10-K 1 f10k_032712.htm FORM 10-K f10k_032712.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[x]
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended:  December 31, 2011
or
[ ]
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ______ to ______
 
Commission File Number: 001-33573
 
LOUISIANA BANCORP, INC.
(Exact name of Registrant as specified in its charter)
 
Louisiana
  
20-8715162
(State or Other Jurisdiction of
  
(I.R.S. Employer
Incorporation or Organization)
  
Identification Number)
     
1600 Veterans Memorial Boulevard, Metairie, Louisiana
  
70005
(Address of Principal Executive Offices)
  
(Zip Code)

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

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

Title of each class
  
Name of each exchange on which registered
Common Stock, $.01 par value per share
  
The Nasdaq Stock Market, LLC

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

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

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

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.     YES [x] NO [  ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files).     YES [x] NO [  ]

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
  Large accelerated filer [  ]   Accelerated filer [  ]  
  Non-accelerated filer  [  ]   Smaller reporting company [x]  
 
(Do not check if a smaller reporting company)
        
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     YES [  ] NO [x]
 
The aggregate market value of the 2,482,219 shares of the Registrant’s common stock held by non-affiliates, based upon the closing price of $15.77 for the common stock on June 30, 2011, as reported by the Nasdaq Stock Market, was approximately $39.1 million.  Shares of common stock held by executive officers, directors, the Company’s Employee Stock Ownership Plan and the 2007 Recognition and Retention Plan have been excluded since such persons may be deemed to be affiliates.  This determination of affiliate status is not necessarily a conclusive determination for other purposes.

Number of shares of common stock outstanding as of March 27, 2012: 3,235,622

DOCUMENTS INCORPORATED BY REFERENCE

Set forth below are the documents incorporated by reference and the part of the Form 10-K into which the document is incorporated:
Portions of the definitive Proxy Statement for the 2012 Annual Meeting of Stockholders are incorporated by reference into Part III, Items 10-14 of this Form 10-K.
 
 
 
LOUISIANA BANCORP, INC.
2011 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

   
Page
 
 
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Forward-Looking Statements

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

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

 
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Item 1.  Business.

General

Louisiana Bancorp, Inc. is a Louisiana corporation that became the holding company for Bank of New Orleans following the conversion of the Bank in July 2007 from a federally chartered mutual savings bank to a federally chartered stock savings bank.  The Bank currently operates out of its headquarters and two traditional bank branches located in the New Orleans, Louisiana metropolitan area.  A fourth location, which had been closed since 2005 when it was significantly damaged by Hurricane Katrina, was officially closed during the fourth quarter of 2011.  In January 2012, the Bank purchased a building and property located Covington, Louisiana, which will become our fourth banking office.  This facility was purchased from a regional commercial bank which had consolidated its existing locations in the area.  The Bank anticipates opening this new facility in the second quarter of 2012.  At December 31, 2011, the Bank had 62 full-time employees and two part-time employees. At December 31, 2011, 2010 and 2009, the Company had total assets of $313.1 million, $320.9 million, and $329.8 million, respectively.   Net interest income during these years was $9.8 million, $10.3 million and $10.6 million, respectively, and net income was $2.1 million, $2.6 million, and $2.5 million, respectively.

We are primarily engaged in attracting deposits from the general public and using those funds to invest in loans and securities.  Our principal sources of funds are deposits, repayments of loans and mortgage-backed securities, maturities of investments and interest-bearing deposits, other funds provided from operations and funds borrowed from outside sources such as the Federal Home Loan Bank of Dallas, the Federal Reserve, and commercial banks.  These funds are primarily used for the origination of various loan types including single-family residential mortgage loans, multi-family residential and commercial real estate mortgage loans, home equity loans and lines of credit and other consumer loans.  The Bank derives its income principally from interest earned on loans, mortgage-backed and other securities and, to a lesser extent, from fees received in connection with the origination of loans and for other services.  Bank of New Orleans’ primary expenses are interest expense on deposits and borrowings, and general operating expenses.

We are an active originator of residential home mortgage loans and commercial real estate loans in our market area.  Our commercial real estate loans are primarily secured by multi-family residential collateral, non-residential collateral and vacant land.  Our business plan is focused on developing a portfolio of residential home loans and commercial real estate loans that will benefit the residents and small to mid-sized businesses of the New Orleans metropolitan area.  Our total real estate loan portfolio has grown from $95.4 million at December 31, 2007, to $196.6 million at December 31, 2011.  At December 31, 2011, our one-to four-family residential loans comprised 53.5% or $105.7 million of the total loan portfolio, while multi-family residential, commercial real estate and land loans comprised 36.7% or $72.4 million of total loans. Home equity loans and lines of credit were $18.5 million, or 9.3% of the total loan portfolio at December 31, 2011.

Deposits with the Bank are insured to the maximum extent provided by law by the Federal Deposit Insurance Corporation.   The Bank is subject to examination and comprehensive regulation by the Office of Comptroller of the Currency and the FDIC.   The Company is a savings and loan holding company subject to examination and regulation by the Board of Governors of the Federal Reserve System.   The Bank is also a member of the Federal Home Loan Bank of Dallas, which is one of the 12 regional banks comprising the Federal Home Loan Bank System.   The Bank is also subject to regulations of the Board of Governors of the Federal Reserve System governing reserves required to be maintained against deposits and certain other matters.

 
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Our headquarters office is located at 1600 Veterans Memorial Boulevard, Metairie, Louisiana, and our telephone number is (504) 834-1190.  We maintain a website at www.bankofneworleans.com, and we provide our customers with on-line banking and telephone banking services.

Market Area and Competition

Bank of New Orleans’ primary market area is southeastern Louisiana, in general and, more specifically, Jefferson Parish and neighboring Orleans Parish.  During 2012, management intends to open a full-service branch in St. Tammany Parish which is located north of Lake Pontchartrain.  Jefferson, Orleans and St. Tammany Parishes are the three largest parishes in the seven parish New Orleans Metropolitan Statistical Area (“MSA”).  According to the 2010 U.S. Census, Jefferson and Orleans Parishes are ranked second and third, respectively, in total population within the state.  In the ten years between U.S. Census measurements, the population of Jefferson Parish has decreased 5.0% to 432,552, and the population of Orleans Parish has declined by 29.1% to 343,829.  The Orleans Parish market area was severely impacted by the devastation of Hurricane Katrina in August 2005.  Floodwaters covered 80% of Orleans Parish, and a significant portion of Jefferson Parish, causing property damage estimated by the National Weather Service to be excess of $125 billion.  The damage to housing and commercial real estate in our market area, in addition to the roads and public utilities, contributed to the dramatic decline in the population of the Orleans Parish market. Management and the Board of the Company remain optimistic that the city’s new political administration and $45 billion in federal investment will promote the city’s rebirth and repopulation during the next several years.

