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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-Q

 

 

(Mark one)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2011

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             

Commission file number: 0-54238

 

 

EUREKA FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   27-3671639
(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

(Registrant’s 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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of February 10, 2012, there were 1,314,705 shares of the registrant’s common stock outstanding.

 

 

 


EUREKA FINANCIAL CORP.

Table of Contents

 

     Page
Number
 
PART I — FINANCIAL INFORMATION   

Item 1:

 

Financial Statements

  
 

Consolidated Balance Sheets as of December 31, 2011 and September 30, 2011 (unaudited)

     1   
 

Consolidated Statements of Income for the Three Months Ended December 31, 2011 and 2010 (unaudited)

     2   
 

Consolidated Statement of Changes in Stockholders’ Equity for the Three Months Ended December 31, 2011 (unaudited)

     3   
 

Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2011 and 2010 (unaudited)

     4   
 

Notes to Consolidated Financial Statements (unaudited)

     5   

Item 2:

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     20   

Item 3:

 

Quantitative and Qualitative Disclosures About Market Risk

     26   

Item 4:

 

Controls and Procedures

     26   
PART II — OTHER INFORMATION   

Item 1:

 

Legal Proceedings

     26   

Item 1A:

 

Risk Factors

     26   

Item 2:

 

Unregistered Sales of Equity Securities and Use of Proceeds

     26   

Item 3:

 

Defaults Upon Senior Securities

     26   

Item 4:

 

Mine Safety Disclosures

     26   

Item 5:

 

Other Information

     26   

Item 6:

 

Exhibits

     27   
SIGNATURES   


PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

EUREKA FINANCIAL CORP. AND SUBSIDIARY

Consolidated Balance Sheets

(unaudited)

 

September 30, September 30,
       December 31,
2011
     September 30,
2011
 

Assets:

       

Cash and due from banks

     $ 1,697,768       $ 1,501,421   

Interest-bearing deposits in other banks

       6,235,122         9,846,340   
    

 

 

    

 

 

 

Cash and cash equivalents

       7,932,890         11,347,761   

Investment securities held to maturity (fair value of $17,959,534 and $17,064,650, respectively)

       17,911,561         16,966,542   

Mortgage-backed securities available for sale, at fair value

       18,472         25,592   

Federal Home Loan Bank stock, at cost

       615,900         648,400   

Loans receivable, net of allowance for loan losses of $1,020,038 and $1,000,038, respectively

       106,811,380         104,455,832   

Premises and equipment, net

       1,256,350         1,238,667   

Deferred tax asset, net

       1,377,220         1,533,287   

Accrued interest receivable and other assets

       1,314,000         1,298,913   
    

 

 

    

 

 

 

Total Assets

     $ 137,237,773       $ 137,514,994   
    

 

 

    

 

 

 

Liabilities and Stockholders’ Equity:

       

Deposits:

       

Non-interest bearing

     $ 3,103,834       $ 3,384,974   

Interest bearing

       110,646,613         111,399,324   
    

 

 

    

 

 

 

Total deposits

       113,750,447         114,784,298   

Advances from borrowers for taxes and insurance

       758,403         472,816   

Accrued interest payable and other liabilities

       945,556         793,154   
    

 

 

    

 

 

 

Total Liabilities

       115,454,406         116,050,268   
    

 

 

    

 

 

 

Stockholders’ Equity:

       

Common stock, $0.01 par value; 10,000,000 shares authorized; 1,314,705 shares issued and outstanding at December 31, 2011 and September 30, 2011

       13,147         13,147   

Paid-in capital

       11,950,125         11,945,757   

Retained earnings — substantially restricted

       10,368,832         10,072,616   

Accumulated other comprehensive income

       1,063         1,336   

Unearned ESOP shares

       (549,800      (568,130
    

 

 

    

 

 

 

Total Stockholders’ Equity

       21,783,367         21,464,726   
    

 

 

    

 

 

 

Total Liabilities and Stockholders’ Equity

     $ 137,237,773       $ 137,514,994   
    

 

 

    

 

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

1


EUREKA FINANCIAL CORP. AND SUBSIDIARY

Consolidated Statements of Income

(unaudited)

 

