Item 1. Business - -----------------
General
The Company is a Louisiana corporation organized in December 1994 at the direction of Teche Federal Bank (the "Bank" or "Teche Federal") to acquire all of the capital stock that the Bank issued in its conversion from the mutual to stock form of ownership (the "Conversion"). References to the "Bank" or "Teche Federal" herein, unless the context requires otherwise, refer to the Company on a consolidated basis.
The Bank is a community-oriented federal savings bank offering a variety of financial services to meet the local banking needs of St. Mary, Lafayette, Iberia, St. Martin, Terrebonne, upper Lafourche, East Baton Rouge and St. Landry Parishes, Louisiana (the "primary market area"). At September 30, 2005, Teche Federal conducted its business from its office in New Iberia, Louisiana, and eighteen branch offices in the following cities: Baton Rouge (two offices), Bayou Vista (one office), Breaux Bridge (one office), Eunice (one office), Franklin (one office), Houma (two offices), Lafayette (three offices), Morgan City (one office), New Iberia (three offices), Opelousas (one office), Prairieville (one office) and Thibodaux (one office), all within Louisiana.
The Company and the Bank are subject to regulation by the Office of Thrift Supervision ("OTS"), the Federal Deposit Insurance Corporation ("FDIC") and the Securities and Exchange Commission ("SEC").
Market Area/Competition
Teche Federal's home office is located in Franklin, St. Mary Parish, Louisiana. The Bank also has branch offices in the Parishes of Iberia, St. Martin, Lafayette, Terrebonne, Lafourche, St. Landry, East Baton Rouge and Ascension, Louisiana.
The local economy is dependent to a certain extent on the oil and gas, seafood and agricultural (primarily sugar cane) industries. These industries are cyclical in nature and have a direct impact on the level and performance of the Bank's loan portfolio. Economic downturns in the past have caused a decrease in loan originations and an increase in nonperforming assets. However, the metropolitan Lafayette area, which is the fourth largest city in Louisiana, has experienced sustained growth and is the home to the University of Louisiana at Lafayette, several hospitals and various small-to medium-size businesses, and has provided the Bank with increased lending opportunities.
The Bank encounters strong competition both in the attraction of deposits and origination of real estate and other loans. Competition comes primarily from other financial institutions in its primary market area, including savings banks, commercial banks and savings associations, credit unions and investment and mortgage brokers in serving its primary market area. The Bank also originates mortgage loans through its branch offices and affiliations with mortgage originators, secured by properties throughout its primary market area and other locations in Louisiana.
Lending Activities
The Bank's lending strategy historically focused on the origination of traditional one-to-four-family mortgage loans with the primary emphasis on single family residences in the Bank's primary market area. In recent years, the Bank has emphasized SmartGrowth Loans, consisting of commercial loans, home equity loans, alternative mortgage loans and consumer loans. In furtherance of this strategy, the Bank has increased the amount of its commercial real estate and commercial loan portfolios, consumer loans and alternative mortgage loans for retention in the Company's loan portfolio. Alternative mortgage loans originated by the Bank are residential real estate loans that do not meet all of the Bank's standard loan underwriting criteria. At September 30, 2005, SmartGrowth Loans totaled $300.4 million or 60.9% of total loans.
Analysis of Loan Portfolio. Set forth below is selected data relating to the composition of the Bank's loan portfolio at the dates indicated.
Loan Maturity Tables. The following table sets forth the maturity of the Bank's residential construction and commercial real estate loan portfolio at September 30, 2005. The table does not include prepayments or scheduled principal repayments. Adjustable-rate loans are shown as maturing based on contractual maturities.
Residential Construction/ Commercial Permanent Real Estate --------- ----------- (In Thousands)
Amounts due: 1 year or less............................... $ 6,074 $ 6,277 After 1 year: 1 year to 5 years.......................... - 9,485 More than 5 years.......................... 7,234 31,115 ------- -------
Total due after September 30, 2006....... $ 7,234 $40,600
Total amount due......................... $13,308 $46,877 ======= =======
The following table sets forth the dollar amount of residential construction/permanent loans and commercial real estate loans due after September 30, 2006 that have pre-determined interest rates and that have floating or adjustable interest rates.
Floating or Fixed Adjustable Rates Rates Total ----- ----- ----- (In Thousands)
Residential construction/permanent... $ 4,115 $ 3,119 $ 7,234 Commercial real estate............... 25,306 15,294 40,600 ------- ------- ------- Total.......................... $29,421 $18,413 $47,834 ======= ======= =======
One- to Four-Family Residential Loans. Teche Federal generally originates single-family owner occupied residential mortgage loans in amounts up to 80% of the lower of the appraised value or selling price of the property securing the loan. The Bank also originates such loans in amounts up to 100% of the lower of the appraised value or selling price of the mortgaged property, provided that private mortgage insurance is provided on the amount in excess of 90% of the lesser of the appraised value or selling price.
The Bank offers fixed-rate and adjustable-rate mortgage loans with terms of up to 30 years, which amortize monthly. Interest rates charged on mortgage loans are competitively priced based on market conditions and the Bank's cost of funds. The Bank originates and holds most of its fixed-rate mortgage loans as long term investments. Most loans are originated in conformance with the Federal Home Loan Mortgage Corporation ("FHLMC") and the Federal National Mortgage Association ("FNMA") guidelines and can therefore be sold in the secondary market should management deem it necessary. The Bank originated $21.2 million of fixed-rate mortgage loans during the year ended September 30, 2005.