The local economy in southern Louisiana is reliant on a variety of sectors.  Traditionally, the oil industry, the Port of New Orleans and tourism were the bellwethers of the local economy.  The local economy has diversified, although oil, shipping and tourism remain important sectors of the economy.  According to the U.S. Bureau of Labor Statistics, the trade, transportation and utilities sector represented 20.0% of the New Orleans MSA labor force at December 31, 2011, followed by government (15.4%), education and health services (15.0%) and leisure and hospitality (13.9%).   During the second quarter of 2010, the Deepwater Horizon drilling platform exploded creating the largest environmental disaster in the United States.  As a result of this accident, a drilling moratorium was enacted immediately following the spill, which has severely impacted the oil and gas producing sector of our economy, primary in the coastal portions of the state.  The long-term impact of the spill on our economy and coastal ecosystem will need to be evaluated over many years.

During 2011, an estimated $23.8 billion was budgeted for projects to improve drainage and levees, rebuild public housing, and construct a new Veterans Administration medical complex.  For 2012, the top ten construction projects have an aggregate budget of $7.9 billion and include improvements to our schools, roads and bridges, public housing and two public hospitals.

At December 31, 2011, the U.S. Bureau of Labor Statistics estimated that the seasonally adjusted unemployment rate for the nation was 8.5%, a decrease of 0.9% from December 31, 2010.  The unemployment rate for state of Louisiana and the New Orleans MSA were 7.0% and 7.1%, respectively, at December 31, 2011.  These rates indicate a year-over-year decrease in unemployment of 0.8% for the state, and 0.6% for the New Orleans MSA.

The average sales price of existing homes in the New Orleans MSA decreased by 3.83% during 2011 compared to an increase of 2.96% in 2010.  In Jefferson Parish, the average sales price of existing homes decreased from $184,286 to $179.598, or 2.54%, during 2011 compared to a decrease of 1.5% during 2010.  In Orleans and St. Tammany Parishes, the average sales price for existing homes in 2011 decreased by 5.79% and 3.82%, respectively.
 
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During 2011, there were 15,521 foreclosure actions filed in the state compared to 15,753 foreclosure actions filed in 2010.  Foreclosure actions include default notices, auction sale notices, and bank repossessions.  In Orleans Parish there were 1,901 foreclosure filings in 2011 reflecting a decrease of 22.4% from 2010, and 2,901 filings in Jefferson Parish reflecting a decrease of 5.1% from 2010.  On the national level, there were 1.9 million foreclosure filings during 2011, a decrease of 34.3% percent from 2010.

We face significant competition in originating loans and attracting deposits.  This competition stems primarily from commercial banks, other savings banks and savings associations and mortgage-banking companies.  In the New Orleans MSA, as of June 30, 2011, there were 36 banks or savings institutions and numerous credit unions, which are competing for a share of the deposit market.  Many of the financial service providers operating in our market area are significantly larger, and have greater financial resources, than us.  Based on the most recent data available through the FDIC, the Bank’s $198.7 million in deposits at June 30, 2011 represented a deposit market share of 0.88% for the parishes of Jefferson and Orleans, and a 0.68% market share for the seven parish New Orleans MSA.  Of the 25 institutions operating in Jefferson and Orleans parishes as of June 30, 2011, we rank 15th in terms of deposit market share.  We face additional competition for deposits from short-term money market funds and other corporate and government securities funds, mutual funds and from other non-depository financial institutions such as brokerage firms and insurance companies.  We believe that the presence of a local executive management team experienced with the challenges associated with the region’s rebuilding efforts provides the Bank with an advantage over the national banks in our market area, particularly as it relates to the credit approval process.

Lending Activities

General.  At December 31, 2011, our net loan portfolio totaled $195.6 million or 62.5% of total assets.  Our principal lending activity is the origination of first mortgage loans collateralized by one- to four-family, also known as “single-family,” residential real estate loans located in our market area.  In addition, the Bank originates home equity loans and lines of credit secured by residential real estate.  Over the past several years, we have increased our emphasis on originating multi-family (over four units) residential, commercial real estate and land loans.  We also originate consumer loans, consisting of loans secured by deposits, auto loans, and unsecured home improvement loans, in addition to commercial and personal loans. We do not originate sub-prime, “alt-a”, no-interest, or “no-doc” loans, nor do we hold any such loans in our loan portfolio.

The types of loans that we may originate are subject to federal and state law and regulations.  Interest rates charged by us on loans are affected principally by the demand for such loans and the supply of money available for lending purposes and the rates offered by our competitors.  These factors are, in turn, affected by general and economic conditions, the monetary policy of the federal government, including the Federal Reserve Board, legislative tax policies and governmental budgetary matters.
 
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Loan Portfolio Composition.  The following table shows the composition of our loan portfolio by type of loan at the dates indicated.

   
December 31,
  
   
2011
    
2010
    
2009
    
2008
    
2007
  
   
Amount
    
%
    
Amount
    
%
    
Amount
    
%
    
Amount
    
%
    
Amount
    
%
  
   
(Dollars In Thousands)
  
Real estate loans:
                                                            
One- to four-family residential(1)
   $ 105,718       53.5 %   $ 98,635       54.5 %   $ 85,726       53.4 %   $ 51,547       45.4 %   $ 46,437       46.8 %
Home equity loans and lines
     18,467       9.3       15,745       8.7       14,389       9.0       10,297       9.1       8,702       8.8  
Multi-family residential
     14,591       7.4       11,785       6.5       9,423       5.9       7,859       6.9       7,435       7.5  
Commercial real estate
     56,492       28.6       52,594       29.0       47,798       29.8       39,700       35.0       32,234       32.5  
Land loans
     1,299       0.7       951       0.5       1,213       0.8       1,095       1.0       546       0.5  
Total real estate loans
     196,567       99.5       179,710       99.2       158,549       98.9       110,498       97.4       95,354       96.1  
Consumer and other loans:
                                                                                
Student loans
     --       --       --       --       485       0.3       1,398       1.2       2,133       2.1  
Loans secured by deposits
     568       0.3       464       0.3       478       0.3       283       0.2       530       0.5  
Other
     452       0.2       900       0.5       835       0.5       1,368       1.2       1,260       1.3  
Total consumer loans
     1,020       0.5       1,364       0.8       1,798       1.1       3,049       2.6       3,923       3.9  
Total loans
   $ 197,587        100.0 %   $ 181,074        100.0 %   $ 160,347        100.0 %   $ 113,547        100.0 %     99,277        100.0 %
Less:
                                                                                
Deferred loan fees
     150               205               240               359               376          
Allowance for loan losses
     1,805               1,759               1,661               1,952               1,999          
Net loans
   $ 195,632             $ 179,110             $ 158,446             $ 111,236             $ 96,902          
_____________________
(1)
For purposes of this report on Form 10-K, the one- to four-family residential category consists of single-family residential mortgage loans secured by first mortgages.  We typically have second mortgages on home equity loans and lines of credit.
 
 
 
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Contractual Terms to Final Maturities. The following table shows the scheduled contractual maturities of our loans as of December 31, 2011, before giving effect to net items.  Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less.  The amounts shown below do not take into account anticipated loan prepayments.

