orleans area. These include Orleans, Jefferson, Plaquemines, St. Bernard, St. Tammany, St. Charles and St. John Parishes. The traditional components of the area's economic base have consisted of tourism, the port of New Orleans and related shipbuilding, and the petroleum industry. Slowdowns in the petroleum industry had a material negative impact on the area's economy in the early 1980s, which were compounded by defense-related cutbacks in recent years. The area's economy has stabilized in recent years due to development of tourism and convention activities and related service-oriented companies, as well as the gaming industry. In addition, the New Orleans economic base has diversified into areas such as health services, the aerospace industry and research and technology. However, there is still a significant degree of volatility in the local economy due to a continued heavy reliance on the same industries that led to the decline in the 1980s, and there has been a decline in the population since the early 1980s. Competition for deposits and lending in the Greater New Orleans area is substantial, with most of the current competition being from commercial banks.
Lending Activities
Loan Portfolio Composition. At December 31, 2000, the Company's net loan portfolio totaled $17.2 million, representing approximately 35.2% of the Company's $48.9 million of total assets at that date. The majority of lending activity has been the origination of one-to-four family residential mortgage loans. A greater emphasis is being placed on the origination of construction loans, commercial real estate loans, home improvement loans, and consumer loans. At December 31, 2000, conventional first mortgage, one- to four-family residential loans (excluding construction loans) amounted to $8.7 million or 49.5% of the total loan portfolio, before net items. In addition, the Company originates construction loans, commercial real estate loans and consumer loans. At December 31, 2000, there were $1.3 million in construction loans amounting to 7.4% of the total loan portfolio, commercial real estate loans totaled $5.7 million or 32.6% of the total loan portfolio, and consumer loans amounted to $1.8 million or 10.5% of the total loan portfolio, in each case before net items.
Loan Portfolio Composition. The following table sets forth the composition of the Company's loan portfolio by type of loan at the dates indicated.
Contractual Terms to Final Maturities. The following table sets forth certain information as of December 31, 2000 regarding the dollar amount of loans maturing in the Bank's portfolio, based on the contractual date of the loan's final maturity, before giving effect to net items. Demand loans and loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less. The amounts shown below do not reflect normal principal amortization; rather, the balance of each loan outstanding at December 31, 2000 is shown in the appropriate year of the loan's final maturity.
------------------------------------ (1) Gross of loans in process, deferred loan fees, unearned discounts and interest, and allowance for loan losses.
------------------------------------
The following table sets forth the dollar amount of all loans, before net items, due after one year from December 31, 2000 as shown in the preceding table, which have fixed interest rates or which have floating or adjustable interest rates. Floating or Fixed- Adjustable Rate Rate Total ------- ------- ------- (Dollars in Thousands)
One-to-Four Family Residential $ 3,031 $ 5,688 $ 8,719 Commercial Real Estate 4,150 1,590 5,740 Construction 381 921 1,302 Consumer 1,532 316 1,848 ------- ------- -------
Total $ 9,094 $ 8,515 $17,609 ======= ======= =======
Scheduled contractual maturities of loans do not necessarily reflect the actual term of the Company's loan portfolio. The average life of mortgage loans is substantially less than their average contractual terms because of loan prepayments and enforcement of due-on-sale clauses, which give the Company the right to declare a loan immediately due and payable in the event, among other things, that the borrower sells the real property subject to the mortgage and the loan is not repaid. The average life of mortgage loans tends to increase, however, when current mortgage loan rates substantially exceed rates on existing mortgage loans and, conversely, decrease when rates on existing mortgage loans substantially exceed current mortgage loan rates.
Origination of Loans. The lending activities of the Bank are subject to the written underwriting standards and loan origination procedures established by the Bank's Board of Directors and management. Loan originations are obtained through a variety of sources, including referrals from real estate brokers, builders and existing customers. Written loan applications are taken by lending personnel, and the loan department supervises the procurement of credit reports, appraisals and other documentation involved with a loan. Property valuations are performed by independent outside appraisers approved by the Bank's Board of Directors or a committee thereof.
Under the Bank's real estate lending policy, either a title opinion signed by an approved attorney or a title insurance policy must be obtained for each real estate loan. The Bank also requires fire and extended coverage casualty insurance, in order to protect the properties securing its real estate loans. Borrowers must also obtain flood insurance policies when the property is in a flood hazard area as designated by the Department of Housing and Urban Development. Borrowers may be required to advance funds on a monthly basis together with each payment of principal and interest to a mortgage loan account from which the Bank makes disbursements for items such as real estate taxes, hazard insurance premiums and private mortgage insurance premiums as they become due.
The Bank's loan approval process is intended to assess the borrower's ability to repay the loan, the viability of the loan and the adequacy of the value of the property that will secure the loan. The Bank's lending policies require that most loans to be originated by the Bank be approved in advance by the Board of Directors or the Loan Committee.
The following table shows total loans originated and repaid during the periods indicated.
Year Ended December 31, 2000 1999 1998 -------- -------- -------- (In Thousands) Loan Originations: One-to-Four Family Residential $ 1,364 $ 2,760 $ 1,709 Construction 3,003 218 405 Commercial Real Estate 6,002 40 -- Consumer 1,468 119 804 -------- -------- -------- Total Originations 11,837 3,137 2,918
Loan Principal Payments (4,464) (2,601) (2,714) Other Increases (Decreases), Net (1) 63 206 (105) -------- -------- -------- Net Increase (Decrease) in Loan Portfolio $ 7,436 $ 742 $ 99 ======== ======== ========
------------------------------------
(1) Other items consist of loans in process, deferred loan fees, unearned discounts and interest, and allowance for loan losses.
------------------------------------
Real Estate Lending Standards and Underwriting Policies. Effective March 19, 1993, all financial institutions were required to adopt and maintain comprehensive written real estate lending policies that are consistent with safe and sound banking practices. These lending policies must reflect consideration of the Interagency Guidelines for Real Estate Lending Policies adopted by the federal banking agencies, including the OTS, in December 1992 ("Guidelines"). The Guidelines set forth uniform regulations prescribing standards for real estate lending. Real estate lending is defined as extensions of credit secured by liens on interests in real estate or made for the purpose of financing the construction of a building or other improvements to real estate, regardless of whether a lien has been taken on the property.
An institution's lending policy must address certain lending considerations set forth in the Guidelines, including loan-to-value ("LTV") limits, loan administration procedures, underwriting standards, portfolio diversification standards, and documentation, approval and reporting requirements. The policy must also be appropriate to the size of the institution and the nature and scope of its operations, and must be reviewed and approved by the institution's board of directors at least annually. The LTV ratio framework, with the LTV ratio being the total amount of credit to be extended divided by the appraised value or purchase price of the property at the time the credit is originated, must be established for each category of real estate loans. If a loan is not secured by a first lien, the lender must combine all senior liens when calculating this ratio. The Guidelines, among other things, establish the following supervisory LTV limits: raw land (65%); land development (75%); construction (commercial, multi-family and nonresidential) (80%); improved property and one- to four-family residential construction (85%); and one- to four-family (owner occupied) and home equity (no maximum ratio; however, any LTV ratio in excess of 90% should require appropriate insurance or readily marketable collateral).
Certain institutions can make real estate loans that do not conform with the established LTV ratio limits up to 100% of the institution's total capital. Within this aggregate limit, total loans for all commercial, agricultural, multi-family and other non-one-to-four family residential properties should not exceed 30% of total capital. An institution will come under increased supervisory scrutiny as the total of such loans approaches these levels. Certain loans are exempt from the LTV ratios (e.g., those guaranteed by a government agency, loans to facilitate the sale of real estate owned, loans renewed, refinanced or restructured by the original lender(s) to the same borrower(s) where there is no advancement of new funds, etc.).
The Bank is in compliance with the above standards.
