Attached files
file | filename |
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EX-10.1 - EXHIBIT 10.1 - Eureka Financial Corp. | c17250exv10w1.htm |
EX-10.2 - EXHIBIT 10.2 - Eureka Financial Corp. | c17250exv10w2.htm |
EX-32.0 - EXHIBIT 32.0 - Eureka Financial Corp. | c17250exv32w0.htm |
EX-31.1 - EXHIBIT 31.1 - Eureka Financial Corp. | c17250exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - Eureka Financial Corp. | c17250exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark one)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
OR
o | 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: 0-54238
EUREKA FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Maryland | 26-3671639 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
3455 Forbes Avenue, Pittsburgh, Pennsylvania | 15213 | |
(Address of principal executive offices) | (Zip Code) |
(412) 681-8400
(Registrants telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
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 (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
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 such shorter period that the registrant was required to submit and post such files). Yes
o No o
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 definition of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(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
Exchange Act).
Yes o No þ
As of
May 16, 2011, there were 1,314,705 shares of the registrants common stock outstanding.
EUREKA FINANCIAL CORP.
Table of Contents
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Exhibit 10.1 | ||||||||
Exhibit 10.2 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.0 |
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements |
EUREKA FINANCIAL CORP. AND SUBSIDIARY
Consolidated Balance Sheets
(unaudited)
March 31, | September 30, | |||||||
2011 | 2010 | |||||||
Assets: |
||||||||
Cash and due from banks |
$ | 1,475,960 | $ | 886,456 | ||||
Interest-bearing deposits in other banks |
14,818,209 | 10,763,745 | ||||||
Cash and cash equivalents |
16,294,169 | 11,650,201 | ||||||
Investment securities held to maturity (fair
market value of $14,067,000 and $10,522,353,
respectively) |
14,210,693 | 10,482,550 | ||||||
Mortgage-backed securities, available for sale |
32,061 | 38,595 | ||||||
Federal Home Loan Bank stock, at cost |
718,600 | 796,400 | ||||||
Loans receivable, net of allowance for loan
losses of $940,038 and $905,038, respectively |
100,591,448 | 98,033,540 | ||||||
Premises and equipment, net |
1,313,543 | 1,360,233 | ||||||
Deferred tax asset, net |
1,836,798 | 2,018,594 | ||||||
Accrued interest receivable and other assets |
2,241,544 | 2,929,470 | ||||||
Total Assets |
$ | 137,238,856 | $ | 127,309,583 | ||||
Liabilities and Stockholders Equity |
||||||||
Deposit Accounts: |
||||||||
Non-interest bearing |
$ | 3,594,980 | $ | 3,417,157 | ||||
Interest bearing |
111,481,524 | 107,626,407 | ||||||
Total Deposits |
115,076,504 | 111,043,564 | ||||||
Advances from borrowers for taxes and insurance |
335,026 | 429,816 | ||||||
FHLB advances |
| 1,000,000 | ||||||
Accrued interest payable and other liabilities |
1,019,101 | 706,879 | ||||||
Total Liabilities |
116,430,631 | 113,180,259 | ||||||
Total Commitments and Contingencies |
| | ||||||
Stockholders Equity: |
||||||||
Common stock, $0.01 par value; 10,000,000 shares
authorized; 1,314,705 shares issued and
outstanding at March 31, 2011;
$0.10
par value; 4,000,000 shares authorized;
1,377,810 shares issued; 1,261,231 shares
outstanding at September 30,
2010, respectively |
13,147 | 137,781 | ||||||
Paid-in capital |
11,916,490 | 6,348,745 | ||||||
Retained earnings substantially restricted |
9,481,530 | 9,111,556 | ||||||
Accumulated other comprehensive income |
1,848 | 97 | ||||||
Unearned ESOP shares |
(604,790 | ) | | |||||
Treasury
stock, 116,579 shares at cost at September 30, 2010 |
| (1,468,855 | ) | |||||
Total Stockholders Equity |
20,808,225 | 14,129,324 | ||||||
Total Liabilities and Stockholders Equity |
$ | 137,238,856 | $ | 127,309,583 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
1
Table of Contents
EUREKA FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Income
(unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Interest Income |
||||||||||||||||
Loans |
$ | 1,527,154 | $ | 1,472,351 | $ | 3,026,329 | $ | 2,960,954 | ||||||||
Investment securities and other interest-earning assets: |
||||||||||||||||
Taxable |
136,202 | 35,645 | 237,307 | 61,096 | ||||||||||||
Tax exempt |
7,218 | 12,029 | 14,520 | 24,020 | ||||||||||||
Mortgage-backed securities |
604 | 930 | 1,273 | 1,949 | ||||||||||||
Total Interest Income |
1,671,178 | 1,520,955 | 3,279,429 | 3,048,019 | ||||||||||||
Interest Expense |
||||||||||||||||
Deposits |
450,649 | 501,670 | 929,499 | 1,031,283 | ||||||||||||
FHLB advances |
| 13,899 | 7,259 | 28,921 | ||||||||||||
Total Interest Expense |
450,649 | 515,569 | 936,758 | 1,060,204 | ||||||||||||
Net Interest Income |
1,220,529 | 1,005,386 | 2,342,671 | 1,987,815 | ||||||||||||
Provision for Loan Losses |
17,600 | 15,000 | 35,000 | 20,000 | ||||||||||||
Net Interest Income after Provision for Loan Losses |
1,202,929 | 990,386 | 2,307,671 | 1,967,815 | ||||||||||||
Non-Interest Income |
||||||||||||||||
Fees on NOW accounts |
6,714 | 8,592 | 15,176 | 19,190 | ||||||||||||
Other income |
9,908 | 6,323 | 20,080 | 13,588 | ||||||||||||
Total Non-Interest Income |
16,622 | 14,915 | 35,256 | 32,778 | ||||||||||||
Non-Interest Expenses |
||||||||||||||||
Salaries and benefits |
429,898 | 377,221 | 865,383 | 751,202 | ||||||||||||
Occupancy |
85,985 | 84,296 | 176,366 | 168,757 | ||||||||||||
Computer |
52,360 | 41,752 | 98,905 | 83,933 | ||||||||||||
Legal and accounting |
59,614 | 72,369 | 112,322 | 124,403 | ||||||||||||
Donations |
4,750 | 4,325 | 6,050 | 5,550 | ||||||||||||
FDIC insurance premiums |
35,827 | 30,401 | 73,180 | 46,339 | ||||||||||||
Other |
45,530 | 56,219 | 93,174 | 102,957 | ||||||||||||
Total Non-Interest Expenses |
713,964 | 666,583 | 1,425,380 | 1,283,141 | ||||||||||||
Income before Income Tax Provision |
505,587 | 338,718 | 917,547 | 717,452 | ||||||||||||
Income Tax Provision |
206,339 | 115,256 | 375,894 | 259,656 | ||||||||||||
Net Income |
$ | 299,248 | $ | 223,462 | $ | 541,653 | $ | 457,796 | ||||||||
Earnings per Common Share Basic and Diluted |
$ | 0.23 | $ | 0.17 | $ | 0.41 | $ | 0.35 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
2
Table of Contents
EUREKA FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statement of Changes in Stockholders Equity
For the Six Months Ended March 31, 2011
(unaudited)
Accumulated | ||||||||||||||||||||||||||||
Other | ||||||||||||||||||||||||||||
Common | Paid-In | Retained | Comprehensive | Unearned | Treasury | |||||||||||||||||||||||
Stock | Capital | Earnings | Income | ESOP Shares | Stock | Total | ||||||||||||||||||||||
Balance September 30, 2010 |
$ | 137,781 | $ | 6,348,745 | $ | 9,111,556 | $ | 97 | $ | | $ | (1,468,855 | ) | $ | 14,129,324 | |||||||||||||
Comprehensive Income: |
||||||||||||||||||||||||||||
Net Income |
541,653 | 541,653 | ||||||||||||||||||||||||||
Other comprehensive income |
||||||||||||||||||||||||||||
Unrealized
gain on securities, net of deferred income tax of $1,099 |
1,751 | 1,751 | ||||||||||||||||||||||||||
Total Comprehensive Income |
543,404 | |||||||||||||||||||||||||||
Corporate Reorganization |
||||||||||||||||||||||||||||
Public shares converted (530,992 at $0.10 par to
551,070 at $0.01 par)
|
(47,589 | ) | 47,589 | |||||||||||||||||||||||||
Retirement of treasury shares (116,579) |
(11,658 | ) | (1,457,197 | ) | (1,468,855 | ) | | |||||||||||||||||||||
Sale of shares (763,635 shares, including 61,090
shares to the ESOP)
|
7,636 | 6,688,724 | (610,900 | ) | | 6,085,460 | ||||||||||||||||||||||
Cancellation of MHC shares |
(73,023 | ) | 287,866 | 214,843 | ||||||||||||||||||||||||
ESOP shares earned |
| 763 | 6,110 | 6,873 | ||||||||||||||||||||||||
Dividends on common stock ($0.15/share and $0.07/share on 530,992 and 1,261,231 shares at December 31, 2010 and March 31, 2011, respectively) |
| | (171,679 | ) | | | | (171,679 | ) | |||||||||||||||||||
Balance March 31, 2011 |
$ | 13,147 | $ | 11,916,490 | $ | 9,481,530 | $ | 1,848 | $ | (604,790 | ) | $ | | $ | 20,808,225 | |||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
3
Table of Contents
EUREKA FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(unaudited)
Six Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Cash Flows from Operating Activities |
||||||||
Net income |
$ | 541,653 | $ | 457,796 | ||||
Adjustments to reconcile net income to net cash provided by
operating activities: |
||||||||
Depreciation of premises and equipment |
80,015 | 71,243 | ||||||
Provision for loan losses |
35,000 | 20,000 | ||||||
Net accretion/amortization of discounts and premiums on
securities and unamortized loan fees and costs |
6,621 | 7,259 | ||||||
Noncash expense for ESOP |
6,873 | | ||||||
Deferred tax expense |
180,697 | 216,391 | ||||||
Decrease (increase) in accrued interest receivable |
(63,002 | ) | 4 | |||||
Decrease (increase) in other assets |
750,928 | (642,425 | ) | |||||
Decrease in accrued interest payable |
(9,410 | ) | (10,284 | ) | ||||
Increase in other liabilities |
321,632 | 104,879 | ||||||
Net Cash Provided by Operating Activities |
1,851,007 | 224,863 | ||||||
Cash Flows from Investing Activities |
||||||||
Proceeds from maturities and redemptions of investment
securities held to maturity |
3,500,000 | | ||||||
Purchase of investment securities held to maturity |
(7,227,531 | ) | (4,750,000 | ) | ||||
Redemption of FHLB stock |
77,800 | | ||||||
Net loans made to customers |
(1,933,821 | ) | (1,980,511 | ) | ||||
Net decrease (increase) in commercial leases |
(666,347 | ) | 1,211,795 | |||||
Payments on mortgage-backed securities |
9,411 | 9,376 | ||||||
Premises and equipment expenditures |
(33,325 | ) | 3,227 | |||||
Net Cash Used in Investing Activities |
(6,273,813 | ) | (5,506,113 | ) | ||||
Cash Flows from Financing Activities |
||||||||
Net increase in deposit accounts |
4,032,940 | 14,050,122 | ||||||
Net decrease in advances from borrowers for taxes and insurance |
(94,790 | ) | (115,042 | ) | ||||
Payment of long term FHLB advances |
(1,000,000 | ) | (1,000,000 | ) | ||||
Payment of dividends |
(171,679 | ) | (159,314 | ) | ||||
Reissuance
of treasury stock, net |
| 9,472 | ||||||
Proceeds from stock offering, net of expenses |
6,085,460 | | ||||||
Proceeds from equity exchange of Eureka Bancorp, MHC |
214,843 | | ||||||
Net Cash Provided by Financing Activities |
9,066,774 | 12,785,238 | ||||||
Net Increase In Cash and Cash Equivalents |
4,643,968 | 7,503,988 | ||||||
Cash and Cash Equivalents Beginning |
11,650,201 | 5,417,845 | ||||||
Cash and Cash Equivalents Ending |
$ | 16,294,169 | $ | 12,921,833 | ||||
Supplementary Cash Flows Information |
||||||||
Income taxes paid |
| $ | 35,200 | |||||
Interest paid |
$ | 946,168 | $ | 1,049,337 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
4
Table of Contents
Note 1 Nature of Operations and Significant Accounting Policies
Eureka Financial Corp., a Maryland corporation (the Company), and its wholly-owned
subsidiary, Eureka Bank (the Bank), provide a variety of financial services to individuals and
corporate customers through its main office and branch located in Southwestern Pennsylvania. The
Companys primary deposit products are interest-bearing checking accounts, savings accounts and
certificates of deposits. Its primary lending products are single-family residential loans,
multi-family and commercial real estate loans, and commercial leases.