   
One- to Four-
Family
Residential
    
Home Equity
Loans &
Lines
    
Multi-family
Residential
    
 
Commercial
Real Estate
  
   
(In Thousands)
  
Amounts due after December 31, 2011 in:
                        
One year or less
   $ 1,168     $ 333     $ 338     $ -  
After one year through two years
     994       487       2,307       854  
After two years through three years
     1,215       428       1,653       915  
After three years through five years
     1,323       1,152       1,281       5,754  
After five years through ten years
     17,996       11,732       3,149       27,080  
After ten years through 15 years
     39,614       3,354       5,863       21,889  
After 15 years
     43,408       981       -       -  
Total
   $ 105,718     $ 18,467     $ 14,591     $ 56,492  
 
   
Land Loans
    
Consumer
and Other
    
Total Loans
  
   
(In Thousands)
  
Amounts due after December 31, 2011 in:
                  
One year or less
   $ 116     $ 264     $ 2,219  
After one year through two years
     188       274       5,104  
After two years through three years
     190       238       4,639  
After three years through five years
     -       231       9,741  
After five years through ten years
     695       13       60,665  
After ten years through 15 years
     110       -       70,830  
After 15 years
     -       -       44,389  
Total
   $ 1,299     $ 1,020     $ 197,587  

The following table shows the dollar amount of our loans at December 31, 2011 due after December 31, 2012 as shown in the preceding table, which have fixed interest rates or which have floating or adjustable interest rates.

   
Fixed-Rate
    
Floating or
Adjustable
Rate
    
Total
  
Real Estate Loans:
  
(In Thousands)
  
One- to four-family residential
   $ 78,078     $ 26,472     $ 104,550  
Home equity loans & lines
     5,921       12,213       18,134  
Multi-family residential
     10,905       3,348       14,253  
Commercial real estate
     54,190       2,302       56,492  
Land loans
     995       188       1,183  
Consumer and other
     708       48       756  
Total
   $ 150,797     $ 44,571     $ 195,368  
 
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Loan Originations.  Our lending activities are subject to underwriting standards and loan origination procedures established by our board of directors and management.  Loan originations are obtained through a variety of sources, primarily existing customers as well as new customers obtained from referrals and local advertising and promotional efforts.  Single-family residential mortgage loan applications and consumer loan applications are taken primarily at our main office.  Applications for other loans typically are taken personally by our commercial loan officer or consumer loan officer, although they may be received by a branch office initially and then referred to our commercial loan officer or consumer loan officer.  All loan applications are processed and underwritten centrally at our main office.

Our single-family residential mortgage loans are written on standardized documents used by the Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”) and Federal National Mortgage Association (“FNMA” or “Fannie Mae”).  We also utilize an automated loan processing and underwriting software system for our new single-family residential mortgage loans.  Property valuations of loans secured by real estate are undertaken by an independent third-party appraiser approved by our board of directors.

In addition to originating loans, we occasionally purchase participation interests in larger balance loans, typically commercial real estate and multi-family residential mortgage loans and construction loans, from other financial institutions in our market area or other markets in Louisiana.  Such participations are reviewed for compliance with our underwriting criteria before they are purchased.  Generally, we have purchased such loans without any recourse to the seller.  However, we actively monitor the performance of such loans through the receipt of regular reports from the lead lender regarding the loan’s performance, physically inspecting the loan security property on a periodic basis, discussing the loan with the lead lender on a regular basis and receiving copies of updated financial statements from the borrower.  Bank of New Orleans’ largest potential exposure on a purchased participation interest at December 31, 2011 was a $773,000 participation interest in a $1.4 million loan secured by a single-family home in New Orleans.  At December 31, 2011, our total purchased interest in participation loans was $1.6 million, all of which were performing in accordance with their contractual terms at such date.

In addition, Bank of New Orleans also occasionally sells participation interests in loans it originates.  We generally have sold participation interests when a loan would exceed our internal limitations for concentrations of credit, or exceeds our statutory loans-to-one borrower limit.  Our loans-to-one borrower limit, with certain exceptions, generally is 15% of our unimpaired capital and surplus or $7.3 million at December 31, 2011.  At December 31, 2011, the Bank’s five largest borrowers, and their related entities, have loan balances of $3.6 million, $3.6 million, $3.2 million, $3.0 million and $2.9 million, respectively, and all of such loans were performing in accordance with their terms at such date.
 
 
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The following table shows our total loans originated, purchased, sold and repaid during the periods indicated.

   
Year Ended December 31,
   
2011
    
2010
    
2009
   
(In thousands)
Loan originations:
    
Real Estate Loans:
              
One- to four-family residential
   $ 59,218     $ 58,990     $ 59,089  
Home equity loans and lines
     9,906       6,889       8,666  
Multi-family residential
     6,180       5,094       2,546  
Commercial real estate
     18,641       11,967       14,660  
Land loans
     370       190       304  
Consumer and other
     842       1,314       724  
Total loan originations
     95,157       84,444       85,989  
Loans purchased(1)
     -       -       -  
Loans sold
     (30,715 )     (30,771 )     (12,508 )
Loan principal repayments
     (47,771 )     (32,596 )     (25,108 )
Total loans sold and principal repayments
     (78,486 )     (63,367 )     (37,616 )
Transfer to other real estate owned
     (158 )     (350 )     (1,573 )
Increase (decrease) due to other items, net(2)
     9       (63 )     410  
Net increase in total loans
   $ 16,522     $ 20,664     $ 47,210  
________
(1)
Includes purchases of participation interests in loans.
(2)
Other items consist of deferred fees and the allowance for loan losses.
 
One-to Four-Family Residential Mortgage Lending.  One of our primary lending activities continues to be the origination of loans secured by first mortgages on one- to four-family residences in our market area.  At December 31, 2011, $105.7 million of our total loan portfolio consisted of single-family residential mortgage loans, an increase of $7.1 million from December 31, 2010, and an increase of $59.3 from December 31, 2007.  Originations of one- to four-family loans were $59.2 million, $59.0 million, and $59.1 million, respectively, for the years ended December, 31, 2011, 2010 and 2009.  During this three year period, our single-family residential real estate loans as a percentage of total loans increased from 45.4% at December 31, 2008, to 53.5% at December 31, 2011.

Our single-family residential mortgage loan originations include loans that are underwritten on terms and documentation conforming to guidelines issued by Freddie Mac and Fannie Mae, and non-conforming “jumbo” loans, which have principal balances in excess of the Fannie Mae conforming loan limit of $417,000.  Applications for one-to four-family residential mortgage loans are accepted at any of our banking offices and are then referred to the Residential Lending Department at our main office in order to underwrite the creditworthiness of the loan.  Once our underwriting process is completed, the loan package is submitted to our mortgage loan committee for approval. We currently originate fixed-rate, fully amortizing mortgage loans with maturities of 10, 15, 20 or 30 years.  With the exception of those 30-year mortgage loans that are secondary market eligible and which we generally sell into the secondary market, we generally retain a substantial portion of the single-family residential mortgage loans that we originate.  During the current year, we have focused our origination efforts on increasing our production of adjustable rate mortgage (“ARM”) loans, where the interest rate either adjusts on an annual basis or is fixed for an initial period of three, five, or seven years and then adjusts annually.  The retention of ARM loans helps management mitigate the risk that future interest rate increases may have on our portfolio.  We do not originate ARM loans that would be considered “sub-prime”, interest-only, or those that provide for the negative amortization of principal.  At December 31, 2011, $26.5 million, or 25.3%, of our one- to four-family residential loan portfolio maturing after December 31, 2012 consisted of ARM loans.  In addition to traditional mortgage loan products offered by the Bank, we also offer reverse mortgages on an agency basis where we sell the origination to a third party that “table funds” the loan at closing.
 