Although Louisiana laws and regulations permit state-chartered savings institutions, such as the Bank, to originate and purchase loans secured by real estate located throughout the United States, the Bank's present lending is done primarily within its primary market area, which consists of Orleans, Jefferson, Plaquemines, St. Bernard, St. Tammany, St. Charles, and St. John Parishes in Louisiana. Subject to the Bank's loans-to-one borrower limitation, the Bank is permitted to invest without limitation in residential mortgage loans and up to 400% of its capital in loans secured by non-residential or commercial real estate. The Bank may also invest in secured and unsecured consumer loans in an amount not exceeding 35% of the Bank's total assets. This 35% limitation may be exceeded for certain types of consumer loans, such as home equity and property improvement loans secured by residential real property. In addition, the Bank may invest up to 10% of its total assets in secured and unsecured loans for commercial, corporate, business or agricultural purposes. At December 31, 2000, the Bank was well within each of the above lending limits.
A savings institution generally may not make loans to one borrower and related entities in an amount which exceeds 15% of its unimpaired capital and surplus, although loans in an amount equal to an additional 10% of unimpaired capital and surplus may be made to a borrower if the loans are fully secured by readily marketable securities. At December 31, 2000, the Bank's limit on loans-to-one borrower was $500,000 and its five largest loans or groups of loans-to-one borrower, including persons or entities related to the borrower, amounted to $500,000, $423,000, $420,000, $419,000 and $416,000, respectively, at such date. All of these loans, except the $420,000 loan were current at December 31, 2000.
Loans on Existing Residential Properties. The primary real estate lending activity of the Company is the origination of loans secured by first mortgage liens on one- to four-family residences. At December 31, 2000, $8.7 million or 49.5% of the Company's total loan portfolio, before net items, consisted of conventional first mortgage, one-to four-family residential loans (excluding construction loans).
The loan-to-value ratio, maturity and other provisions of the loans made by the Bank generally have reflected the policy of making less than the maximum loan permissible under applicable regulations, in accordance with sound lending practices, market conditions and underwriting standards established by the Bank. The Bank's lending policies on one- to four-family residential mortgage loans generally limit the maximum loan-to-value ratio to 95% of the lesser of the appraised value or purchase price of the property, and generally one- to four-family residential loans in excess of an 80% loan-to-value ratio require private mortgage insurance. Residential mortgage loans are amortized on
a monthly basis with principal and interest due each month and customarily include "due-on-sale" clauses, which are provisions giving the Bank the right to declare a loan immediately due and payable in the event the borrower sells or otherwise disposes of the real property subject to the mortgage or the loan is not repaid. The Bank enforces due-on-sale clauses to the extent permitted under applicable laws.
Various legislative and regulatory changes have given the Bank the authority to originate and purchase mortgage loans which provide for periodic interest rate adjustments subject to certain limitations. The Bank has been actively marketing ARMs in order to decrease the vulnerability of its operations to changes in interest rates. At December 31, 2000, one-to-four family residential ARMs represented $8.6 million or 48.7% of the total loan portfolio, before net items.
The Bank's one- to four-family residential ARMs are fully amortizing loans with contractual maturities of up to 30 years. These loans have interest rates which are scheduled to adjust periodically in accordance with a designated index. The Bank currently offers ARMs on which the interest rate adjusts every year based upon the monthly median cost of funds for SAIF-insured institutions, plus a specified margin. The margin above the cost of funds index is generally 2.65%. There is a 2% cap on the rate adjustment per period and a 6% cap on the rate adjustment over the life of the loan. The Bank has originated ARMs using other indexes in the past. The adjustable-rate loans in the Bank's loan portfolio are not convertible by their terms into fixed-rate loans, are not assumable without the Bank's consent, do not contain prepayment penalties and do not produce negative amortization.
The Bank qualifies borrowers based on the initial interest rate on the ARM rather than the fully indexed rate. In a rising interest rate environment, the interest rate on the ARM will increase on the next adjustment date, resulting in an increase in the borrower's monthly payment. To the extent the increased rate adversely affects the borrower's ability to repay his loan, the Bank is exposed to increased credit risk. As of December 31, 2000, the Bank's non-accruing loans were $211,000. See "Asset Quality."
The demand for adjustable-rate loans in the Bank's primary market area has been a function of several factors, including the level of interest rates, and the difference between the interest rates offered by competitors for fixed-rate loans and adjustable-rate loans. Due to the generally lower rates of interest prevailing in recent periods, the market demand for adjustable-rate loans has decreased as consumer preference for fixed-rate loans has increased. The Bank currently offers fixed rate products with maturities up to 30 years.
The Bank is an approved FHA/VA Lender. This designation authorizes the Bank to make certian types of government loans for sale in the secondary market. In addition, the Bank offers FHA Title I home improvement loans. As of December 31, 2000, the Bank had three lending officers on its staff. Loans which meet the Bank's underwriting criteria will be kept in the Bank's loan portfolio. Loans may be sold in the secondary market as determined by management.
Construction Loans. Construction lending is generally considered to involve a higher degree of risk of loss than long-term financing on improved, owner-occupied real estate because of the uncertainties of construction, including the possibility of costs exceeding the initial estimates and the need to obtain a tenant or purchaser if the property will not be owner-occupied. The Company generally attempts to mitigate the risks associated with construction lending by, among other things, lending primarily in its market area, using conservative underwriting guidelines, and closely monitoring the construction process. There were 19 construction loans in the Bank's portfolio at December 31, 2000 totaling $1.3 million or 7.4% of the total portfolio.
Commercial Real Estate Loans. The Company's commercial real estate loan portfolio primarily consists of loans secured by office buildings, retail establishments, churches and multi-family dwellings located within the Company's primary market area. Commercial real estate loans amounted to $5.7 or 32.6% of the total loan portfolio at December 31, 2000. The largest commercial real estate loan at December 31, 2000 was $500,000 and the remaining commercial real estate loan portfolio at December 31, 2000 consisted of 33 loans with an average balance of $159,000.
Nonresidential real estate loans may have terms up to 30 years and generally have adjustable rates of interest. As part of its commitment to loan quality, the Company's senior management reviews each nonresidential loan prior to approval by the Board of Directors. All loans are based on the appraised value of the secured property and loans are generally not made in amounts in excess of 70% of the appraised value of the secured property. All appraisals are performed by an independent appraiser designated by the Company and are reviewed by management. In originating nonresidential loans, the Company considers the quality of the property, the credit of the borrower, the historical and projected cash flow of the project, the location of the real estate and the quality of the property management. The Company originated $1,019,000 and purchased participations totaling $4,551,000 in commercial real estate loans in 2000 and originated $40,000 in 1999.
Commercial real estate lending is generally considered to involve a higher degree of risk than single-family residential lending. Such lending typically involves large loan balances concentrated in a single borrower or groups of related borrowers for rental or business properties. In addition, the payment experience on loans secured by income-producing properties is typically dependent on the success of the operation of the related project and thus is typically affected by adverse conditions in the real estate market and in the economy. The Company generally attempts to mitigate the risks associated with commercial real estate lending by, among other things, lending primarily in its market area and using low LTV ratios in the underwriting process.
Consumer Loans. The Company's consumer loans consist of loans on deposits, boat, automobile and second mortgage loans. At December 31, 2000, loans on deposits amounted to $638,000, representing 34.5% of total consumer loans and 3.6% of the total loan portfolio, before net items. Loans secured by deposit accounts are generally offered with an interest rate equal to 2% above the rate on the deposit account.
The Company's second mortgage loans amounted to $351,000 or 2.0% of the total loan portfolio at December 31, 2000. The second mortgages are secured by one-to-four family residences, are for a fixed amount and a fixed term, and are made to individuals for a variety of purposes.
