FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking
statements, which can be identified by the use of words such as “estimate,” “project,” “believe,”
“intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,”
“will,” “may,” “should,” “indicate,” “would,” “believe,”
“contemplate,” “continue,” “target” and words of similar meaning. These forward-looking statements
include, but are not limited to:
|
·
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statements of our goals, intentions and expectations;
|
|
·
|
statements regarding our business plans, prospects, growth and operating strategies;
|
|
·
|
statements regarding the asset quality of our loan and investment portfolios; and
|
|
·
|
estimates of our risks and future costs and benefits.
|
These forward-looking statements are based on
our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties
and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions
with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any
obligation to update any forward-looking statements after the date of this annual report.
The following factors, among others, could cause
actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
|
·
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our ability to manage our operations under the economic conditions in our market area;
|
|
·
|
adverse changes in the financial industry, securities, credit and national and local real estate markets (including real estate
values);
|
|
·
|
significant increases in our loan losses, including as a result of our inability to resolve classified and non-performing assets
or reduce risks associated with our loans, and management’s assumptions in determining the adequacy of the allowance for
loan losses;
|
|
·
|
credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and in our
allowance for loan losses and provision for loan losses;
|
|
·
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the use of estimates in determining fair value of certain of our assets, which may prove to be incorrect and result in significant
declines in valuations;
|
|
·
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competition among depository and other financial institutions;
|
|
·
|
our success in increasing our one- to four-family residential real estate lending and commercial real estate lending;
|
|
·
|
our ability to attract and maintain deposits and to grow our core deposits, and our success in introducing new financial products;
|
|
·
|
our ability to maintain our asset quality even as we continue to grow our commercial real estate and commercial business loan
portfolios;
|
|
·
|
changes in interest rates generally, including changes in the relative differences between short-term and long-term interest
rates and in deposit interest rates, that may affect our net interest margin and funding sources;
|
|
·
|
fluctuations in the demand for loans;
|
|
·
|
changes in consumer spending, borrowing and savings habits;
|
|
·
|
declines in the yield on our assets resulting from the current low interest rate environment;
|
|
·
|
risks related to a high concentration of loans secured by real estate located in our market area;
|
|
·
|
the results of examinations by our regulators, including the possibility that our regulators may, among other things, require
us to increase our allowance for loan losses, write down assets, change our regulatory capital position, limit our ability to borrow
funds or maintain or increase deposits, or prohibit us from paying dividends, which could adversely affect our dividends and earnings;
|
|
·
|
changes in the level of government support of housing finance;
|
|
·
|
our ability to enter new markets successfully and capitalize on growth opportunities;
|
|
·
|
changes in laws or government regulations or policies affecting financial institutions, including the Dodd-Frank Act and the
JOBS Act, which could result in, among other things, increased deposit insurance premiums and assessments, capital requirements,
regulatory fees and compliance costs, particularly the new capital regulations, and the resources we have available to address
such changes;
|
|
·
|
changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards
Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board;
|
|
·
|
changes in our compensation and benefit plans, and our ability to retain key members of our senior management team and to address
staffing needs in response to product demand or to implement our strategic plans;
|
|
·
|
loan delinquencies and changes in the underlying cash flows of our borrowers;
|
|
·
|
our ability to control costs and expenses, particularly those associated with operating as a publicly traded company;
|
|
·
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the failure or security breaches of computer systems on which we depend;
|
|
·
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the ability of key third-party service providers to perform their obligations to us;
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|
·
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changes in the financial condition or future prospects of issuers of securities that we own; and
|
|
·
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other economic, competitive, governmental, regulatory and operational factors affecting our operations, pricing, products and
services described elsewhere in this annual report.
|
BUSINESS OF HERITAGE NOLA BANCORP
Heritage NOLA Bancorp, Inc. (the “Company”)
was incorporated in Maryland on February 13, 2017 as part of the mutual-to-stock conversion of Heritage Bank of St. Tammany (“Heritage
Bank” or the “Bank”), for the purpose of becoming the savings and loan holding company of Heritage Bank. Since
being incorporated, other than holding the common stock of Heritage Bank, retaining approximately 50% of the net cash proceeds
of the stock conversion offering and making a loan to the employee stock ownership plan of Heritage Bank, we have not engaged in
any business activities to date.
The Company is authorized to pursue business
activities permitted by applicable laws and regulations, which may include the acquisition of banking and financial services companies.
See “Supervision and Regulation – Holding Company Regulation” for a discussion of the activities that are permitted
for savings and loan holding companies. We currently have no understandings or agreements to acquire other financial institutions,
although we may determine to do so in the future. We may also borrow funds for reinvestment in Heritage Bank.
Our cash flow depends on earnings from the investment
of the net proceeds we retained from our initial public stock offering that was consummated in July 2017
,
and any dividends
we receive from Heritage Bank. We neither own nor lease any property, but, as necessary, pay a fee to Heritage Bank for the use
of its premises, equipment and furniture. At the present time, we employ only persons who are officers of Heritage Bank who also
serve as officers of Heritage NOLA Bancorp. We use the support staff of Heritage Bank from time to time and pay a fee to Heritage
Bank for the time devoted to Heritage NOLA Bancorp by employees of Heritage Bank. However, these persons are not separately compensated
by Heritage NOLA Bancorp. Heritage NOLA Bancorp may hire additional employees, as appropriate, to the extent it expands its business
in the future.
BUSINESS OF HERITAGE BANK OF ST. TAMMANY
General
We conduct our business from our main office
in Covington, Louisiana, and our branch offices in Slidell. Louisiana, and Madisonville, Louisiana. All offices are located in
St. Tammany Parish, within the metropolitan area of New Orleans. Additionally, on September 11, 2018, the Bank purchased a site
in western St. Tammany Parish, Louisiana to build an additional branch facility in the future.
Covington is the Parish Seat of St. Tammany
Parish, which is located on the north shore of Lake Pontchartrain which separates St. Tammany Parish from New Orleans. Our primary
market area is St. Tammany Parish. To a lesser extent, we also originate loans in the greater New Orleans metropolitan area and
the parishes and counties contiguous to St. Tammany Parish.
Our business consists primarily of taking deposits
from the general public and investing those deposits, together with funds generated from operations, in one- to four-family residential
real estate loans, including non-owner-occupied properties and home equity lines of credit, and commercial real estate. We also
originate land, construction and multifamily loans, and to a much lesser extent, originate consumer loans and purchase commercial
business loans. At December 31, 2018, $69.4 million, or 69.2% of our total loan portfolio, was comprised of one- to four-family
residential real estate loans, $13.5 million of which were non-owner-occupied loans. While we originate conforming one- to four-family
residential real estate loans that we sell to Freddie Mac, we also originate a substantial amount of non-conforming loans that
we retain in our portfolio. Since the consummation of our stock offering, we have hired two experienced commercial lenders and
intend to increase our emphasis on the origination of commercial real estate loans.
We offer a variety of deposit accounts,
including noninterest-bearing and interest-bearing demand deposit accounts, savings accounts, and certificates of deposit. We
utilize advances from the FHLB-Dallas for asset/liability management purposes. At December 31, 2018, we had $16.8 million in
advances outstanding with the FHLB-Dallas.
In recent years we have accepted wholesale certificates
of deposit through National CD Rateline, an on-line service, and directly from other federally insured institutions. Pursuant to
our business strategy, we are seeking to increase our core deposits, which we define as demand deposit, NOW and statement savings
accounts, by aggressively marketing and pricing these deposit products and by growing our commercial lending relationships, and
reduce our reliance on wholesale certificates of deposit as a funding source.
Heritage Bank of St. Tammany is subject to comprehensive
regulation and examination by its primary federal regulator, the Office of the Comptroller of the Currency (“OCC”).
Our executive and administrative office is located
at 205 North Columbia Street, Covington, Louisiana 70433, and our telephone number at this address is (985) 892-4565. Our website
address is
www.heritagebank.org
. Information on our website is not incorporated into this annual report and should not be
considered part of this annual report.
Market Area
We conduct our business from our main office
in Covington, Louisiana, and our branch offices in Slidell, Louisiana, and Madisonville, Louisiana, all of which are located in
St. Tammany Parish, within the greater metropolitan area of New Orleans. Additionally, on September 11, 2018, the Bank purchased
a site in western St. Tammany Parish, Louisiana to build an additional branch facility in the future.
Covington is the Parish Seat of St. Tammany
Parish, which is located on the north shore of Lake Pontchartrain which separates St. Tammany Parish from New Orleans. Our primary
market area is St. Tammany Parish, and to a lesser extent, the parishes contiguous to St. Tammany Parish. Our business is dependent
on the local economy in southeastern Louisiana which includes the petrochemical industry, port activity along the Mississippi River,
healthcare and tourism. Service jobs, primarily in healthcare, education and construction and development, represent the largest
employment sector in St. Tammany Parish.
According to the United States census, the estimated
July 2015 population of St. Tammany Parish was 250,000, representing an increase of 7.0% from the 2010 census population of 234,000.
During this same time period, the New Orleans City population is estimated to have grown by 13.3%, the Louisiana population grew
by an estimated 3.0% and the United States population grew by an estimated 4.1%. From 2011 through 2015, the median household income
for St. Tammany Parish was $62,000, compared to median household incomes of $54,000 and $45,000 for the State of Louisiana and
for the United States, respectively.
Competition
We face vigorous competition both in making
loans and attracting deposits due to a high concentration of financial institutions within our market area. Additionally, we are
much smaller than the majority of depository institutions in our market area. The financial resources of these larger competitors
permit them to pay higher interest rates on their deposits and to be more aggressive in new loan originations. Our competition
includes commercial banks, savings institutions, mortgage banking firms, consumer finance companies and credit unions and, with
respect to deposits, from money market funds, brokerage firms, mutual funds and insurance companies. As of June 30, 2018, based
on the most recent available FDIC data, there were 26 FDIC-insured financial institutions with offices in St. Tammany Parish, of
which we ranked 11th, with a market share of deposits of 1.4%. We do not have a significant market share of either deposits or
residential lending in any other parish in Louisiana.
Lending Activities
General.
Our principal lending
activity is originating one- to four-family residential real estate loans, including non-owner-occupied loans and home equity lines
of credit, and commercial real estate loans. We also originate land, construction and multifamily loans, and to a much lesser extent,
we originate consumer loans.
Historically a significant amount of loans that
we have originated are non-conforming, and we retain these loans in our portfolio. Generally, we sell most of the conforming conventional,
fixed-rate one- to four-family residential real estate loans that we originate to Freddie Mac on a servicing-retained basis. In
2018 and 2017, approximately 69% and 71% of the owner-occupied, one-to four-family residential real estate loans that we originated,
respectively, were retained in our portfolio.
While commercial real estate loans have not
historically comprised a significant portion of our total loan portfolio, we continued to increase our portfolio of these loans
in 2018, through loan originations and participation purchases. The participations were purchased from other financial institutions
that are secured by properties within our market area of St. Tammany Parish and in the parishes contiguous to St. Tammany Parish.
We intend to continue to purchase these types of participations, and since the consummation of our conversion and stock offering
we have hired two commercial lenders in an effort to increase our origination of commercial real estate loans.
In 2016, we began purchasing loans from the
Bankers Healthcare Group, a nationally recognized lender to healthcare professionals. Consistent with our business plan to grow
our loan portfolio while managing our interest rate risk, subject to market conditions, we may increase our holdings of these types
of commercial business loans in the future.
However, we expect that one- to four-family
residential real estate lending will continue to be the core of our lending operations in the future.
Loan Portfolio Composition.