September 30, September 30,
       Three Months Ended
December 31,
 
       2011        2010  

Interest Income

         

Loans, including fees

     $ 1,552,209         $ 1,499,175   

Investment securities and other interest-earning assets:

         

Taxable

       163,893           101,105   

Tax exempt

       10,318           7,302   

Mortgage-backed securities

       470           669   
    

 

 

      

 

 

 

Total Interest Income

       1,726,890           1,608,251   
    

 

 

      

 

 

 

Interest Expense

         

Deposits

       343,155           478,850   

FHLB advances

       —             7,259   
    

 

 

      

 

 

 

Total Interest Expense

       343,155           486,109   
    

 

 

      

 

 

 

Net Interest Income

       1,383,735           1,122,142   
    

 

 

      

 

 

 

Provision for Loan Losses

       20,000           17,400   
    

 

 

      

 

 

 

Net Interest Income after Provision for Loan Losses

       1,363,735           1,104,742   
    

 

 

      

 

 

 

Non-Interest Income

         

Service fees on deposit accounts

       8,801           8,462   

Other income

       11,581           10,172   
    

 

 

      

 

 

 

Total Non-Interest Income

       20,382           18,634   
    

 

 

      

 

 

 

Non-Interest Expenses

         

Salaries and benefits

       435,324           405,495   

Occupancy

       89,197           90,381   

Data processing

       46,001           46,545   

Professional fees

       63,143           52,708   

FDIC insurance premiums

       13,473           37,353   

Other

       107,933           77,634   
    

 

 

      

 

 

 

Total Non-Interest Expenses

       755,071           711,416   
    

 

 

      

 

 

 

Income before Income Tax Provision

       629,046           411,960   

Income Tax Provision

       240,800           169,555   
    

 

 

      

 

 

 

Net Income

     $ 388,246         $ 242,405   
    

 

 

      

 

 

 

Earnings Per Share — Basic and Diluted

     $ 0.31         $ 0.19   
    

 

 

      

 

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

2


EUREKA FINANCIAL CORP. AND SUBSIDIARY

Consolidated Statement of Changes in Stockholders’ Equity

For the Three Months Ended December 31, 2011

(unaudited)

 

000000 000000 000000 000000 000000 000000
    Common
Stock
    Paid-In
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income
    Unearned
ESOP
Shares
    Total  

Balance at September 30, 2011

  $ 13,147      $ 11,945,757      $ 10,072,616      $ 1,336      $ (568,130   $ 21,464,726   

Comprehensive Income:

              388,246   

Net income

    —          —          388,246        —          —       

Other comprehensive income:

           

Change in net unrealized gain on available for sale securities, net of tax benefit of $140

    —          —          —          (273     —          (273

Total Comprehensive Income

    —          —          —          —          —          —     

ESOP shares earned

    —          4,368        —          —          18,330        22,698   

Dividends on common stock ($0.07 per share)

    —          —          (92,030     —          —          (92,030
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance December 31, 2011

  $ 13,147      $ 11,950,125      $ 10,368,832      $ 1,063      $ (549,800   $ 21,783,367   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

3


EUREKA FINANCIAL CORP. AND SUBSIDIARY

Consolidated Statements of Cash Flows

(unaudited)

 

September 30, September 30,
       Three Months Ended
December 31,
 
       2011      2010  

Cash Flows from Operating Activities

       

Net income

     $ 388,246       $ 242,405   

Adjustments to reconcile net income to net cash provided by operating activities:

       

Depreciation

       40,987         41,793   

Provision for loan losses

       20,000         17,400   

Net accretion/amortization of discounts and premiums on securities and unamortized loan fees and costs

       4,080         4,734   

Compensation expense for ESOP

       22,698         —     

Deferred tax expense

       156,207         156,065   

(Decrease) increase in accrued interest receivable

       78,926         (35,775

Decrease in other assets

       (94,013      (101,476

Decrease in accrued interest payable

       (30,041      (17,221

Increase in other liabilities

       182,443         97,440   
    

 

 

    

 

 

 

Net Cash Provided by Operating Activities

       769,533         405,365   

Cash Flows from Investing Activities

       

Proceeds from maturities and redemptions of investment securities held to maturity