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We underwrite one- to four-family residential mortgage loans with loan-to-value ratios of up to 90%, provided that the borrower obtains private mortgage insurance on loans that exceed 80% of the appraised value or sales price, whichever is less, of the secured property.  We also require that title insurance, hazard insurance and, if appropriate, flood insurance be maintained on all properties securing real estate loans.  We require that a licensed appraiser from our list of approved appraisers perform and submit to us an appraisal on all properties securing one- to four-family first mortgage loans.  Our mortgage loans generally include due-on-sale clauses which provide us with the contractual right to deem the loan immediately due and payable in the event the borrower transfers ownership of the property.  Due-on-sale clauses are an important means of adjusting the yields of fixed-rate mortgage loans in portfolio and we generally exercise our rights under these clauses.

Home Equity Loans and Lines of Credit.  In addition to the origination of first mortgage loans secured by single-family residences, the Bank also originates home equity loans and lines of credit, typically secured by second mortgages.  At December 31, 2011, our total home equity loans and lines of credit were $18.5 million, an increase of $2.7 million from December 31, 2010.  Our home equity loans have fixed rates of interest and final maturities of 5, 10 or 15 years.  Our home equity lines of credit generally have floating interest rates tied to the Wall Street Journal prime index.  In some cases, a fixed credit spread may be added to the index based on the creditworthiness of the borrower, as determined by our underwriting policies and procedures.  At December 31, 2011, the unused portion of our home equity lines of credit was $12.3 million.

Multi-Family Residential, Commercial Real Estate and Land Loans. At December 31, 2011, our multi-family residential, commercial real estate and land loans amounted to an aggregate of $72.4 million or 36.7% of our total loan portfolio.  Our aggregate multi-family residential, commercial real estate and land loans increased by $7.1 million, from December 31, 2010 to December 31, 2011, and by $32.2 million from December 31, 2007 to December 31, 2011.

Our commercial real estate and multi-family residential real estate loan portfolio consists primarily of loans secured by office buildings, retail and industrial use buildings, strip shopping centers, residential properties with five or more units and other properties used for commercial and multi-family purposes located in our market area.  At December 31, 2011, our multi-family residential real estate loans were $14.6 million or 7.4% of our total loan portfolio, and consist primarily of loans secured by properties with 20 or fewer rental units.  The average outstanding balance of our multi-family residential loans was $310,000, with our largest multi-family residential loan having a balance of $2.1 million at December 31, 2011.   Our commercial real estate loans comprised 28.6% of our total loan portfolio, and had an aggregate balance of $56.5 million at December 31, 2011.  The five largest commercial real estate loans outstanding at year end 2011 were $2.9 million, $2.7 million, $2.5 million, $2.3 million and $2.1 million, and all of such loans were performing in accordance with all their terms at such date.

Although terms for multi-family residential, commercial real estate and land loans vary, our underwriting standards generally allow for terms up to 15 years with monthly amortization over the life of the loan and loan-to-value ratios of not more than 80%.  Interest rates are either fixed or, on occasion, adjustable, based upon designated market indices such as the prime rate or LIBOR, and fees of up to 2.0% are charged to the borrower at the origination of the loan.  In light of local market demands, substantially all of our multi-family residential, commercial real estate and land loans originated in recent years have been fixed-rate loans with terms to maturity of 10 to 15 years.  However, the actual lives of such loans generally are less due to prepayments and re-financings.  In originating multi-family residential, commercial real estate and land loans we estimate what we expect will be the actual life of the loan to maturity and generally seek to originate loans which we expect will have an average maturity of 6-7 years.  Generally, we obtain personal guarantees of the principals as additional collateral for multi-family residential, commercial real estate and land loans.
 
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Multi-family residential, commercial real estate and land lending involves different risks than single-family residential lending.  These risks include larger loans to individual borrowers and loan payments that are dependent upon the successful operation of the project or the borrower’s business.  These risks can be affected by supply and demand conditions in the project’s market area of rental housing units, office and retail space, warehouses, and other commercial space.  We attempt to minimize these risks for loans we originate by limiting loans to businesses with existing operating performance which can be analyzed or to borrowers with whom we are familiar and who have historical results that we can analyze.  We also use conservative debt coverage ratios in our underwriting, and periodically monitor the operation of the business or project and the physical condition of the property.

Various aspects of multi-family residential and commercial real estate loan transactions are evaluated in an effort to mitigate the additional risk in these types of loans.  In our underwriting procedures, consideration is given to the stability of the property’s cash flow history, future operating projections, current and projected occupancy levels, location and physical condition.  Generally, we impose a debt service ratio (the ratio of net cash flows from operations before the payment of debt service to debt service) of not less than 125% in the case of multi-family residential, commercial real estate and land loans.  We also evaluate the credit and financial condition of the borrower, and if applicable, the guarantor.  Appraisal reports prepared by independent appraisers are obtained on each loan to substantiate the property’s market value, and are reviewed by us prior to the closing of the loan.

Construction financing is generally considered to involve a higher degree of credit risk than long-term financing on improved, owner-occupied real estate.  At December 31, 2011 and 2010, the Bank did not have any outstanding construction loans.  Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property’s value at completion of construction compared to the estimated costs, including interest, of construction and other assumptions.  Additionally, if the estimate of value proves to be inaccurate, we may be confronted with a project, when completed, having a value less than the loan amount.  We have attempted to minimize these risks by generally concentrating on loans in our market area to borrowers who have established reputations and/or with whom we have established relationships.

Consumer and Other Lending Activities. In our efforts to provide a full range of financial services to our customers, we offer various types of consumer loans.  Our consumer and other loans amounted to $1.0 million or 0.5% of our total loan portfolio at December 31, 2011.  Our consumer loans include loans secured by deposit accounts, automobile loans, home improvement loans, and unsecured personal loans.  Consumer loans are originated primarily through existing and walk-in customers and direct advertising.

In addition to consumer loans, the Bank offers secured and unsecured commercial loans and lines of credit.  Our non-mortgage commercial loans and lines of credit at December 31, 2011 amounted to $142,000.

Consumer loans generally have higher interest rates and shorter terms than residential loans; however, they have additional credit risk due to the type of collateral securing the loan or in some cases the absence of collateral.  During 2011 and 2010, we had no charge-offs related to consumer loans.
 
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Loan Approval Procedures and Authority. Our Board of Directors establishes the Bank’s lending policies and procedures.  Our Lending Policy Manual is reviewed on at least an annual basis by our management team in order to propose modifications as a result of market conditions, regulatory changes and other factors.  All modifications must be approved by our Board of Directors.