The Company's other consumer loans consisted of 60 loans in the aggregate amount of $859,000 or 4.9% of the total loan portfolio at December 31, 2000. The largest of these loans, in the amount of $64,000 or .36% of the total loan portfolio at December 31, 2000, is secured by a boat.
Loan Fees and Servicing Income. In addition to interest earned on loans, the Company receives income through the servicing of loans and loan fees charged in connection with loan originations and modifications, late payments, prepayments, changes of property ownership and for miscellaneous services related to its loans. Income from these activities varies from period-to-period with the volume and type of loans made.
Loan origination fees or "points" are a percentage of the principal amount of the mortgage loan and are charged to the borrower in connection with the origination of the loan. The Company's loan origination fees are offset against direct loan origination costs, and the resulting net amount is deferred and amortized as interest income over the contractual life of the related loans as an adjustment to the yield of such loans. At December 31, 2000, the Company had approximately $101,000 of loan fees which had been deferred. The deferred loan fees are being recognized as income over the lives of the related loans.
Asset Quality Delinquent Loans. The following table sets forth information concerning delinquent loans at December 31, 2000, in dollar amounts and as a percentage of the Company's total loan portfolio. The amounts presented represent the total outstanding principal balances of the related loans, rather than the actual payment amounts which are past due.
Nonperforming Assets. When a borrower fails to make a required loan payment, the Company attempts to cause the default to be cured by contacting the borrower. In general, contacts are made after a payment is more than 15 days past due. A significant portion of the Company's loans provide for a 45 day grace period, and no late charge is assessed on these loans until the payment is 46 days past due. Defaults are cured promptly in most cases. If the delinquency on a mortgage loan exceeds 90 days and is not cured through the Company's normal collection procedures, or an acceptable arrangement is not worked out with the borrower, the Company will commence foreclosure action.
If foreclosure is effected, the property is sold at a sheriff's sale. If the Company is the successful bidder, the acquired real estate property is then included in the Company's "real estate owned" account until it is sold. The Bank is permitted under applicable regulations to finance sales of real estate owned by "loans to facilitate" which may involve more favorable interest rates and terms than generally would be granted under the Bank's underwriting guidelines. At December 31, 2000, the Bank had two loans to facilitate.
The Company generally places loans on non-accrual status when the payment of interest becomes more than 90 days past due or when interest payments are otherwise deemed uncollectible.
The following table sets forth the amount of the Company's non-performing assets at the dates indicated.
December 31, 2000 1999 1998 ------ ------ ---- (Dollars in Thousands) Nonperforming Assets: Non-Accruing Loans $ 211 $ 177 $737 Real Estate Owned, Net (1) 251 251 62 ------ ------ ---- Total Nonperforming Assets $ 462 $ 428 $799 ====== ====== ==== Troubled Debt Restructurings $ -- $ -- $ 6 ====== ====== ==== Total Nonperforming Loans and Troubled Debt Restructurings as a Percent of Total Loans 1.20% 1.75% 8.20%
Total Nonperforming Assets and Troubled Debt Restructurings as a Percent of Total Assets 0.94% 0.92% 1.70%
------------------------------------
(1) Net of related loss allowances as of each date shown, which allowances at December 31, 2000, 1999 and 1998 amounted to $312,000, $312,000 and $35,000, respectively, for real estate owned.
------------------------------------
The $211,000 of non-accruing loans at December 31, 2000 consisted of seven one-to four- family residential loans for $182,000, one second mortgage loan for $13,000 and one commercial real estate loan for $16,000. The largest non-accruing loan at December 31, 2000 consisted of a $63,000 adjustable-rate real estate loan secured by a residence.
The Company's real estate owned at December 31, 2000 consisted of a former furniture store and warehouse, a one-to-four family residential property and unimproved land. The $251,000 of real estate owned at December 31, 2000 is net of a $312,000 allowance for loss. See Note G of Notes to Consolidated Financial Statements.
Classified Assets. All loans are reviewed on a regular basis under the Company's asset classification policy. The Company's total classified assets at December 31, 2000 (excluding loss assets specifically reserved for amounted to $566,000, of which $0 was classified as special mention and $566,000 was classified as substandard. The largest classified asset at December 31, 2000 consisted of other real estate totaling $512,000. The Company has established reserves of $261,000 on this former furniture store and warehouse. See "Asset Quality-Classified Assets."
The remaining $315,000 of substandard assets at December 31, 2000 consisted of (1) residential mortgage loans totaling $273,000, of which the largest loan had a balance of $63,000 at December 31, 2000, (2) other real estate property with a balance of $50,000 which is fully reserved and (3) consumer loans totaling $42,000. The $63,000 substandard residential mortgage loan is secured by a one-to-four family residence. See "Regulation - The Bank - Classified Assets."
Allowance for Loan Losses. At December 31, 2000, the Company's allowance for loan losses amounted to $262,000 or 1.5% of the total loan portfolio. The Company's loan portfolio consists of one-to-four family residential loans, commercial real estate loans, construction loans, home improvement loans and consumer loans. The loan loss allowance is maintained by management at a level considered adequate to cover possible losses that are currently anticipated based on prior loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, general economic conditions, and other factors and estimates which are subject to change over time. Although management believes that it uses the best information available to make such determinations, future adjustments to allowances may be necessary, and net income could be significantly affected, if circumstances differ substantially from the assumptions used in making the initial determinations.
The following table summarizes changes in the allowance for loan losses and other selected statistics for the periods presented:
At or for the Year Ended December 31, 2000 1999 1998 -------- -------- -------- (Dollars in Thousands)
Total Loans Outstanding $ 17,609 $ 10,110 $ 9,885 ======== ======== ======== Allowance for Loan Losses -------------------------- Beginning Balance $ 230 $ 506 $ 482 Provision (Credit) for Loan Losses 39 -- 24 Loans (Charged-Off) Recovered (1) (7) (276) -- -------- -------- -------- Ending Balance $ 262 $ 230 $ 506 ======== ======== ======== Allowance for Loan Losses as a Percent of Total Loans Outstanding 1.49% 2.27% 5.10%
Allowance for Loan Losses as a Percent of Nonperforming Loans and Troubled Debt Restructurings 124.17% 129.94% 68.10%
---------------------------
(1) There were no loan charge-off or recoveries in 1998.
The following table presents the allocation of the Company's allowance for loan losses by type of loan at each of the dates indicated.
Mortgage-Backed Securities
The Company has invested in a portfolio of mortgage-backed securities that are insured or guaranteed by the Federal Home Loan Mortgage Corporation ("FHLMC"), the Federal National Mortgage Association ("FNMA") or the Government National Mortgage Association ("GNMA"). Mortgage-backed securities (which also are known as mortgage participation certificates or pass-through certificates) represent a participation interest in a pool of one- to four-family or multi-family residential mortgages, the principal and interest payments on which are passed from the mortgage originators, through intermediaries (generally U.S. government agencies and government sponsored enterprises) that pool and repackage the participation interests in the form of securities, to investors such as the Company. FHLMC is a public corporation chartered by the U.S. government and guarantees the timely payment of interest and the ultimate return of principal. FHLMC mortgage-backed securities are not backed by the full faith and credit of the United States, but because FHLMC is a U.S. government sponsored enterprise, these securities are considered high quality investments with minimal credit risks. The GNMA is a government agency within the Department of Housing and Urban Development, which is intended to help finance government assisted housing programs. The GNMA guarantees the timely payment of principal and interest, and GNMA securities are backed by the full faith and credit of the U.S. Government. The FNMA guarantees the timely payment of principal and interest, and FNMA securities are indirect obligations of the U.S. government.
The $22.0 million of mortgage-backed securities at December 31, 2000 were accounted for as available for sale and are thus carried at market value. For additional information relating to the Company's mortgage-backed securities, see Note E of Notes to Consolidated Financial Statements.