Alternative mortgage loans originated by the Bank are residential real estate loans that do not meet the Bank's standard loan underwriting criteria due to, among other things, higher loan to value ratios, lack of private mortgage insurance, weaker credit characteristics of the borrower, absence of credit history or the non-conforming nature of the property securing the loan. Because these loans may have higher credit risks,
they also provide higher yields to the Bank. The Bank attempts to minimize the credit risk by ensuring that the borrowers meet some of the Bank's standard underwriting criteria and securing such loans only by residential real estate. At September 30, 2005, alternative mortgage loans comprised $85.5 million, or 17.4%, of the total loan portfolio.
Residential Construction/Permanent Loans. The Bank's construction loans have primarily been made to finance the construction of single-family owner occupied residential properties and, to a limited extent, single family housing for sale by contractors. Construction/permanent loans generally are made to customers of the Bank in its primary market area. The Bank offers construction/permanent loans in amounts up to 80% of the appraised value of the property securing the loan. Loan proceeds are disbursed in increments as construction progresses and as inspections warrant. Construction/permanent loans to individuals generally do not pay off at completion of the construction phase, but are automatically transferred to the Bank's one- to four-family residential portfolio. These single-family residential loans are structured to allow the borrower to pay interest only on the funds advanced for the construction for a period of up to nine months at the end of which time the loan converts to a permanent mortgage.
Multi-Family and Commercial Real Estate Loans. This portfolio has grown in recent years and management anticipates that it will continue to grow. The Bank originates loans secured by multi-family (greater than four family units) properties. The Bank also originates loans secured by commercial real estate, primarily office buildings (both owner and non-owner occupied) and development loans to builders.
The Bank generally originates multi-family and commercial real estate loans up to 80% of the appraised value of the property securing the loan depending upon the type of collateral. The Bank's philosophy is to originate commercial real estate and multi-family loans only to borrowers known to the Bank and on properties in its market area. This portfolio generally consists of short term (generally five years or less) fixed rate balloon loans originated at prevailing market rates with amortizations up to 15 years.
Loans secured by multi-family and commercial real estate are generally larger and involve a greater degree of risk than one- to four-family residential mortgage loans. Of primary concern in multi-family and commercial real estate lending is the borrower's creditworthiness, the feasibility and cash flow potential of the project, and the outlook for successful operation or management of the properties. As a result, repayment of such loans may be subject to a greater extent than residential real estate loans to adverse conditions in the real estate market or the economy. In accordance with the Bank's classification of assets policy and procedure, the Bank requests annual financial statements on major loans secured by multi-family and commercial real estate. At September 30, 2005 the aggregate balance of the five largest multi-family and commercial real estate loans totaled $14.3 million, with no single loan larger than $4.8 million.
Commercial Non-real Estate Loans. At September 30, 2005, the Bank had $10.6 million invested in commercial non-real estate loans. Such loans are commercial business loans primarily to small business owners in the Bank's market area. These loans are typically secured by equipment, machinery and other business assets and generally have terms of three to five years. Commercial business loans generally have higher interest rates and shorter terms than one- to four-family residential mortgage loans, but also involve a greater degree of risk. These loans may have higher average balances, increased difficulty of loan monitoring and a higher risk of default since their repayment generally depends on the successful operation of the borrower's business. The Bank tries to minimize its risk exposure by limiting these loans to proven businesses and obtaining personal guarantees from the borrowers whenever possible.
Land Loans. At September 30, 2005, the Bank had $14.0 million invested in residential lot loans to individuals.
Home Equity Loans. The Bank also offers home equity loans on single family residences. At September 30, 2005, home equity mortgage loans totaled $49.4 million. While the Bank does offer
adjustable rate home equity lines of credit, the majority of the home equity portfolio have fixed rates with a maximum term of 30 years. A variety of home equity loan programs are offered including combined loan to values up to 125% of collateral, however, such loans are generally for shorter terms. Creditworthiness, capacity, and loan to value are the primary factors considered during underwriting. To offset additional credit risk and higher combined loan to values, the Bank reduces loan terms and increases loan yields.
Consumer Loans. The Bank also offers loans in the form of loans secured by deposits, home equity loans, automobile loans, mobile home loans and unsecured personal consumer loans. Federal regulations allow the Bank to make secured and unsecured consumer loans of up to 35% of the Bank's assets.
Loans secured by deposits at the Bank are made up to 100% of the deposit. At September 30, 2005, the Bank had $5.1 million of loans secured by deposits.
Teche Federal also originates automobile and mobile home loans. At September 30, 2005, the Bank had $7.4 million and $25.4 million of automobile and mobile home loans, respectively.
Consumer loans tend to be originated at higher interest rates than conventional residential mortgage loans and for shorter terms which benefits the Bank's interest rate risk management. However, consumer loans generally involve more risk than first mortgage one- to four-family residential real estate loans. Repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance as a result of damage, loss or depreciation, and the remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Further, the application of various state and federal laws, including federal and state bankruptcy and insolvency law, may limit the amount which may be recovered. These loans may also give rise to defenses by the borrower against the Bank and a borrower may be able to assert against the Bank claims and defenses which it has against the seller of the underlying collateral. In underwriting consumer loans, the Bank considers the borrower's credit history, an analysis of the borrower's income and ability to repay the loan, and the value of the collateral.