Various officers or combinations of officers of Bank of New Orleans have the authority within specifically identified limits to approve new loans.  Our Commercial Lending Committee (comprised of our President, Chief Financial Officer, Commercial Loan Manager and two outside directors) has authority to approve multi-family residential, commercial real estate and land loans in amounts up to $750,000.  Our Loan Committee (comprised of our President, Chief Financial Officer, Residential Loan Manager and Consumer Loan Manager) has authority to approve single-family residential mortgage loans which conform to Fannie Mae or Freddie Mac guidelines, and consumer loans up to $100,000.  All other loans must be approved by the Board of Directors of Bank of New Orleans.

Asset Quality

General.  One of our key objectives has been, and continues to be, maintaining a high level of asset quality. In addition to maintaining credit standards for new originations which we believe are sound, we are proactive in our loan monitoring, collection and workout processes in dealing with delinquent or problem loans.

When a borrower fails to make a scheduled payment, we attempt to cure the deficiency by making personal contact with the borrower.  Initial contacts are generally made within 10 to 15 days after the date the payment is due. In most cases, deficiencies are promptly resolved.  If the delinquency continues, late charges are assessed and additional efforts are made to collect the deficiency.  All loans with an outstanding balance of more than $100,000 which are delinquent 30 days or more are reported to the Board of Directors of Bank of New Orleans.

On loans where the collection of principal or interest payments is doubtful, the accrual of interest income ceases (“non-accrual” loans).  It is our policy, with certain limited exceptions, to discontinue accruing additional interest and reverse any interest accrued on any loan which is 90 days or more past due.  On occasion, this action may be taken earlier if the financial condition of the borrower raises significant concern with regard to his/her ability to service the debt in accordance with the terms of the loan agreement.  Interest income is not accrued on these loans until the borrower’s financial condition and payment record demonstrate an ability to service the debt.

Real estate which is acquired as a result of foreclosure is classified as real estate owned until sold.  Real estate owned is recorded at the lower of cost or fair value less estimated selling costs.  Costs associated with acquiring and improving a foreclosed property are usually capitalized to the extent that the carrying value does not exceed fair value less estimated selling costs.  Holding costs are charged to expense.  Gains and losses on the sale of real estate owned are charged to operations, as incurred.

We account for our impaired loans under generally accepted accounting principles.  An impaired loan generally is one for which it is probable, based on current information, that the lender will not collect all the amounts due under the contractual terms of the loan.  Large groups of smaller balance, homogeneous loans are collectively evaluated for impairment.  Loans collectively evaluated for impairment include smaller balance commercial real estate loans, residential real estate loans and consumer loans.  These loans are evaluated as a group because they have similar characteristics and performance experience.  Larger multi-family residential, commercial real estate and construction loans are individually evaluated for impairment.  As of December 31, 2011 and 2010, our recorded investment in impaired loans was $1.1 million and $908,000, respectively.
 
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Federal regulations and our policies require that we utilize an internal asset classification system as a means of reporting problem and potential problem assets.  We have incorporated an internal asset classification system, substantially consistent with Federal banking regulations, as a part of our credit monitoring system.  Federal banking regulations set forth a classification scheme for problem and potential problem assets as “substandard,” “doubtful” or “loss” assets.  An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected.  Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.”  We typically have not classified assets as “doubtful,” but have been more aggressive in classifying assets as “loss.”  Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted.  Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated “special mention.”

A savings institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by Federal bank regulators which can order the establishment of additional general or specific loss allowances.  The Federal banking agencies, have adopted an interagency policy statement on the allowance for loan and lease losses.  The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines.  Generally, the policy statement recommends that institutions have effective systems and controls to identify, monitor and address asset quality problems; that management analyze all significant factors that affect the collectibility of the portfolio in a reasonable manner; and that management establish acceptable allowance evaluation processes that meet the objectives set forth in the policy statement.  Our management believes that, based on information currently available, its allowance for loan losses is maintained at a level which covers all known and inherent losses that are both probable and reasonably estimable at each reporting date.  However, actual losses are dependent upon future events and, as such, further additions to the level of allowances for loan losses may become necessary.

We review and classify assets on a monthly basis and the Board of Directors is provided with monthly reports on our classified assets.  We classify assets in accordance with the management guidelines described above.  At December 31, 2011 and 2010, our recorded investment in assets classified as “substandard” was $756,000 and $475,000 respectively.  There were no loss allowances specifically allocated to any such substandard loans at December 31, 2011 or at December 31, 2010.  At December 31, 2011, we had no assets classified as “special mention” compared to $130,000 in assets designated as “special mention” at December 31, 2010.
 
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Delinquent Loans.  At December 31, 2011, we had $588,000 in loans delinquent 30 to 89 days, compared to $282,000 at December 31, 2010.  Our loans delinquent 30 to 89 days as of December 31, 2011 were composed of two single family residential mortgage loans totaling $463,000, and six home equity loans or lines of credit totaling $125,000.

The following table shows the delinquencies in our loan portfolio as of the dates indicated.
 
   
December 31, 2011
    
December 31, 2010
  
   
30-89
Days Overdue
    
90 or More Days
Overdue and Still
Accruing
    
30-89
Days Overdue
    
90 or More Days
Overdue and Still
Accruing
  
   
Number
of Loans
    
Principal
Balance
    
Number
of Loans
    
Principal
Balance
    
Number of
Loans
    
Principal
Balance
    
Number
of Loans
    
Principal
Balance
  
Real Estate Loans:
  
(Dollars in Thousands)
  
One- to four-family residential
     2     $ 463       --     $ --       5     $ 94       --     $ --  
Home equity loans and lines
     6       125                       9       188                  
Multi-family residential
     -       -       --       --       -       -       --       --  
Commercial real estate
     -       -                       -       -                  
Land
     -       -                       -       -                  
Consumer and other
     -       -       --       --       -       -       --       --  
Total delinquent loans
     8     $ 588       --     $ --       14     $ 282       --     $ --  
Delinquent loans to total net loans
             0.30 %             -- %             0.16 %             -- %
Delinquent loans to total loans
             0.30 %             -- %             0.16 %             -- %
 
Non-Performing Loans and Real Estate Owned.  Our general policy is to cease accruing interest on loans which are 90 days or more past due and to charge-off all accrued interest.  At December 31, 2011, our non-performing loans totaled $1.1 million, an increase of $166,000 from December 31, 2010.  The largest components of our non-performing loans at December 31, 2011 were 20 home equity loans or lines of credit totaling $569,000 and a $330,000 loan secured by a restaurant in Baton Rouge, Louisiana.
 
For the years ended December 31, 2011 and 2010, the amount of additional interest income that would have been recognized on non-accrual loans if such loans had continued to perform in accordance with their contractual terms was $65,000 and $34,000, respectively.

Real estate owned decreased by $1.2 million to $532,000, during the year ended December 31, 2011.  This reduction was primarily attributed to the sale of a multi-family residential property and the sale of a single-family residential property with December 31, 2010 carrying values of $350,000 and $900,000, respectively.  During 2011, the Bank recorded write-downs on these properties of $215,000. At December 31, 2011, real estate owned was comprised of a single-family residential property with a fair value of $150,000, and our 0.6% participation interest in a $170 million mixed-use property development in Baton Rouge, Louisiana having a fair value of $382,000.  During 2011, the Bank reduced its fair value estimate with respect to its participation interest in this property by $64,000 based on a revised appraisal of the site.
 