Mortgage-backed securities generally yield less than the loans that underlie such securities, because of the cost of payment guarantees or credit enhancements that result in nominal credit risk. In addition, mortgage-backed securities are more liquid than individual mortgage loans and may be used to collateralize obligations of the Company. In general, mortgage-backed pass-through securities are weighted at no more than 20% for risk-based capital purposes, compared to an assigned risk weighting of 50% to 100% for whole residential mortgage loans. As a result, these types of securities allow the Company to optimize regulatory capital to a greater extent than non-securitized whole loans. While mortgage-backed securities carry a reduced credit risk as compared to whole loans, such securities remain subject to the risk that a fluctuating interest rate environment, along with other factors such as the geographic distribution of the underlying mortgage loans, may alter the prepayment rate of such mortgage loans and so affect both the prepayment speed and value of such securities.
The following table sets forth the composition of the Company's mortgage-backed securities at each of the dates indicated.
December 31, ---------------------------
2000 1999 1998 ------- ------- ------- (In Thousands) Mortgage- Backed Securities Available for Sale: FNMA $12,840 $14,284 $16,476 FHLMC 3,366 5,052 3,941 GNMA 5,820 6,718 6,975 ------- ------- ------- Total $22,026 $26,054 $27,392 ======= ======= =======
Information regarding the contractual maturities and weighted average yield of the Company's mortgage-backed securities portfolio at December 31, 2000 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.
The following table sets forth the purchases, sales and principal repayments of the Company's mortgage-backed securities during the periods indicated.
At or For the Year Ended December 31, ---------------------------------- 2000 1999 1998 -------- -------- -------- (Dollars in Thousands)
Mortgage- Backed Securities at Beginning of Period $ 26,054 $ 27,392 $ 28,445 Purchases 2,773 6,003 5,538 Repayments (4,156) (6,195) (5,578) Sales (3,071) -- (1,136) Mark to Market Adjustments 459 (1,054) 197 Amortizations of Premiums and Discounts, Net (33) (92) (74) -------- -------- -------- Mortgage- Backed Securities at End of Period $ 22,026 $ 26,054 $ 27,392 ======== ======== ======== Weighted Average Yield at End of Period 6.56% 5.74% 6.53% ======== ======== ========
Investment Securities
The investment policy of the Company, which is established by the Board of Directors, is designed to maintain liquidity within regulatory limits, maintain a balance of high-quality investments to minimize risk, provide collateral for pledging requirements, provide alternative investments when loan demand is low, maximize returns while preserving liquidity and safety, and manage interest rate risk. The Bank is required to maintain certain liquidity ratios and does so by investing in securities that qualify as liquid assets under OTS regulations. Such securities include obligations issued or fully guaranteed by the United States Government and certain federal agency obligations.
Investment securities (excluding FHLB stock) totaled $5.2 million or 10.6% of total assets at December 31, 2000. All $5.2 million of investment securities, which consists of U.S. Government and agency securities, and equity securities are accounted for as available for sale and are carried at market value. Of the $5.2 million of investment securities, $1.5 million or 29.6% mature within five years of December 31, 2000.
The following table sets forth certain information relating to the Company's investment securities portfolio at the dates indicated.
The following table sets forth the amount of investment securities which mature during each of the periods indicated and the weighted average yields for each range of maturities at December 31, 2000. No tax-exempt yields have been adjusted to a tax-equivalent basis.
(1) As a member of the FHLB of Dallas, the Bank is required to maintain its investment in FHLB stock, which has no stated maturity.
------------------------------------
At December 31, 2000, the Company's investments in any one issuer which exceeded more than 10% of the Company's total stockholders' equity were FHLB notes which had both a carrying value and a market value of $2.7 million at December 31, 2000 and FHLMC notes which had both a carrying value and a market value of $1.4 million at December 31, 2000.
Sources of Funds
General. Deposits are the primary source of the Company's funds for lending and other investment purposes. In addition to deposits, the Company derives funds from principal and interest payments on loans and mortgage-backed securities. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows are significantly influenced by general interest rates and money market conditions. Borrowings may be used on a short-term basis to compensate for reductions in the availability of funds from other sources. They may also be used on a longer-term basis for general business purposes.
Deposits. The Company's deposits are attracted principally from within the Company's primary market area through the offering of a broad selection of deposit instruments, including negotiable order of withdrawal ("NOW") accounts, money market deposit accounts ("MMDA's"), regular savings accounts, and term certificate accounts. Included among these deposit products are individual retirement account certificates of approximately $3.8 million or 9.7% of total deposits at December 31, 2000. Deposit account terms vary, with the principal differences being the minimum balance required, the time periods the funds must remain on deposit and the interest rate.
The large variety of deposit accounts offered by the Bank has increased the Bank's ability to retain deposits and allowed it to be more competitive in obtaining new funds, but has not eliminated the threat of disintermediation (the flow of funds away from savings institutions into direct investment vehicles such as government and corporate securities). During periods of high interest rates, deposit accounts that have adjustable interest rates have been more costly than traditional passbook accounts. In addition, the Bank is subject to short-term fluctuations in deposit flows because funds in transaction accounts can be withdrawn at any time and because 58.3% of the certificates of deposit at December 31, 2000 mature in one year or less. The Bank's ability to attract and maintain deposits is affected by the rate consciousness of its customers and their willingness to move funds into higher-yielding accounts. The Bank's cost of funds has been, and will continue to be, affected by money market conditions.
The following table shows the distribution of, and certain other information relating to, the Company's deposits by type of deposit, as of the dates indicated.
The following table presents the average balance of each type of deposit and the average rate paid on each type of deposit for the periods indicated.
The following table sets forth the savings flows of the Company during the periods indicated.
Year Ended December 31, ----------------------------- 2000 1999 1998 ------- ------- ------- (In Thousands)
Increase (Decrease) Before Interest Credited (1) $(1,581) $(2,990) $ 2,077 Interest Credited 1,943 1,863 1,471 ------- ------- ------- Net Increase (Decrease) in Deposits $ 362 $(1,127) $ 3,548 ======= ======= ======= ------------------------------------
(1) The information provided is net of deposits and withdrawals because the gross amount of deposits and withdrawals is not readily available.
------------------------------------
The Bank attempts to control the flow of deposits by pricing its accounts to remain generally competitive with other financial institutions in its market area, but does not necessarily seek to match the highest rates paid by competing institutions. The Bank has generally not taken a position of price leadership in its markets, except when there has been an opportunity to market longer term deposits.
The principal methods used by the Bank to attract deposits include the offering of a wide variety of services and accounts, competitive interest rates and convenient office locations.
The Bank does not advertise for deposits outside of its primary market area. At December 31, 2000, the Bank had no deposits that were obtained through deposit brokers. The Bank does not actively solicit broker deposits and does not pay fees to such brokers.
The following table presents, by various interest rate categories, the amount of certificates of deposit at December 31, 2000 which mature during the periods indicated.
Balance at December 31, 2000 Maturing in the 12 Months Ending December 31, ----------------------------------------------- 2001 2002 2003 Thereafter Total ------- ------- ------- ------- ------- Certificates of Deposit (In Thousands) ----------------------- 2.00% - 2.99% $ -- $ -- $ -- $ -- $ -- 3.00% - 3.99% -- -- -- -- -- 4.00% - 4.99% 1,151 123 28 32 1,334 5.00% - 5.99% 3,552 2,747 157 -- 6,456 6.00% - 6.99% 12,743 4,437 3,257 1,152 21,589 7.00% - 7.99% 92 244 133 102 571 ------- ------- ------- ------- ------- Total Certificate Accounts $17,538 $ 7,551 $ 3,575 $ 1,286 $29,950 ======= ======= ======= ======= =======
The following table sets forth the maturities of the Company's certificates of deposit of $100,000 or more at December 31, 2000 by time remaining to maturity.