The Company was incorporated in September 2010 to be the Banks holding company upon
completion of the Banks second-step conversion from the mutual holding company to the stock
holding company form of organization, which occurred on February 28, 2011, and to serve as the
successor entity to old Eureka Financial Corp., a federally chartered corporation previously
existing as the mid-tier holding company for the Bank.
Unaudited Interim Financial Statements
The accompanying unaudited consolidated financial statements were prepared pursuant to the
rules and regulations of the United States Securities and Exchange Commission (the SEC) for
interim information. The accompanying unaudited consolidated financial statements for the interim
periods include all adjustments, consisting of normal recurring accruals, which are necessary, in
the opinion of management, to fairly reflect Eureka Financial Corp.s consolidated financial
position and results of operations. Additionally, these consolidated financial statements for the
interim periods have been prepared in accordance with the instructions to the SECs Form 10-Q and
Article 10 of Regulation S-X and therefore do not include all information or footnotes necessary
for a complete presentation of financial condition, results of operations and cash flows in
conformity with accounting principles generally accepted in the United States of America (GAAP).
For further information, refer to the audited consolidated financial statements and footnotes
thereto for the year ended September 30, 2010, as contained in the Companys final prospectus filed
with the SEC on January 20, 2011 pursuant to SEC Rule 424(b)(3).
The preparation of financial statements, in conformity with GAAP, requires management to make
estimates and assumptions that affect the reported amounts in the consolidated financial statements
and accompanying notes. Actual results could differ from those estimates. Material estimates that
are particularly susceptible to significant change in the near term relate to the determination of
the allowance for loan losses, deferred income taxes and the valuation of other-than-temporary
impairment of investment securities. The results of operations for the interim quarterly or year
to date periods are not necessarily indicative of the results that may be expected for the entire
fiscal year or any other period.
Principles of Consolidation
The consolidated financial statements of the Company include the Bank. The consolidated
financial statements do not include the transactions and balances of Eureka Bancorp, MHC (the
MHC), which owned 730,239 shares or 57.9% of the outstanding shares of old Eureka Financial Corp.
prior to the completion of the second-step conversion on February
28, 2011. All significant inter-company transactions and
balances have been eliminated in consolidation.
Earnings Per Share
Basic earnings per share excludes dilution and is computed by dividing net income by
the weighted-average
of common shares outstanding adjusted for the average unearned shares
of the Banks employee stock ownership plan. Diluted earnings per share is computed by dividing net income
by weighted-average shares outstanding plus potential common stock resulting from dilutive stock
options. There were no outstanding stock options at March 31, 2011 or
September 30, 2010.
5
Table of Contents
The following is a reconciliation of the numerators and denominators of the basic and dilutive
earnings per share computations for net income for the three and six months ended March 31, 2011
and 2010. The share totals listed below reflect the conversion ratio
of 1.0457 for shares outstanding prior to the completion of the Banks second step conversion.
Three Months Ended March 31, 2011 | ||||||||||||
Per Share | ||||||||||||
Income | Shares | Amount | ||||||||||
Basic earnings per share |
$ | 299,248 | 1,295,885 | $ | 0.23 | |||||||
Effect of dilutive securities |
| | | |||||||||
Diluted earnings per share |
$ | 299,248 | 1,295,885 | $ | 0.23 |
Three Months Ended March 31, 2010 | ||||||||||||
Per Share | ||||||||||||
Income | Shares | Amount | ||||||||||
Basic earnings per share |
$ | 223,462 | 1,318,927 | $ | 0.17 | |||||||
Effect of dilutive securities |
| | | |||||||||
Diluted earnings per share |
$ | 223,462 | 1,318,927 | $ | 0.17 | |||||||
Six Months Ended March 31, 2011 | ||||||||||||
Per Share | ||||||||||||
Income | Shares | Amount | ||||||||||
Basic earnings per share |
$ | 541,653 | 1,307,503 | $ | 0.41 | |||||||
Effect of dilutive securities |
| | | |||||||||
Diluted earnings per share |
$ | 541,653 | 1,307,503 | $ | 0.41 |
Six Months Ended March 31, 2010 | ||||||||||||
Per Share | ||||||||||||
Income | Shares | Amount | ||||||||||
Basic earnings per share |
$ | 457,796 | 1,318,445 | $ | 0.35 | |||||||
Effect of dilutive securities |
| | | |||||||||
Diluted earnings per share |
$ | 457,796 | 1,318,445 | $ | 0.35 | |||||||
Subsequent Events
Company management has evaluated events and transactions occurring subsequent to the
consolidated balance sheet date of March 31, 2011 for items that should potentially be recognized
or disclosed in the consolidated financial statements.
Reclassifications
Certain comparative amounts from the prior year period have been reclassified to conform to
current period classifications. Such reclassifications had no effect on net income and
stockholders equity.
Note 2 Conversion and Reorganization
The Bank completed its conversion from the mutual holding company form of organization to the
stock holding company form on February 28, 2011. As a result of the conversion, Eureka Financial
Corp., a newly formed Maryland corporation, became the holding company for Eureka Bank and Eureka
Bancorp, MHC and the former Eureka Financial Corp., a federally chartered stock holding company,
ceased to exist. As part of the conversion, all outstanding shares of the former Eureka Financial
Corp. common stock (other than those owned by Eureka Bancorp, MHC) were converted into the right to
receive 1.0457 of a share of the newly formed Eureka Financial Corp. common stock resulting in the
issuance of 551,070 shares of common stock. In addition, a total of 763,635 shares of common stock
were sold in a public offering at the price of $10.00 per share. The completion of
the Companys public offering raised $6.1 million in proceeds, net of $940,000 in offering
expenses and a $611,000 loan related to the Banks employee stock ownership plan.
6
Table of Contents
Note 3 Investment Securities
There were no investment securities available for sale at March 31, 2011 or September 30, 2010
and no sales of investment securities during the six months ended March 31, 2011 and 2010.
Investment securities held to maturity consisted of the following at March 31, 2011 and
September 30, 2010:
March 31, 2011 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | ||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
(Unaudited) | ||||||||||||||||
Obligations of states and political subdivisions |
$ | 497,569 | $ | | $ | (7,569 | ) | $ | 490,000 | |||||||
Government agency debentures |
$ | 13,713,124 | 113,407 | (249,531 | ) | 13,577,000 | ||||||||||
$ | 14,210,693 | $ | 113,407 | $ | (257,100 | ) | $ | 14,067,000 |
September 30, 2010 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | ||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
(Unaudited) | ||||||||||||||||
Obligations of states and political subdivisions |
$ | 497,465 | $ | | $ | (25 | ) | $ | 497,440 | |||||||
Government agency debentures |
9,985,085 | 51,803 | (11,975 | ) | 10,024,913 | |||||||||||
$ | 10,482,550 | $ | 51,803 | $ | (12,000 | ) | $ | 10,522,353 |
At March 31, 2011 and September 30, 2010, $1,250,000 and $1,750,000, respectively, of
government agencies were pledged as security for public monies held by the Company.
The amortized cost and estimated fair value of securities held to maturity at March 31, 2011
and September 30, 2010 by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers might have the right to call or prepay obligations
with or without call or prepayment penalties.