The
following table sets forth the composition of our loan portfolio, by type of loan, at the dates indicated.
|
|
At December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner-occupied
|
|
$
|
52,956
|
|
|
|
52.8
|
%
|
|
$
|
50,863
|
|
|
|
56.6
|
%
|
Non-owner-occupied
|
|
|
13,485
|
|
|
|
13.4
|
|
|
|
12,405
|
|
|
|
13.8
|
|
Home equity lines of credit
|
|
|
2,973
|
|
|
|
3.0
|
|
|
|
2,487
|
|
|
|
2.8
|
|
Commercial real estate
|
|
|
21,868
|
|
|
|
21.8
|
|
|
|
16,364
|
|
|
|
18.2
|
|
Land
|
|
|
2,211
|
|
|
|
2.2
|
|
|
|
2,605
|
|
|
|
2.9
|
|
Construction
|
|
|
2,947
|
|
|
|
2.9
|
|
|
|
1,703
|
|
|
|
1.9
|
|
Multifamily
|
|
|
1,524
|
|
|
|
1.5
|
|
|
|
1,665
|
|
|
|
1.8
|
|
Commercial
|
|
|
1,964
|
|
|
|
2.0
|
|
|
|
1,392
|
|
|
|
1.5
|
|
Consumer
|
|
|
354
|
|
|
|
0.4
|
|
|
|
451
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans receivable
|
|
|
100,282
|
|
|
|
100.0
|
%
|
|
|
89,935
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred loan costs (fees)
|
|
|
(380
|
)
|
|
|
|
|
|
|
(443
|
)
|
|
|
|
|
Loans in process
|
|
|
(1,601
|
)
|
|
|
|
|
|
|
(701
|
)
|
|
|
|
|
Allowance for loan losses
|
|
|
(768
|
)
|
|
|
|
|
|
|
(756
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans receivable, net
|
|
$
|
97,533
|
|
|
|
|
|
|
$
|
88,035
|
|
|
|
|
|
Loan Portfolio Maturities.
The
following table summarizes the scheduled repayments of our loan portfolio at December 31, 2018. Demand loans, loans having no stated
repayment schedule or maturity, and overdraft loans are reported as being due in the year ending December 31, 2019. Maturities
are based on the final contractual payment date and do not reflect the impact of prepayments and scheduled principal amortization.
(Dollars in thousands)
|
|
One-
to four-
family
residential
real estate
|
|
|
Commercial
real estate
|
|
|
Land
|
|
|
Construction
|
|
|
Multifamily
|
|
|
Consumer
|
|
|
Commercial
business
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due During
the Years
Ending December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
$
|
813
|
|
|
$
|
49
|
|
|
$
|
113
|
|
|
$
|
-
|
|
|
$
|
―
|
|
|
$
|
33
|
|
|
$
|
―
|
|
|
$
|
1,008
|
|
2020
|
|
|
382
|
|
|
|
37
|
|
|
|
151
|
|
|
|
―
|
|
|
|
949
|
|
|
|
19
|
|
|
|
―
|
|
|
|
1,538
|
|
2021
|
|
|
523
|
|
|
|
455
|
|
|
|
253
|
|
|
|
―
|
|
|
|
-
|
|
|
|
100
|
|
|
|
8
|
|
|
|
1,339
|
|
2022 to 2023
|
|
|
1,271
|
|
|
|
2,259
|
|
|
|
99
|
|
|
|
―
|
|
|
|
―
|
|
|
|
202
|
|
|
|
463
|
|
|
|
4,294
|
|
2024 to 2028
|
|
|
8,854
|
|
|
|
3,837
|
|
|
|
478
|
|
|
|
―
|
|
|
|
118
|
|
|
|
―
|
|
|
|
1,493
|
|
|
|
14,780
|
|
2029 to 2033
|
|
|
24,208
|
|
|
|
2,924
|
|
|
|
1,020
|
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
28,152
|
|
2034
and beyond
|
|
|
33,363
|
|
|
|
12,307
|
|
|
|
97
|
|
|
|
2,947
|
|
|
|
457
|
|
|
|
―
|
|
|
|
―
|
|
|
|
49,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
69,414
|
|
|
$
|
21,868
|
|
|
$
|
2,211
|
|
|
$
|
2,947
|
|
|
$
|
1,524
|
|
|
$
|
354
|
|
|
$
|
1,964
|
|
|
$
|
100,28
2
|
|
The following table sets forth the scheduled
repayments of fixed- and adjustable-rate loans at December 31, 2018 that are contractually due after December 31, 2019.
|
|
Due After December 31, 2019
|
|
|
|
Fixed
|
|
|
Adjustable
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner-occupied
|
|
$
|
43,746
|
|
|
$
|
8,505
|
|
|
$
|
52,251
|
|
Non-owner-occupied
|
|
|
11,791
|
|
|
|
1,586
|
|
|
|
13,377
|
|
Home equity lines of credit
|
|
|
―
|
|
|
|
2,973
|
|
|
|
2,973
|
|
Commercial real estate
|
|
|
8,966
|
|
|
|
12,853
|
|
|
|
21,819
|
|
Land
|
|
|
680
|
|
|
|
1,418
|
|
|
|
2,098
|
|
Construction
|
|
|
998
|
|
|
|
1,949
|
|
|
|
2,947
|
|
Multifamily
|
|
|
1,067
|
|
|
|
457
|
|
|
|
1,524
|
|
Consumer
|
|
|
―
|
|
|
|
321
|
|
|
|
321
|
|
Commercial business
|
|
|
1,964
|
|
|
|
―
|
|
|
|
1,964
|
|
Total
|
|
$
|
69,212
|
|
|
$
|
30,062
|
|
|
$
|
99,274
|
|
Loan Approval Procedures and Authority
.
Our lending is subject to written, non-discriminatory underwriting standards and origination procedures. Decisions on loan applications
are made on the basis of detailed applications submitted by the prospective borrower and property valuations. Our policies require
that for all real estate loans that we originate with a principal balance of greater than $100,000, property valuations must be
performed by outside independent state-licensed appraisers approved by our board of directors. The loan applications are designed
primarily to determine the borrower’s ability to repay the requested loan, and the more significant items on the application
are verified through use of credit reports, financial statements and tax returns. We will also evaluate a guarantor when a guarantee
is provided as part of the loan.
Pursuant to applicable law, the aggregate amount
of loans that we are permitted to make to any one borrower or a group of related borrowers is generally limited to 15% of Heritage
Bank of St. Tammany’s unimpaired capital and surplus (25% if the amount in excess of 15% is secured by “readily marketable
collateral” or 30% for certain residential development loans). At December 31, 2018, our largest credit relationship consisted
of one loan which totaled $2.5 million and was secured by a commercial office building. Our second largest relationship at this
date was $1.9 million total consisting of fourteen loans secured by residential investment properties. At December 31, 2018, these
loans were performing in accordance with their repayment terms.
We have a loan committee comprised of the Chairman
of the Board, the Chief Credit Officer and five outside directors. A majority of our loan committee must approve any loan over
$100,000 which we will retain in our portfolio. Any loan originated for sale must be approved by at least two members of the loan
committee. Loans which are secured by certificates of deposits or savings accounts may be approved by any officer of the Bank up
to 90% of the amount of the collateralized account.
Generally, we require fire and extended coverage
casualty insurance in amounts at least equal to the principal amount of the loan or the value of improvements on the property,
depending on the type of loan. In addition, we require flood insurance (where appropriate) and may require escrow for property
taxes and insurance on our one- to four-family residential loans.
One- to Four-Family Residential Real Estate
Lending
.
At December 31, 2018, $53.0 million, or 52.8% of our total loans, was secured by owner-occupied, one- to four-family
residential real estate. At this date, we had an additional $13.5 million, or 13.4% of our total loan portfolio, secured by non-owner-occupied,
one- to four-family residential real estate loans. We originate both fixed- and adjustable-rate one- to four-family residential
real estate loans, and at December 31, 2018, these types of loans were comprised of 81% fixed-rate loans, and 19% adjustable-rate
loans.
We generally limit the loan-to-value ratios
of our owner-occupied, one- to four-family residential real estate loans to 89% of the purchase price or appraised value, whichever
is lower, and to 80% of the lower of the purchase price or appraised value, for non-owner-occupied, one- to four-family residential
real estate loans. In addition, we may make one- to four-family residential real estate loans with loan-to-value ratios above 89%
of the purchase price or appraised value, whichever is less, where the borrower obtains private mortgage insurance.
We originate one- to four-family residential
real estate loans for retention in our portfolio as well as for sale in the secondary market. Loans originated for sale are underwritten
according to Freddie Mac guidelines, typically with terms of up to 30 years. We generally retain the servicing on loans we sell
to Freddie Mac. Additionally, we originate a substantial amount of non-conforming, one- to four-family residential real estate
loans that we retain in our portfolio. These loans might be nonconforming as a result of the loan to value of the appraised property
securing the loan, or the debt to income ratio or the credit score of the borrower, or other nonconforming aspects of the credit.
Fixed rate loans that we currently offer and retain in our portfolio at December 31, 2018 had a maximum fixed-rate term of 20 years.
At December 31, 2018, approximately 85% of our
one- to four-family residential real estate loans were secured by properties located in our market area. On a limited basis we
have purchased or originated one- to four-family residential real estate loans from outside of our market area.
Our adjustable-rate, one- to four-family residential
real estate loans generally have fixed rates of interest for initial terms of three and five years, and adjust thereafter every
three and five years, respectively, at a margin, which in recent years has been between 3.00% and 4.00%, depending on the amortization
schedule, over the Federal Cost of Funds Index. Our adjustable-rate loans with a three-year fixed rate have had a maximum lifetime
adjustment of 5% above the initial rate of the loan, and the maximum amount by which the interest rate may be increased is generally
2% per adjustment period. Our adjustable-rate loans with a five-year fixed rate have had a maximum lifetime adjustment of 6% above
the initial rate of the loan, and the maximum amount by which the interest rate may be increased is generally 3% per adjustment
period. Our adjustable-rate loans carry terms to maturity of up to 30 years.
We also originate fixed-rate and adjustable-rate
non-owner-occupied, one- to four-family residential real estate loans. The fixed-rate loans have terms of up to 15 years. Our adjustable-rate
loans have terms and amortization schedules of up to 20 years.
Although adjustable-rate one- to four-family
residential real estate loans may reduce our vulnerability to changes in market interest rates because they periodically reprice,
as interest rates increase, the required payments due from the borrower also increase (subject to rate caps), increasing the potential
for default by the borrower. At the same time, the ability of the borrower to repay the loan and the marketability of the underlying
collateral may be adversely affected by higher interest rates. Upward adjustments of the contractual interest rate are also limited
by the maximum periodic and lifetime rate adjustments permitted by our loan documents. As a result, the effectiveness of adjustable-rate
one- to four-family residential real estate loans in compensating for changes in market interest rates may be limited during periods
of rapidly rising interest rates.
Other than construction
loans which are interest-only during the construction period and then convert to permanent one-to four-family residential mortgage
loans, we do not offer “interest only” mortgage loans on permanent one- to four-family residential real estate loans
(where the borrower pays interest for an initial period, after which the loan converts to a fully amortizing loan). We also do
not offer one- to four-family residential real estate loans that provide for negative amortization of principal, such as “Option
ARM” loans, where the borrower can pay less than the interest owed on the loan, resulting in an increased principal balance
during the life of the loan. We generally do not offer “subprime loans” on one- to four- family residential real estate
loans (
i.e.
, loans to borrowers with weakened credit histories typically characterized by payment delinquencies, previous
charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high
debt-burden ratios), or “Alt-A” (
i.e.
, loans to borrowers with better credit scores who borrow with alternative
documentation such as little or no verification of income).
Home Equity Lines of Credit.
We
offer home equity lines of credit on owner-occupied homes, which are secured by first or second mortgages on residences. We generally
offer these loans with a maximum total loan-to-value ratio (including senior liens on the collateral property) of up to 89%. Our
home equity lines of credit are interest-only revolving lines of credit with a draw period of up to 10 years. Generally, the rates
on our home equity lines of credit are tied to the prevailing Prime Rate as published in
The Wall Street Journal
. Our home
equity lines of credit require additional underwriting criteria, including that the loan must be in the borrower’s personal
name and generally that the borrower must have a deposit relationship with the Bank. At December 31, 2018, we had $3.0 million
of home equity lines of credit, representing 3.0% of our total loan portfolio. At December 31, 2018, we had no home equity lines
of credit that were 60 days or more delinquent.
The majority of our home equity lines of credit
are secured by properties in which we hold or service the first mortgage. However, home equity lines of credit may have greater
risk than one- to four family residential real estate loans secured by first mortgages. Our interest is generally subordinated
to the interest of the institution holding the first mortgage. Even where we hold the first mortgage, we face the risk that the
value of the collateral may not be sufficient to compensate us for the amount of the unpaid loan and costs of foreclosure and we
may be unsuccessful in recovering the remaining balance from those customers.
Commercial Real Estate Lending
.