Maturing During Quarter Ending Amounts ------------------------------ ------- (In Thousands)
March 31, 2001 $ -- June 30, 2001 -- September 30, 2001 -- December 31, 2001 -- After December 31, 2001 3,361 ------ Total Certificates of Deposit With Balances of $100,000 or More $3,361 ======
Borrowings
The Bank may obtain advances from the FHLB of Dallas upon the security of the common stock it owns in that bank and certain of its residential mortgage loans, investment securities and mortgage-backed securities, provided certain standards related to credit worthiness have been met. See "Regulation - The Bank - Federal Home Loan Bank System." Such advances are made pursuant to several credit programs, each of which has its own interest rate and range of maturities. Such advances are generally available to meet seasonal and other withdrawals of deposit accounts and to permit increased lending. At December 31, 2000, outstanding advances from FHLB totaled $3,000,000, at 6.598%, maturing February 20, 2001, collateralized by mortgage-backed securities. The Bank had advances from the FHLB at December 31, 1999 totaling $1,000,000 at 5.923%, which matured January 20, 2000, collateralized by mortgage-backed securities.
Subsidiaries
The Bank is a wholly-owned subsidiary of the Company. At December 31, 2000, the Bank had no subsidiaries. Under Louisiana law, a state-chartered association may invest up to 10% of its assets in service organizations or corporations.
On December 23, 1996, the Company acquired a 70% interest in Jefferson Community Lending, which was engaged in the business of mortgage lending. During 1998, the Company continued a restructuring plan to reduce costs and increase future operating efficiencies by consolidating the operations of Jefferson Lending into those of the Bank and commencing the dissolution of Jefferson Community Lending.
In January 1998, the Company formed Algiers.Com, Inc. Algiers.Com, Inc. owns a 51% interest in Planet Mortgage, L.L.C. ("Planet Mortgage"), which was formed during 1998. Planet Mortgage is engaged in the solicitation of mortgage loans through its internet site at www.planetmortgage.com.
Competition
The Company faces significant competition both in attracting deposits and in making loans. Its most direct competition for deposits has come historically from commercial banks, credit unions and other savings institutions located in its primary market area, including many large financial institutions which have greater financial and marketing resources available to them. Some of the Company's major competitors include Bank One, Hibernia National Bank, Whitney National Bank and Fifth District Savings and Loan. In addition, the Company faces additional significant competition for investors' funds from short-term money market mutual funds and issuers of corporate and government securities. The Company competes for deposits principally by offering depositors a variety of deposit programs. The Company does not rely upon any individual group or entity for a material portion of its deposits. The Company estimates that its market share of total deposits in Orleans parish and Jefferson parish, Louisiana is less than 1.0%.
The Company's competition for real estate loans comes principally from mortgage banking companies, commercial banks, other savings institutions and credit unions. The Company competes for loan originations primarily through the interest rates and loan fees it charges, and the efficiency and quality of services it provides borrowers and real estate brokers. Factors which affect competition include general and local economic conditions, current interest rate levels and volatility in the mortgage markets.
Employees
The Company and its subsidiaries had 24 full-time employees at December 31, 2000. None of these employees are represented by a collective bargaining agent, and the Company believes that it enjoys good relations with its personnel.
REGULATION
The Company
General. The Company, as a registered savings and loan holding company within the meaning of the Home Owners' Loan Act, as amended ("HOLA"), is subject to OTS regulations, examinations, supervision and reporting requirements. As a subsidiary of a savings and loan holding company, the Bank is subject to certain restrictions in its dealings with the Company and affiliates thereof.
Activities Restrictions. There are generally no restrictions on the activities of a savings and loan holding company which holds only one subsidiary savings institution. However, if the Director of the OTS determines that there is reasonable cause to believe that the continuation by a savings and loan holding company of an activity constitutes a serious risk to the financial safety, soundness or stability of its subsidiary savings institution, the Director may impose such restrictions as deemed necessary to address such risk, including limiting (i) payment of dividends by the savings institution; (ii) transactions between the savings institution and its affiliates; and (iii) any activities of the savings institution that might create a serious risk that the liabilities of the holding company and its affiliates may be imposed on the savings institution. Notwithstanding the above rules as to permissible business activities of unitary savings and loan holding companies, if the savings institution subsidiary of such a holding company fails to meet the QTL test, as discussed under "The Bank - Qualified Thrift Lender Test," then such unitary holding company also shall become subject to the activities restrictions applicable to multiple savings and loan holding companies and, unless the savings institution requalifies as a QTL within one year thereafter, shall register as, and become subject to the restrictions applicable to, a bank holding company. See "The Bank - Qualified Thrift Lender Test."
If the Company were to acquire control of another savings institution, other than through merger or other business combination with the Bank, the Company would thereupon become a multiple savings and loan holding company. Except where such acquisition is pursuant to the authority to approve emergency thrift acquisitions and where each subsidiary savings institution meets the QTL test, as set forth below, the activities of the Company and any of its subsidiaries (other than the Bank or other subsidiary savings institutions) would thereafter be subject to further restrictions. Among other things, no multiple savings and loan holding company or subsidiary thereof which is not a savings institution shall commence or continue for a limited period of time after becoming a multiple savings and loan holding company or subsidiary thereof any business activity, except upon prior notice to and no objection by the OTS, other than: (i) furnishing or performing management services for a subsidiary savings institution; (ii) conducting an insurance agency or escrow business; (iii) holding, managing, or liquidating assets owned by or acquired from a subsidiary savings institution; (iv) holding or managing properties used or occupied by a subsidiary savings institution; (v) acting as trustee under deeds of trust; (vi) those activities authorized by regulation as of March 5, 1987 to be engaged in by multiple savings and loan holding companies; or (vii) unless the Director of the OTS by regulation prohibits or limits such activities for savings and loan holding companies, those activities authorized by the FRB as permissible for bank holding companies. Those activities described in (vii) above also must be approved by the Director of the OTS prior to being engaged in by a multiple savings and loan holding company.
Limitations on Transactions with Affiliates. Transactions between savings institutions and any affiliates are governed by Sections 23A and 23B of the Federal Reserve Act and OTS regulations. 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 the Company) and any companies which are controlled by such parent holding company are affiliates of the savings institution. Generally, such provisions (i) limit 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 and (ii) require that all such transactions be on terms substantially the same, or at least as favorable, to the institution or subsidiary as those provided to a non-affiliate. The term "covered transaction" includes the making of loans, purchase of assets, issuance of a guarantee and other similar transactions. In addition to the restrictions imposed by such provisions, no savings institution may (i) loan or otherwise extend credit to an affiliate, except for any affiliate which engages only in activities which are permissible for bank holding companies, or (ii) purchase or invest 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(h) and (g) 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 and 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, 2000, the Bank was in compliance with the above restrictions.
Restrictions on Acquisitions. Except under limited circumstances, savings and loan holding companies are prohibited from acquiring, without prior approval of the Director of the OTS, (i) control of any other savings institution or savings and loan holding company or substantially all the assets thereof or (ii) more than 5% of the voting shares of a savings institution or holding company thereof which is not a subsidiary. Except with the prior approval of the Director of the OTS, no director or officer of a savings and loan holding company or person owning or controlling by proxy or otherwise more than 25% of such company's stock, may acquire control of any savings institution, other than a subsidiary savings institution, or of any other savings and loan holding company.
The Director of the OTS may only approve acquisitions resulting in the formation of a multiple savings and loan holding company which controls savings institutions in more than one state if (i) the multiple savings and loan holding company involved controls a savings institution which operated a home or branch office located in the state of the institution to be acquired as of March 5, 1987; (ii) the acquirer is authorized to acquire control of the savings institution pursuant to the emergency acquisition provisions of the Federal Deposit Insurance Act ("FDIA"); or (iii) the statutes of the state in which the institution to be acquired is located specifically permit institutions to be acquired by the state-chartered institutions or savings and loan holding companies located in the state where the acquiring entity is located (or by a holding company that controls such state-chartered savings institutions).