March 31, 2011 | ||||||||
Amortized | Fair | |||||||
Cost | Value | |||||||
Due after five years through ten years |
$ | 1,250,000 | $ | 1,279,000 | ||||
Due after ten years |
12,960,693 | 12,788,000 | ||||||
$ | 14,210,693 | $ | 14,067,000 | |||||
September 30, 2010 | ||||||||
Amortized | Fair | |||||||
Cost | Value | |||||||
Due after five years through ten years |
$ | 3,000,000 | $ | 3,017,280 | ||||
Due after ten years |
7,482,550 | 7,505,073 | ||||||
$ | 10,482,550 | $ | 10,522,353 | |||||
7
Table of Contents
Temporarily impaired investments consisted of the following at March 31, 2011 and September
30, 2010:
March 31, 2011 | ||||||||||||||||||||||||
Less than 12 Months | More than 12 Months | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
Obligations of states and
political subdivisions |
$ | | $ | | $ | 490,000 | $ | (7,569 | ) | $ | 490,000 | $ | (7,569 | ) | ||||||||||
Government agency debentures |
5,746,000 | (249,531 | ) | | | 5,746,000 | (249,531 | ) | ||||||||||||||||
$ | 5,746,000 | $ | (249,531 | ) | $ | 490,000 | $ | (7,569 | ) | $ | 6,236,000 | $ | (257,100 | ) | ||||||||||
September 30, 2010 | ||||||||||||||||||||||||
Less than 12 Months | More than 12 Months | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
Obligations of states and
political subdivisions |
$ | 497,440 | $ | (25 | ) | $ | | $ | | $ | 497,440 | $ | (25 | ) | ||||||||||
Government agency debentures |
2,989,575 | (10,425 | ) | 498,450 | (1,550 | ) | 3,488,025 | (11,975 | ) | |||||||||||||||
$ | 3,487,015 | $ | (10.450 | ) | $ | 498,450 | $ | (1,550 | ) | $ | 3,985,465 | $ | (12,000 | ) | ||||||||||
Eureka
Financial Corp. had nine and four securities in an unrealized loss position at March 31,
2011 and September 30, 2010, respectively. Accrued interest relating to investments was approximately $132,000 and $54,000 as of March
31, 2011 and September 30, 2010, respectively.
Eureka Financial Corp.s current intention is not to sell any impaired securities and it is more likely than not it will not be required to sell these securities before
the recovery of its amortized cost basis.
Note 4 Mortgage-Backed Securities
The amortized cost and fair values of mortgage-backed securities, all of which are secured by
residential real estate and are available for sale, are summarized as follows:
March 31, 2011 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Freddie Mac certificates |
$ | 7,498 | $ | 489 | $ | | $ | 7,987 | ||||||||
Fannie Mae certificates |
21,566 | 2,508 | | 24,074 | ||||||||||||
$ | 29,064 | $ | 2,997 | $ | | $ | 32,061 | |||||||||
September 30, 2010 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Freddie Mac certificates |
$ | 8,945 | $ | 109 | $ | (30 | ) | $ | 9,024 | |||||||
Fannie Mae certificates |
29,503 | 180 | (112 | ) | 29,571 | |||||||||||
$ | 38,448 | $ | 289 | $ | (142 | ) | $ | 38,595 | ||||||||
The amortized cost and estimated market values of mortgage-backed securities at March 31,
2011 by contractual maturity are shown below. Expected maturities will differ from contractual
maturities because borrowers have the right to repay obligations without penalty. Amounts have been
rounded to the nearest dollar.
March 31, 2011 | ||||||||
Amortized | Fair | |||||||
Cost | Value | |||||||
Due after one year through five years |
$ | 3,400 | $ | 3,520 | ||||
Due after five years through ten years |
18,448 | 20,494 | ||||||
Due after ten years |
7,216 | 8,047 | ||||||
$ | 29,064 | $ | 32,061 | |||||
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There were no sales of mortgage-backed securities during the six months ended March 31,
2011 and 2010.
There were no temporarily impaired mortgage-backed securities at March 31, 2011.
Temporarily impaired mortgage-backed securities at September 30, 2010 consisted of the following:
September 30, 2010 | ||||||||||||||||||||||||
Less than 12 Months | More than 12 Months | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
Freddie Mac certificates |
$ | | $ | | $ | 5,219 | $ | (30 | ) | $ | 5,219 | $ | (30 | ) | ||||||||||
Fannie Mae certificates |
| | 20,147 | (112 | ) | 20,147 | (112 | ) | ||||||||||||||||
$ | | $ | | $ | 25,366 | $ | (142 | ) | $ | 25,366 | $ | (142 | ) | |||||||||||
The Company had no securities in an unrealized loss position at March 31, 2011 and four
securities in an unrealized position at September 30, 2010.
Note 5 Loans
Major classifications of loans are as follows at March 31, 2011 and September 30, 2010:
March 31, | September 30, | |||||||
2011 | 2010 | |||||||
One- to four-family real estate |
$ | 42,896,419 | $ | 41,341,759 | ||||
Construction |
2,176,685 | 1,392,781 | ||||||
Multi-family real estate |
14,659,136 | 14,529,362 | ||||||
Commercial real estate |
19,210,056 | 19,363,550 | ||||||
Home equity and second mortgages |
1,242,384 | 1,586,407 | ||||||
Secured loans |
354,356 | 579,092 | ||||||
Unsecured improvement loans |
490,054 | 169,854 | ||||||
Commercial leases |
16,826,880 | 16,160,533 | ||||||
Commercial lines of credit |
3,840,374 | 3,966,326 | ||||||
101,696,344 | 99,089,664 | |||||||
Plus: |
||||||||
Unamortized loan premiums |
18,264 | 26,493 | ||||||
Less: |
||||||||
Unamortized loan fees and costs, net |
(183,122 | ) | (177,579 | ) | ||||
Allowance for loan losses |
(940,038 | ) | (905,038 | ) | ||||
$ | 100,591,448 | $ | 98,033,540 | |||||
Loan Portfolio Composition
The loan and lease receivable portfolio is broken down into the following categories: (1) one-
to four-family real estate loans; (2) construction loans; (3) multi-family real estate loans; (4)
commercial real estate loans; (5) home equity and second mortgage loans; (6) secured loans; (7)
unsecured improvement loans; (8) commercial leases; and (9) commercial lines of credit.
One- to four-family real estate loans include residential first mortgage loans originated by
the Bank in the greater Pittsburgh metropolitan area. We currently originate fully amortizing
loans with maturities up to 30 years. These loans have a maximum loan-to-value ratio of 80%, unless
they fall into our first time homebuyer program in our CRA Assessment Area, and then it could
extend up to 95%. Due to our stringent underwriting, historical losses, and location of the
majority of the portfolio, the Bank risk is considered minimal.
Construction loans include dwelling and land loans where funds are being held by the Bank
until the construction has ended. Dwelling construction consists of new construction and upgrades
to existing dwellings. The normal construction period is for a term of six months. Construction
loans on land are originated for developments where the land is being prepared for future home
building. On-site inspections are performed as per the draw schedule for all construction loans.
The risk associated with the construction loans is considered low as the Bank makes only a small
number of these loans at any given time and adheres to the draw schedule to ensure work is being
completed in a timely and professional manner.
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Table of Contents
Multi-family real estate loans include five or more unit dwellings. These loans could pose a
higher risk to the Bank than the one- to four-family real estate loans and therefore are originated
with a term of up to 20 years and a loan-to-value ratio of 75%. Different risk factors are taken
into consideration when originating these loans such as whether the property is owner or non-owner
occupied, location, the strength of borrower, rent rolls and total lending relationship with the
borrower(s).
Commercial real estate loans consist of loans that are originated where a commercial property
is being used as collateral. These loans also produce a higher risk to the Bank and have the same
maximum terms and loan-to-value ratios as the multi-family loans. The risks associated with these
loans are affected by economic conditions, location, strength of borrower, rent rolls and potential
resale value should foreclosure become necessary.
Home equity and second mortgages include loans as first or second liens to any applicant who
maintains an owner occupied or single family dwelling. These loans also include home equity line
of credits. The maximum loan amount is $100,000. The first and second lien combined can not exceed
80% of the appraised value of the property. The risk to the Bank depends on whether we hold the
first and/or second lien. We rely heavily on the appraised value to ensure equity is available as
well as the strength of the borrower. These loans are not considered to be more than moderate
risk.
Secured loans are made to applicants who maintain deposit accounts at the Bank. The Bank will
originate these loans up to a term of five years or to maturity date whichever comes first. These
loans pose no risk to the Bank as the loan amount will never exceed the collateral that is securing
the loan.
Unsecured improvement loans consist of loans that have no or very little useful collateral and
therefore pose a greater risk to the Bank. These loans generally have a higher interest rate
assigned to them and a maximum term of up to five years. Well documented underwriting is in place
to ensure that the borrower has the ability to repay the debt. While the Bank does not originate a
significant amount of these types of loans, they are considered to be moderate to high risk due to
the unsecured nature of the loan.
Commercial leases consist of loans that typically are collateralized by some form of equipment
or vehicles. Forms under the UCC are filed on all collateral to ensure the Bank has the ability to
take possession should the loan go into default. The maximum term is up to seven years but
typically fall in the three to five year range which gives the Bank a quicker repayment of the
debt. Based on the collateral alone, the value of which is sometimes difficult to ascertain, one
or two years after origination as market and economic climate can change, these loans do have a
higher risk assigned to them. However, our historical loss has been negligible over the last ten
years, which is also taken into consideration when the loans are originated and before they are
assigned a risk weighting.
Commercial lines of credit consist of lines where no residential property is used as
collateral. These loans are made to individuals as well as companies, and are collateralized by
property, equipment or receivables. The loan amount is determined by the borrowers financial
strength as well as the collateral. The lines are based on the collateral and the ability of the
borrower(s) to repay the debt. The lines are closely monitored and limits adjusted accordingly
based on updated tax returns and/or other changes to the financial well being of the borrower(s).
Subsequently, risk is controlled but considered moderate based on the collateral and nature of the
loan.
Credit Quality
The Banks risk rating system is made up of five loan grades (1, 2, 3, 4 and 5). A
description of the general characteristics of the risk grades follows:
Rating 1 Pass
Rating 1 has asset risks ranging from excellent low risk to acceptable. This rating considers
customer history of earnings, cash flow, liquidity, leverage, capitalization, consistency of debt
service coverage, the nature and extent of customer relationship and other relevant specific
business factors such as the stability of the industry or market area, changes to management,
litigation or unexpected events that could have an impact on risks.
10
Table of Contents
Rating 2 Special Mention
A special mention asset has a potential weakness that deserves managements close attention.
If left uncorrected, these potential weaknesses may result in deterioration of the repayment
prospects for the asset or in the
institutions credit position at some future date. Special mention assets are not adversely
classified and do not expose an institution to sufficient risk to warrant adverse classification.
The special mention classification is a transitory one and is the first classification that
requires an action plan to resolve the weaknesses inherent to the credit. These relationships will
be reviewed at least quarterly.