In
addition to one- to four-family residential real estate lending, we also originate and purchase, and intend to increase our emphasis
on the origination and purchase of, commercial real estate loans. At December 31, 2018, $21.9 million, or 21.8% of our total loan
portfolio, was comprised of commercial real estate loans.
Our commercial real estate loans are fixed-rate
loans or adjustable rate loans with amortization schedules of not more than 20 years. The maximum loan-to-value ratio of our commercial
real estate loans made on improved property is generally 80% of the lower of the purchase price or appraised value of the property
securing the loan, and is 75% on land development and vacant lots. Our commercial real estate loans are typically secured by retail,
service or other commercial properties.
Set forth below is information regarding our
commercial real estate loans at December 31, 2018. At December 31, 2018, $9.2 million of our commercial loans were secured by non-owner-occupied
properties.
Type of Loan
|
|
Number of Loans
|
|
|
Balance
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Office
|
|
|
26
|
|
|
$
|
11,183
|
|
Restaurant
|
|
|
9
|
|
|
|
4,405
|
|
Retail
|
|
|
8
|
|
|
|
2,376
|
|
Grocery
|
|
|
2
|
|
|
|
1,454
|
|
Boat Storage Facility
|
|
|
1
|
|
|
|
1,069
|
|
Other
|
|
|
5
|
|
|
|
1,381
|
|
Total
|
|
|
51
|
|
|
$
|
21,868
|
|
At December 31, 2018, our largest outstanding
commercial real estate loan had a balance of $2.5 million and was secured by a commercial office building. This loan was performing
in accordance with its original repayment terms at December 31, 2018.
We consider a number of factors in originating
commercial real estate loans. We evaluate the qualifications and financial condition of the borrower, including project-level and
global cash flows, credit history, and management expertise, as well as the value and condition of the property securing the loan.
When evaluating the qualifications of the borrower, we first consider the financial resources of the borrower, then value of the
property, the borrower’s experience in owning or managing similar property and the borrower’s payment history with
us and other financial institutions. In evaluating the property securing the loan, the factors we consider include the net operating
income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of the
mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service). We generally require
a debt service ratio of at least 1.20 times.
Commercial real estate loans entail greater
credit risks compared to one- to four-family residential real estate loans because they typically involve larger loan balances
concentrated with single borrowers or groups of related borrowers. In addition, the payment of loans secured by income-producing
properties typically depends on the successful operation of the property, as repayment of the loan generally is dependent, in large
part, on sufficient income from the property to cover operating expenses and debt service. Changes in economic conditions that
are not in the control of the borrower or lender could affect the value of the collateral for the loan or the future cash flow
of the property. Additionally, any decline in real estate values may be more pronounced for commercial real estate than residential
properties. There may be additional risk on commercial rentals, where the borrower is not the occupant of the collateral property.
If we foreclose on a commercial real estate loan, our holding period for the collateral is typically longer than for one- to four-family
residential real estate loans because there are fewer potential purchasers of the collateral. Further, our commercial real estate
loans generally have relatively large balances to single borrowers or related groups of borrowers. Accordingly, if any of our judgments
regarding the collectability of our commercial real estate loans prove incorrect, the resulting charge-offs may be larger on a
per loan basis than those incurred with respect to one- to four-family residential loans.
Multifamily Real Estate Loans.
At
December 31, 2018, multifamily real estate loans were comprised of three lending relationships and totaled $1.5 million, or 1.5%
of our total loan portfolio.
We originate a variety of fixed- and adjustable-rate
multifamily real estate loans with balloon and amortization terms up to 20 years. Multifamily real estate loan amounts generally
do not exceed 80% of the property’s appraised value at the time the loan is originated. Aggregate debt service ratios, including
the guarantor’s cash flow and the borrower’s other projects, have a guideline minimum income to debt service ratio
of 1.20x. We require multifamily real estate loan borrowers with loan relationships in excess of $150,000 to submit annual financial
statements and/or rent rolls on the subject property. We may request such information for smaller loans on a case-by-case basis.
These properties may also be subject to annual inspections with pictures as evidence appropriate maintenance is being performed.
At December 31, 2018, our largest multifamily
real estate loan had a balance of $949,000 and was a participation that we purchased that is secured by a 58-unit property located
in our market area. At December 31, 2018, this loan was performing in accordance with its terms.
Construction and Land Lending
.
At December 31, 2018, we had $2.9 million, or 2.9% of our total loan portfolio, in construction loans, all of which were secured
by owner-occupied, single-family residences. At this date we had an additional $2.2 million, or 2.2% of our total loan portfolio,
in land loans. We offer loans for the construction of owner-occupied residential properties as well as non-owner occupied residential
and commercial properties. At December 31, 2018, our largest construction loan was a $440,000 loan secured by an owner-occupied,
one- to four-family residential real estate loan. This loan was performing in accordance with its original repayment terms at December
31, 2018.
Our residential construction loans generally
have initial terms of 12 months (subject to extension), during which the borrower pays interest only. Upon completion of construction,
these loans convert to conventional amortizing mortgage loans. We do not extend credit if construction has already commenced, except
in unique circumstances and upon the approval of the President and Chief Credit Officer or the loan committee and if title insurance
is obtained. Our residential construction loans have rates and terms comparable to residential real estate loans that we originate.
The maximum loan-to-value ratio of our residential construction loans is generally 85% of the lesser of the appraised value of
the completed property or the total cost of the construction project. Residential construction loans are generally underwritten
pursuant to the same guidelines used for originating permanent residential mortgage loans.
Raw land loans have terms of not more than 15
years. The maximum loan-to-value of these loans is 65% of the lesser of the appraised value or the purchase price of the property.
Construction and land lending generally involves
greater credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction or loan depends
largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated
cost (including interest) of construction and other assumptions. If the estimate of construction cost is inaccurate, we may be
required to advance additional funds beyond the amount originally committed in order to protect the value of the property. Moreover,
if the estimated value of the completed project is inaccurate, the borrower may hold a property with a value that is insufficient
to assure full repayment of the construction loan upon the sale of the property. Construction and land loans also expose us to
the risk that improvements will not be completed on time in accordance with specifications and projected costs. In addition, the
ultimate sale or rental of the property may not occur as anticipated. Land loans pose additional risk because the property generally
does not produce income and may be relatively illiquid.
Commercial Business Lending
.
In
2016, we began purchasing loans from the Bankers Healthcare Group, a nationally recognized lender to healthcare professionals.
At December 31, 2018, we had $2.0 million of commercial business loans, $1.7 million of which were loans to healthcare professionals
secured by personal guarantees from the borrower, purchased from Bankers Healthcare Group. Commercial business loans represent
2.0% of our total loan portfolio. Consistent with our business plan to grow our loan portfolio while managing our interest rate
risk, subject to market conditions, we may increase our holdings of the Bankers Healthcare Group loans such that the aggregate
outstanding balance of these loans would equal our regulatory loans to one borrower limitation. We anticipate originating more
commercial business loans in the future.
Consumer Lending.
At December
31, 2018, we had $354,000, or 0.4% of our loan portfolio, in consumer loans. This figure includes $12,000 of demand deposit overdrafts.
Our consumer loans are primarily secured by savings accounts or certificates of deposit, and are interest-only loans. The majority
of these loans have a variable rate of interest for a term of up to five years, tied to the Wall Street Journal prime rate.
Loan Originations, Participations, Purchases
and Sales
We originate real estate and other loans through
employee marketing and advertising efforts, our existing customer base, walk-in customers and referrals from customers. In recent
years, we expanded our staff to include additional residential real estate lenders and experienced commercial lenders to increase
our loan originations.
Consistent with our growth strategy, we have
purchased loans and participations in loans secured by both one- to four-family residential and commercial real estate. For the
year ended December 31, 2018, one- to four-family secured loans accounted for $474,000 in purchased loans and participations and
commercial real estate accounted for $3.2 million in purchased loans and participations. Additionally during 2018, we purchased
loans to healthcare professionals through Bankers Healthcare Group totaling $652,000. We originate one-to four-family residential
real estate loans that conform to Freddie Mac guidelines for sale into the secondary market. In 2018 and 2017, we originated for
sale and sold $3.5 million and $3.4 million, respectively, of one- to four-family residential real estate loans.
The following table sets forth our loan origination,
purchase, sale and principal repayment activity during the periods indicated.
|
|
Years Ended December 31,
|
|
(Dollars in thousands)
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Total loans, at beginning of period
|
|
$
|
89,935
|
|
|
$
|
76,661
|
|
|
|
|
|
|
|
|
|
|
Loans originated:
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
One- to four-family residential:
|
|
|
|
|
|
|
|
|
Owner-occupied
|
|
|
11,242
|
|
|
|
11,740
|
|
Non-owner-occupied
|
|
|
2,128
|
|
|
|
1,656
|
|
Home equity lines of credit
|
|
|
1,761
|
|
|
|
1,666
|
|
Commercial real estate
|
|
|
5,385
|
|
|
|
1,826
|
|
Land
|
|
|
410
|
|
|
|
433
|
|
Construction
|
|
|
4,452
|
|
|
|
1,691
|
|
Multifamily
|
|
|
—
|
|
|
|
219
|
|
Commercial Business
|
|
|
420
|
|
|
|
—
|
|
Consumer
|
|
|
355
|
|
|
|
55
|
|
Total loans originated
|
|
|
26,153
|
|
|
|
19,286
|
|
|
|
|
|
|
|
|
|
|
Loans purchased:
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
One- to four-family residential:
|
|
|
|
|
|
|
|
|
Owner-occupied
|
|
|
—
|
|
|
|
984
|
|
Non-owner-occupied
|
|
|
474
|
|
|
|
1,186
|
|
Commercial real estate
|
|
|
3,244
|
|
|
|
10,055
|
|
Multifamily
|
|
|
—
|
|
|
|
475
|
|
Commercial business
|
|
|
652
|
|
|
|
1,235
|
|
Total loans purchased
|
|
|
4,370
|
|
|
|
13,935
|
|
|
|
|
|
|
|
|
|
|
Loans sold:
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
One- to four-family residential:
|
|
|
|
|
|
|
|
|
Owner-occupied
|
|
|
3,472
|
|
|
|
3,393
|
|
Total loans sold
|
|
|
3,472
|
|
|
|
3,393
|
|
|
|
|
|
|
|
|
|
|
Other:
|
|
|
|
|
|
|
|
|
Principal repayments, etc
|
|
|
16,704
|
|
|
|
16,554
|
|
|
|
|
|
|
|
|
|
|
Net loan activity
|
|
|
10,347
|
|
|
|
13,274
|
|
Total loans, including loans held for sale, at end of period
|
|
$
|
100,282
|
|
|
$
|
89,935
|
|
Delinquencies, Classified Assets and Nonperforming
Assets
Delinquency Procedures.
When a
borrower fails to make a required monthly payment on a residential real estate loan, after 60 days the delinquent loan is reported
to the board of directors and is placed on a watch list. After 90 days delinquent the loan is transferred to the appropriate collections
or risk management personnel. Our policies provide that a late notice be sent when a loan is 15 days past due, and continuing with
late notices sent after 30, 60 and 90 days. In addition, we may call the borrower when the loan is 30 days past due, and we attempt
to cooperate with the borrower to determine the reason for nonpayment and to work with the borrower to establish a repayment schedule
that will cure the delinquency. Once the loan is considered in default, generally at 90 days past due, a letter is generally sent
to the borrower explaining that the entire balance of the loan is due and payable, the loan is placed on non-accrual status, and
additional efforts are made to contact the borrower. If the borrower does not respond, we generally initiate foreclosure proceedings
when the loan is 120 days past due. If the loan is reinstated, foreclosure proceedings will be discontinued and the borrower will
be permitted to continue to make payments. In certain instances, we may modify the loan or grant a limited exemption from loan
payments to allow the borrower to reorganize his or her financial affairs.
When we acquire real estate as a result of foreclosure
or by deed in lieu of foreclosure, the real estate is classified as other real estate owned until it is sold. The real estate is
recorded at fair value at the date of acquisition less estimated costs to sell, and any write-down resulting from the
acquisition is charged to the allowance for loan losses. Subsequent decreases in the value of the property are charged to operations.
After acquisition, all costs in maintaining the property are expensed as incurred. Costs relating to the development and improvement
of the property, however, are capitalized to the extent of estimated fair value less estimated costs to sell.