Under the Bank Holding Company Act of 1956, the FRB is authorized to approve an application by a bank holding company to acquire control of a savings institution. In addition, a bank holding company that controls a savings institution may merge or consolidate the assets and liabilities of the savings institution with, or transfer assets and liabilities to, any subsidiary bank which is a member of the Bank Insurance Fund ("BIF") with the approval of the appropriate federal banking agency and the FRB. As a result of these provisions, there have been a number of acquisitions of savings institutions by bank holding companies in recent years.
The Bank
General. The OFI is the Bank's chartering authority, and the OTS is the Bank's primary federal regulator. The OTS and the OFI have extensive authority over the operations of Louisiana-chartered savings institutions. As part of this authority, savings institutions are required to file periodic reports with the OTS and the OFI and are subject to periodic examinations by the OTS, the OFI and the FDIC. 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.
The OTS' 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 and unsound practices. Other actions or inactions may provide the basis for enforcement actions, including misleading or untimely reports filed with the OTS.
Insurance of Accounts. The deposits of the Bank are insured to the maximum extent permitted by the SAIF, which is administered by the FDIC, and are backed by the full faith and credit of the U.S. Government. As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the FDIC. The FDIC also has the authority to initiate enforcement actions against savings institutions, after giving the OTS an opportunity to take such action.
Under current FDIC regulations, institutions are assigned to one of three capital groups which are based solely on the level of an institution's capital--"well capitalized," "adequately capitalized," and "undercapitalized" --which are defined in the same manner as the regulations establishing the prompt corrective action system discussed below. These three groups are then divided into three subgroups which reflect varying levels of supervisory concern, from those which are considered to be healthy to those which are considered to be of substantial supervisory concern.
The deposits of the Bank are currently insured by the SAIF. Both the SAIF and the BIF, the federal deposit insurance fund that covers commercial bank deposits, are required by law to attain and thereafter maintain a reserve ratio of 1.25% of insured deposits.
In the fourth quarter of 1996, the FDIC lowered the assessment rates for SAIF members to reduce the disparity in the assessment rates paid by BIF and SAIF members. Beginning October 1, 1996, effective SAIF rates generally range from zero basis points to 27 basis points. From 1998 through 1999, SAIF members will pay 6.4 basis points to fund the FICO, while BIF member institutions will pay approximately 1.3 basis points. The Bank's insurance premiums, which had amounted to 23 basis points, were thus reduced to 6.4 basis points effective January 1, 1998.
The FDIC may terminate the deposit insurance of any insured depository institution, including the Bank, 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 FDIC. 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 FDIC. Management is aware of no existing circumstances which would result in termination of the Bank's deposit insurance.
Regulatory Capital Requirements. Federally insured savings institutions are required to maintain minimum levels of regulatory capital. The OTS has established capital standards applicable to all savings institutions. These standards generally must be as stringent as the comparable capital requirements imposed on national banks. The OTS also is authorized to impose capital requirements in excess of these standards on individual institutions on a case-by-case basis.
Current OTS capital standards require savings institutions to satisfy three different capital requirements. Under these standards, savings institutions must maintain "tangible" capital equal to at least 1.5% of adjusted total assets, "core" capital equal to at least 3.0% of adjusted total assets and "total" capital (a combination of core and "supplementary" capital) equal to at least 8.0% of "risk-weighted" assets. For purposes of the regulation, core capital generally consists of common stockholders' equity (including retained earnings). Tangible capital is given the same definition as core capital but is reduced by the amount of all the savings institution's intangible assets, with only a limited exception for purchased mortgage servicing rights. At December 31, 2000, the Bank had no intangible assets which are deducted in computing its tangible capital. 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). At December 31, 2000, the Bank had no subsidiaries.
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 assigned by the OTS for principal categories of assets are (i) 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; (ii) 20% for securities (other than equity securities) issued by U.S. Government-sponsored agencies and mortgage-backed securities issued by, or fully guaranteed as to principal and interest by, the FNMA or the FHLMC, except for those classes with residual characteristics or stripped mortgage-related securities; (iii) 50% for prudently underwritten permanent one- to four-family first lien mortgage loans not more than 90 days delinquent and having a loan-to-value ratio of not more than 80% at origination unless insured to such ratio by an insurer approved by the FNMA or the FHLMC, qualifying residential bridge loans made directly for the construction of one- to four-family residences, and qualifying multi-family residential loans; and (iv) 100% for all other loans and investments, including consumer loans, commercial loans, and one- to four-family residential real estate loans more than 90 days delinquent, and for repossessed assets.
In August 1993, the OTS adopted a final rule incorporating an interest-rate risk component into the risk-based capital regulation. Under the rule, an institution with a greater than "normal" level of interest rate risk will be subject to a deduction of its interest rate risk component from total capital for purposes of calculating its risk-based capital. As a result, such an institution will be required to maintain additional capital in order to comply with the risk-based capital requirement. An institution with a greater than "normal" interest rate risk is defined as an institution that would suffer a
loss of net portfolio value exceeding 2.0% of the estimated economic value of its assets in the event of a 200 basis point increase or decrease (with certain minor exceptions) in interest rates. The interest rate risk component will be calculated, on a quarterly basis, as one-half of the difference between an institution's measured interest rate risk and 2.0%, multiplied by the economic value of its assets. The rule also authorizes the Director of the OTS, or his designee, to waive or defer an institution's interest rate risk component on a case-by-case basis. The final rule was originally effective as of January 1, 1994, subject however to a two quarter "lag" time between the reporting date of the data used to calculate an institution's interest rate risk and the effective date of each quarter's interest rate risk component. However, in October 1994 the Director of the OTS indicated that it would waive the capital deductions for institutions with a greater than "normal" risk until the OTS published an appeals process. On August 21, 1995, the OTS released Thrift Bulletin 67 which established (i) an appeals process to handle "requests for adjustments" to the interest rate risk component and (ii) a process by which "well-capitalized" institutions may obtain authorization to use their own interest rate risk model to determine their interest rate risk component. The Director of the OTS indicated, concurrent with the release of Thrift Bulletin 67, that the OTS will continue to delay the implementation of the capital deduction for interest rate risk pending the testing of the appeals process set forth in Thrift Bulletin 67.
At December 31, 2000, the Bank exceeded all of its regulatory capital requirements, with tangible, core and risk-based capital ratios of 13.8%, 13.8% and 38.1%, respectively. The following table sets forth the Bank's compliance with each of the above-described capital requirements as of December 31, 2000.
------------------------------------
(1) Does not reflect the 4.0% requirement to be met in order for an institution to be "adequately capitalized." See "Prompt Corrective Action."
(2) Does not reflect the interest-rate risk component in the risk-based capital requirement, the effective date of which has been postponed as discussed above.
(3) General valuation allowances are only used in the calculation of risk-based capital. Such allowances are limited to 1.25% of risk-weighted assets.
(4) Tangible and core capital are computed as a percentage of adjusted total assets of $49.3 million. Risk-based capital is computed as a percentage of adjusted risk-weighted assets of $18.5 million.
------------------------------------
Effective November 28, 1994, the OTS revised its interim policy issued in August 1993 under which savings institutions computed their regulatory capital in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Under the revised OTS policy, 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.
Any savings institution that fails any of the capital requirements is subject to possible enforcement actions by the OTS or the FDIC. 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 OTS' 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. Under the prompt corrective action regulations of the OTS, an institution is deemed to be (i) "well capitalized" if it has total risk-based capital of 10.0% or more, has a Tier 1 risk-based capital ratio of 6.0% or more, has a Tier 1 leverage capital ratio of 5.0% or more and is not subject to any order or final capital directive to meet and maintain a specific capital level for any capital measure, (ii) "adequately capitalized" if it has a total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based capital ratio of 4.0% or more and a Tier 1 leverage capital ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the definition of "well capitalized," (iii) "undercapitalized" if it has a total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio that is less than 4.0% or a Tier 1 leverage capital ratio that is less than 4.0% (3.0% under certain circumstances), (iv) "significantly undercapitalized" if it has a total risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based capital ratio that is less than 3.0% or a Tier 1 leverage capital ratio that is less than 3.0%, and (v) "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 FDIC may not reclassify a significantly undercapitalized institution as critically undercapitalized).