Rating 3 Substandard
Substandard assets are assets that are inadequately protected by the sound worth or paying
capacity of the borrower or of the collateral pledged. These assets have a well-defined weakness
or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct
possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loss
potential, while existing in the aggregate amount of substandard assets, does not have to exist in
individual assets classified as substandard. The loans may have a delinquent history or
combination of weak collateral, weak guarantor strength or income statement losses. These assets
listed may include assets with histories of repossessions or some that are non-performing
bankruptcies. These relationships will be reviewed at least quarterly.
Rating 4 Doubtful
Doubtful assets have many of the same characteristics of substandard assets with the exception
that the Bank has determined that loss is not only possible but is probable and the risk is close
to certain that loss will occur. When a loan is assigned to this category the Bank will identify
the probable loss and it will receive allocation in the loan loss reserve analysis. These
relationships will be reviewed at least quarterly.
Rating 5 Loss
Once an asset is identified as a definite loss to the Bank, it will receive the classification
of loss. There may be some future potential recovery; however it is more practical to write off
the loan at the time of classification. Losses will be taken in the period in which they are
determined to be uncollectable.
Credit quality indicators as of March 31, 2011 were as follows:
Special | ||||||||||||||||||||
Pass | Mention | Substandard | Doubtful | Total | ||||||||||||||||
One- to four-family real estate |
$ | 42,749,693 | $ | 70,192 | $ | 76,534 | $ | | $ | 42,896,419 | ||||||||||
Construction |
2,176,685 | | | | 2,176,685 | |||||||||||||||
Multi-family |
14,659,136 | | | | 14,659,136 | |||||||||||||||
Commercial real estate |
19,210,056 | | | | 19,210,056 | |||||||||||||||
Home equity and second mortgages |
1,242,384 | | | | 1,242,384 | |||||||||||||||
Secured loans |
354,356 | | | | 354,356 | |||||||||||||||
Unsecured improvement loans |
466,420 | | 23,634 | | 490,054 | |||||||||||||||
Commercial leases |
16,370,382 | 456,498 | | | 16,826,880 | |||||||||||||||
Commercial lines of credit |
3,370,676 | 469,698 | | | 3,840,374 | |||||||||||||||
$ | 100,599,788 | $ | 996,388 | $ | 100,168 | $ | | $ | 101,696,344 | |||||||||||
A loan is considered impaired when, based on current information and events, it is
probable that the Company will be unable to collect the scheduled payments of principal or interest
when due according to the contractual terms of the loan agreement. Factors considered by management
in determining impairment include payment status, collateral value and the probability of
collecting scheduled principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired. Management
determines the significance of payment delays and payment shortfalls on a case-by-case basis,
taking into consideration all of the circumstances surrounding the loan and the borrower, including
the length of the delay, the reasons for the delay, the borrowers prior payment record and the
amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a
loan by loan basis for commercial and construction loans by either the present value of expected
future cash flows discounted at the loans effective interest rate, the loans observable market
price or the fair value of the collateral if the loan is collateral dependent. There were no
impaired loans as of or for the six months ended March 31, 2011 or at September 30, 2010.
11
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The performance and credit quality of the loan portfolio is also monitored by analyzing the
age of the loans receivable as determined by the length of time a recorded payment is past due.
The following table presents the classes of the loan portfolio summarized by the past due status as
of March 31, 2011:
Non- | ||||||||||||||||||||||||||||
30-59 Days | 60-89 Days | 90 Days or | Total Past | Total Loans | accrual | |||||||||||||||||||||||
Past Due | Past Due | More Past Due | Due | Current | Receivables | Loans | ||||||||||||||||||||||
One- to four-family real estate |
$ | | $ | 1,120 | $ | 46,357 | $ | 47,477 | $ | 42,848,942 | $ | 42,896,419 | $ | 46,357 | ||||||||||||||
Construction |
| | | | 2,176,685 | 2,176,685 | | |||||||||||||||||||||
Multi-family real estate |
| | | | 14,659,136 | 14,659,136 | | |||||||||||||||||||||
Commercial real estate |
| | | | 19,210,056 | 19,210,056 | | |||||||||||||||||||||
Home equity and second
mortgages |
| | | | 1,242,384 | 1,242,384 | | |||||||||||||||||||||
Secured loans |
| | | | 354,356 | 354,356 | | |||||||||||||||||||||
Unsecured improvement loans |
| | | | 490,054 | 490,054 | | |||||||||||||||||||||
Commercial leases |
456,498 | | | 456,498 | 16,370,382 | 16,826,880 | | |||||||||||||||||||||
Commercial lines of credit |
469,698 | | | 469,698 | 3,370,676 | 3,840,374 | | |||||||||||||||||||||
$ | 926,196 | $ | 1,120 | $ | 46,357 | $ | 973,673 | $ | 100,722,671 | $ | 101,696,344 | $ | 46,357 | |||||||||||||||
Eureka Financial Corp. primarily grants loans to customers throughout Southwestern
Pennsylvania. Eureka Financial Corp. maintains a diversified loan portfolio and the ability of its
debtors to honor their obligations is not substantially dependant on any particular economic
business sector. Loans on non-accrual at March 31, 2011 and September 30, 2010 were approximately
$46,000 and $58,000, respectively. The foregone interest on non-accrual loans was approximately
$907 and $683 for the three months ended March 31, 2011 and 2010, respectively. The foregone
interest on non-accrual loans was approximately $1,835 and $1,379 for the six months ended March
31, 2011 and 2010, respectively. As of March 31, 2011 and September 30, 2010, there were no loans, that were 90 days or more delinquent and still accruing
interest.
12
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The following table details
the allowance for loan
losses and loan receivable
balances at March 31, 2011 and the activity in the allowance for the three months ended March 31, 2011.
An allocation of the
allowance to one category
of loans does not prevent
the Companys ability to
utilize the allowance to
absorb losses in a
different category. The
loans receivable are
disaggregated on the basis
of the Companys impairment
methodology.
Home | ||||||||||||||||||||||||||||||||||||||||||||
One- to four | equity and | Unsecured | Commercial | |||||||||||||||||||||||||||||||||||||||||
family real | Multi-family | Commercial | second | Secured | improvement | Commercial | lines of | |||||||||||||||||||||||||||||||||||||
estate | Construction | real estate | real estate | mortgages | loans | loans | leases | credit | Unallocated | Total | ||||||||||||||||||||||||||||||||||
Allowance for Credit Losses: |
||||||||||||||||||||||||||||||||||||||||||||
Beginning Balance 1/1/2011 |
$ | 125,286 | $ | 10,723 | $ | 109,578 | $ | 296,313 | $ | 14,150 | | | $ | 280,976 | $ | 42,629 | $ | 42,783 | $ | 922,438 | ||||||||||||||||||||||||
Charge-offs |
| | | | | | | | | | ||||||||||||||||||||||||||||||||||
Recoveries |
| | | | | | | | | | ||||||||||||||||||||||||||||||||||
Provisions (credits) |
27,416 | 7,082 | 366 | (7,065 | ) | 681 | | | 9,690 | 3,164 | (23,734 | ) | 17,600 | |||||||||||||||||||||||||||||||
Ending Balance |
$ | 152,702 | 17,805 | 109,944 | 289,248 | 14,831 | | | 290,666 | 45,793 | 19,049 | 940,038 | ||||||||||||||||||||||||||||||||
Ending Balance: Individually Evaluated for
Impairment |
| | | | | | | | | | | |||||||||||||||||||||||||||||||||
Ending Balance: Collectively Evaluated for
Impairment |
152,072 | 17,805 | 109,944 | 289,248 | 14,831 | | | 290,666 | 45,793 | 19,049 | 940,038 | |||||||||||||||||||||||||||||||||
Loans Receivable: |
||||||||||||||||||||||||||||||||||||||||||||
Ending Balance |
42,896,419 | 2,176,685 | 14,659,136 | 19,210,056 | 1,242,384 | 354,356 | 490,054 | 16,826,880 | 3,840,374 | 101,696,344 | ||||||||||||||||||||||||||||||||||
Ending Balance: Individually Evaluated for
Impairment |
| | | | | | | | | | ||||||||||||||||||||||||||||||||||
Ending Balance: Collectively Evaluated for
Impairment |
$ | 42,896,419 | $ | 2,176,685 | $ | 14,659,136 | $ | 19,210,056 | $ | 1,242,384 | $ | 354,356 | $ | 490,054 | $ | 16,826,880 | $ | 3,840,374 | $ | | $ | 101,696,344 | ||||||||||||||||||||||
An allowance for loan and lease losses (ALLL) is maintained to absorb losses from the
loan and lease portfolio. The ALLL is based on managements continuing evaluation of the risk
classifications and credit quality of the loan and lease portfolio, assessment of current economic
conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated
loss experience, and the amount of non-performing loans. Management reviews the loan and lease
portfolio on a quarterly basis using a defined, consistently applied process in order to make
appropriate and timely adjustments to the ALLL.
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Table of Contents
Changes in the allowance for loan losses were as follows for the three and six months ended
March 31, 2011 and 2010:
Three Months | Six Months | |||||||||||||||
Ended March 31, | Ended March 31, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Balance beginning of period |
$ | 922,438 | $ | 836,987 | $ | 905,038 | $ | 831,987 | ||||||||
Provision charged to operations |
17,600 | 15,000 | 35,000 | 20,000 | ||||||||||||
Net charge-offs |
| | | | ||||||||||||
Balance end of period |
$ | 940,038 | $ | 851,987 | $ | 940,038 | $ | 851,987 | ||||||||
Note 6 Commitments
Eureka Financial Corp.s maximum exposure to credit loss for loan and lease commitments
(unfunded loans and leases) at March 31, 2011 and September 30, 2010 was approximately $9,557,336
and $9,071,000, respectively, with interest rates from 2.25% to 7.75% and 2.25% to 6.75%,
respectively. Fixed rate loan commitments at March 31, 2011 and September 30, 2010 were
approximately $2,720,000 and $3,847,000, respectively, with fixed rates of interest ranging from
4.75% to 7.75% and 4.75% to 6.75%, respectively.
In the normal course of business, there are various outstanding commitments and contingent
liabilities, such as commitments to extend credit which are not reflected in the accompanying
consolidated financial statements. These commitments involve, to varying degrees, elements of
credit risk in excess of amounts recognized in the consolidated balance sheets.
Loan commitments are made to accommodate the financial needs of Eureka Financial Corps
customers. These arrangements have credit risk essentially the same as that involved in extending
loans to customers and are subject to Eureka Financial Corp.s normal credit policies and loan
underwriting standards. Collateral is obtained based on managements credit assessment of the
customer. Management currently expects no loss from these activities.