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The following table shows the amounts of our non-performing assets (defined as non-accruing loans, accruing loans 90 days or more past due and real estate owned) at the dates indicated. The Bank had no troubled debt restructurings as of any of the dates indicated below.

   
December 31,
  
   
2011
    
2010
    
2009
    
2008
    
2007
  
                               
Non-accruing loans:
  
(Dollars in Thousands)
  
Real Estate loans:
                              
One- to four-family residential
   $ 110     $ 123     $ 36     $ 52     $ 46  
Home equity loans and lines
     569       682       378       389       353  
Multi-family residential
     --       --       515       --       --  
Commercial real estate
     330       --       --       --       299  
Land loans
     --       34       --       --       --  
Consumer and other
     65       69       74       79       144  
Total non-accruing loans
     1,074       908       1,003       520       842  
Accruing loans 90 days or more past due:
                                        
Real Estate loans:
                                        
One- to four-family residential
     --       --       --       --       --  
Home equity loans and lines
     --       --       --       --       --  
Multi-family residential
     --       --       --       --       --  
Commercial real estate
     --       --       --       --       --  
Land loans
     --       --       --       --       --  
Consumer and other
     --       --       --       --       --  
Total accruing loans 90 days or more past due
     --       --       --       --       --  
Total non-performing loans(1)
     1,074       908       1,003       520       842  
Real estate owned, net
     532       1,696       1,573       --       --  
Total non-performing assets
   $ 1,606     $ 2,604     $ 2,576     $ 520     $ 842  
Total non-performing loans as a percentage of loans, net
     0.55 %     0.51 %     0.63 %     0.47 %     0.87 %
Total non-performing loans as a percentage of total assets
     0.34 %     0.28 %     0.30 %     0.16 %     0.31 %
Total non-performing assets as a percentage of total assets
     0.51 %     0.81 %     0.78 %     0.16 %     0.31 %
_________________
(1)
Non-performing loans consist of non-accruing loans plus accruing loans 90 days or more past due.

Allowance for Loan Losses.  The allowance for loan losses is established through a provision for loan losses.  We maintain the allowance at a level believed, to the best of management’s knowledge, to cover all known and inherent losses in the portfolio that are both probable and reasonable to estimate at each reporting date.  Management reviews the allowance for loan losses on a monthly basis in order to identify those inherent losses and to assess the overall collection probability for the loan portfolio.  Our evaluation process includes, among other things, an analysis of delinquency trends, non-performing loan trends, the level of charge-offs and recoveries, prior loss experience, total loans outstanding, the volume of loan originations, the type, size and geographic concentration of our loans, the value of collateral securing the loan, the borrower’s ability to repay and repayment performance, the number of loans requiring heightened management oversight, local economic conditions and industry experience.  Such risk ratings are periodically reviewed by management and revised as deemed appropriate.  The establishment of the allowance for loan losses is significantly affected by management judgment and uncertainties and there is a likelihood that different amounts would be reported under different conditions or assumptions.  Various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses.  Such agencies may require us to make additional provisions for estimated loan losses based upon judgments different from those of management.
 
The Bank recorded charge-offs of $8,000 during 2011 compared to $174,000 during 2010.  Our charge-offs during 2011 were primarily attributed to small single-family residential loans.  During 2010, the Bank recorded a $171,000 charge-off on a $515,000 multi-family residential loan that was transferred to real estate owned at the end of 2010.  The property was subsequently sold during the first quarter of 2011 at a sales price equal to our carrying value.
 
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We will continue to monitor and modify our allowances for loan losses as conditions dictate.  No assurances can be given that our level of allowance for loan losses will cover all of the inherent losses on our loans or that future adjustments to the allowance for loan losses will not be necessary if economic and other conditions differ substantially from the economic and other conditions used by management to determine the current level of the allowance for loan losses.

The following table shows changes in our allowance for loan losses during the periods presented.

   
At or For the Year Ended December 31,
  
   
2011
    
2010
    
2009
    
2008
    
2007
  
                               
   
(Dollars in Thousands)
  
Total loans outstanding at end of period
   $ 197,587     $ 181,074     $ 160,347     $ 113,547     $ 99,277  
                                         
Allowance for loan losses, beginning of period
     1,759       1,661       1,952       1,999       2,292  
Provision (recovery) for loan losses
     53       269       337       (43 )     (268 )
Charge-offs:
                                        
Real Estate loans:
                                        
One- to four-family residential
     2       --       31       --       38  
Home equity loans and lines
     6       3       191       2       4  
Multi-family residential
     --       171       --       --       --  
Commercial real estate
     --       --       396       --       --  
Land loans
     --       --       --       --       --  
Consumer and other
     --       --       10       2       --  
Total charge-offs
     8       174       628       4       42  
Recoveries on loans previously charged off
     1       3       --       --       17  
Allowance for loan losses, end of period
   $ 1,805     $ 1,759     $ 1,661     $ 1,952     $ 1,999  
Allowance for loan losses as a percent of non-performing loans
     168.06 %     193.72 %     165.60 %     375.38 %     237.41 %
Allowance for loan losses as a percent of  total loans
     0.91 %     0.98 %     1.04 %     1.72 %     2.01 %
Ratio of net charge-offs during the period to average loans outstanding during the period
     -- %     0.10 %     0.47 %     -- %     -- %

The following table shows how our allowance for loan losses is allocated by type of loan at each of the dates indicated.
 
   
December 31,
  
   
2011
    
2010
    
2009
    
2008
    
2007
  
   
Amount
of Allowance
    
Loan
Category
as a %
of Total
Loans
    
Amount
of Allowance
     Loan
Category
as a %
of Total
Loans
      
Amount
of Allowance
     Loan
Category
as a %
of Total
Loans
      
Amount
of Allowance
    
Loan
Category
as a %
of Total
Loans
      
Amount
of Allowance
    
Loan
Category
as a %
of Total
Loans
  
   
(Dollars in Thousands)
  
                                                             
Real estate loans:
                                                            
One-to four-family residential
   $ 889       53.50 %   $ 858       54.50 %   $ 726       53.40 %   $ 91       45.40 %   $ 106       46.80 %
Home equity loans and lines
     207       9.3       270       8.7       273       9       210       9.1       238       8.8  
Multi-family residential
     148       7.4       100       6.5       167       5.9       2       6.9       1       7.5  
Commercial real estate
     485       28.6       442       29       397       29.8       49       35       57       32.5  
Land loans
     2       0.7       9       0.5       10       0.8       2       1       1       0.5  
Consumer and other
     74       0.5       80       0.8       88       1.1       98       2.6       96       3.9  
Unallocated
     --       --       --       --       --       --       1,500       --       1,500       --  
Total
   $ 1,805       100.00 %   $ 1,759       100.00 %   $ 1,661       100.00 %   $ 1,952       100.00 %   $ 1,999       100.00 %
 
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Investment Activities

General.  We invest in securities pursuant to our Investment Policy, which has been approved by our Board of Directors.  The Board’s ALCO/Investment Committee monitors our investment activity and ensures that the Bank’s investments are consistent with the Investment Policy.  The respective Boards of Directors of the Bank and Company review all investment activity at their regular scheduled meetings.