An institution generally must file a written capital restoration plan which meets specified requirements with its appropriate federal banking agency 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, 2000, the Bank was deemed a well capitalized institution for purposes of the above regulations and as such is not subject to the above mentioned restrictions.
Safety and Soundness. The OTS and other federal banking agencies have established guidelines for safety and soundness, addressing operational and managerial standards, as well as compensation matters for insured financial institutions. Institutions failing to meet these standards are required to submit compliance plans to their appropriate federal regulators. The OTS and the other agencies have also established guidelines regarding asset quality and earnings standards for insured institutions. The Bank believes that it is in compliance with these guidelines and standards.
Liquidity Requirements. All savings institutions are required to maintain an average daily balance of liquid assets equal to a certain percentage of the sum of its average daily balance of net withdrawable deposit accounts and borrowings payable in one year or less. The liquidity requirement may vary from time to time (between 4% and 10%) depending upon economic conditions and savings flows of all savings institutions. At the present time, the required minimum liquid asset ratio is 4%. At December 31, 2000, the Bank's liquidity ratio was 62.50%.
Capital Distributions. OTS regulations govern capital distributions by savings institutions, which include cash dividends, stock redemptions or repurchases, cash-out mergers, interest payments on certain convertible debt and other transactions charged to the capital account of a savings institution to make capital distributions. Generally, the regulation creates a safe harbor for specified levels of capital distributions from institutions meeting at least their minimum capital requirements, so long as such institutions notify the OTS and receive no objection to the distribution from the OTS. Savings institutions and distributions that do not qualify for the safe harbor are required to obtain prior OTS approval before making any capital distributions.
Generally, a savings institution that before and after the proposed distribution meets or exceeds its fully phased-in capital requirements (Tier 1 institutions) may make capital distributions during any calendar year equal to the higher of (i) 100% of net income for the calendar year-to-date plus 50% of its "surplus capital ratio" at the beginning of the calendar year or (ii) 75% of net income over the most recent four-quarter period. The "surplus capital ratio" is defined to mean the percentage by which the institution's tangible, core or risk-based capital ratio exceeds its tangible, core or risk-based capital requirement. Failure to meet minimum capital requirements will result in further restrictions on capital distributions, including possible prohibition without explicit OTS approval. See "Regulatory Capital Requirements."
In order to make distributions under these safe harbors, Tier 1 and Tier 2 institutions must submit 30 days written notice to the OTS prior to making the distribution. The OTS may object to the distribution during that 30-day period based on safety and soundness concerns. In addition, a Tier 1 institution deemed to be in need of more than normal supervision by the OTS may be downgraded to a Tier 2 or Tier 3 institution as a result of such a determination.
At December 31, 2000, the Bank was a Tier 1 institution for purposes of this regulation.
Loans to One Borrower. The permissible amount of loans-to-one borrower now generally follows the national bank standard for all loans made by savings institutions. The national bank standard generally does not permit loans-to-one borrower to exceed the greater of $500,000 or 15% of unimpaired capital and surplus. Loans in an amount equal to an additional 10% of unimpaired capital and surplus also may be made to a borrower if the loans are fully secured by readily marketable securities. For information about the largest borrowers from the Bank, see "Business - Lending Activities - Real Estate Lending Standards and Underwriting Policies."
Classified Assets. Federal regulations require that each insured savings institution classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, federal examiners have authority to identify problem assets and, if appropriate, classify them. There are three classifications for problem assets: "substandard," "doubtful" and "loss." Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets, with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. Another category designated "special mention" also must be established and maintained for assets which do not currently expose an insured institution to a sufficient degree of risk to warrant classification as substandard, doubtful or loss. Assets classified as substandard or doubtful require the institution to establish general allowances for loan losses. If an asset or portion thereof is classified loss, the insured institution must either establish specific allowances for loan losses in the amount of 100% of the portion of the asset classified loss, or charge-off such amount. General loss allowances established to cover possible losses related to assets classified substandard or doubtful may be included in determining an institution's regulatory capital up to certain amounts, while specific valuation allowances for loan losses do not qualify as regulatory capital. Federal examiners may disagree with an insured institution's classifications and amounts reserved. See "Business - Asset Quality - Classified Assets."
Branching by Federal Savings Institutions. OTS policy permits interstate branching to the full extent permitted by statute (which is essentially unlimited). Generally, federal law prohibits federal savings institutions from establishing, retaining or operating a branch outside the state in which the federal institution has its home office unless the
institution meets the Internal Revenue Service's domestic building and loan test (generally, 60% of a thrift's assets must be housing-related) ("IRS Test"). The IRS Test requirement does not apply if: (i) the branch(es) result(s) from an emergency acquisition of a troubled savings institution (however, if the troubled savings institution is acquired by a bank holding company, does not have its home office in the state of the bank holding company bank subsidiary and does not qualify under the IRS Test, its branching is limited to the branching laws for state-chartered banks in the state where the savings institution is located); (ii) the law of the state where the branch would be located would permit the branch to be established if the federal savings institution were chartered by the state in which its home office is located; or (iii) the branch was operated lawfully as a branch under state law prior to the savings institution's conversion to a federal charter.
Furthermore, the OTS will evaluate a branching applicant's record of compliance with the Community Reinvestment Act of 1977 ("CRA"). An unsatisfactory CRA record may be the basis for denial of a branching application.
Community Reinvestment Act and the Fair Lending Laws. Savings institutions have a responsibility under the CRA and related regulations of the OTS to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. In addition, the Equal Credit Opportunity Act and the Fair Housing Act (together, the "Fair Lending Laws") prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. An institution's failure to comply with the provisions of CRA could, at a minimum, result in regulatory restrictions on its activities, and failure to comply with the Fair Lending Laws could result in enforcement actions by the OTS, as well as other federal regulatory agencies and the Department of Justice.
Qualified Thrift Lender Test. All savings institutions are required to meet a QTL test in order to avoid certain restrictions on their operations. Under Section 2303 of the Economic Growth and Regulatory Paperwork Reduction Act of 1996, a savings institution can comply with the QTL test by either qualifying as a domestic building and loan association as defined in Section 7701(a)(19) of the Internal Revenue Code of 1986, as amended ("Code") or meeting the second prong of the QTL test set forth in Section 10(m) of the HOLA. A savings institution that does not meet the QTL test must either convert to a bank charter or comply with the following restrictions on its operations: (i) the institution may not engage in any new activity or make any new investment, directly or indirectly, unless such activity or investment is permissible for a national bank; (ii) the branching powers of the institution shall be restricted to those of a national bank; (iii) the institution shall not be eligible to obtain any advances from its FHLB; and (iv) payment of dividends by the institution shall be subject to the rules regarding payment of dividends by a national bank. Upon the expiration of three years from the date the savings institution ceases to meet the QTL test, it must cease any activity and not retain any investment not permissible for a national bank and immediately repay any outstanding FHLB advances (subject to safety and soundness considerations).