       5,505,000         1,250,000   

Purchase of investment securities held to maturity

       (6,450,000      (5,500,000

Redemption of FHLB stock

       32,500         39,900   

Net loans made to customers

       (1,412,072      (1,065,195

Net (increase) decrease in commercial leases

       (967,661      135,181   

Net paydowns in mortgage-backed securities

       6,793         5,252   

Premises and equipment expenditures

       (58,671      (4,500
    

 

 

    

 

 

 

Net Cash Used in Investing Activities

       (3,344,110      (5,139,362

Cash Flows from Financing Activities

       

Net (decrease) increase in deposit accounts

       (1,033,851      4,175,787   

Net increase in advances from borrowers for taxes and insurance

       285,587         253,944   

Payment of long term FHLB advances

       —           (1,000,000

Payment of dividends

       (92,030      (79,649
    

 

 

    

 

 

 

Net Cash (Used In) Provided by Financing Activities

       (840,293      3,350,082   
    

 

 

    

 

 

 

Net Decrease In Cash and Cash Equivalents

       (3,414,871      (1,383,915

Cash and Cash Equivalents — Beginning

       11,347,761         11,650,201   
    

 

 

    

 

 

 

Cash and Cash Equivalents — Ending

     $ 7,932,890       $ 10,266,286   

Supplementary Cash Flows Information

       

Interest paid

     $ 354,362       $ 503,330   

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

4


EUREKA FINANCIAL CORP. AND SUBSIDIARY

Notes to Consolidated Financial Statements

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 Bank’s primary deposit products are interest-bearing checking accounts, savings accounts and certificates of deposits. Its primary lending products are one- to four-family residential real estate loans, multi-family and commercial real estate loans, and commercial leases.

The Company was incorporated in September 2010 to be the Bank’s holding company upon completion of the Bank’s “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 SEC’s 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, 2011, as contained in the Company’s Annual Report on Form 10-K filed with the SEC on December 29, 2011.

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, the value of deferred tax assets 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. as of December 31, 2010. 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 weighted-average shares outstanding. Unallocated shares held by the Bank’s employee stock ownership plan are not deemed outstanding for earnings per share calculations. Diluted earnings per share is computed by dividing net income by weighted-average shares outstanding plus potential common stock resulting from dilutive stock options.

 

5


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 months ended December 31, 2011 and 2010. The share totals listed below reflect the conversion ratio of 1.0457 implemented in connection with the Bank’s second step conversion.

 

September 30, September 30, September 30,
       Three Months Ended December 31, 2011  
       Income        Weighted
Average

Shares
       Per
Share

Amount
 

Basic earnings per share

     $ 388,246           1,259,704         $ 0.31   

Effect of dilutive securities

       —             —             —     
    

 

 

      

 

 

      

 

 

 

Diluted earnings per share

     $ 388,246           1,259,704         $ 0.31   
    

 

 

      

 

 

      

 

 

 

 

September 30, September 30, September 30,
       Three Months Ended December 31, 2010  
       Income        Weighted
Average

Shares
       Per
Share

Amount
 

Basic earnings per share

     $ 242,405           1,261,231         $ 0.19   

Effect of dilutive securities

       —             —             —     
    

 

 

      

 

 

      

 

 

 

Diluted earnings per share

     $ 242,405           1,261,231         $ 0.19   
    

 

 

      

 

 

      

 

 

 

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 at $10.00 per share. The completion of the Company’s public offering raised $6.1 million in proceeds, net of $940,000 in offering expenses and a $611,000 loan related to the Bank’s employee stock ownership plan.