Delinquent commercial real estate, multifamily,
construction and land loans are handled in a similar fashion. Our procedures for repossession and sale of consumer collateral are
subject to various requirements under applicable laws, including consumer protection laws. In addition, we may determine that foreclosure
and sale of such collateral would not be cost-effective for us.
Troubled Debt Restructurings.
We
occasionally modify loans to extend the term or make other concessions to help a borrower stay current on his or her loan and to
avoid foreclosure. We consider modifications only after analyzing the borrower’s current repayment capacity, evaluating
the strength of any guarantors based on documented current financial information, and assessing the current value of any collateral
pledged. We generally do not forgive principal or interest on loans, but may do so if it is in our best interest and increases
the likelihood that we can collect the remaining principal balance. We may modify the terms of loans to lower interest rates (which
may be at below market rates), to provide for fixed interest rates on loans where fixed rates are otherwise not available, to provide
for longer amortization schedules, or to provide for interest-only terms. These modifications are made only when there is a reasonable
and attainable workout plan that has been agreed to by the borrower and that is in our best interests. At December 31, 2018, we
had no loans which were classified as a troubled debt restructuring.
Delinquent Loans
. The following
table sets forth our loan delinquencies by type and amount at the dates indicated.
|
|
Loans Delinquent For
|
|
|
|
|
|
|
30-89 Days
|
|
|
90 Days and Over
|
|
|
Total
|
|
|
|
Number
|
|
|
Amount
|
|
|
Number
|
|
|
Amount
|
|
|
Number
|
|
|
Amount
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner-occupied
|
|
|
15
|
|
|
$
|
2034
|
|
|
|
1
|
|
|
$
|
100
|
|
|
|
16
|
|
|
$
|
2,134
|
|
Non-owner-occupied
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Home equity lines of credit
|
|
|
1
|
|
|
|
82
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
82
|
|
Commercial real estate
|
|
|
1
|
|
|
|
222
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
222
|
|
Land
|
|
|
2
|
|
|
|
15
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
|
|
15
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Multifamily
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
3
|
|
|
|
66
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
|
|
66
|
|
Commercial business
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
22
|
|
|
$
|
2,419
|
|
|
|
1
|
|
|
$
|
100
|
|
|
|
23
|
|
|
$
|
2,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner-occupied
|
|
|
13
|
|
|
$
|
1,744
|
|
|
|
1
|
|
|
$
|
225
|
|
|
|
14
|
|
|
$
|
1,969
|
|
Non-owner-occupied
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Home equity lines of credit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial real estate
|
|
|
1
|
|
|
|
237
|
|
|
|
1
|
|
|
|
131
|
|
|
|
2
|
|
|
|
368
|
|
Land
|
|
|
2
|
|
|
|
103
|
|
|
|
2
|
|
|
|
34
|
|
|
|
4
|
|
|
|
137
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Multifamily
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
2
|
|
|
|
20
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
|
|
20
|
|
Commercial business
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
18
|
|
|
$
|
2,104
|
|
|
|
4
|
|
|
$
|
390
|
|
|
|
22
|
|
|
$
|
2,494
|
|
Classified Assets
. Federal regulations
provide that loans and other assets of lesser quality should be classified as “substandard,” “doubtful”
or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth
and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized
by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies
are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,”
with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of
currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss”
are those considered “uncollectible” and of such little value that their continuance as assets without the establishment
of a specific allowance for loan losses is not warranted. Assets that do not currently expose the insured institution to sufficient
risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated as “special
mention.” At December 31, 2018, we had no loans designated as “special mention.”
When an insured institution classifies problem
assets as either substandard or doubtful, it may establish general allowances in an amount deemed prudent by management to cover
losses that were both probable and reasonable to estimate. General allowances represent allowances which have been established
to cover accrued losses associated with lending activities that were both probable and reasonable to estimate, but which, unlike
specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets
as “loss,” it is required either to establish a specific allowance for losses equal to 100% of that portion of the
asset so classified or to charge-off such amount. An institution’s determination as to the classification of its assets and
the amount of its valuation allowances is subject to review by the regulatory authorities, which may require the establishment
of additional general or specific allowances.
In connection with the filing of our periodic
regulatory reports and in accordance with our classification of assets policy, we regularly review the problem loans in our portfolio
to determine whether any loans require classification in accordance with applicable regulations. If a problem loan deteriorates
in asset quality, the classification is changed to “special mention,” “substandard,” “doubtful”
or “loss” depending on the circumstances and the evaluation. Generally, loans 90 days or more past due are placed on
nonaccrual status and classified “substandard.”
The following table sets forth our amounts of
classified assets as of the dates indicated. Amounts shown at December 31, 2018 and 2017 include approximately $100,000 and $390,000
of nonperforming loans, respectively. The related specific valuation allowance in the allowance for loan losses for such nonperforming
loans was $10,000 and $38,000 at December 31, 2018 and 2017, respectively.
|
|
At December 31,
|
|
(Dollars in thousands)
|
|
2018
|
|
|
2017
|
|
Substandard assets
|
|
$
|
662
|
|
|
$
|
859
|
|
Doubtful assets
|
|
|
―
|
|
|
|
―
|
|
Loss assets
|
|
|
―
|
|
|
|
―
|
|
Total classified assets
|
|
$
|
662
|
|
|
$
|
859
|
|
Nonperforming Assets.
The table
below sets forth the amounts and categories of our non-performing assets at the dates indicated.
|
|
At
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
Non-accrual loans:
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
One-
to four-family residential:
|
|
|
|
|
|
|
|
|
Owner-occupied
|
|
$
|
100
|
|
|
$
|
225
|
|
Non-owner-occupied
|
|
|
―
|
|
|
|
―
|
|
Home
equity lines of credit
|
|
|
―
|
|
|
|
―
|
|
Commercial
real estate
|
|
|
―
|
|
|
|
131
|
|
Land
|
|
|
―
|
|
|
|
16
|
|
Construction
|
|
|
―
|
|
|
|
―
|
|
Multifamily
|
|
|
―
|
|
|
|
―
|
|
Consumer
|
|
|
―
|
|
|
|
―
|
|
Commercial
business
|
|
|
―
|
|
|
|
―
|
|
Total
|
|
|
100
|
|
|
|
372
|
|
|
|
|
|
|
|
|
|
|
Accruing
loans 90 days or more past due:
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
One-
to four-family residential:
|
|
|
|
|
|
|
|
|
Owner-occupied
|
|
|
―
|
|
|
|
―
|
|
Non-owner-occupied
|
|
|
―
|
|
|
|
―
|
|
Home
equity lines of credit
|
|
|
―
|
|
|
|
―
|
|
Commercial
real estate
|
|
|
―
|
|
|
|
―
|
|
Land
|
|
|
―
|
|
|
|
18
|
|
Construction
|
|
|
―
|
|
|
|
―
|
|
Multifamily
|
|
|
―
|
|
|
|
―
|
|
Consumer
|
|
|
―
|
|
|
|
―
|
|
Commercial
business
|
|
|
―
|
|
|
|
―
|
|
Total
accruing loans 90 days or more past due
|
|
|
―
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
Total
non-performing loans
|
|
|
100
|
|
|
|
390
|
|
|
|
|
|
|
|
|
|
|
Real
estate owned
|
|
|
―
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
Total
non-performing assets
|
|
$
|
100
|
|
|
$
|
474
|
|
|
|
|
|
|
|
|
|
|
Accruing
troubled debt restructurings:
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
One-
to four-family residential:
|
|
|
|
|
|
|
|
|
Owner-occupied
|
|
$
|
―
|
|
|
$
|
―
|
|
Non-owner-occupied
|
|
|
―
|
|
|
|
―
|
|
Home
equity lines of credit
|
|
|
―
|
|
|
|
―
|
|
Commercial
real estate
|
|
|
―
|
|
|
|
―
|
|
Land
|
|
|
―
|
|
|
|
―
|
|
Construction
|
|
|
―
|
|
|
|
―
|
|
Multifamily
|
|
|
―
|
|
|
|
―
|
|
Consumer
|
|
|
―
|
|
|
|
―
|
|
Commercial
business
|
|
|
―
|
|
|
|
―
|
|
Total
|
|
$
|
―
|
|
|
$
|
―
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
Total
non-performing loans to total loans
|
|
|
0.10
|
%
|
|
|
0.43
|
%
|
Total
non-performing assets to total assets
|
|
|
0.08
|
%
|
|
|
0.43
|
%
|
Total
non-performing loans and TDRs to total loans
|
|
|
0.10
|
%
|
|
|
0.43
|
%
|
Total
non-performing assets and TDRs to total assets
|
|
|
0.08
|
%
|
|
|
0.43
|
%
|
For the year ended December 31, 2018, gross
interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms was
immaterial. Interest income recognized on such loans for the year ended December 31, 2018 was immaterial.
Other Loans of Concern.
At December
31, 2018 and 2017, there were $562,000 and $487,000, respectively, of other loans, all of which were classified as substandard,
that are not already disclosed in the nonperforming assets and troubled debt restructurings table above where there is information
about possible credit problems of borrowers that caused management to have serious doubts about the ability of the borrowers to
comply with present loan repayment terms and that may result in disclosure of such loans in the future.
Allowance for Loan Losses
Analysis and Determination of the Allowance
for Loan Losses
. Our allowance for loan losses is the amount considered necessary to reflect probable incurred losses in
our loan portfolio. We evaluate the need to establish allowances against losses on loans on a quarterly basis. When additional
allowances are necessary, a provision for loan losses is charged to earnings.
Our methodology for assessing the appropriateness
of the allowance for loan losses consists of two key elements: (1) specific allowances for identified impaired loans; and (2) a
general valuation allowance on the remainder of the loan portfolio. Although we determine the amount of each element of the allowance
separately, the entire allowance for loan losses is available for the entire portfolio.
We identify loans that may need to be charged
off as a loss by reviewing all delinquent loans, classified loans, and other loans about which management may have concerns about
collectability. For individually reviewed loans, the borrower’s inability to make payments under the terms of the loan as
well as the shortfall in collateral value could result in our charging off the loan or the portion of the loan that was impaired.
Among other factors, we consider current general
economic conditions, including current housing price depreciation, in determining the appropriateness of the allowance for loan
losses for our residential real estate portfolio. We use evidence obtained from our own loan portfolio as well as published housing
data on our local markets from third party sources we believe to be reliable as a basis for assumptions about the impact of housing
depreciation.
Substantially all of our loans are secured by
collateral. Loans 90 days past due and other classified loans are evaluated for impairment and general or specific allowances are
established. Typically for a nonperforming real estate loan in the process of collection, the value of the underlying collateral
is estimated using either the original independent appraisal if it is less than 12 months old, adjusted for current economic conditions
and other factors, or a new independent appraisal, and related general or specific allowances for loan losses are adjusted on a
quarterly basis. If a nonperforming real estate loan is in the process of foreclosure and/or there are serious doubts about further
collectability of principal or interest, and there is uncertainty about the value of the underlying collateral, we will order a
new independent appraisal if it has not already been obtained. Any shortfall would result in immediately charging off the portion
of the loan that was impaired.
Specific Allowances for Identified Problem
Loans
. We establish a specific allowance when loans are determined to be impaired. Loss is measured by determining the
present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral less estimated
selling expenses. Factors in identifying a specific problem loan include: (1) the strength of the customer’s personal or
business cash flows; (2) the availability of other sources of repayment; (3) the amount due or past due; (4) the type and value
of collateral; (5) the strength of our collateral position; (6) the estimated cost to sell the collateral; and (7) the borrower’s
effort to cure the delinquency. In addition, for loans secured by real estate, we consider the extent of any past due and unpaid
property taxes applicable to the property serving as collateral on the mortgage.
General Valuation Allowance on the Remainder
of the Loan Portfolio
. We establish a general allowance for loans that are not classified as impaired to recognize the
inherent losses associated with lending activities, but which, unlike specific allowances, has not been allocated to particular
problem assets. This general valuation allowance is determined by segregating the loans by loan category and assigning allowance
percentages based on our historical loss experience, delinquency trends and management’s evaluation of the collectability
of the loan portfolio. The allowance may be adjusted for significant factors that, in management’s judgment, affect the collectability
of the portfolio as of the evaluation date. These significant factors may include changes in lending policies and procedures, changes
in existing general economic and business conditions affecting our primary market area, credit quality trends, collateral value,
loan volumes and concentrations, seasoning of the loan portfolio, recent loss experience in particular segments of the portfolio,
duration of the current business cycle and bank regulatory examination results. The applied loss factors are re-evaluated quarterly
to ensure their relevance in the current real estate environment.