Our investment policy is designed primarily to manage the interest rate sensitivity of our assets and liabilities, to generate a favorable return without incurring undue interest rate and credit risk, to complement our lending activities and to provide and maintain liquidity.  On occasion, we also have used a leveraged investment strategy for the purpose of enhancing returns.  Pursuant to this strategy, we have utilized borrowings from the Federal Home Loan Bank (“FHLB”) of Dallas as well as other sources to purchase additional investment securities.  We attempt to match the advances with the securities purchased in order to obtain a favorable difference, or “spread,” between the interest paid on the advance against the yield received on the security purchased.

At December 31, 2011, our investment and mortgage-backed securities amounted to $82.3 million in the aggregate or 26.3% of total assets at such date.  The largest component of our securities portfolio in recent periods has been mortgage-backed securities, which amounted to $69.9 million or 84.9% of the securities portfolio at December 31, 2011.  The second largest component of our securities portfolio at December 31, 2011 was U.S. government and agency securities which amounted to $12.2 million or 14.8% of the securities portfolio. Our agency debt securities often have call provisions which provide the agency with the ability to call the securities at specified dates.  In addition, we invest in municipal securities, corporate debt obligations and other securities.

At December 31, 2011, we had gross unrealized gains of $970,000 and $3.5 million, respectively, on our available-for-sale and held-to-maturity securities. There were no gross unrealized losses on either our available-for-sale securities or held-to-maturity securities as of December 31, 2011.

 Pursuant to FASB ASC 320-10, our securities are classified as available for sale (“AFS”), held to maturity (“HTM), or trading, at the time of acquisition.  Securities classified as held to maturity must be purchased with the intent and ability to hold that security until its final maturity, and can be sold prior to maturity only under rare circumstances.  Held to maturity securities are accounted for based upon the historical cost of the security.  Available for sale securities can be sold at any time based upon needs or market conditions.  Available for sale securities are accounted for at fair value, with unrealized gains and losses on these securities, net of income tax provisions, reflected in retained earnings as accumulated other comprehensive income.  At December 31, 2011, we had $22.8 million of securities classified as available for sale, $59.6 million of securities classified as held to maturity and no securities classified as trading account.  During the year ended December 31, 2011, we sold an aggregate of $1.2 million of available-for-sale securities at a gain of $72,000.  No securities classified as held-to-maturity were sold during the year.

We do not purchase mortgage-backed derivative instruments that would be characterized “high-risk” under Federal banking regulations at the time of purchase, nor do we purchase corporate obligations which are not rated investment grade or better.

Our mortgage-backed securities consist primarily of mortgage pass-through certificates issued by the Government National Mortgage Association (“GNMA” or “Ginnie Mae”), Fannie Mae or Freddie Mac.  Our mortgage-backed securities also include collateralized mortgage obligations (“CMOs”) issued by such agencies.  At December 31, 2011, $2.0 million of our mortgage-backed securities were CMOs.  At such date, all of our mortgage-backed securities were issued by the GNMA, FNMA or FHLMC and we held no mortgage-backed securities from private issuers.
 
16
 
Investments in mortgage-backed securities involve a risk that actual prepayments will be greater than estimated prepayments over the life of the security, which may require adjustments to the amortization of any premium or accretion of any discount relating to such instruments, thereby changing the net yield on such securities.  There is also reinvestment risk associated with the cash flows from such securities or in the event such securities are redeemed by the issuer.  In addition, the market value of such securities may be adversely affected by changes in interest rates.

The FHLMC is a public corporation chartered by the U.S. Government.  The FHLMC issues participation certificates backed principally by conventional mortgage loans.  The FHLMC guarantees the timely payment of interest and the ultimate return of principal within one year.  The FNMA is a private corporation chartered by the U.S. Congress with a mandate to establish a secondary market for conventional mortgage loans.  Because the FHLMC, the FNMA and the GNMA were established to provide support for low- and middle-income housing, there are limits to the maximum size of loans that qualify for these programs.  To accommodate larger-sized loans, and loans that, for other reasons, do not conform to the agency programs, a number of private institutions have established their own home-loan origination and securitization programs.

Mortgage-backed securities typically are issued with stated principal amounts, and the securities are backed by pools of mortgages that have loans with interest rates that are within a range and have varying maturities.  The cash flow associated with the underlying pool of mortgages, i.e., fixed rate or adjustable rate, as well as prepayment risk, are passed on to the certificate holder.  The life of a mortgage-backed pass-through security thus approximates the life of the underlying mortgages.

Collateralized mortgage obligations are typically issued by a special-purpose entity, in our case, by government agencies, which may be organized in a variety of legal forms, such as a trust, a corporation, or a partnership.  Substantially all of the collateralized mortgage obligations held in our portfolio consist of senior sequential tranches.  By purchasing senior sequential tranches, management attempts to ensure the cash flow associated with such an investment.

The following table sets forth certain information relating to our investment and mortgage-backed securities portfolios at the dates indicated.
 
   
December 31,
  
   
2011
    
2010
    
2009
  
   
Amortized
Cost
    
Market
Value
    
Amortized
Cost
    
Market
Value
    
Amortized
Cost
    
Market
Value
  
   
(In Thousands)
  
Securities Available-for-Sale:
                                    
Mortgage-backed securities
   $ 9,648     $ 10,356     $ 14,505     $ 15,383     $ 25,864     $ 27,079  
U.S. government and agency obligations
     11,949       12,211       46,924       47,106       35,267       35,445  
Equity Securities
     183       183       --       --       --       --  
Total Securities AFS
     21,780       22,750       61,429       62,489       61,131       62,524  
Securities Held to Maturity:
                                                
Mortgage-backed securities
     59,581       63,067       62,185       65,985       90,194       94,430  
U.S. government and agency obligations
     --       --       --       --       3,000       2,985  
Municipal obligations
     --       --       1,354       1,370       1,352       1,384  
Total Securities HTM
     59,581       63,067       63,539       67,355       94,546       98,799  
Total Mortgage-Backed and Investment Securities
   $ 81,361     $ 85,817     $ 124,968     $ 129,844     $ 155,677     $ 161,323  
 
17
 
The following table sets forth the amount of investment and mortgage-backed securities which mature during each of the periods indicated and the weighted average yields for each range of maturities at December 31, 2011.  No tax-exempt yields have been adjusted to a tax-equivalent basis.
 