Note 7 Fair Value Measurements and Fair Values of Financial Instruments
Management uses its best judgment in estimating the fair value of Eureka Financial Corp.s
financial instruments; however, there are inherent weaknesses in any estimation technique.
Therefore, for substantially all financial instruments, the fair value estimates herein are not
necessarily indicative of the amounts Eureka Financial Corp. could have realized in a sales
transaction on the dates indicated. The estimated fair value amounts have been measured as of their
respective year-ends and have not been re-evaluated or updated for purposes of these financial
statements subsequent to those respective dates. As such, the estimated fair values of these
financial instruments subsequent to the respective reporting dates may be different than the
amounts reported at each year-end.
ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation methods
used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in
active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority
to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under
ASC 820 are as follows:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement
date for identical, unrestricted assets or liabilities.
Level 2: Quoted prices in markets that are not active, or inputs that are observable either
directly or indirectly, for substantially the full term of the asset or liability.
Level 3: Prices or valuation techniques that require inputs that are both significant to the
fair value measurement and unobservable (i.e., supported with little or no market activity).
An assets or liabilitys level within the fair value hierarchy is based on the lowest level
of input that is significant to the fair value measurement.
14
Table of Contents
For financial assets measured at fair value on a recurring basis, the fair value measurements
by level within the fair value hierarchy used at March 31, 2011 and September 30, 2010 are as
follows:
(Level 1) | ||||||||||||||||
Quoted Prices | (Level 2) | |||||||||||||||
in Active | Significant | (Level 3) | ||||||||||||||
Markets for | Other | Significant | ||||||||||||||
March 31, | Identical | Observable | Unobservable | |||||||||||||
Description | 2011 | Assets | Inputs | Inputs | ||||||||||||
Mortgage-backed securities available for sale |
$ | 32,061 | $ | | $ | 32,061 | $ | |
(Level 1) | ||||||||||||||||
Quoted Prices | (Level 2) | |||||||||||||||
in Active | Significant | (Level 3) | ||||||||||||||
Markets for | Other | Significant | ||||||||||||||
September 30, | Identical | Observable | Unobservable | |||||||||||||
Description | 2010 | Assets | Inputs | Inputs | ||||||||||||
Mortgage-backed securities available for sale |
$ | 38,595 | $ | | $ | 38,595 | $ | |
There are no non-financial assets or liabilities measured at fair value as of March 31,
2011 or September 30, 2010.
15
Table of Contents
The following information should not be interpreted as an estimate of the fair value of
the entire Company since a fair value calculation is only provided for a limited portion of Eureka
Financial Corp.s assets and liabilities. Due to a wide range of valuation techniques and the
degree of subjectivity used in making the estimates, comparisons between Eureka Financial Corp.s
disclosures and those of other companies may not be meaningful. The following methods and
assumptions that are presented below the following table were used to estimate fair values of
Eureka Financial Corp.s financial instruments at March 31, 2011 and September 30, 2010:
March 31, | September 30, | |||||||||||||||
2011 | 2010 | |||||||||||||||
Carrying | Fair Market | Carrying | Fair Market | |||||||||||||
Amount | Value | Amount | Value | |||||||||||||
Financial assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 16,294,169 | $ | 16,294,169 | $ | 11,650,201 | $ | 11,650,201 | ||||||||
Mortgage-backed securities |
32,061 | 32,061 | 38,595 | 38,595 | ||||||||||||
Held to maturity securities |
14,210,693 | 14,067,000 | 10,482,550 | 10,522,353 | ||||||||||||
Federal Home Loan Bank stock |
718,600 | 718,600 | 796,400 | 796,400 | ||||||||||||
Loans receivable, net |
100,591,448 | 104,230,000 | 98,033,540 | 102,239,000 | ||||||||||||
Accrued interest receivable |
530,349 | 530,349 | 467,347 | 467,347 | ||||||||||||
Financial Liabilities: |
||||||||||||||||
Deposits |
115,076,504 | 117,894,000 | 111,043,564 | 112,630,000 | ||||||||||||
Advances from borrowers for taxes and
insurance |
335,026 | 335,026 | 429,816 | 429,816 | ||||||||||||
FHLB advances |
| | 1,000,000 | 1,013,000 | ||||||||||||
Accrued interest payable |
143,854 | 143,854 | 153,264 | 153,264 | ||||||||||||
Off-balance sheet commitments |
| | | |
Cash and Cash Equivalents
The carrying amount is a reasonable estimate of fair value due to the short term nature of the
instrument.
Securities
The fair value of securities available for sale (carried at fair value) and held to maturity
(carried at amortized cost) are determined by obtaining quoted market prices on nationally
recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical
technique used widely in the industry to value debt securities without relying exclusively on
quoted market prices for the specific securities but rather by relying on the securities
relationship to other benchmark quoted prices. For certain securities which are not traded in
active markets or are subject to transfer restrictions, valuations are adjusted to reflect
illiquidy and/or non-transferability, and such adjustments are generally based on available market
evidence (Level 3). In the absence of such evidence, managements best estimate is used.
Managements best estimate consists of both internal and external support on certain Level 3
investments. Internal cash flow models using a present value formula that includes assumptions
market participants would use along with indicative exit pricing obtained from broker/dealers
(where available) were used to support fair values of certain Level 3 investments.
Federal Home Loan Bank Stock
The carrying value of the FHLB stock is a reasonable estimate of fair value due to
restrictions on the securities.
Loans Receivable
The fair values for one-to four-family residential loans are estimated using discounted cash
flow analysis using fields from similar products in the secondary markets. The carrying amount of
construction loans approximated its fair value given their short-term nature. The fair values of
consumer and commercial loans are estimated using discounted cash flow analysis, using interest
rates reported in various government releases and Eureka Financial Corp.s own product pricing
schedule for loans with terms similar to Eureka Financial Corps. The fair values of multi-family
and nonresidential mortgages are estimated using discounted cash flow analysis, using interest
rates based on a national survey of similar loans.
Accrued Interest Receivable
The carrying amount is a reasonable estimate of fair value due to the short term nature of the
instrument.
16
Table of Contents
Deposit Liabilities
The fair values disclosed for demand deposits are, by definition, equal to the amount payable
on demand at the repricing date (i.e., their carrying amounts). Fair values of certificates of
deposits are estimated using a discounted cash flow calculation that applies a comparable Federal
Home Loan Bank advance rate to the aggregated weighted average maturity on time deposits.
Advances from Borrowers for Taxes and Insurance
The fair value of advances from borrowers for taxes and insurance is the amount payable on
demand at the reporting date.
Federal Home Loan Bank Advances
The fair value of FHLB advances was determined using the FHLB pricing tables as of March 31,
2011.
Accrued Interest Payable
The carrying amount is a reasonable estimate of fair value.
Off-Balance Sheet Commitments
The values of off-balance sheet commitments are based on their carrying value, taking into
account the remaining terms and conditions of the agreement.
Note 8 Capital Requirements
The Bank is subject to various regulatory capital requirements administered by the federal
banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Banks financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines
that involve quantitative measures of the Banks assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices. The Banks capital amounts and
classification are also subject to qualitative judgments by the regulators about components,
risk-weightings and other factors.
The Federal Reserve Bank of Cleveland requires the Bank to maintain certain average clearing
balances. As of March 31, 2011 and September 30, 2010, the Bank had a required clearing balance of
$25,000.
The Bank may not declare or pay a cash dividend if the effect thereof would cause its net
worth to be reduced below either the amounts required for the liquidation account discussed below
or the regulatory capital requirements imposed by federal and state regulations.
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As of October 19, 2009, the most recent notification from the Office of Thrift Supervision
categorized the Bank as well capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized the Bank must maintain minimum total risk based,
core and tangible ratios as set forth in the accompanying table. There are no conditions or events
since the notification that management believed has changed the institutions category. The
following shows the Banks compliance with regulatory capital standards at March 31, 2011 and
September 30, 2010:
To be well Capitalized | ||||||||||||||||||||||||
under Prompt | ||||||||||||||||||||||||
For Capital Adequacy | Corrective Action | |||||||||||||||||||||||
Actual | Purposes | Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
As of March 31, 2011 |
||||||||||||||||||||||||
Total capital (to risk-weighted assets) |
$ | 18,179 | 21.47 | % | >$6,773 | > 8.00 | % | >$8,466 | > 10.00 | % | ||||||||||||||
Tier 1 capital (to risk-weighted assets) |
17,239 | 20.36 | > 3,386 | > 4.00 | > 5,079 | > 6.00 | ||||||||||||||||||
Core (Tier 1) capital (to adjusted total assets) |
17,239 | 12.66 | > 5,446 | > 4.00 | > 6,808 | > 5.00 | ||||||||||||||||||
As of September 30, 2010 |
||||||||||||||||||||||||
Total capital (to risk-weighted assets) |
$ | 13,644 | 16.39 | % | > $6,662 | > 8.00 | % | > $8,327 | > 10.00 | % | ||||||||||||||
Tier 1 capital (to risk-weighted assets) |
12,739 | 15.30 | > 3,331 | > 4.00 | > 4,996 | > 6.00 | ||||||||||||||||||
Core (Tier 1) capital (to adjusted total assets) |
12,739 | 10.10 | > 5,048 | > 4.00 | > 6,309 | > 5.00 |
The following is a reconciliation of Eureka Banks equity under accounting principles
generally accepted in the United States of America to regulatory capital as of March 31, 2011 and
September 30, 2010:
March 31, | September 30, | |||||||
2011 | 2010 | |||||||
Total equity |
$ | 18,343 | $ | 13,841 | ||||
Unrealized gains on securities available-for-sale |
(2 | ) | | |||||
Deferred tax asset disallowed portion |
(1,102 | ) | (1,102 | ) | ||||
Tier 1 capital |
17,239 | 12,739 | ||||||
Other adjustments: |
||||||||
Allowable allowances for loan and lease losses |
940 | 905 | ||||||
Total regulatory capital |
$ | 18,179 | $ | 13,644 | ||||
Note 9 Recent Accounting Pronouncements
Accounting Standards Update No. 2010-06, Fair Value Measurements and Disclosures (Topic
820)-Improving Disclosures About Fair Value Measurements requires expanded disclosures related to
fair value measurements including (i) the amounts of significant transfers of assets or liabilities
between Levels 1 and 2 of the fair value hierarchy and the reasons for the transfers, (ii) the
reasons for transfers of assets or liabilities in or out of Level 3 of the fair value hierarchy,
with significant transfers disclosed separately, (iii) the policy for determining when transfers
between the levels of the fair value hierarchy are recognized and (iv) for recurring fair value
measurements of assets and liabilities in Level 3 of the fair value hierarchy, a gross presentation
of information about purchases, sales, issuances and settlements. ASU 2010-06 further clarifies
that (i) companies should provide fair value measurement disclosures for each class of assets and
liabilities (rather than major category), which would generally be a subset of assets or
liabilities within a line item in the statement of financial position and (ii) companies should
provide disclosures about the valuation techniques and inputs used to measure fair value for both
recurring and non-recurring fair value measurements for each class of assets and liabilities
included in Levels 2 and 3 of the fair value hierarchy. ASU No. 2010-06 requires the disclosures
related to the gross presentation of purchases, sales, issuances and settlements of assets and
liabilities included in Level 3 of the fair value hierarchy beginning January 1, 2011. The
remaining disclosure requirements and clarifications made by ASU 2010-06 became effective on
January 1, 2010. The adoption of ASU No. 2010-06 did not have a material impact on our consolidated
results of operations or financial position.