The following table sets forth activity in our
allowance for loan losses for the years indicated.
|
|
At or For the Years Ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
756
|
|
|
$
|
692
|
|
|
|
|
|
|
|
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
One- to four-family residential:
|
|
|
|
|
|
|
|
|
Owner-occupied
|
|
|
―
|
|
|
|
―
|
|
Non-owner-occupied
|
|
|
―
|
|
|
|
―
|
|
Home equity lines of credit
|
|
|
―
|
|
|
|
―
|
|
Commercial real estate
|
|
|
1
|
|
|
|
16
|
|
Land
|
|
|
―
|
|
|
|
―
|
|
Construction
|
|
|
―
|
|
|
|
―
|
|
Multifamily
|
|
|
―
|
|
|
|
―
|
|
Consumer
|
|
|
8
|
|
|
|
―
|
|
Commercial business
|
|
|
―
|
|
|
|
―
|
|
Total charge-offs
|
|
|
9
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
One- to four-family residential:
|
|
|
|
|
|
|
|
|
Owner-occupied
|
|
|
13
|
|
|
|
―
|
|
Non-owner-occupied
|
|
|
―
|
|
|
|
―
|
|
Home equity lines of credit
|
|
|
―
|
|
|
|
―
|
|
Commercial real estate
|
|
|
3
|
|
|
|
―
|
|
Land
|
|
|
―
|
|
|
|
―
|
|
Construction
|
|
|
―
|
|
|
|
―
|
|
Multifamily
|
|
|
―
|
|
|
|
―
|
|
Consumer
|
|
|
―
|
|
|
|
―
|
|
Commercial business
|
|
|
―
|
|
|
|
―
|
|
Total recoveries
|
|
|
16
|
|
|
|
―
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs (recoveries)
|
|
|
(7
|
)
|
|
|
16
|
|
Provision for loan losses
|
|
|
5
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
768
|
|
|
$
|
756
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
Net charge-offs to average loans outstanding
|
|
|
-0.01
|
%
|
|
|
0.02
|
%
|
Allowance for loan losses to non-performing loans at end of year
|
|
|
768.00
|
%
|
|
|
193.85
|
%
|
Allowance for loan losses to total loans at end of year
|
|
|
0.77
|
%
|
|
|
0.84
|
%
|
Allocation of Allowance for Loan Losses.
The following table sets forth the allowance for loan losses allocated by loan category, the total loan balances by category,
and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each
category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance
to absorb losses in other categories. At the dates indicated, we had no unallocated allowance for loan losses.
|
|
At December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Amount
|
|
|
Percent of
Allowance to
Total
Allowance
|
|
|
Percent of
Loans in
Category to
Total Loans
|
|
|
Amount
|
|
|
Percent of
Allowance to
Total
Allowance
|
|
|
Percent of
Loans in
Category to
Total Loans
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
$
|
519
|
|
|
|
67.6
|
%
|
|
|
69.2
|
%
|
|
$
|
545
|
|
|
|
72.1
|
%
|
|
|
73.2
|
%
|
Commercial real estate
|
|
|
113
|
|
|
|
14.7
|
|
|
|
21.8
|
|
|
|
94
|
|
|
|
12.4
|
|
|
|
18.2
|
|
Land
|
|
|
23
|
|
|
|
3.0
|
|
|
|
2.2
|
|
|
|
56
|
|
|
|
7.4
|
|
|
|
2.9
|
|
Construction
|
|
|
16
|
|
|
|
2.1
|
|
|
|
2.9
|
|
|
|
8
|
|
|
|
1.1
|
|
|
|
1.9
|
|
Multifamily
|
|
|
5
|
|
|
|
0.6
|
|
|
|
1.5
|
|
|
|
4
|
|
|
|
0.5
|
|
|
|
1.8
|
|
Consumer
|
|
|
9
|
|
|
|
1.2
|
|
|
|
0.4
|
|
|
|
1
|
|
|
|
0.1
|
|
|
|
0.5
|
|
Commercial business
|
|
|
83
|
|
|
|
10.8
|
|
|
|
2.0
|
|
|
|
48
|
|
|
|
6.4
|
|
|
|
1.5
|
|
Total allowance for loan losses
|
|
$
|
768
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
$
|
756
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
At December 31, 2018, our allowance for loan
losses represented 0.8% of total loans and 768.0% of nonperforming loans, and at December 31, 2017, our allowance for loan losses
represented 0.8% of total loans and 193.9% of nonperforming loans. During the year ended December 31, 2018, there were $9,000 loan
charge-offs and $16,000 in recoveries, and for the year ended December 31, 2017, there were $16,000 in loan charge-offs and no
recoveries.
Although we believe that we use the best information
available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and
results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the
determinations. Because future events affecting borrowers and collateral cannot be predicted with certainty, the existing allowance
for loan losses may not be adequate and management may determine that increases in the allowance are necessary if the quality of
any portion of our loan portfolio deteriorates as a result. Furthermore, as an integral part of its examination process, the OCC
will periodically review our allowance for loan losses. The OCC may have judgments different than management’s, and we may
determine to increase our allowance as a result of these regulatory reviews. Any material increase in the allowance for loan losses
may adversely affect our financial condition and results of operations.
Investment Activities
General.
Our investment policy
is established by the board of directors. The objectives of the policy are to: (i) ensure adequate liquidity for loan demand and
deposit fluctuations, and to allow us to alter our liquidity position to meet both day-to-day and long-term changes in assets and
liabilities; (ii) manage interest rate risk in accordance with our interest rate risk policy; (iii) provide collateral for pledging
requirements; (iv) maximize return on our investments; and (v) maintain a balance of high quality investments to minimize risk.
Our executive officers meet monthly to assess
our asset/liability risk profile and this group is responsible for implementing our investment policy, subject to the board of
director’s approval of the investment strategies and monitoring of the investment performance. The Chief Financial Officer
has the overall responsibility for managing the investment portfolio and executing transactions. The board of directors regularly
reviews our investment strategies and the market value of our investment portfolio.
We account for investment and mortgage-backed
securities in accordance with Accounting Standards Codification Topic 320, “Investments - Debt and Equity Securities.”
Accounting Standards Codification 320 requires that investments be categorized as held-to-maturity, trading, or available-for-sale.
Our decision to classify certain of our securities as available-for-sale is based on our need to meet daily liquidity needs and
to take advantage of profits that may occur from time to time.
Federally chartered savings institutions have
authority to invest in various types of assets, including government-sponsored enterprise obligations, securities of various federal
agencies, residential mortgage-backed securities, certain certificates of deposit of insured financial institutions, overnight
and short-term loans to other banks, corporate debt instruments, debt instruments of municipalities and Fannie Mae and Freddie
Mac equity securities. At December 31, 2018 and 2017, our investment portfolio consisted of mortgage-backed securities only.
Mortgage-Backed Securities
. At
December 31, 2018, we had mortgage-backed securities with a carrying value of $4.7 million, which constituted 100.0% of our securities
portfolio. Mortgage-backed securities are securities issued in the secondary market that are collateralized by pools of mortgages.
Certain types of mortgage-backed securities are commonly referred to as “pass-through” certificates because the principal
and interest of the underlying loans is “passed through” to investors, net of certain costs, including servicing and
guarantee fees. Mortgage-backed securities typically are collateralized by pools of one- to four-family or multifamily mortgages,
although we invest primarily in mortgage-backed securities backed by one- to four-family mortgages. The issuers of such securities
pool and resell the participation interests in the form of securities to investors such as Heritage Bank of St. Tammany. The interest
rate of the security is lower than the interest rates of the underlying loans to allow for payment of servicing and guaranty fees.
All of our mortgage-backed securities are either backed by Ginnie Mae, a United States Government agency, or government-sponsored
enterprises, such as Fannie Mae and Freddie Mac.
Residential mortgage-backed securities issued
by United States Government agencies and government-sponsored enterprises are more liquid than individual mortgage loans because
there is an active trading market for such securities. In addition, residential mortgage-backed securities may be used to collateralize
our borrowings. Investments in residential mortgage-backed securities involve a risk that actual payments will be greater or less
than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or
accretion of any discount relating to such interests, thereby affecting the net yield on our securities. Current prepayment speeds
determine whether prepayment estimates require modification that could cause amortization or accretion adjustments.
Other Securities
. We hold common
stock of the FHLB-Dallas in connection with our borrowing activities. The FHLB-Dallas common stock is carried at cost and classified
as restricted equity securities. It is not practicable to determine the fair value of FHLB-Dallas stock due to restrictions placed
on its transferability. We may be required to purchase additional FHLB-Dallas stock if we increase borrowings in the future. We
also hold stock in First National Bankers Bank, (FNBB), a correspondent bank, as well as in our data service provider, Financial
Institutions Service Corporation.
The following table sets forth the amortized
cost and fair value of our investment securities portfolio, at the dates indicated.
|
|
At December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
4,260
|
|
|
$
|
4,221
|
|
|
$
|
5,514
|
|
|
$
|
5,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
518
|
|
|
|
507
|
|
|
|
651
|
|
|
|
641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
$
|
4,778
|
|
|
$
|
4,728
|
|
|
$
|
6,165
|
|
|
$
|
6,164
|
|
Portfolio Maturities and Yields.
The
composition and maturities of the investment securities portfolio at December 31, 2018 are summarized in the following table. Maturities
are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur.
|
|
One Year or Less
|
|
|
More than One Year
through Five Years
|
|
|
More than Five Years
through Ten Years
|
|
|
More than Ten Years
|
|
|
Total Securities
|
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
|
|
|
Amortized
Cost
|
|
|
Fair Value
|
|
|
Weighted
Average
Yield
|
|
|
|
(Dollars in thousands)
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
1
|
|
|
|
1.47%
|
|
|
|
179
|
|
|
|
1.21
|
%
|
|
|
1,758
|
|
|
|
2.20
|
%
|
|
|
2,322
|
|
|
|
2.94
|
%
|
|
|
4,260
|
|
|
|
4,221
|
|
|
|
2.56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
―
|
|
|
|
―%
|
|
|
|
―
|
|
|
|
―%
|
|
|
|
289
|
|
|
|
2.08
|
%
|
|
|
229
|
|
|
|
2.19
|
%
|
|
|
518
|
|
|
|
507
|
|
|
|
2.13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
$
|
1
|
|
|
|
1.47%
|
|
|
$
|
179
|
|
|
|
1.21
|
%
|
|
$
|
2,047
|
|
|
|
2.18
|
%
|
|
$
|
2,551
|
|
|
|
2.87
|
%
|
|
$
|
4,778
|
|
|
$
|
4,728
|
|
|
|
2.51
|
%
|
Sources of Funds
General.
Deposits, scheduled amortization
and prepayments of loan principal, amortization payments from mortgage-backed securities, proceeds from loan sales, maturities
and calls of securities and funds provided by operations are our primary sources of funds for use in lending, investing and for
other general purposes. We also use borrowings, primarily FHLB-Dallas advances, to supplement cash flow needs, lengthen the maturities
of liabilities for interest rate risk purposes and to manage the cost of funds.
Deposits.
We offer deposit products
having a range of interest rates and terms. We currently offer noninterest-bearing demand accounts, savings accounts, NOW accounts
and certificates of deposit. In recent years we have accepted financial institution jumbo certificates of deposit through National
CD Rateline, an on-line service. Pursuant to our business strategy, we are seeking to increase our core deposits by aggressively
marketing and pricing these deposit products and by growing our commercial lending relationships, and reduce our reliance on certificates
of deposit as a funding source.
The flow of deposits is influenced significantly
by general economic conditions, changes in market and other prevailing interest rates and competition. Our deposits are primarily
obtained from areas surrounding our offices.