   
Amounts at December 31, 2011 Which Mature In
        
   
One Year
or Less
    
More than
One Year
to Five
Years
    
More than
Five Years
to Ten
Years
    
More
Than Ten
Years
    
Total
  
   
(In Thousands)
  
Available-for-Sale:
                              
Mortgage-backed securities
   $ 160     $ 2,232     $ 5,113     $ 2,851     $ 10,356  
U.S. government and agency obligations
     --       12,211       --       --       12,211  
Municipal obligations
     --       --       --       --       --  
Total
   $ 160     $ 14,443     $ 5,113     $ 2,851     $ 22,567  
Weighted Average Yield
     5.00 %     2.26 %     5.18 %     5.00 %     3.29 %
Equity Securities
                                     183  
Total
                                   $ 22,750  
Held to Maturity:
                                        
Mortgage-backed securities
   $ --     $ 524     $ 14,184     $ 44,873     $ 59,581  
U.S. government and agency obligations
     --       --       --       --       --  
Municipal obligations
     --       --       --       --       --  
Total
   $ --     $ 524     $ 14,184     $ 44,873     $ 59,581  
Weighted Average Yield
     -- %     4.36 %     5.08 %     4.02 %     4.27 %
Total Mortgage-Backed and Investment Securities:
                                        
Mortgage-backed securities
   $ 160     $ 2,756     $ 19,297     $ 47,724     $ 69,937  
U.S. government and agency obligations
     --       12,211       --       --       12,211  
Municipal obligations
     --       --       --       --       --  
Total
   $ 160     $ 14,967     $ 19,297     $ 47,724     $ 82,148  
Weighted Average Yield
     5.00 %     2.33 %     5.11 %     4.08 %     4.00 %
Equity Securities
                                     183  
Total
                                   $ 82,331  

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

   
December 31,
  
   
2011
    
2010
    
2009
  
   
(In Thousands)
  
Fixed-rate:
                  
Available for sale
   $ 10,356     $ 15,383     $ 27,079  
Held to maturity
     50,953       50,665       74,446  
Total fixed-rate
     61,309       66,048       101,525  
Adjustable-rate:
                        
Available for sale
     --       --       --  
Held to maturity
     8,628       11,520       15,748  
Total adjustable-rate
     8,628       11,520       15,748  
Total mortgage-backed securities
   $ 69,937     $ 77,568     $ 117,273  
 
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Information regarding the contractual maturities and weighted average yield of our mortgage-backed securities portfolio at December 31, 2011 is presented below.  Due to repayments of the underlying loans, the actual maturities of mortgage-backed securities generally are substantially less than the scheduled maturities.

   
Amounts at December 31, 2011 Which Mature in
  
   
One Year
or Less
    
Weighted
Average
Yield
    
More
Than One
Year to
Five
Years
    
Weighted
Average
Yield
    
More
Than Five
Years to
Ten
Years
    
Weighted
Average
Yield
    
More
than 10
Years
    
Weighted
Average
Yield
  
   
(Dollars in Thousands)
  
Fixed-rate:
                                                
Available for sale
   $ 160       5.00 %   $ 2,232       4.68 %   $ 5,113       5.18 %   $ 2,851       5.00 %
Held to maturity
     --       0.00 %     485       4.50 %     14,056       5.10 %     36,412       4.13 %
Total fixed-rate
     160       5.00 %     2,717       4.65 %     19,169       5.12 %     39,263       4.19 %
Adjustable-rate:
                                                                
Available for sale
     --               --               --       --       --          
Held to maturity
     --               39       2.61 %     128       2.54 %     8,461       3.56 %
Total adjustable-rate
     --               39       2.61 %     128       2.54 %     8,461       3.56 %
Total
   $ 160       5.00 %   $ 2,756       4.62 %   $ 19,297       5.11 %   $ 47,724       4.08 %
 
Sources of Funds

General.  Deposits, loan repayments and prepayments, proceeds from sales of loans, cash flows generated from operations and FHLB advances are the primary sources of our funds for use in lending, investing and for other general purposes.

Deposits.  We offer a variety of deposit accounts with a range of interest rates and terms.  Our deposits consist of checking, both interest-bearing and non-interest-bearing, money market, savings and certificate of deposit accounts.  At December 31, 2011, 30.8% of the funds deposited with Bank of New Orleans were in non-maturity deposits, which are commonly referred to as “core deposits”.  Total certificates of deposit were $134.5 million at December 31, 2011 compared to $134.8 million at December 31, 2010.

The flow of deposits is influenced significantly by general economic conditions, changes in money market rates, prevailing interest rates and competition.  Our deposits are obtained predominantly from the areas where our branch offices are located.  We have historically relied primarily on customer service and long-standing relationships with customers to attract and retain these deposits; however, market interest rates and rates offered by competing financial institutions significantly affect our ability to attract and retain deposits.

Bank of New Orleans uses traditional means of advertising its deposit products, including broadcast and print media and we generally do not solicit deposits from outside our market area.  In recent years, we have emphasized the origination of core deposits.

We do not actively solicit certificate accounts of $100,000 or more, known as “jumbo CDs,” or use brokers to obtain deposits.  At December 31, 2011, our jumbo CDs amounted to $57.4 million, of which $40.8 million are scheduled to mature within twelve months.
 
19
 
The following table shows the distribution of, and certain other information relating to, our deposits by type of deposit, as of the dates indicated.
 
   
December 31,
  
   
2011
    
2010
    
2009
  
   
Amount
    
%
    
Amount
    
%
    
Amount
    
%
  
   
(Dollars in Thousands)
  
Certificate accounts:
                                    
Less than 1.00%
   $ 64,299       33.1 %   $ 32,253       17.1 %   $ 1,111       0.6 %
1.00% - 1.99%
     20,660       10.6       44,120       23.4       55,776       29.6  
2.00% - 2.99%
     17,878       9.2       16,678       8.8       32,870       17.4  
3.00% - 3.99%
     23,784       12.3       30,293       16.1       28,363       15.0  
4.00% - 4.99%
     7,833       4.0       11,482       6.1       17,273       9.2  
5.00% - 5.99%
     --       --       8       --       222       0.1  
Total certificate accounts
     134,454       69.2       134,834       71.5       135,615       71.9  
                                                 
Savings accounts
     21,621       11.1       19,368       10.3       18,328       9.7  
Checking:
                                                
Interest bearing
     21,064       10.9       19,319       10.3       19,789       10.5  
Non-interest bearing
     9,764       5.0       8,130       4.3       7,893       4.2  
Money market
     7,423       3.8       6,711       3.6       6,997       3.7  
Total savings and transaction accounts
     59,872       30.8       53,528       28.5       53,007       28.1  
Total deposits
   $ 194,326       100.00 %   $ 188,362       100.00 %   $ 188,622       100.00 %

The following table shows the average balance of each type of deposit and the average rate paid on each type of deposit for the periods indicated.

   
Year Ended December 31,
  
   
2011
    
2010
    
2009
  
   
Average
Balance
    
Interest
Expense
    
Average
Rate
Paid
    
Average
Balance
    
Interest
Expense
    
Average
Rate
Paid
    
Average
Balance
    
Interest
Expense
    
Average
Rate
Paid
  
   
(Dollars in Thousands)
  
Passbook Savings Accounts
   $ 20,618     $ 82       0.40 %   $ 18,496     $ 92       0.50 %   $ 18,513     $ 93       0.50 %
Checking
     18,998       27       0.14       18,344       34       0.19       19,417       53       0.27  
Money market
     7,018       31       0.44       6,560       36       0.55       5,512       31       0.56  
Certificates of deposit
     135,030       2,506