In July 2010, the FASB issued ASU 2010-20, Receivables (Subtopic 310)-Disclosures About
the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The main
objective of ASU 2010-20 is to provide financial statement users greater transparency about an
entitys allowance for credit losses and the credit quality of its financing receivables. Existing
disclosure guidance was amended to require an entity to provide a greater level of disaggregated
information about the credit quality of its financing receivables and its allowance for credit
losses. In addition, the amendments in ASU 2010-20 require an entity to disclose credit quality
indicators, past due information, and modifications of its financing receivables. These
improvements will help financial statement users assess an entitys credit risk exposures and its
allowance for credit losses. ASU 2010-20 is effective for interim or annual periods ending on or
after December 15, 2010. Since ASU 2010-20 only requires enhanced disclosures, the adoption of
this statement did not have a material impact on our consolidated financial statements or results
of operations.
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Table of Contents
In April 2011, the FASB issued ASU 2011-02, Receivables (Subtopic 310): A Creditors
Determination of Whether a Restructuring is a Troubled Debt Restructuring (ASU 2011-02). ASU
2011-02 provides additional guidance and clarification in determining whether a creditor has
granted a concession and whether a debtor is experiencing financial difficulties for purposes of
determining whether a restructuring constitutes a troubled debt restructuring. This update is
effective for interim and annual periods ending after June 15, 2011. Management does not expect the
adoption of this statement to have a material impact on the Companys consolidated financial
condition or results of operations.
Other required disclosures about activity that occurs during a reporting period are
effective for periods beginning on or after December 15, 2010. Additionally, ASU 2011-01 deferred
the date for disclosures related to troubled debt restructures to coincide with the effective date
of a proposed accounting standards update related to troubled debt restructures, which is currently
expected to be effective for periods ending after June 15, 2011. The Company anticipates that
adoption of these additional disclosures will not have a material impact on the Companys
consolidated financial statements.
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operation |
Safe Harbor Statement for Forward-Looking Statements
This report may contain forward-looking statements within the meaning of the federal
securities laws. These statements are not historical facts; rather they are statements based on the
Companys current expectations regarding its business strategies and its intended results and
future performance. Forward-looking statements are preceded by terms such as expects, believes,
anticipates, intends and similar expressions.
Forward-looking statements are not guarantees of future performance. Numerous risks and
uncertainties could cause or contribute to the Companys actual results, performance and
achievements being materially different from those expressed or implied by the forward-looking
statements. Factors that may cause or contribute to these differences include, without limitation,
general economic conditions, including changes in market interest rates and changes in monetary and
fiscal policies of the federal government; legislative and regulatory changes; the quality and
composition of the loan and investment securities portfolio; loan demand; deposit flows;
competition; and changes in accounting principles and guidelines. Additional factors that may
affect our results are discussed in the Companys prospectus dated January 11, 2011 under the
section titled Risk Factors. These factors should be considered in evaluating the forward-looking
statements and undue reliance should not be placed on such statements. Except as required by
applicable law or regulation, the Company assumes no obligation and disclaims any obligation to
update any forward-looking statements.
Critical Accounting Policies
The discussion and analysis of Eureka Financial Corp.s financial condition and results of
operations are based on our consolidated financial statements, which are prepared in conformity
with generally accepted accounting principles in the United States of America. The preparation of
these financial statements requires management to make estimates and assumptions affecting the
reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the
reported amounts of income and expenses. We consider the accounting policies discussed below to be
critical accounting policies. The estimates and assumptions that we use are based on historical
experience and various other factors and are believed to be reasonable under the circumstances.
Actual results may differ from these estimates under different assumptions or conditions, resulting
in a change that could have a material impact on the carrying value of our assets and liabilities
and our results of operations.
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Table of Contents
Allowance for Loan Losses. The allowance for loan losses is maintained at a level
representing managements best estimate of known and inherent losses in the loan portfolio, based
on managements evaluation of the portfolios collectability. The allowance is established through
the provision for loan losses, which is charged against income. Management estimates the allowance
balance required using loss experience in particular segments of the portfolio, the size and
composition of the loan portfolio, trends and absolute levels of non-performing loans, classified
and criticized loans and delinquent loans, trends in risk ratings, trends in industry charge-offs
by particular segments and changes in existing general economic and business conditions affecting
our lending areas and the
national economy. Additionally, for loans identified by management as impaired, management
will provide a specific provision for loan loss based on the expected discounted cash flows of the
loan, or for loans determined to be collateral dependent, a specific provision for loan loss is
established based on appraised value less costs to sell. Determining the amount of the allowance
for loan losses necessarily involves a high degree of judgment. Among the material estimates
required to establish the allowance are: loss exposure at default; the amount and timing of future
cash flows on impaired loans; value of collateral; and determination of loss factors to be applied
to the various elements of the portfolio. All of these estimates are susceptible to significant
change. Although we believe that we use the best information available to establish the allowance
for loan losses, future adjustments to the allowance may be necessary if actual conditions differ
substantially from the assumptions used in making the evaluation. Further, current economic
conditions have increased the uncertainty inherent in these estimates and assumptions. In addition,
the Office of Thrift Supervision, as an integral part of its examination process, periodically
reviews our allowance for loan losses. Such agency may require us to recognize adjustments to the
allowance based on its judgments about information available to it at the time of its examination.
A large loss could deplete the allowance and require increased provisions to replenish the
allowance, which would negatively affect earnings.
Deferred Income Taxes. We use the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Deferred tax assets are
reduced by a valuation allowance when it is more likely than not that some portion of the deferred
tax asset will not be realized. We exercise significant judgment in evaluating the amount and
timing of recognition of the resulting tax liabilities and assets. These judgments require us to
make projections of future tax rates and taxable income. The judgments and estimates we make in
determining our deferred tax assets, which are inherently subjective, are reviewed on a continual
basis as regulatory and business factors change. Any reduction in estimated future taxable income
may require us to record a valuation allowance against our deferred tax asset.
Valuation of Other-Than-Temporary Impairment of Investment Securities. We evaluate our
investment securities portfolio on a quarterly basis for indicators of other-than-temporary
impairment, which requires significant judgment. We assess whether other-than-temporary impairment
has occurred when the fair value of a debt security is less than the amortized cost basis at the
balance sheet date. Under these circumstances, other-than-temporary impairment is considered to
have occurred: (1) if we intend to sell the security; (2) if it is more likely than not that we
will be required to sell the security before recovery of its amortized cost basis; or (3) the
present value of the expected cash flows is not sufficient to recover the entire amortized cost
basis. For securities that we do not expect to sell or that we are not more likely than not to be
required to sell, the other-than-temporary impairment is separated into credit and non-credit
components. The credit-related other-than-temporary impairment, represented by the expected loss in
principal, is recognized in non-interest income, while noncredit-related other-than-temporary
impairment is recognized in other comprehensive income (loss). Noncredit-related
other-than-temporary impairment results from other factors, including increased liquidity spreads
and extension of the security. For securities which we do expect to sell, all other-than-temporary
impairment is recognized in earnings. Other-than-temporary impairment is presented in the income
statement on a gross basis with a reduction for the amount of other-than-temporary impairment
recognized in other comprehensive income (loss). Once an other-than-temporary impairment is
recorded, when future cash flows can be reasonably estimated, future cash flows are re-allocated
between interest and principal cash flows to provide for a level-yield on the security.
Comparison of Financial Condition at March 31, 2011 and September 30, 2010
At March 31, 2011, assets increased $9.9 million, or 7.8%, to $137.2 million from $127.3
million at September 30, 2010, primarily due to a $4.7 million increase in cash and cash
equivalents and a $3.7 million increase in investment securities. These increases were funded by
the increase in deposits and the proceeds from the Companys stock offering in connection with the
Banks second-step conversion. Also, at March 31, 2011, loans receivable, net increased $2.6
million, or 2.6%, to $100.6 million from $98.0 million at September 30, 2010, primarily due to an
increase in one- to four-family and construction loans. Other assets decreased $700,000 to $2.2
million at March 31, 2011 from $2.9 million at September 30, 2010 primarily as a result of the
prepaid conversion costs being absorbed into equity.
20
Table of Contents
Eureka Financial Corp. actively manages credit risk through its underwriting practices and
collection operations and it does not offer nor has it historically offered loans to subprime or
Alt-A borrowers. Non-accrual loans totaled $46,000, or 0.05% of total net loans, at March 31, 2011
compared to $58,000, or 0.06% of total net loans, at September 30, 2010. The non-accrual loan
total for March 31, 2011 included two one- to four-family real estate loans. The non-accrual loan
total for September 30, 2010 included two one- to four-family real estate loans and one commercial
line of credit.
At March 31, 2011, total liabilities increased by $3.2 million, or 2.9%, from September 30,
2010. This increase was primarily attributable to an increase in deposits of $4.1 million, or
3.6%. The increase in deposits was primarily the result of an increase in certificates of deposit,
which increased from $47.6 million at September 30, 2010 to $51.6 million at March 31, 2011. The
growth in deposit accounts helped to fund the $3.7 million increase in investment securities and to
repay a $1.0 million Federal Home Loan Bank borrowing.