The following table sets forth the distribution
of our average total deposit accounts, by account type, for the years indicated.
|
|
For the Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Average
Balance
|
|
|
Percent
|
|
|
Weighted
Average
Rate
|
|
|
Average
Balance
|
|
|
Percent
|
|
|
Weighted
Average
Rate
|
|
|
|
(Dollars in thousands)
|
|
Deposit type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement savings
|
|
$
|
14,656
|
|
|
|
19.6
|
%
|
|
|
0.25
|
%
|
|
$
|
15,489
|
|
|
|
20.8
|
%
|
|
|
0.23
|
%
|
Non-interest bearing demand
|
|
|
3,730
|
|
|
|
5.0
|
|
|
|
―
|
|
|
|
4,812
|
|
|
|
6.5
|
|
|
|
―
|
|
NOW
|
|
|
3,894
|
|
|
|
5.2
|
|
|
|
0.23
|
|
|
|
3,469
|
|
|
|
4.6
|
|
|
|
0.20
|
|
Certificates of deposit
|
|
|
52,629
|
|
|
|
70.2
|
|
|
|
1.70
|
|
|
|
50,734
|
|
|
|
68.1
|
|
|
|
1.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
74,909
|
|
|
|
100.0
|
%
|
|
|
1.26
|
%
|
|
$
|
74,504
|
|
|
|
100.0
|
%
|
|
|
1.10
|
%
|
As of December 31, 2018, the aggregate amount
of our outstanding certificates of deposit in amounts greater than or equal to $100,000 was approximately $34.1 million. The following
table sets forth the maturity of those certificates as of December 31, 2018.
|
|
At
December 31, 2018
|
|
|
|
(In thousands)
|
|
|
|
|
|
Three months or less
|
|
$
|
2,977
|
|
Over three months through six months
|
|
|
3,790
|
|
Over six months through one year
|
|
|
11,306
|
|
Over one year to three years
|
|
|
12,607
|
|
Over three years
|
|
|
3,376
|
|
|
|
|
|
|
Total
|
|
$
|
34,056
|
|
The following table sets forth all our certificates
of deposit classified by interest rate as of the dates indicated.
|
|
At December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Interest Rate:
|
|
|
|
|
|
|
|
|
Less than 1.00%
|
|
$
|
50
|
|
|
$
|
1,085
|
|
1.00% - 1.99%
|
|
|
31,173
|
|
|
|
38,245
|
|
2.00% - 2.99%
|
|
|
20,821
|
|
|
|
8,367
|
|
3.00% - 3.99%
|
|
|
2,370
|
|
|
|
1,805
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
54,414
|
|
|
$
|
49,502
|
|
Borrowings.
We may obtain advances
from the FHLB-Dallas upon the security of our capital stock in the FHLB-Dallas and our one- to four-family residential real estate
portfolio. We utilize these advances for asset/liability management purposes and for additional funding for our operations. Such
advances may be made pursuant to several different credit programs, each of which has its own interest rate and range of maturities.
To the extent such borrowings have different terms to reprice than our deposits, they can change our interest rate risk profile.
At December 31, 2018, we had $16.8 million in outstanding advances from the FHLB-Dallas. At December 31, 2018, based on available
collateral and our ownership of FHLB-Dallas stock, and based upon our internal policy, we had access to additional FHLB-Dallas
advances of up to $26.6 million.
In addition, Heritage Bank of St. Tammany has
the ability to borrow up to $3.0 million on a line of credit with First National Bankers’ Bank. At December 31, 2018, there
was no balance on this line of credit.
The following table sets forth information concerning
balances and interest rates on our borrowings at and for the periods shown:
|
|
At or For the Years Ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
FHLB:
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
16,822
|
|
|
$
|
14,064
|
|
Average balance during period
|
|
|
13,415
|
|
|
|
15,771
|
|
Maximum outstanding at any month end
|
|
|
16,822
|
|
|
|
20,088
|
|
Weighted average interest rate at end of period
|
|
|
2.41
|
%
|
|
|
1.55
|
%
|
Average interest rate during period
|
|
|
1.98
|
%
|
|
|
1.29
|
%
|
Expense and Tax Allocation Agreements
Heritage Bank has entered into an agreement
with Heritage NOLA Bancorp to provide it with certain administrative support services, whereby Heritage Bank is compensated at
not less than the fair market value of the services provided. In addition, Heritage Bank and Heritage NOLA Bancorp have entered
into an agreement to establish a method for allocating and for reimbursing the payment of their consolidated tax liability.
Employees
As of December 31, 2018 we had 23 full-time
equivalent employees. Our employees are not represented by any collective bargaining group. Management believes that we have a
good working relationship with our employees.
REGULATION AND SUPERVISION
General
As a federal savings bank, Heritage Bank is
subject to examination and regulation by the OCC, and is also subject to examination by the FDIC. This regulation and supervision
establishes a comprehensive framework of activities in which an institution may engage and is intended primarily for the protection
of the FDIC’s deposit insurance fund and depositors, and not for the protection of security holders. Heritage Bank also is
a member of and owns stock in the FHLB-Dallas, which is one of the 11 regional banks in the Federal Home Loan Bank System.
Under this system of regulation, the regulatory
authorities have extensive discretion in connection with their supervisory, enforcement, rulemaking and examination activities
and policies, including rules or policies that: establish minimum capital levels; restrict the timing and amount of dividend payments;
govern the classification of assets; determine the adequacy of loan loss reserves for regulatory purposes; and establish the timing
and amounts of assessments and fees. Moreover, as part of their examination authority, the banking regulators assign numerical
ratings to banks and savings institutions relating to capital, asset quality, management, liquidity, earnings and other factors.
The receipt of a less than satisfactory rating in one or more categories may result in enforcement action by the banking regulators
against a financial institution. A less than satisfactory rating may also prevent a financial institution, such as Heritage Bank
of St. Tammany or its holding company, from obtaining necessary regulatory approvals to access the capital markets, pay dividends,
acquire other financial institutions or establish new branches.
In addition, we must comply with significant
anti-money laundering and anti-terrorism laws and regulations, Community Reinvestment Act laws and regulations, and fair lending
laws and regulations. Government agencies have the authority to impose monetary penalties and other sanctions on institutions that
fail to comply with these laws and regulations, which could significantly affect our business activities, including our ability
to acquire other financial institutions or expand our branch network.
As a savings and loan holding company, Heritage
NOLA Bancorp is required to comply with the rules and regulations of the Federal Reserve Board. It is required to file certain
reports with the Federal Reserve Board and is subject to examination by the enforcement authority of the Federal Reserve Board.
Heritage NOLA Bancorp is also subject to the rules and regulations of the Securities and Exchange Commission under the federal
securities laws.
Any change in applicable laws or regulations,
whether by the OCC, the FDIC, the Federal Reserve Board or Congress, could have a material adverse impact on the operations and
financial performance of Heritage NOLA Bancorp and Heritage Bank.
Set forth below is a brief description of material
regulatory requirements that are applicable to Heritage Bank and Heritage NOLA Bancorp. The description is limited to certain material
aspects of the statutes and regulations addressed, and is not intended to be a complete description of such statutes and regulations
and their effects on Heritage Bank and Heritage NOLA Bancorp.
Federal Banking Regulation
Business Activities.
A federal
savings association derives its lending and investment powers from the Home Owners’ Loan Act, as amended, and applicable
federal regulations. Under these laws and regulations, Heritage Bank of St. Tammany may invest in mortgage loans secured by residential
and commercial real estate, commercial business and consumer loans, certain types of debt securities and certain other assets,
subject to applicable limits. Heritage Bank may also establish subsidiaries that may engage in certain activities not otherwise
permissible for Heritage Bank, including real estate investment and securities and insurance brokerage.
Examinations and Assessments.
Heritage Bank is primarily supervised by the Office of the Comptroller of the Currency (“OCC”), and as such is required
to file reports with and is subject to periodic examination by the OCC. Heritage Bank also is required to pay assessments to the
OCC to fund the agency’s operations.
Capital Requirements.
Federal
regulations require FDIC-insured depository institutions, including federal savings associations, to meet several minimum capital
standards: a common equity Tier 1 capital to risk-based assets ratio, a Tier 1 capital to risk-based assets ratio, a total capital
to risk-based assets and a Tier 1 capital to total assets leverage ratio. The existing capital requirements were effective January
1, 2015 and are the result of a final rule implementing regulatory amendments based on recommendations of the Basel Committee on
Banking Supervision and certain requirements of the Dodd-Frank Act.
The capital standards require the maintenance
of common equity Tier 1 capital, Tier 1 capital and Total capital to risk-weighted assets of at least 4.5%, 6% and 8%,
respectively. The regulations also establish a minimum required leverage ratio of at least 4% Tier 1 capital. Common equity Tier 1
capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as
common equity Tier 1 and Additional Tier 1 capital. Additional Tier 1 capital generally includes certain noncumulative perpetual
preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes
Tier 1 capital (common equity Tier 1 capital plus Additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of
capital instruments and related surplus meeting specified requirements, and may include cumulative preferred stock and long-term
perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included
in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions
that have exercised an opt-out election regarding the treatment of Accumulated Other Comprehensive Income (“AOCI”),
up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Institutions
that have not exercised the AOCI opt-out have AOCI incorporated into common equity Tier 1 capital (including unrealized gains and
losses on available-for-sale-securities). Heritage Bank has exercised the opt-out and therefore does not include AOCI in its regulatory
capital determinations. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the
regulations.
In determining the amount of risk-weighted assets
for purposes of calculating risk-based capital ratios, an institution’s assets, including certain off-balance sheet assets
(e.g., recourse obligations, direct credit substitutes, residual interests), are multiplied by a risk weight factor assigned by
the regulations based on the risk deemed inherent in the type of asset. Higher levels of capital are required for asset categories
believed to present greater risk. For example, a risk weight of 0% is assigned to cash and U.S. government securities, a risk weight
of 50% is generally assigned to prudently underwritten first lien one to four-family residential mortgages, a risk weight of 100%
is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans and a risk weight of
between 0% to 600% is assigned to permissible equity interests, depending on certain specified factors.
In addition to establishing the minimum regulatory
capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the
institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted
assets above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement
is being phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented
at 2.5% on January 1, 2019.
As a result of the recently enacted
Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies are required to develop a “Community
Bank Leverage Ratio” (the ratio of a bank’s tangible equity capital to average total consolidated assets) for financial
institutions with assets of less than $10 billion. A “qualifying community bank” that exceeds this ratio will
be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered
“well capitalized” under Prompt Corrective Action statutes. The federal banking agencies may consider a financial
institution’s risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement.
The federal banking agencies must set the minimum capital for the new Community Bank Leverage Ratio at not less than 8% and not
more than 10%. A financial institution can elect to be subject to this new definition.
At December 31, 2018, Heritage Bank’s
capital exceeded all applicable requirements.
Loans-to-One Borrower.
Generally,
a federal savings association may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of
unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan
is secured by readily marketable collateral, which generally does not include real estate. As of December 31, 2018, Heritage Bank
was in compliance with the loans-to-one borrower limitations.
Qualified Thrift Lender Test.
As a federal savings association, Heritage Bank must satisfy the qualified thrift lender, or “QTL,” test. Under the
QTL test, Heritage Bank of St. Tammany must maintain at least 65% of its “portfolio assets” in “qualified thrift
investments” (primarily residential mortgages and related investments, including mortgage-backed securities) in at least
nine months of the most recent 12-month period. “Portfolio assets” generally means total assets of a savings association,
less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property
used in the conduct of the savings association’s business.
Heritage Bank of St. Tammany also may satisfy
the QTL test by qualifying as a “domestic building and loan association” as defined in the Internal Revenue Code of
1986, as amended. This test generally requires a savings association to have at least 75% of its deposits held by the public and
earn at least 25% of its income from loans and U.S. government obligations. Alternatively, a savings association can satisfy this
test by maintaining at least 60% of its assets in cash, real estate loans and U.S. Government or state obligations.
A savings association that fails the qualified
thrift lender test must operate under specified restrictions set forth in the Home Owners’ Loan Act. The Dodd-Frank Act made
noncompliance with the QTL test subject to agency enforcement action for a violation of law. At December 31, 2018, Heritage Bank
satisfied the QTL test.
Capital Distributions.