Loans-to-One Borrower. Savings associations cannot make any loans to one borrower in an amount that exceeds in the aggregate 15% of unimpaired capital and retained income on an unsecured basis and an additional amount equal to 10% of unimpaired capital and retained income if the loan is secured by readily marketable collateral (generally, financial instruments, not real estate) or $500,000, whichever is higher. The Bank's maximum loan-to-one borrower limit was approximately $8.5 million as of September 30, 2005.
Non-Performing and Problem Assets
General. Teche Federal's primary market area is dependent, to a certain extent, on the oil and gas, seafood and agricultural (primarily sugar cane) industries. These industries are cyclical in nature and have a direct impact on the level and performance of the Bank's loan portfolio. Management continually monitors its loan portfolio for appropriate underwriting standards.
Non-Performing Assets and Delinquencies. When a borrower fails to make a required payment on a loan and does not cure the delinquency promptly, the loan is classified as delinquent. In this event, the normal procedure followed by the Bank is to make contact with the borrower at prescribed intervals in an effort to bring the loan to a current status. In most cases, delinquencies are cured promptly. If a delinquency is not cured, the Bank normally, subject to any required prior notice to the borrower, commences foreclosure proceedings, in which the property may be sold. In a foreclosure sale, the Bank may acquire title to the property through foreclosure, in which case the property so acquired is offered for sale and may be financed by a loan involving terms more favorable to the borrower than those normally offered. Any property
acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned until such time as it is sold or otherwise disposed of by the Bank to recover its investment. Any real estate acquired in settlement of loans is initially recorded at the estimated fair value at the time of acquisition and is subsequently reduced by additional allowances which are charged to earnings if the estimated fair value of the property declines below its initial value. Subsequent costs directly relating to development and improvement of property are capitalized (not to exceed fair value), whereas costs related to holding property are expensed.
The Bank's general policy is to place a loan on nonaccrual status when the loan becomes 90 days delinquent or otherwise demonstrates other risks of collectibility. Interest on loans that are contractually 90 days or more past due is generally reserved through an allowance account. The Bank sometimes modifies this general policy after a review of the value of the collateral pledged against individual loans. The allowance is established by a charge to interest income equal to all interest previously accrued, and interest is subsequently recognized only to the extent cash payments are received until, in management's judgment, the borrower's ability to make periodic interest and principal payments is back to normal, in which case the loan is returned to accrual status.
The following table sets forth information regarding non-accrual loans, real estate owned ("REO"), and loans that are 90 days or more delinquent but on which the Bank was accruing interest at the dates indicated and restructured loans. There are no restructured loans other than those included in the table.
Interest income that would have been recorded on loans accounted for on a non-accrual basis under the original terms of such loans was not significant for the year ended September 30, 2005.
Potential Problem Loans. In August and September of 2005, the southern coastal areas in the State of Louisiana were struck by two major hurricanes. The Company's primary market area generally was on the outskirts of both storms and avoided a direct hit. However, the Company has identified affected
borrowers within its portfolio. Borrowers have been affected by the hurricanes either from property damage, job losses or both.
In accordance with directives received from bank regulatory agencies regarding disaster relief, management has adopted a policy of allowing forbearance and waivers of late fees from affected borrowers. Management has contacted its borrowers in the affected areas to determine their needs for possible forbearance. Forbearance generally includes postponing loan payments for initially up to three months and also include in an extension of loan maturities.
The principal amount of loans outstanding under the forbearance program is not included in the nonaccrual and past due loans in the table above. The loans are considered current under the forbearance terms. As of December 27, 2005, loans under forbearance terms were primarily 1-4 family mortgage loans and consumer loans and totaled approximately $3.6 million.
Real Estate Owned. Real estate acquired by the Bank as the result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned until it is sold. When property is acquired it is recorded at the fair value at the date of foreclosure. At September 30, 2005, the Bank had REO with a net balance of $270.
Allowances for Loan Losses. The allowance for loan losses is a valuation allowance available for losses incurred on loans. Any losses are charged to the allowance for loan losses when the loss actually occurs or when a determination is made that a loss is probable to occur. Recoveries are credited to the allowance at the time of recovery.
Periodically during the year management estimates the likely level of losses to determine whether the allowance for loan losses is adequate to absorb losses in the existing portfolio. Based on the estimates, an amount is charged to the provision for loan losses and credited to the allowance for loan losses in order to adjust the allowance to a level determined to be adequate to absorb such losses.
The hurricanes that struck the South Louisiana coastal areas in August and September impacted some of the Bank's borrowers and the underlying collateral. An assessment of the effects of these hurricanes is ongoing. Management has contacted the borrowers in the affected areas to determine their need for possible forbearance, which the Bank offers, to its affected borrowers. Forbearance generally includes postponing loan payments for initially up to the three (3) months and may result in an extension of loan maturities as a result of these efforts.
Management's judgment as to the level of losses on existing loans involves the consideration of current and anticipated economic conditions and their potential effects on specific borrowers; an evaluation of the existing relationships among loans, known the inherent risks in the loan portfolio, and the present level of the allowance; results of examination of the loan portfolio by regulatory agencies; and management's internal review of the loan portfolio. In determining the collectibility of certain loans, management also considers the fair value of any underlying collateral.