At March 31, 2011, stockholders equity increased $6.7 million to $20.8 million from $14.1
million at September 30, 2010. The increase was primarily the
result of the $6.1 million in net proceeds received in connection with the Banks second step conversion, which was consummated on
February 28, 2011, and net income of $542,000 for the six-month period, offset by dividends paid to
stockholders in the amount of $172,000. Because of interest rate volatility, accumulated other
comprehensive income and stockholders equity could materially fluctuate in future periods.
Results of Operations for the Three and Six Months Ended March 31, 2011 and 2010
Overview.
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
(Dollars in thousands, except | ||||||||
per share amounts) | ||||||||
Net income |
$ | 299 | $ | 223 | ||||
Basic earnings per share |
0.23 | 0.17 | ||||||
Diluted earnings per share |
0.23 | 0.17 | ||||||
Average equity to average assets |
12.48 | % | 10.91 | % |
Six Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
(Dollars in thousands, except | ||||||||
per share amounts) | ||||||||
Net income |
$ | 542 | $ | 458 | ||||
Basic earnings per share |
0.41 | 0.35 | ||||||
Diluted earnings per share |
0.41 | 0.35 | ||||||
Average equity to average assets |
11.70 | % | 11.93 | % |
The increase in net income for the three and six months ended March 31, 2011, was attributable
to increased income from investment securities and a decreased cost of funds, offset by increased
non-interest expenses.
Net Interest Income. Net interest income increased $215,000 to $1.2 million for the three
months ended March 31, 2011 from $1.0 million for the comparable 2010 period. For the six months
ended March 31, 2011, net interest income increased $355,000 to $2.3 million from $2.0 million for
the comparable 2010 period. For the three and six month periods ended March 31, 2011,
respectively, higher net interest income was the result of a $150,000 and $231,000 increase in
interest income, respectively, and a decrease of $65,000 and $123,000
in interest expense from the
comparable 2010 periods, respectively. The total interest income increases for each period were
primarily due to a $95,000 and $166,000, respectively, increase in interest from investment
securities as both the average balance and yield earned on securities increased. The decrease in
total interest expense for the three and six month periods ending March 31, 2011 was primarily
attributable to decreases in deposit interest expense due to lower interest rates.
21
Table of Contents
Rate/Volume Analysis. The following tables set forth the effects of changing rates and volumes
on our net interest income. The rate column shows the effects attributable to changes in rate
(changes in rate multiplied by current volume). The volume column shows the effects attributable to
changes in volume (changes in volume multiplied by prior rate). The net column represents the sum
of the prior columns. For purposes of these tables, changes attributable to changes in both rate
and volume that cannot be segregated have been allocated proportionally based on the changes due to
rate and the changes due to volume.
Three Months Ended | ||||||||||||
March 31, 2011 | ||||||||||||
Compared to | ||||||||||||
Three Months Ended | ||||||||||||
March 31, 2010 | ||||||||||||
Increase | ||||||||||||
(Decrease) | ||||||||||||
Due to | ||||||||||||
Rate | Volume | Net | ||||||||||
(In thousands) | ||||||||||||
Interest income: |
||||||||||||
Loans receivable |
$ | (29 | ) | $ | 84 | $ | 55 | |||||
Investment securities |
62 | 33 | 95 | |||||||||
Total interest-earning assets |
33 | 117 | 150 | |||||||||
Interest Expense: |
||||||||||||
NOW money markets accounts |
(6 | ) | 6 | 0 | ||||||||
Passbook and club accounts |
(11 | ) | 1 | (10 | ) | |||||||
IRA accounts |
(15 | ) | 13 | (2 | ) | |||||||
Certificates of deposit |
(80 | ) | 43 | (37 | ) | |||||||
CDARS |
(2 | ) | (1 | ) | (3 | ) | ||||||
Borrowings |
(8 | ) | (5 | ) | (13 | ) | ||||||
Total interest-bearing liabilities |
(122 | ) | 57 | (65 | ) | |||||||
Net change in net interest income |
$ | 155 | $ | 60 | 215 |
Six Months Ended | ||||||||||||
March 31, 2011 | ||||||||||||
Compared to | ||||||||||||
Six Months Ended | ||||||||||||
March 31, 2010 | ||||||||||||
Increase | ||||||||||||
(Decrease) | ||||||||||||
Due to | ||||||||||||
Rate | Volume | Net | ||||||||||
(In thousands) | ||||||||||||
Interest income: |
||||||||||||
Loans receivable |
$ | (57 | ) | $ | 122 | $ | 65 | |||||
Investment securities |
79 | 87 | 166 | |||||||||
Total interest-earning assets |
22 | 209 | 231 | |||||||||
Interest Expense: |
||||||||||||
NOW money markets accounts |
(29 | ) | 20 | (9 | ) | |||||||
Passbook and club accounts |
(23 | ) | 4 | (19 | ) | |||||||
IRA accounts |
(32 | ) | 27 | (5 | ) | |||||||
Certificates of deposit |
(165 | ) | 103 | (62 | ) | |||||||
CDARS |
(6 | ) | (1 | ) | (7 | ) | ||||||
Borrowings |
(6 | ) | (16 | ) | (22 | ) | ||||||
Total interest-bearing liabilities |
(261 | ) | 137 | (124 | ) | |||||||
Net change in net interest income |
$ | 283 | $ | 72 | 355 |
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Table of Contents
Provision for Loan Losses. The provision for loan losses for the three and six months
ended March 31, 2011, was $17,600 and $35,000, respectively, compared to $15,000 and $20,000,
respectively, for the comparable 2010 periods. The increased provision in the 2011 periods reflects
growth in the loan portfolio with consideration given to the absence of charge-offs and decreased
non-performing loans and classified and criticized assets.
Non-performing loans decreased $12,000 to $46,000 at March 31, 2011 from $58,000 at September
30, 2010. There were no net charge-offs for the three and six months ended March 31, 2011 as
compared to net charge-offs totaling $0 and $2,048 for the three and six months ended March 31,
2010, respectively.
Non-interest Income. The following tables show the components of non-interest income and the
percentage changes for the three and six months ended March 31, 2011 and 2010.
Three Months Ended | ||||||||||||||||
March 31, | ||||||||||||||||
2011 | 2010 | $ Change | % Change | |||||||||||||
Fees on NOW accounts |
$ | 6,714 | $ | 8,592 | $ | (1,878 | ) | (21.9 | )% | |||||||
Other income |
9,908 | 6,323 | 3,585 | 56.7 | % | |||||||||||
Total non-interest income |
$ | 16,622 | $ | 14,915 | 1,707 | 11.4 | % | |||||||||
Six Months Ended | ||||||||||||||||
March 31, | ||||||||||||||||
2011 | 2010 | $ Change | % Change | |||||||||||||
Fees on NOW accounts |
$ | 15,176 | $ | 19,190 | $ | (4,014 | ) | (20.9 | )% | |||||||
Other income |
20,080 | 13,588 | 6,492 | 47.8 | % | |||||||||||
Total non-interest income |
$ | 35,256 | $ | 32,778 | 2,478 | 7.6 | % | |||||||||
Non-interest Expense. The following tables show the components of non-interest expense and the
percentage changes for the three and six months ended March 31, 2011 and 2010.
Three Months Ended | ||||||||||||||||
March 31, | ||||||||||||||||
2011 | 2010 | $ Change | % Change | |||||||||||||
Salary and benefits |
$ | 429,898 | $ | 377,221 | $ | 52,617 | 14.0 | % | ||||||||
Occupancy |
85,985 | 84,296 | 1,689 | 2.0 | ||||||||||||
Computer |
52,360 | 41,752 | 10,608 | 25.4 | ||||||||||||
Legal and accounting |
59,614 | 72,369 | (12,755 | ) | (17.6 | ) | ||||||||||
Donations |
4,750 | 4,325 | 425 | 9.8 | ||||||||||||
FDIC insurance premiums |
35,827 | 30,401 | 5,426 | 17.8 | ||||||||||||
Other |
45,530 | 56,219 | (10,689 | ) | (19.0 | ) | ||||||||||
Total non-interest expense |
$ | 713,964 | $ | 666,583 | $ | 47,381 | 7.1 | % | ||||||||
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Table of Contents
Salaries and benefits expense increased $54,000 for the three months ended March 31,
2011 due primarily to an approximate $31,000 increase in salary and benefits expense, a $14,000
increase in retirement fund contributions and a $7,000 increase in employee stock ownership plan
expense related to the new employee stock ownership plan implemented in connection with the Banks
second-step conversion. Legal and accounting expense decreased $12,000 primarily related to
expenses incurred with the termination of the Banks former employee stock ownership plan in the
prior period. Other expenses decreased $10,000 related to check printing charges and debit card
expenses in the prior period.
Six Months Ended | ||||||||||||||||
March 31, | ||||||||||||||||
2011 | 2010 | $ Change | % Change | |||||||||||||
Salary and benefits |
$ | 865,383 | $ | 751,202 | $ | 114,181 | 15.2 | % | ||||||||
Occupancy |
176,366 | 168,757 | 7,609 | 4.5 | ||||||||||||
Computer |
98,905 | 83,933 | 14,972 | 17.8 | ||||||||||||
Legal and accounting |
112,322 | 124,403 | (12,081 | ) | (9.7 | ) | ||||||||||
Donations |
6,050 | 5,550 | 500 | 9.0 | ||||||||||||
FDIC insurance premiums |
73,180 | 46,339 | 26,841 | 57.9 | ||||||||||||
Other |
93,174 | 102,957 | (9,783 | ) | (9.5 | ) | ||||||||||
Total non-interest expense |
$ | 1,425,380 | $ | 1,283,141 | $ | 142,239 | 11.1 | % | ||||||||
Salaries and benefits expense increased $114,000 for the six months ended March 31, 2011
due primarily to an approximate $76,000 increase in salary and benefits expense, a $30,000 increase
in retirement fund contributions and a $7,000 increase in employee stock ownership expense related
to the new employee stock ownership plan implemented in connection with the Banks second-step
conversion. Computer expense increased $15,000 during the six months ended March 31, 2011 due to
increased data processing expenses. FDIC insurance premiums increased $27,000 as a result of an
increase in deposits and a lower assessment in the quarter ended December 31, 2009. Legal and
accounting expense decreased $12,000 primarily related to expenses incurred with the termination of
the Banks former employee stock ownership plan in the prior period. Other expenses decreased
$10,000 related to check printing charges and debit card expenses in the prior period.