Currently, the prong of the QTL test that is not based on the Code 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. Assets that qualify without limit for inclusion as part of the 65% requirement are loans made to purchase, refinance, construct, improve or repair domestic residential housing and manufactured housing; home equity loans; mortgage-backed securities (where the mortgages are secured by domestic residential housing or manufactured housing); stock issued by the FHLB of Dallas; and direct or indirect obligations of the FDIC. In addition, the following assets, among others, may be included in meeting the test subject to an overall limit of 20% of the savings institution's portfolio assets: 50% of residential mortgage loans originated and sold within 90 days of origination; 100% of consumer and educational loans (limited to 10% of total portfolio assets); and stock issued by the FHLMC or the FNMA. Portfolio assets consist of total assets minus the sum of (i) goodwill and other intangible assets, (ii) property used by the savings institution to conduct its business, and (iii) liquid assets up to 20% of the institution's total assets. At December 31, 2000, the qualified thrift investments of the Bank were approximately 86.6% of its portfolio assets.
Federal Home Loan Bank System. The Bank is a member of the FHLB of Dallas, which is one of 12 regional FHLBs that administers the home financing credit function of savings institutions. Each FHLB 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 FHLB System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the Board of Directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the FHLB of Dallas in an amount equal to at least 1% of its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year. At December 31, 2000, the Bank had $585,000 in FHLB stock, which was in compliance with this requirement.
The FHLBs 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 FHLB dividends paid in the past and could continue to do so in the future. These contributions also could have an adverse effect on the value of FHLB stock in the future.
Federal Reserve System. The FRB requires all depository institutions to maintain reserves against their transaction accounts (primarily NOW and Super NOW checking accounts) and non-personal time deposits. As of December 31, 2000, no reserves were required to be maintained on the first $4.7 million of transaction accounts, reserves of 3% were required to be maintained against the next $47.8 million of net transaction accounts (with such dollar amounts subject to adjustment by the FRB), and a reserve of 10% (which is subject to adjustment by the FRB to a level between 8% and 14%), is required against all remaining net transaction accounts. Because required reserves must be maintained in the form of vault cash or a non-interest-bearing account at a Federal Reserve Bank, the effect of this reserve requirement is to reduce an institution's earning assets.
Louisiana Regulation
As a Louisiana-chartered savings association, the Bank also is subject to regulation and supervision by the OFI. The Bank is required to file periodic reports with and is subject to periodic examinations at least once every three years by the OFI. The lending and investment authority of the Bank is prescribed by Louisiana laws and regulations, as well as applicable federal laws and regulations, and the Bank is prohibited from engaging in any activities not permitted by such law and regulations.
The Bank is required by Louisiana law and regulations to comply with certain reserve and capital requirements. At December 31, 2000, the Bank was in compliance with all applicable reserve and capital requirements.
Louisiana law and regulations also restrict the lending and investment authority of Louisiana-chartered savings institutions. Such laws and regulations restrict the amount a Louisiana-chartered savings association can lend to any one borrower to an amount which, in the aggregate, does not exceed the lesser of (i) 10% of the association's savings deposits or (ii) the sum of the association's paid-in capital, surplus, reserves for losses, and undivided profits. Federal law imposes more restrictive limitations. See "Business-Lending Activities." Notwithstanding the foregoing, Louisiana and federal law permits any such association to lend to any one borrower an aggregate amount of at least $500,000.
In addition, Louisiana law restricts the ability of Louisiana-chartered savings associations to invest in, among other things, (i) commercial real estate loans (including commercial construction real estate loans) up to 40% of total assets; (ii) real estate investments for other than the association's offices up to 10% of total assets; (iii) consumer loans, commercial paper and corporate debt securities up to 30% of total assets; (iv) commercial, corporate, business or agricultural loans up to 10% of total assets; and (v) capital stock, obligations and other securities of service organizations up to 10% of total assets. Louisiana law also sets forth maximum loan-to-value ratios with respect to various types of loans. Applicable federal regulations impose more restrictive limitations in certain instances. See "Business-Lending Activities-Real Estate Lending Standards and Underwriting Policies."
The investment authority of Louisiana-chartered savings associations is broader in many respects than that of federally-chartered savings and loan associations. However, state-chartered savings associations, such as the Bank, are generally prohibited from acquiring or retaining any equity investment, other than certain investments in service corporations, of a type or in an amount that is not permitted for a federally-chartered savings association. This prohibition applies to equity investments in real estate, investments in equity securities and any other investment or transaction that is in substance an equity investment, even if the transaction is nominally a loan or other permissible transaction. At December 31, 2000, the Bank was in compliance with such provisions.
Furthermore, effective January 1, 1990, a state-chartered savings association may not engage as principal in any activity not permitted for federal associations unless the FDIC has determined that such activity would pose no significant risk to the affected deposit insurance fund and the Bank is in compliance with the fully phased-in capital standards prescribed under FIRREA. When certain activities are permissible for a federal association, the state association may engage in the activity in a higher amount if the FDIC has not determined that such activity would pose a significant risk of loss to the affected deposit insurance fund and the Bank meets the fully phased-in capital requirements. This increased investment authority does not apply to investments in nonresidential real estate loans. At December 31, 2000, the Bank had no investments which were affected by the foregoing limitations.
Under Louisiana law, a Louisiana-chartered savings association may establish or maintain a branch office anywhere in Louisiana with prior regulatory approval. In addition, an out-of-state savings association or holding company may acquire a Louisiana-chartered savings association or holding company if the OFI determines that the laws of such other state permit a Louisiana-chartered savings association or holding company to acquire a savings association or holding company in such other state. Any such acquisition would require the out-of-state entity to apply to the OFI and receive OFI approval.
As previously reported in the Company's Form 10-QSB for the quarterly period ended September 30, 2000, on October 4, 2000, the Office of Thrift Supervision (OTS) issued an order to "Cease and Desist" (the "Order") to the Bank. The Order was issued by the OTS as a result of their examination of the Bank as of April 10, 2000. The Order is an arrangement between the Bank and the OTS in which the Bank agrees to perform, among other things, the following within specified time periods:
(a) the Bank shall appoint a permanent compliance officer; (b) the Bank shall develop written policies and procedures for compliance in consumer lending, and for training lending personnel in these policies and procedures and in consumer compliance laws; (c) the Bank shall establish a plan for internal controls and procedures to ensure compliance with compliance regulations, and provide an ongoing monitoring program to assess the effectiveness and progress of compliance controls; (d) the Bank shall review all outstanding loans made since the last OTS compliance examination, dated June 23, 1997 to determine certain compliance matters for reporting to the OTS.
As previously reported in the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1999, on March 1, 2000 the Office of Thrift Supervision (OTS) and the Office of Financial Institutions (OFI) issued a preliminary supervisory agreement (the "Agreement") as a result of their examination of the Bank as of November 29, 1999. On April 17, 2000 the Company signed the Agreement, which, among other things, calls for the following actions to be taken within specified time periods:
(a) the Bank shall appoint a new Chief Executive Officer, two new directors and a compliance officer;
(b) the Bank must formulate a revised three year business plan;
(c) the Bank must adopt written policy and procedures for non-real estate commercial and consumer lending; and
(d) the Bank must obtain written approval from the regional director for any contractual arrangements with employees or third parties outside of the normal course of business and for any capital distributions.
Management believes it has taken affirmative action toward complying with the provisions of the Order and the Agreement.
TAXATION
Federal Taxation
General. The Company and the Bank are subject to the generally applicable corporate tax provisions of the Code, and the Bank is subject to certain additional provisions of the Code which apply to thrifts and other types of financial institutions. The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters material to the taxation of the Company and the Bank and is not a comprehensive discussion of the tax rules applicable to the Company and the Bank.
Year. The Company and the Bank file federal income tax returns on the basis of a calendar year ending on December 31. For 2000 and 2001, the Company and the Bank intend to file a consolidated tax return.
Bad Debt Reserves. In August 1966, legislation was enacted that repeals the reserve method of accounting (including the percentage of taxable income method) previously used by many savings institutions to calculate their bad debt reserve for federal income tax purposes. Savings institutions with $500 million or less in assets may, however, continue to use the experience method. As a result, the Bank must recapture that portion of its reserve which exceeds the amount that could have been taken under the ex