It should be understood that estimates of loan losses involve an exercise of judgment. While it is possible that is particular periods the Company may sustain losses, which are substantial relative to the allowance for loan losses, it is the judgment of management that the allowance of loan losses reflected in the consolidated balance sheets is adequate to absorb losses in the existing loan portfolio.
Allocation of Allowance for Loan Losses. The following table sets forth the allocation of the Bank's allowance for loan losses by loan category and the percent of loans in each category to total loans receivable at the dates indicated. The portion of the loan loss allowance allocated to each loan category does not represent the total available for losses which may occur within the loan category since the total loan loss allowance is a valuation reserve applicable to the entire loan portfolio. The change in allocation from September 30, 2004 to September 30, 2005 reflects the relative balances at year end of each loan category as well as management's assessment at year end of the risk characteristics of each loan category.
________________________ (1) Includes specific reserves for assets classified as loss.
Analysis of the Allowance for Loan Losses. The following table sets forth information with respect to the Bank's allowance for loan losses for the periods indicated:
Investment Activities
General. To supplement lending activities, the Company invests in residential mortgage-backed securities, including collateralized mortgage obligations ("CMO's"), investment securities and interest- bearing deposits. These investments have historically consisted of investment securities issued by U.S. government agencies and government-sponsored corporations. Such securities can serve as collateral for borrowings and, through repayments and maturities, as a source of liquidity.
The Company is authorized to invest in various types of assets, including U.S. Treasury obligations, securities of various federal agencies and government-sponsored corporations, including securities issued
by FHLMC, FNMA, and the Government National Mortgage Association, securities of state and municipal governments, deposits at the FHLB of Dallas, certificates of deposit of federally insured institutions, certain bankers' acceptances and federal funds. Subject to various restrictions, the Company also has the authority to invest in commercial paper, corporate debt and/or equity securities and ARM funds, the assets of which conform to the investments that federally chartered savings institutions are otherwise authorized to make directly.
The Company's investments in mortgage-backed securities and CMO's includes securities issued by government agencies, private issuers and financial institutions. At September 30, 2005, the Company's investment in CMO's did not include any residual interest or interest-only or principal-only securities. As a matter of policy, the Company does not invest in residual interests of CMO's or interest-only and principal- only securities. The CMO's held by the Company at September 30, 2005 consisted of floating rate and fixed rate tranches. Generally, private issued CMO's tend to have greater prepayment and credit risk than those issued by government agencies or government-sponsored corporations, such as the FHLMC, FNMA and GNMA, because they often are secured by jumbo loans. At September 30, 2005, the Bank had CMO's with an aggregate estimated market value of $7.2 million, all of which were privately issued. To minimize the risk of private issued CMO's, the Bank only purchases those CMOs rated AA or better by one of the rating agencies.
The following table sets forth the carrying value of the Company's investment portfolio, short-term investments and FHLB stock at the dates indicated.
Investment Portfolio Maturities. The following table sets forth certain information regarding the amortized cost, carrying value, market value, weighted average yields and maturities of the Bank's investment and mortgage-backed securities portfolio at September 30, 2005.
________________________ (1) Does not assume prepayments. (2) Yields on municipal obligations have not been computed on a tax equivalent basis.
Sources of Funds
General. Deposits are the major source of the Bank's funds for lending and other investment purposes. Teche Federal also derives funds from amortization and prepayment of loans and mortgage-backed securities, maturities of investment securities and operations. Scheduled loan principal and interest payments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and market conditions. Teche Federal also utilizes advances from the FHLB of Dallas. In recent years, the Bank has emphasized SmartGrowth Deposits consisting of checking accounts, money market accounts and savings accounts. SmartGrowth Deposits totaled $224.6 million at September 30, 2005.
Deposits. Consumer and commercial deposits are attracted principally from within the Bank's primary market area through the offering of a broad selection of deposit instruments including regular savings, demand and NOW accounts and certificates of deposit. Deposit account terms vary according to the minimum balance required, the time period the funds must remain on deposit and the interest rate, among other factors.
The interest rates paid by the Bank on deposits can be set daily at the direction of senior management. Senior management determines the interest rate to offer the public on new and maturing accounts. Senior management obtains the interest rates being offered by other financial institutions within its market area. This data along with a report showing the dollar value of certificates of deposit maturing is reviewed and interest rates are determined.
Non-interest bearing demand accounts constituted $39.8 million, or 7.7% of the Bank's deposit portfolio at September 30, 2005. Money market accounts and NOW accounts constituted $129.9 million, or 25.2% of the Bank's deposit portfolio at September 30, 2005. Regular savings accounts constituted $54.9 million, or 10.6% of the Bank's deposit portfolio at September 30, 2005. Certificates of deposit constituted $291.4 million or 56.5% of the deposit portfolio, including $96.8 million of which had balances of $100,000 and over. As of September 30, 2005, the Bank had no brokered deposits.
Certificate Accounts of $100,000 or More. Teche Federal maintains a policy of offering higher interest rates on certificates with larger balances. As a result, to some extent, Teche Federal customers tend to consolidate accounts to earn the highest possible interest. This enables the Bank to effectively compete in the marketplace, reduce the number of accounts and associated costs, and increase, to some extent the number of accounts with balances of $100,000 or more. The following table indicates the amount of the Bank's certificates of deposit of $100,000 or more by time remaining until maturity as of September 30, 2005.