Income Taxes. Income tax expense was $206,000 and $376,000, respectively, for the three and
six month periods ended March 31, 2011, compared to $115,000 and $260,000 for the comparable
periods in 2010. The increase in income tax expense in the 2011 periods was primarily the result
of an increase in pre-tax income as the effective tax rate for the
periods ended March 31, 2011 at
41% while the comparable periods for 2010 were 34% and 36%,
respectively.
Liquidity and Capital Resources
Liquidity Management. Liquidity is the ability to meet current and future financial
obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan
repayments, maturities of investment securities and borrowings from the Federal Home Loan Bank of
Pittsburgh. While maturities and scheduled amortization of loans and securities are predictable
sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest
rates, economic conditions and competition.
We regularly adjust our investments in liquid assets based upon our assessment of (1) expected
loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and
securities and (4) the objectives of our asset/liability management policy.
Our most liquid assets are cash and cash equivalents. The level of these assets depends on our
operating, financing, lending and investing activities during any given period. At March 31, 2011,
cash and cash equivalents totaled $16.3 million. In addition, at March 31, 2011, we had the
ability to borrow a total of approximately $59.0 million from the Federal Home Loan Bank of
Pittsburgh. At March 31, 2011, we had no Federal Home Loan Bank advances outstanding.
At March 31, 2011, we had $3.1 million in loan commitments outstanding, which consisted of
commitments to grant $2.7 million in loans and $200,000 in commercial lines of credit and $200,000
in commercial
leases. At March 31, 2011, we had $4.8 million in undisbursed lines of credit, $59,000 in
undisbursed loans in process and $1.6 million in undisbursed construction loans.
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Certificates of deposit due within one year of March 31, 2011 totaled $37.8 million,
representing 73.3% of certificates of deposit at March 31, 2011. We believe, based on past
experience, that we will retain a significant portion of these deposits at maturity. However, if
these maturing deposits do not remain with us, we will be required to seek other sources of funds,
including other certificates of deposit and borrowings. Depending on market conditions, we may be
required to pay higher rates on such deposits or other borrowings than we currently pay on the
certificates of deposit due on or before March 31, 2012.
The Company is a separate legal entity from the Bank and will have to provide for its own
liquidity to pay its operating expenses and other financial obligations. Upon completion of the
Banks conversion, the Companys primary source of liquidity will be the proceeds it retained from
the stock offering and, in the future, dividends received from the Bank. The amount of dividends
that the Bank may declare and pay to the Company in any calendar year, without the receipt of prior
approval from the Office of Thrift Supervision but with prior notice to Office of Thrift
Supervision, cannot exceed net income for that year to date plus retained net income (as defined)
for the preceding two calendar years. At March 31, 2011, the Company had $1.9 million in liquid
assets.
Capital Management. The Bank must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to support loan growth and deposit withdrawals, to satisfy
financial commitments and to take advantage of investment opportunities. Historically, the Bank has
been able to retain a significant amount of its deposits as they mature.
The Bank is required to maintain specific amounts of capital pursuant to OTS regulatory
requirements. As of March 31, 2011, the Bank was in compliance with all regulatory capital
requirements, which were effective as of such date, with total risk-based capital, Tier 1
risk-based capital and core capital ratios of 21.47%, 20.36% and 12.66%, respectively. The
regulatory requirements at that date were 8.0%, 4.0% and 4.0%, respectively. At March 31, 2011, the
Bank was considered well-capitalized under applicable regulatory guidelines.
The capital raised from our stock offering significantly increased our liquidity and capital
resources. Over time, the initial level of liquidity will be reduced as net proceeds from the stock
offering are used for general corporate purposes, including the funding of lending activities. Our
financial condition and results of operations will likely be enhanced by the capital from the
offering, resulting in increased net interest-earning assets and revenue. However, the large
increase in equity resulting from the capital raised in the offering will, initially, have an
adverse impact on our return on equity. Under Office of Thrift Supervision regulations, we will
not be allowed to repurchase any shares during the first year following the offering, except to
fund the restricted stock awards under the equity benefit plan after its approval by shareholders,
unless extraordinary circumstances exist and we receive regulatory approval.
Off-Balance Sheet Arrangements
In the normal course of operations, we engage in a variety of financial transactions that, in
accordance with generally accepted accounting principles, are not recorded in our financial
statements. These transactions involve, to varying degrees, elements of credit, interest rate and
liquidity risk. Such transactions are used primarily to manage customers requests for funding and
take the form of loan commitments, unused lines of credit and letters of credit. For information
about our loan commitments, unused lines of credit and letters of credit, see note 6 to the
consolidated financial statements included in this Form 10-Q and in the audited consolidated
financial statements for the year ended September 30, 2010 included in the Companys prospectus
dated January 11, 2011.
For
the three months ended March 31, 2011, the Company did not engage in any off-balance sheet
transactions reasonably likely to have a material effect on the
Companys financial condition, results
of operations or cash flows.
Item 3. | Quantitative and Qualitative Disclosure About Market Risk |
This item is not applicable as the Company is a smaller reporting company.
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Item 4. | Controls and Procedures |
The Companys management, including the Companys principal executive officer and principal
financial officer, have evaluated the effectiveness of the Companys disclosure controls and
procedures, as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange
Act of 1934, as amended, (the Exchange Act). Based upon their evaluation, the principal
executive officer and principal financial officer concluded that, as of the end of the period
covered by this report, the Companys disclosure controls and procedures were effective for the
purpose of ensuring that the information required to be disclosed in the reports that the Company
files or submits under the Exchange Act with the Securities and Exchange Commission (the SEC) (1)
is recorded, processed, summarized and reported within the time periods specified in the SECs
rules and forms, and (2) is accumulated and communicated to the Companys management, including its
principal executive and principal financial officers, as appropriate to allow timely decisions
regarding required disclosure. In addition, based on that evaluation, no change in the Companys
internal control over financial reporting occurred during the quarter ended March 31, 2011 that has
materially affected, or is reasonably likely to materially affect, the Companys internal control
over financial reporting.
PART II. OTHER INFORMATION
Item 1. | Legal Proceedings |
The Company is not involved in any pending legal proceedings. The Bank is not involved in any
pending legal proceedings other than routine legal proceedings occurring in the ordinary course of
business. The Banks management believes that such routine legal proceedings, in the aggregate,
are immaterial to the Banks financial condition and results of operations.
Item 1A. | Risk Factors |
For information regarding the Companys risk factors, see Risk Factors in the Companys
prospectus, filed with the Securities and Exchange Commission pursuant to Rule 424(b)(3) on January
20, 2011. As of March 31, 2011, the risk factors of the Company have not changed materially from
those disclosed in the prospectus.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
(a) Not applicable.
(b) On February 28, 2011, the Company completed its stock offering in connection with the
second step conversion of Eureka Bancorp, MHC. As part of the conversion, the Company succeeded
Eureka Financial Corp. as the stock holding company of the Bank and Eureka Financial Corp. and
Eureka Bancorp, MHC ceased to exist. In the stock offering, a total of 763,635 shares with an
aggregate offering price of $7,636,350, representing Eureka Bancorp, MHCs ownership interest in
Eureka Financial Corp. were sold by the Company in a subscription and community offering. Pursuant
to a registration statement on Form S-1 (No. 333-169767), which was declared effective by the
Securities and Exchange Commission on January 11, 2011, $18,273,230 of securities were registered,
of which a maximum of 1,058,000 shares with an aggregate offering price of $10,580,000 were offered
for a purchase price of $10.00 per share, and a maximum of 769,323 shares could be issued in
exchange for shares of Eureka Financial Corp. common stock. The offering was commenced on January
20, 2011 and completed on February 28, 2011. In addition, each share of old Eureka Financial Corp.
common stock that was outstanding as of January 12, 2011 was exchanged for 1.0457 shares of Company
common stock. An aggregate of 1,314,705 shares were issued in exchange (cash was issued in lieu
of fractional shares).
Sandler ONeill & Partners, L.P. (Sandler ONeill) was engaged to assist in the marketing of
the common stock. For their services, Sandler ONeill received a fee of $150,000. Sandler ONeill
also was engaged to act as our records management agent in connection with the offering. For these
services, Sandler ONeill received a fee of $10,000.
Expenses related to the offering are estimated to be approximately $940,000, including the
expenses paid to Sandler ONeill described above, none of which were paid to officers or directors
of the Company or the Bank or associates of such persons. No underwriting discounts, commissions
or finders fees were paid in connection with
the offering. Net proceeds of the offering are estimated to be approximately $6.1 million.
As a result of completion of the offering, 1,314,705 shares of Company common stock were
outstanding as of February 28, 2011.
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Of the net proceeds of the stock offering, $4.6 million were contributed to the Bank.
Additionally, $611,000, an amount necessary to allow the ESOP to purchase 61,090 shares of Company
common stock at $10.00 per share, was loaned to the ESOP. All further proceeds were retained at the
holding company level for future capital needs.
Initially, both the Company and the Bank have invested the net proceeds from the stock
offering in short-term investments until these proceeds can be deployed for other purposes.
(c) Not applicable.
Item 3. | Defaults Upon Senior Securities |
Not applicable.
Item 4. | [Removed and Reserved] |
Item 5. | Other Information. |
Not applicable.
Item 6. | Exhibits |
2.1 | Plan of Conversion and Reorganization (1) |
|||
3.1 | Articles of Incorporation of Eureka Financial Corp. (1) |
|||
3.2 | Bylaws of Eureka Financial Corp. (1) |
|||
4.0 | Form of Stock Certificate of Eureka Financial Corp. (1) |
|||
10.1 | Employment Agreement between Eureka Financial Corp. and Edward F. Seserko,
dated as of February 28, 2011 |
|||
10.2 | Employment Agreement between Eureka Financial Corp. and Gary B. Pepper, dated
as of February 28, 2011 |
|||
31.1 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
|||
31.2 | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer |
|||
32.0 | Section 1350 Certification |
(1) | Incorporated herein by reference to the exhibits to the Companys Registration Statement on Form S-1 (File No. 333-169767), as amended, initially filed with the Securities and Exchange Commission on October 5, 2010. |
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SIGNATURES
Pursuant to the requirements 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.
EUREKA FINANCIAL CORP. |
||||
Dated: May 16, 2011 | By: | /s/ Edward F. Seserko | ||
Edward F. Seserko | ||||
President and Chief Executive Officer (principal executive officer) |
||||
Dated: May 16, 2011 | By: | /s/ Gary B. Pepper | ||
Gary B. Pepper | ||||
Executive Vice President and Chief Financial Officer (principal accounting and financial officer) |
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