Federal
regulations govern capital distributions by a federal savings association, which include cash dividends, stock repurchases and
other transactions charged to the savings association’s capital account. A federal savings association must file an application
with the OCC for approval of a capital distribution if:
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the total capital distributions for the applicable calendar
year exceed the sum of the savings association’s net income for that year to date plus the savings association’s retained
net income for the preceding two years;
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the savings association would not be at least adequately capitalized following the distribution;
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the distribution would violate any applicable statute, regulation, agreement or regulatory condition; or
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the savings association is not eligible for expedited treatment of its filings, generally due to an unsatisfactory CAMELS rating
or being subject to a cease and desist order or formal written agreement that requires action to improve the institution’s
financial condition.
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Even if an application is not otherwise required,
every savings association that is a subsidiary of a savings and loan holding company, such as Heritage Bank of St. Tammany, must
still file a notice with the Federal Reserve Board at least 30 days before the board of directors declares a dividend or approves
a capital distribution.
A notice or application related to a capital
distribution may be disapproved if:
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the federal savings association would be undercapitalized following the distribution;
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the proposed capital distribution raises safety and soundness concerns; or
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the capital distribution would violate a prohibition contained in any statute, regulation or agreement.
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In addition, the Federal Deposit Insurance Act
provides that an insured depository institution may not make any capital distribution if, after making such distribution, the institution
would fail to meet any applicable regulatory capital requirement. A federal savings association also may not make a capital distribution
that would reduce its regulatory capital below the amount required for the liquidation account established in connection with its
conversion to stock form.
Community Reinvestment Act and Fair Lending
Laws.
All federal savings associations have a responsibility under the Community Reinvestment Act and related regulations
to help meet the credit needs of their communities, including low- and moderate-income borrowers. In connection with its examination
of a federal savings association, the OCC is required to assess the federal savings association’s record of compliance with
the Community Reinvestment Act. A savings association’s failure to comply with the provisions of the Community Reinvestment
Act could, at a minimum, result in denial of certain corporate applications such as branches or mergers, or in restrictions on
its activities. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in
their lending practices on the basis of characteristics specified in those statutes. The failure to comply with the Equal Credit
Opportunity Act and the Fair Housing Act could result in enforcement actions by the OCC, as well as other federal regulatory agencies
and the Department of Justice.
The Community Reinvestment Act requires all
institutions insured by the Federal Deposit Insurance Corporation to publicly disclose their rating. Heritage Bank received a “satisfactory”
Community Reinvestment Act rating in its most recent federal examination.
Transactions with Related Parties.
A federal savings association’s authority to engage in transactions with its affiliates is limited by Sections 23A and 23B
of the Federal Reserve Act and federal regulation. An affiliate is generally a company that controls, or is under common control
with, an insured depository institution such as Heritage Bank. Heritage NOLA Bancorp is an affiliate of Heritage Bank because of
its control of Heritage Bank of St. Tammany. In general, transactions between an insured depository institution and its affiliates
are subject to certain quantitative limits and collateral requirements. In addition, federal regulations prohibit a savings association
from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from
purchasing the securities of any affiliate, other than a subsidiary. Finally, transactions with affiliates must be consistent with
safe and sound banking practices, not involve the purchase of low-quality assets and be on terms that are as favorable to the institution
as comparable transactions with non-affiliates.
Heritage Bank’s authority to extend credit
to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons, is currently governed
by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among
other things, these provisions generally require that extensions of credit to insiders:
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be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent
than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk
of repayment or present other unfavorable features; and
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not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits
are based, in part, on the amount of Heritage Bank’s capital.
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In addition, extensions of credit in excess
of certain limits must be approved by Heritage Bank’s board of directors. Extensions of credit to executive officers are
subject to additional limits based on the type of extension involved.
Enforcement.
The OCC has primary
enforcement responsibility over federal savings associations and has authority to bring enforcement action against all “institution-affiliated
parties,” including directors, officers, shareholders, attorneys, appraisers and accountants who knowingly or recklessly
participate in wrongful action likely to have an adverse effect on a federal savings association. Formal enforcement action by
the OCC may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors of
the institution and the appointment of a receiver or conservator. Civil penalties cover a wide range of violations and actions,
and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million
per day. The FDIC also has the authority to terminate deposit insurance or recommend to the OCC that enforcement action be taken
with respect to a particular savings association. If such action is not taken, the FDIC has authority to take the action under
specified circumstances.
Standards for Safety and Soundness.
Federal
law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards
relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting,
interest rate risk exposure, asset growth, compensation and other operational and managerial standards as the agency deems appropriate.
Interagency guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address
problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines
that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to
the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate
federal banking agency may require the institution to implement an acceptable compliance plan. Failure to implement such a plan
can result in further enforcement action, including the issuance of a cease and desist order or the imposition of civil money penalties.
Interstate Banking and Branching.
Federal
law permits well capitalized and well managed holding companies to acquire banks in any state, subject to Federal Reserve Board
approval, certain concentration limits and other specified conditions. Interstate mergers of banks are also authorized, subject
to regulatory approval and other specified conditions. In addition, among other things, recent amendments made by the Dodd-Frank
Act permit banks to establish
de novo
branches on an interstate basis provided that branching is authorized by the law of
the host state for the banks chartered by that state.
Prompt Corrective Action
.
Under
the federal Prompt Corrective Action statute, the OCC is required to take supervisory actions against undercapitalized institutions
under its jurisdiction, the severity of which depends upon the institution’s level of capital. An institution that has a
total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a common equity Tier 1 ratio
of less than 4.5% or a leverage ratio of less than 4% is considered to be “undercapitalized.” A savings institution
that has total risk-based capital of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a common equity Tier
1 ratio of less than 3.0% or a leverage ratio that is less than 3.0% is considered to be “significantly undercapitalized.”
A savings institution that has a tangible capital to assets ratio equal to or less than 2.0% is deemed to be “critically
undercapitalized.”
Generally, the OCC is required to appoint a
receiver or conservator for a federal savings association that becomes “critically undercapitalized” within specific
time frames. The regulations also provide that a capital restoration plan must be filed with the OCC within 45 days of the date
that a federal savings association is deemed to have received notice that it is “undercapitalized,” “significantly
undercapitalized” or “critically undercapitalized.” Any holding company of a federal savings association that
is required to submit a capital restoration plan must guarantee performance under the plan in an amount of up to the lesser of
5.0% of the savings association’s assets at the time it was deemed to be undercapitalized by the OCC or the amount necessary
to restore the savings association to adequately capitalized status. This guarantee remains in place until the OCC notifies the
savings association that it has maintained adequately capitalized status for each of four consecutive calendar quarters. Institutions
that are undercapitalized become subject to certain mandatory measures such as restrictions on capital distributions and asset
growth. The OCC may also take any one of a number of discretionary supervisory actions against undercapitalized federal savings
associations, including the issuance of a capital directive and the replacement of senior executive officers and directors.
At December 31, 2018, Heritage Bank met the
criteria for being considered “well capitalized,” which means that its total risk-based capital ratio exceeded 10%,
its Tier 1 risk-based ratio exceeded 8.0%, its common equity Tier 1 ratio exceeded 6.5% and its leverage ratio exceeded 5.0%.
Insurance of Deposit Accounts.
Heritage Bank is a member of the Deposit Insurance Fund, which is administered by the FDIC. Deposit accounts in Heritage Bank are
insured up to a maximum of $250,000 for each separately insured depositor.
The FDIC imposes an assessment for deposit insurance
on all depository institutions. Under the FDIC’s risk-based assessment system, insured institutions are assigned to risk
categories based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment
rate depends upon the category to which it is assigned and certain adjustments specified by FDIC regulations, with less risky institutions
paying lower rates. Assessment rates (inclusive of possible adjustments) for banks with less than $10 billion of assets currently
range from 1.5 to 30 basis points of each institution’s total assets less tangible capital. The FDIC may increase or decrease
the scale uniformly, except that no adjustment can deviate more than two basis points from the base scale without notice and comment
rulemaking. The FDIC’s current system represents a change, required by the Dodd-Frank Act, from its prior practice of basing
the assessment on an institution’s volume of deposits.
The Dodd-Frank Act increased the minimum target
Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The FDIC was required
to seek to achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more were supposed
to fund the increase. The FDIC indicated in November 2018 that the 1.35% ratio was exceeded. Insured institutions of less than
$10 billion of assets will receive credits for the portion of their assessments that contributed to raising the reserve ratio between
1.15% and 1.35% when the fund ratio achieves 1.38%. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving
it to the discretion of the FDIC and the FDIC has exercised that discretion by establishing a long-range fund ratio of 2%.
The FDIC has authority to increase insurance
assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results
of operations of Heritage Bank. Future insurance assessment rates cannot be predicted.
Insurance of deposits may be terminated by the
FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule order or regulatory condition imposed in writing. We do not know
of any practice, condition or violation that might lead to termination of deposit insurance.
In addition to the FDIC assessments, the Financing
Corporation (“FICO”) is authorized to impose and collect, with the approval of the Federal Deposit Insurance Corporation,
assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize
the former Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019.
For the quarter ended December 31, 2018, the annualized FICO assessment was equal to 0.32 basis points of total assets less
tangible capital.
Proposed Federal Regulation
On September 10, 2018, the Office of the Comptroller
of the Currency issued a proposed rule implementing a section of the Economic Growth, Relief and Consumer Protection Act that permits
an eligible federal savings association with total consolidated assets of $20 billion or less as of December 31, 2017, to elect
to operate with national bank powers without converting to a national bank charter. An eligible savings association is a federal
savings association that: (1) is well capitalized; (2) has a CAMELs composite rating of 1 or 2; (3) has a consumer compliance rating
of 1 or 2; (4) has a Community Reinvestment Act rating of “outstanding” or “satisfactory,” if applicable;
and (5) is not subject to an enforcement action. The proposed rule is subject to change, and the OCC will issue a final rule after
reviewing all comments on the proposal.
Other Regulations
Interest and other charges collected or contracted
for by Heritage Bank are subject to state usury laws and federal laws concerning interest rates. Heritage Bank’s operations
are also subject to federal laws applicable to credit transactions, such as the:
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Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
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Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials
to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
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Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending
credit;
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Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;
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Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;
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Truth in Savings Act; and
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rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.
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The operations of Heritage Bank also are subject
to the:
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Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes
procedures for complying with administrative subpoenas of financial records;
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Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from
deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic
banking services;
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Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,”
such as digital check images and copies made from that image, the same legal standing as the original paper check;
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The USA PATRIOT Act, which requires savings associations to, among other things, establish broadened anti-money laundering
compliance programs, and due diligence policies and controls to ensure the detection and reporting of money laundering. Such required
compliance programs are intended to supplement existing compliance requirements that also apply to financial institutions under
the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and
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The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions
with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial
products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide
such customers the opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated
third parties.
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Federal Reserve System
The Federal Reserve Board regulations require
depository institutions to maintain noninterest-earning reserves against their transaction accounts (primarily NOW and regular
checking accounts). The Federal Reserve Board regulations generally require that reserves be maintained against aggregate transaction
accounts as follows: for that portion of transaction accounts aggregating $103.6 million or less (which may be adjusted by the
Federal Reserve Board) the reserve requirement is 3.0% and the amounts greater than $103.6 million require a 10.0% reserve (which
may be adjusted annually by the Federal Reserve Board between 8.0% and 14.0%). The first $14.5 million of otherwise reservable
balances (which may be adjusted by the Federal Reserve Board) are exempted from the reserve requirements. Heritage Bank is in compliance
with these requirements.
Federal Home Loan Bank System
Heritage Bank of St. Tammany is a member of
the Federal Home Loan Bank System, which consists of 11 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a
central credit facility primarily for member institutions. Members of the Federal Home Loan Bank are required to acquire and hold
shares of capital stock in the Federal Home Loan Bank. Heritage Bank was in compliance with this requirement at December 31, 2018.
Based on redemption provisions of the FHLB-Dallas, the stock has no quoted market value and is carried at cost. Heritage Bank reviews
for impairment, based on the ultimate recoverability, the cost basis of the FHLB-Dallas. As of December 31, 2018, no impairment
has been recognized.
Holding Company Regulation
Heritage NOLA Bancorp is a unitary savings and
loan holding company subject to regulation and supervision by the Federal Reserve Board. The Federal Reserve Board has enforcement
authority over Heritage NOLA Bancorp and its non-savings institution subsidiaries. Among other things, this authority permits the
Federal Reserve Board to restrict or prohibit activities that are determined to be a risk to Heritage Bank.