Certificates Weighted of Deposit Interest Rate ---------- ------------- (In Thousands) Maturity Period: 3 months or less.................... $14,799 $3.23% Over 3 through 6 months............. 14,619 3.06 Over 6 through 12 months............ 27,276 3.34 Over 12 months...................... 40,184 3.57 ------- ----- Totals.............................. $96,878 $3.37% ======= =====
Borrowings
Deposits are the primary source of funds of the Bank's lending and investment activities and for its general business purposes. The Bank may obtain advances from the FHLB of Dallas to supplement its supply of lendable funds. Advances from the FHLB of Dallas are typically secured by a pledge of the Bank's stock in the FHLB of Dallas and a portion of the Bank's first mortgage loans and certain other assets. The Bank, if the need arises, may also access the Federal Reserve Bank discount window to supplement its supply of lendable funds and to meet deposit withdrawal requirements. At September 30, 2005, Teche Federal had $93.4 million in advances outstanding from the FHLB of Dallas.
The following table sets forth certain information regarding the Bank's short term advances at or for the years ended on the dates indicated:
Subsidiary Activity
The only subsidiary of the Company is Teche Federal Bank.
As of September 30, 2005, the Bank had one subsidiary: Family Investment Services, Inc. ("FISI") and the net book value of the Bank's investment in stock, unsecured loans and conforming loans in its service corporation was $77,172. FISI was inactive at September 30, 2005.
Personnel
As of September 30, 2005, the Bank had 213 full-time and 82 part-time employees. None of the Bank's employees is represented by a collective bargaining group. The Bank believes that its relationship with its employees is good.
Regulation
Set forth below is a brief description of all material laws and regulations which relate to the regulation of the Bank and the Company. The description does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations.
Holding Company Regulation
General. The Company is a unitary savings and loan holding company subject to regulatory oversight by the OTS. As such, the Company is required to register and file reports with the OTS and is subject to regulation and examination by the OTS. In addition, the OTS has enforcement authority over the Company and its non-savings association subsidiaries, should such subsidiaries be formed, which also permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings association. This regulation and oversight is intended primarily for the protection of the depositors of the Bank and not for the benefit of stockholders of the Company. The Company is also required to file certain reports with, and otherwise comply with, the rules and regulations of the OTS and the SEC.
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 (the "Act") was enacted to address corporate and accounting fraud. The Securities and Exchange Commission (the "SEC") has promulgated new regulations pursuant to the Act and may continue to propose additional implementing or clarifying regulations as necessary in furtherance of the Act. The passage of the Act by Congress and the implementation of new regulations by the SEC subject publicly-traded companies to additional and more cumbersome reporting regulations and disclosure. Compliance with the Act and corresponding regulations may increase the Company's expenses.
Activities Restrictions. As a grandfathered unitary savings and loan holding company under the GLB Act, the Company is generally not subject to any restrictions on its business activities or those of its non-savings institution subsidiaries. However, if the Company were to fail to meet the Qualified Thrift Lender Test, then it would become subject to the activities restrictions of the Home Owners' Loan Act applicable to multiple holding companies. See "Regulation of the Bank -- Qualified Thrift Lender Test."
If the Company were to acquire control of another savings association, it would lose its grandfathered status under the GLB Act and its business activities would be restricted to certain activities specified by OTS regulation, which include performing services and holding properties used by a savings institution subsidiary, certain activities authorized for savings and loan holding companies as of March 5, 1987, and nonbanking activities permissible for bank holding companies pursuant to the Bank Holding Company Act of 1956 (the "BHC Act") or authorized for financial holding companies pursuant to the GLB Act. Furthermore, no company may acquire control of the Company unless the acquiring company was a unitary savings and loan holding company on May 4, 1999 (or became a unitary savings and loan holding company pursuant to an application pending as of that date) or the acquiring company is only engaged in activities that are permitted for multiple savings and loan holding companies or for financial holding companies under the BHC Act as amended by the GLB Act.
Regulation of the Bank
General. As a federally chartered, FDIC-insured savings association, the Bank is subject to extensive regulation by the OTS and the FDIC. Lending activities and other investments must comply with various federal statutory and regulatory requirements. The Bank is also subject to certain reserve requirements promulgated by the Federal Reserve Board.
The OTS, in conjunction with the FDIC, regularly examines the Bank and prepares reports for the consideration of the Bank's Board of Directors on any deficiencies that they find in the Bank's operations. The Bank's relationship with its depositors and borrowers is also regulated to a great extent by federal law, especially in such matters as the ownership of savings accounts and the form and content of the Bank's mortgage documents.
The Bank must file reports with the OTS and the FDIC concerning its activities and financial condition, in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with or acquisitions of other savings institutions. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the FDIC and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulations, whether by the OTS, the FDIC or the Congress could have a material adverse impact on the Company, the Bank and their operations.
Insurance of Deposit Accounts. The FDIC administers two separate deposit insurance funds. Generally, the Bank Insurance Fund (the "BIF") insures the deposits of commercial banks and the Savings Association Insurance Fund (the "SAIF") insures the deposits of savings institutions. The FDIC is authorized to increase deposit insurance premiums if it determines such increases are appropriate to maintain the reserves of either the SAIF or BIF or to fund the administration of the FDIC. In addition, the FDIC is authorized to levy emergency special assessments on BIF and SAIF members.
Regulatory Capital Requirements. OTS capital regulations require savings institutions to meet three capital standards: (1) tangible capital equal to 1.5% of total adjusted assets, (2) a leverage ratio (core capital) equal to at least 3% of total adjusted assets for savings associations that receive the highest supervision rating for safety and soundness and 4% of total adjusted assets for all other associations, and (3) a risk-based capital requirement equal to 8.0% of total risk-weighted assets. The Bank's capital levels can be found at Note 19 to the Consolidated Financial Statements included as part of Exhibit 13 to this report.
Savings associations with a greater than "normal" level of interest rate exposure will, in the future, be subject to a deduction for an interest rate risk ("IRR") component which may be deducted from capital for purposes of calculating their risk-based capital requirement. See "-- Net Portfolio Value Analysis."
The Bank is not under any agreement with regulatory authorities nor is it aware of any current recommendations by the regulatory authorities which, if they were to be implemented, would have a material effect on liquidity, capital resources or operations of the Bank or the Company.
Net Portfolio Value Analysis - Interest Rate Risk. The Bank is subject to interest rate risk to the degree that its interest-bearing liabilities, primarily deposits with short- and medium-term maturities, mature or reprice at different rates than our interest-earning assets. Although having liabilities that mature or reprice less frequently on average than assets will be beneficial in times of rising interest rates, such an asset/liability structure will result in lower net income during periods of declining interest rates, unless offset by other factors.
The Bank believes it is critical to manage the relationship between interest rates and the effect on its net portfolio value ("NPV"). This approach calculates the difference between the present value of expected cash flows from assets and the present value of expected cash flows from liabilities, as well as cash flows from off-balance sheet contracts. The Bank manages assets and liabilities within the context of the marketplace, regulatory limitations and within its limits on the amount of change in NPV which is acceptable given certain interest rate changes.
The OTS requires all regulated thrift institutions to calculate the estimated change in the institution's NPV assuming instantaneous parallel shifts in the Treasury yield curve of 100 to 300 basis points either up or down in 100 basis point increments. The NPV is defined as the present value of expected cash flows from existing assets less the present value of expected cash flows from existing liabilities plus the present value of net expected cash inflows from existing off-balance sheet contracts.
The OTS provides an interest rate sensitivity report of NPV to all institutions that file with the OTS a Consolidated Maturity & Rate Schedule ("CMR") as a part of the institution's quarterly Thrift Financial Report. The OTS simulation model uses a discounted cash flow analysis and an option-based pricing approach to measuring the interest rate sensitivity of NPV. The OTS model estimates the economic value of each type of asset, liability, and off-balance sheet contract under the assumption that the Treasury yield curve shifts instantaneous and parallel up and down 100 to 300 basis points in 100 basis points increments. The OTS allows thrifts with under $1 billion in total assets to use the results of their interest rate sensitivity model, which is based on information provided by the institution, to estimate the sensitivity of NPV.
The OTS model utilizes an option-based pricing approach to estimate the sensitivity of mortgage loans. The most significant embedded option in these types of assets is the prepayment option of the borrowers. The OTS model uses various price indications and prepayment assumptions to estimate sensitivity of mortgage loans.
In the OTS model, the value of deposit accounts appears on the asset and liability side of the NPV analysis. In estimating the value of certificates of deposit accounts ("CD"), the liability portion of the CD is represented by the implied value when comparing the difference between the CD face rate and available wholesale CD rates. On the asset side of the NPV calculation, the value of the "customer relationship" due to the rollover of retail CD deposits represents an intangible asset in the NPV calculation.
Other deposit accounts such as NOW accounts, money market demand accounts, passbook accounts, and non-interest-bearing accounts also are included on the asset and liability side of the NPV calculation in the OTS model. These accounts are valued at 100% of the respective account balances on the liability side. On the asset side of the analysis, the value of the "customer relationship" of the various types of deposit accounts is reflected as a deposit intangible.
The NPV sensitivity of borrowed funds is estimated by the OTS model based on a discounted cash flow approach.
The OTS uses, as a critical point, a change of plus or minus 200 basis points in order to set its "normal" institutional results and peer comparisons. A resulting change in NPV of more than 2% of the estimated market value of its assets will require the institution to deduct from its capital 50% of that excess change. The rules provide that the OTS will calculate the IRR component quarterly for each institution. The greater the change, positive or negative, in NPV, the more interest rate risk is assumed to exist with the institution. The following table lists the Bank's latest percentage change in NPV assuming an immediate change of plus or minus 100, 200, and 300 basis points from the level of interest rates at September 30, 2005.
(1) The -300bp scenarios are not shown due to low interest rate environment. (2) Represents the excess (deficiency) of the estimated NPV assuming the indicated change in interest rates minus the estimated NPV assuming no change in interest rates. (3) Calculated as the amount of change in the estimated NPV divided by the estimated NPV assuming no change in interest rates. (4) Calculated as the estimated NPV divided by average total assets. (5) Calculated as the excess (deficiency) of the NPV ratio assuming the indicated change in interest rates over the estimated NPV ratio assuming no change in interest rates.