As a savings and loan holding company, Heritage
NOLA Bancorp’s activities are limited to those activities permissible by law for financial holding companies (if Heritage
NOLA Bancorp makes an election to be treated as a financial holding company and meets the other requirements to be a financial
holding company) or multiple savings and loan holding companies. A financial holding company may engage in activities that are
financial in nature, incidental to financial activities or complementary to a financial activity. Such activities include lending
and other activities permitted for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, insurance and
underwriting equity securities. Multiple savings and loan holding companies are authorized to engage in activities specified by
federal regulation, including activities permitted for bank holding companies under Section 4(c)(8) of the Bank Holding Company
Act.
Federal law prohibits a savings and loan holding
company, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of another savings institution
or savings and loan holding company without prior written approval of the Federal Reserve Board, and from acquiring or retaining
control of any depository institution not insured by the FDIC. In evaluating applications by holding companies to acquire savings
institutions, the Federal Reserve Board must consider such things as the financial and managerial resources and future prospects
of the company and institution involved, the effect of the acquisition on and the risk to the federal deposit insurance fund, the
convenience and needs of the community and competitive factors. A savings and loan holding company may not acquire a savings institution
in another state and hold the target institution as a separate subsidiary unless it is a supervisory acquisition under Section
13(k) of the Federal Deposit Insurance Act or the law of the state in which the target is located authorizes such acquisitions
by out-of-state companies.
Savings and loan holding companies have historically
not been subjected to consolidated regulatory capital requirements. The Dodd-Frank Act required the Federal Reserve Board to establish
for all bank and savings and loan holding companies minimum consolidated capital requirements that are as stringent as those required
for the insured depository subsidiaries. However, the Federal Reserve Board has extended to savings and loan holding companies
the applicability of the “Small Bank Holding Company” exception to its consolidated capital requirements and, as a
result of recent legislation, increased the threshold for the exception from $1.0 billion in assets to $3.0 billion. As a result,
savings and loan holding companies with less than $3.0 billion in consolidated assets are generally not subject to the capital
requirements unless otherwise advised by the Federal Reserve Board.
The Dodd-Frank Act extended the “source
of strength” doctrine to savings and loan holding companies. The Federal Reserve Board has promulgated regulations implementing
the “source of strength” policy that require holding companies to act as a source of strength to their subsidiary depository
institutions by providing capital, liquidity and other support in times of financial stress.
The Federal Reserve Board has issued a policy
statement regarding the payment of dividends and the repurchase of shares of common stock by bank holding companies and savings
and loan holding companies. In general, the policy provides that dividends should be paid only out of current earnings and only
if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs,
asset quality and overall financial condition. Regulatory guidance provides for prior regulatory consultation with respect to capital
distributions in certain circumstances such as where the company’s net income for the past four quarters, net of dividends
previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate of earnings retention
is inconsistent with the company’s capital needs and overall financial condition. The ability of a holding company to pay
dividends may be restricted if a subsidiary bank becomes undercapitalized. The policy statement also states that a holding company
should inform the Federal Reserve Board supervisory staff prior to redeeming or repurchasing common stock or perpetual preferred
stock if the holding company is experiencing financial weaknesses or if the repurchase or redemption would result in a net reduction,
as of the end of a quarter, in the amount of such equity instruments outstanding compared with the beginning of the quarter in
which the redemption or repurchase occurred. These regulatory policies may affect the ability of Heritage NOLA Bancorp to pay dividends,
repurchase shares of common stock or otherwise engage in capital distributions.
In order for Heritage NOLA Bancorp to be regulated
as savings and loan holding company by the Federal Reserve Board, rather than as a bank holding company, Heritage Bank of St. Tammany
must qualify as a “qualified thrift lender” under federal regulations or satisfy the “domestic building and loan
association” test under the Internal Revenue Code. Under the qualified thrift lender test, a savings institution is required
to maintain at least 65% of its “portfolio assets” (total assets less: (i) specified liquid assets up to 20% of
total assets; (ii) intangible assets, including goodwill; and (iii) the value of property used to conduct business) in
certain “qualified thrift investments” (primarily residential mortgages and related investments, including certain
mortgage-backed and related securities) in at least nine out of each 12 month period. At December 31, 2018, Heritage Bank maintained
72.6% of its portfolio assets in qualified thrift investments and was in compliance with the qualified thrift lender requirement.
Federal Securities Laws
Heritage NOLA Bancorp common stock is registered
with the Securities and Exchange Commission. Heritage NOLA Bancorp is subject to the information, proxy solicitation, insider trading
restrictions and other requirements under the Securities Exchange Act of 1934.
The registration under the Securities Act of
1933 of shares of common stock issued in Heritage NOLA Bancorp’s public offering does not cover the resale of those shares.
Shares of common stock purchased by persons who are not affiliates of Heritage NOLA Bancorp may be resold without registration.
Shares purchased by an affiliate of Heritage NOLA Bancorp will be subject to the resale restrictions of Rule 144 under the Securities
Act of 1933. If Heritage NOLA Bancorp meets the current public information requirements of Rule 144 under the Securities Act of
1933, each affiliate of Heritage NOLA Bancorp that complies with the other conditions of Rule 144, including those that require
the affiliate’s sale to be aggregated with those of other persons, would be able to sell in the public market, without registration,
a number of shares not to exceed, in any three-month period, the greater of 1% of the outstanding shares of Heritage NOLA Bancorp,
or the average weekly volume of trading in the shares during the preceding four calendar weeks. In the future, Heritage NOLA Bancorp
may permit affiliates to have their shares registered for sale under the Securities Act of 1933.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 is intended to
improve corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded
companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities
laws. We have policies, procedures and systems designed to comply with these regulations, and we review and document such policies,
procedures and systems to ensure continued compliance with these regulations.
Change in Control Regulations
Under the Change in Bank Control Act, no person
may acquire control of a savings and loan holding company such as Heritage NOLA Bancorp unless the Federal Reserve Board has been
given 60 days prior written notice and has not issued a notice disapproving the proposed acquisition, taking into consideration
certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition.
Control, as defined under federal law, means ownership, control of or holding irrevocable proxies representing more than 25% of
any class of voting stock, control in any manner of the election of a majority of the institution’s directors, or a determination
by the regulator that the acquirer has the power, directly or indirectly, to exercise a controlling influence over the management
or policies of the institution. Acquisition of more than 10% of any class of a savings and loan holding company’s voting
stock constitutes a rebuttable determination of control under the regulations under certain circumstances including where, as will
be the case with Heritage NOLA Bancorp, the issuer has registered securities under Section 12 of the Securities Exchange Act of
1934.
In addition, federal regulations provide that
no company may acquire control of a savings and loan holding company without the prior approval of the Federal Reserve Board. Any
company that acquires such control becomes a “savings and loan holding company” subject to registration, examination
and regulation by the Federal Reserve Board.
Emerging Growth Company Status
Heritage NOLA Bancorp, Inc. is an emerging growth
company under the JOBS Act. We will cease to be an emerging growth company upon the earliest of: (i) the end of the fiscal year
following the fifth anniversary of the completion of our initial stock offering, (ii) the first fiscal year after our annual gross
revenues are $1.0 billion or more, (iii) the date on which we have, during the previous three-year period, issued more than $1.0
billion in non-convertible debt securities or (iv) the end of any fiscal year in which the market value of our common stock held
by non-affiliates exceeded $700 million as of the end of the second quarter of that fiscal year. We expect to lose our status as
an emerging growth company in April 2022, five years after the completion of our stock offering.
An “emerging growth company” may
choose not to hold stockholder votes to approve annual executive compensation (more frequently referred to as “say-on-pay”
votes) or executive compensation payable in connection with a merger (more frequently referred to as “say-on-golden parachute”
votes). An emerging growth company also is not subject to the requirement that its auditors attest to the effectiveness of the
company’s internal control over financial reporting, and can provide scaled disclosure regarding executive compensation;
however, Heritage NOLA Bancorp, Inc. will also not be subject to the auditor attestation requirement or additional executive compensation
disclosure so long as it remains a “smaller reporting company” under Securities and Exchange Commission regulations
(generally a company with less than $75 million of voting and non-voting common equity held by non-affiliates). Finally, an emerging
growth company may elect to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable
to public companies until such pronouncements are made applicable to private companies, but must make such election when the company
is first required to file a registration statement. Heritage NOLA Bancorp, Inc. has elected to use the extended transition period
to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made
applicable to private companies. Accordingly, our financial statements may not be comparable to the financial statements of public
companies that comply with such new or revised accounting standards.
TAXATION
Federal Taxation
General.
Heritage NOLA Bancorp
and Heritage Bank of St. Tammany are subject to federal income taxation in the same general manner as other corporations, with
some exceptions discussed below. The following discussion of federal taxation is intended only to summarize material federal income
tax matters and is not a comprehensive description of the tax rules applicable to Heritage NOLA Bancorp and Heritage Bank of St.
Tammany.
Method of Accounting.
For federal
income tax purposes, Heritage Bank of St. Tammany currently reports its income and expenses on the cash method of accounting and
uses a tax year ending December 31 for filing its federal income tax returns. The Small Business Protection Act of 1996 eliminated
the use of the reserve method of accounting for bad debt reserves by savings institutions, effective for taxable years beginning
after 1995.
Minimum Tax.
The Internal Revenue
Code of 1986, as amended, imposes an alternative minimum tax at a rate of 20% on a base of regular taxable income plus certain
tax preferences, less an exemption amount, referred to as “alternative minimum taxable income.” The alternative minimum
tax is payable to the extent tax computed this way exceeds tax computed by applying the regular tax rates to regular taxable income.
Net operating losses can, in general, offset no more than 90% of alternative minimum taxable income. Certain payments of alternative
minimum tax may be used as credits against regular tax liabilities in future years. At December 31, 2018, Heritage Bank had no
minimum tax credit carryforward.
Net Operating Loss Carryovers.
Generally, a corporation may carry forward net operating losses generated in tax years beginning after December 31, 2017 indefinitely
and can offset up to 80% of taxable income. For the year ended December 31, 2018, Heritage NOLA Bancorp, Inc. and Subsidiary
generated no federal net operating loss carryforwards. Heritage NOLA Bancorp, Inc. and Subsidiary generated no net operating
loss carryforward for Louisiana. Heritage NOLA Bancorp, Inc. and Subsidiary also had no net operating loss carryforward generated
prior to 2018.
Capital Loss Carryovers.
Generally,
a corporation may carry back capital losses to the preceding three taxable years and forward to the succeeding five taxable years.
Any capital loss carryback or carryover is treated as a short-term capital loss for the year to which it is carried. As such, it
is grouped with any other capital losses for the year to which carried and is used to offset any capital gains. Any undeducted
loss remaining after the five-year carryover period is not deductible. At December 31, 2018, Heritage NOLA Bancorp, Inc. and Subsidiary
had no capital loss carryover.
Corporate Dividends.
We may generally
exclude from our income 100% of dividends received from Heritage Bank as a member of the same affiliated group of corporations.
Audit of Tax Returns.
Heritage
Bank’s federal income tax returns have not been audited by the Internal Revenue Service in the most recent five-year period.
State Taxation
Heritage NOLA Bancorp is subject to the Louisiana
Corporation Income Tax based on our Louisiana taxable income. The Corporation Income Tax applies at graduated rates from 4% upon
the first $25,000 of Louisiana taxable income to 8% on all Louisiana taxable income in excess of $200,000. For these purposes,
“Louisiana taxable income” means net income which is earned by us within or derived from sources within the State of
Louisiana, after adjustments permitted under Louisiana law, including a federal income tax deduction. In addition, Heritage Bank
will be subject to the Louisiana Shares Tax which is imposed on the assessed value of Heritage Bank’s capital. The formula
for deriving the assessed value is to apply the applicable rate to the sum of:
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(1)
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20% of our capitalized earnings, plus
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(2)
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80% of our taxable stockholders’ equity, minus
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(3)
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50% of our real and personal property assessment.
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Various items may also be subtracted in calculating
a company’s capitalized earnings.
As a Maryland business corporation, Heritage
NOLA Bancorp files an annual report with and pays personal property taxes to the State of Maryland.
Availability of Annual Report on Form 10-K
This Annual Report on Form 10-K is available
on our website at
www.heritagebank.org
. Information on the website is not incorporated into, and is not otherwise considered
a part of, this Annual Report on Form 10-K.