As the table shows, increases and decreases in interest rates would result in net decreases in the Bank's NPV. The Bank's NPV decreases by 18.2% if interest rates increase by 200 basis points. Certain shortcomings are inherent in the methodology used in the above table. Modeling changes in NPV requires the making of certain assumptions that may tend to oversimplify the manner in which actual yields and costs respond to changes in market interest rates. First, the models assume that the composition of the Bank's interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period
being measured. Second, the models assume that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Accordingly, although the NPV measurements do provide an indication of the Bank's interest rate risk exposure at a particular point in time, such measurements are not intended to provide a precise forecast of the effect of changes in market interest rates on the Bank's net interest income.
In times of decreasing interest rates, the value of fixed-rate assets could increase in value and the lag in repricing of interest rate sensitive assets could be expected to have a positive effect on the Bank.
Dividend and Other Capital Distribution Limitations. The OTS imposes various restrictions or requirements on the ability of savings institutions to make capital distributions including cash dividends.
A savings association that is a subsidiary of a savings and loan holding company, such as the Bank, must file an application or a notice with the OTS at least 30 days before making a capital distribution. Savings associations are not required to file an application for permission to make a capital distribution and need only file a notice if the following conditions are met: (1) they are eligible for expedited treatment under OTS regulations, (2) they would remain adequately capitalized after the distribution, (3) the annual amount of capital distribution does not exceed net income for that year to date added to retained net income for the two preceding years, and (4) the capital distribution would not violate any agreements between the OTS and the savings association or any OTS regulations. Any other situation would require an application to the OTS.
In addition, the OTS could prohibit a proposed capital distribution if, after making the distribution, by any institution, which would otherwise be permitted by the regulation, if the OTS determines that the distribution would constitute an unsafe or unsound practice.
A federal savings institution is prohibited from making a capital distribution if, after making the distribution the savings institution would be unable to meet any one of its minimum regulatory capital requirements. Further, a federal savings institution cannot distribute regulatory capital that is needed for its liquidation account.
Qualified Thrift Lender Test. The Home Owners' Loan Act ("HOLA"), as amended, requires savings institutions to meet a Qualified Thrift Lender ("QTL") test. If the Bank maintains an appropriate level of Qualified Thrift Investments (primarily residential mortgages and related investments, including certain mortgage-backed securities) ("QTIs") and otherwise qualifies as a QTL, it will continue to enjoy full borrowing privileges from the FHLB of Dallas. The required percentage of QTIs is 65% of portfolio assets (defined as all assets minus intangible assets, property used by the institution in conducting its business and liquid assets equal to 10% of total assets). Certain assets are subject to a percentage limitation of 20% of portfolio assets. In addition, savings associations may include shares of stock of the FHLBs, FNMA and FHLMC as qualifying QTIs. The FDICIA also amended the method for measuring compliance with the QTL test to be on a monthly basis in nine out of every 12 months, as opposed to on a daily or weekly average of QTIs. As of September 30, 2005, the Bank was in compliance with its QTL requirement with 83.07% of its assets invested in QTIs.
A savings association that does not meet a QTL test must either convert to a bank charter or comply with the following restrictions on its operations: (I) the savings association may not engage in any new activity or make any new investment, directly or indirectly, unless such activity or investment is permissible for a national bank; (ii) the branching powers of the savings association shall be restricted to those of a national bank; (iii) the savings association shall not be eligible to obtain any advances from its FHLB; and (iv) payment of dividends by the savings association shall be subject to the rules regarding payment of dividends by a national bank. Upon the expiration of three years from the date the savings association ceases
to be a QTL, it must cease any activity and not retain any investment not permissible for a national bank and immediately repay any outstanding FHLB advances (subject to safety and soundness considerations).
Item 2.
Item 2. Description of Properties - ---------------------------------
Properties
The Bank operates from its main office located at 1120 Jefferson Terrace, New Iberia, Louisiana and fourteen offices. The Bank's total investment in office property and equipment was $28.5 million with a net book value of $18.9 million at September 30, 2005. The Bank currently operates automated teller machines at most of its branch offices.
Item 3.
Item 3. Legal Proceedings - -------------------------
Neither the Company nor its subsidiaries are involved in any pending legal proceedings, other than routine legal matters occurring in the ordinary course of business, which in the aggregate involve amounts which are believed by management to be immaterial to the consolidated financial condition or results of operations of the Company.
Item 4.
Item 4. Submission of Matters to a Vote of Security-Holders - -----------------------------------------------------------
None.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and - -------------------------------------------------------------------------------- Issuer Purchases of Equity Securities - -------------------------------------
Information relating to the market for Registrant's common equity and related stockholder matters appears under the heading "Market and Dividend Information" in the Registrant's Annual Report to Stockholders for the fiscal year ended September 30, 2005 ("Annual Report") and is incorporated herein by reference.
Set forth below is information regarding the Company's stock repurchases during the fourth quarter of the fiscal year ended September 30, 2005.
Item 6.
Item 6. Selected Financial Data - -------------------------------
The above-captioned information appears under the heading "Selected Financial Information" in the Annual Report and is incorporated herein by reference.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations - -------------
The above-captioned information appears under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report and is incorporated herein by reference.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk - -------------------------------------------------------------------
See the information that appears under the heading "Net Portfolio Value Analysis - Interest Rate Risk" in this Annual Report on Form 10-K.
Item 8.
Item 8. Financial Statements and Supplementary Data - ---------------------------------------------------
The Consolidated Financial Statements of Teche Holding and its subsidiaries, together with the report thereon by Dixon Hughes PLLC, and the supplementary financial information appear in the Annual Report and are incorporated herein by reference.
Item 9.
Item 9. Changes In and Disagreements with Accountants on Accounting and - -------------------------------------------------------------------------------- Financial Disclosure - --------------------
None.
Item 9A.
Item 9A. Controls and Procedures - --------------------------------
(a) Evaluation of disclosure controls and procedures. Based on their evaluation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")), the Company's principal executive officer and principal financial officer have concluded that as of the end of the period covered by this Annual Report on Form 10-K such disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
(b) Changes in internal control over financial reporting. During the last quarter of the year under report, there was no change in the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
Item 9B.
Item 9B. Other Information - --------------------------
Not Applicable
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant - -----------------------------------------------------------
The information that appears under the headings "Section 16(a) Beneficial Ownership Reporting Compliance" and "Proposal I - Election of Directors" in the Registrant's definitive proxy statement for the Registrant's Annual Meeting of Stockholders to be held in January 2006 (the "Proxy Statement") which is incorporated herein by reference. See also "Item 1. Business of the Bank -- Personnel" included herein.
The Company has adopted a Code of Ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions. A copy of the Code will be furnished without charge upon written request to the Secretary, Teche Holding Company, 1120 Jefferson Terrace Boulevard, New Iberia, Louisiana 70560.
Item 11.
Item 11. Executive Compensation - -------------------------------
The above-captioned information appears under the heading "Director and Executive Officer Compensation" in the Proxy Statement and is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management - -----------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference to the section captioned "Voting Securities and Principal Holders Thereof" in the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by reference to the section captioned "Proposal I -- Election of Directors" in the Proxy Statement.
(c) Management of the Company knows of no arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the registrant.
(d) Securities Authorized for Issuance Under Equity Compensation Plans
Set forth below is information as of September 30, 2005 with respect to compensation plans under which equity securities of the Registrant are authorized for issuance.
____________ (1) Plans approved by stockholders include the Teche Holding Company 2001 Stock-Based Incentive Plan. (2) Includes 33,659 shares remaining available for grant under the Teche Holding Company 2001 Stock-Based Incentive Plan, which permits up to 15% of the 250,000 shares reserved for issuance under the plan to be awarded as restricted stock instead of options. During the year ended September 30, 2005, awards of 104,400 shares were made under this plan. (3) Plans not approved by stockholders include the Teche Holding Company 1997 Stock Option Plan, the Teche Holding Company 1998 Stock Option Plan, the Teche Holding Company Stock Option Agreement with Scott Sutton and the Teche Federal Savings Bank Restricted Stock Agreement with Scott Sutton. For information regarding the material features of these plans, see Note 16 to the Consolidated Financial Statements included as part of Exhibit 13 to this report.
Item 13.
Item 13. Certain Relationships and Related Transactions - -------------------------------------------------------
The above-captioned information appears under the heading "Certain Relationships and Related Transactions" in the Proxy Statement and is incorporated herein by reference.
Item 14.
Item 14. Principal Accountant Fees and Services - -----------------------------------------------
The information relating to this item is incorporated herein by reference to the information contained under the section captioned "Principal Accounting Fees and Services" in the Proxy Statement.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules - ---------------------------------------------------
(a) The following documents are filed as a part of this report:
(1) The following financial statements and the independent auditors' report included in the Annual Report are incorporated herein by reference:
Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of September 30, 2005 and 2004 Consolidated Statements of Income For the Years Ended September 30, 2005, 2004 and 2003 Consolidated Statements of Stockholders' Equity for the Years Ended September 30, 2005, 2004 and 2003 Consolidated Statements of Cash Flows for the Years Ended September 30, 2005, 2004 and 2003 Notes to Consolidated Financial Statements
The remaining information appearing in the Annual Report is not deemed to be filed as part of this report, except as expressly provided herein.
(2) Other than Exhibit 23.2, Reissued Report of Predecessor Independent Auditor, all schedules are omitted because they are not required or applicable, or the required information is shown in the consolidated financial statements or the notes thereto.
(3) Exhibits
* Incorporated herein by reference to the identically numbered exhibits to the Registrant's Registration Statement on Form S-1, filed with the Commission on December 16, 1994, Registration No. 333-87486.
** Incorporated herein by reference to Exhibits 10.1 and 10.2 to the Registrant's Form 10-K for the fiscal year ended September 30, 1995.
*** Incorporated herein by reference to Exhibits 4.1 and 4.2 to the Registrant's Registration Statement on Form S-8, filed with the Commission on June 3, 1998, Registration No. 333-55913.
**** Incorporated herein by reference to Exhibits 4.1 and 4.2 to the Registrant's Registration Statement on Form S-8, filed with the Commission on January 28, 2000, Registration No. 333-95583.
***** Incorporated herein by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-8, filed with the Commission on May 1, 2002, Registration No. 333-87354.
******Incorporated herein by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-8, filed with the Commission on May 25, 2005, Registration No. 333-125218.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
TECHE HOLDING COMPANY
Dated: December 29, 2005 By: /s/ Patrick O. Little ---------------------------------- Patrick O. Little President, Chief Executive Officer and Chairman of the Board (Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on December 29, 2005.