Note 3 — Investment Securities

Investment securities held to maturity consisted of the following at December 31, 2011 and September 30, 2011:

 

September 30, September 30, September 30, September 30,
       December 31, 2011  
       Amortized
Cost
       Gross
Unrealized
Gains
       Gross
Unrealized
Losses
     Fair Value  
                (Unaudited)         

Obligations of states and political subdivisions

     $ 492,724         $ 37,570         $ —         $ 530,294   

Government agency debentures

       17,418,837           18,890           (8,488      17,429,240   
    

 

 

      

 

 

      

 

 

    

 

 

 
     $ 17,911,561         $ 56,460         $ (8,488    $ 17,959,534   
    

 

 

      

 

 

      

 

 

    

 

 

 

 

6


September 30, September 30, September 30, September 30,
       September 30, 2011  
       Amortized
Cost
       Gross
Unrealized
Gains
       Gross
Unrealized
Losses
     Fair Value  
                (Unaudited)         

Obligations of states and political subdivisions

     $ 497,672         $ 19,278         $ —         $ 516,950   

Government agency debentures

       16,468,870           82,430           (3,600      16,547,700   
    

 

 

      

 

 

      

 

 

    

 

 

 
     $ 16,966,542         $ 101,708         $ (3,600    $ 17,064,650   
    

 

 

      

 

 

      

 

 

    

 

 

 

At December 31, 2011 and September 30, 2011, $1.5 million of government agencies were pledged as security for public monies held by the Company.

The amortized cost and fair value of securities held to maturity at December 31, 2011, 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.

 

September 30, September 30,
       December 31, 2011  
       Amortized
Cost
       Fair
Value
 

Due after five years through ten years

     $ 750,000         $ 750,825   

Due after ten years

       17,161,561           17,208,709   
    

 

 

      

 

 

 
     $ 17,911,561         $ 17,959,534   
    

 

 

      

 

 

 

Temporarily impaired investments consisted of the following at December 31, 2011 and September 30, 2011:

 

September 30, September 30, September 30, September 30, September 30, September 30,
       December 31, 2011  
       Less than 12 Months      More than 12 Months        Total  
       Fair
Value
       Unrealized
Losses
     Fair
Value
       Unrealized
Losses
       Fair
Value
       Unrealized
Losses
 

Government agency debentures

     $ 4,989,200         $ (8,488    $ —           $ —           $ 4,989,200         $ (8,488
    

 

 

      

 

 

    

 

 

      

 

 

      

 

 

      

 

 

 

 

September 30, September 30, September 30, September 30, September 30, September 30,
       September 30, 2011  
       Less than 12 Months      More than 12 Months        Total  
       Fair
Value
       Unrealized
Losses
     Fair
Value
       Unrealized
Losses
       Fair
Value
       Unrealized
Losses
 

Government agency debentures

     $ 3,746,400         $ (3,600    $ —           $ —           $ 3,746,400         $ (3,600
    

 

 

      

 

 

    

 

 

      

 

 

      

 

 

      

 

 

 

 

 

7


Investments are reviewed for decline in value on a quarterly basis. All investments are interest rate sensitive. These investments earned interest at fixed and adjustable rates. The adjustable rate instruments are generally linked to an index, such as the three month LIBOR rate, plus or minus a variable. The value of these instruments fluctuates with interest rates.

The Company had seven securities in an unrealized loss position at December 31, 2011 and had five securities in an unrealized loss position at September 30, 2011. The decline in fair value is due primarily to interest rate fluctuations and the current economic environment. The Company’s current intention is to not 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. Unrealized losses at December 31, 2011 relate to government agency debentures.

Accrued interest relating to investments was approximately $130,803 and $207,299 as of December 31, 2011 and September 30, 2011, respectively.

Note 4 — Mortgage-Backed Securities

The amortized cost and fair values of mortgage-backed securities, all of which are government-sponsored entities secured by residential real estate and are available for sale, are summarized as follows:

 

September 30, September 30, September 30, September 30,
       December 31, 2011  
       Amortized
Cost
       Gross
Unrealized
Gains
       Gross
Unrealized
Losses
       Fair
Value
 

Freddie Mac certificates

     $ 1,824         $ 200         $ —           $ 2,024   

Fannie Mae certificates

       15,037           1,411           —             16,448   
    

 

 

      

 

 

      

 

 

      

 

 

 
     $ 16,861         $ 1,611         $ —           $ 18,472   
    

 

 

      

 

 

      

 

 

      

 

 

 

The amortized cost and fair values of mortgage-backed securities at December 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.

 

September 30, September 30,
       December 31, 2011  
       Amortized
Cost
       Fair
Value
 

Due after one year through five years

     $ 1,237         $ 1,357   

Due after five years through ten years

       11,094           12,103   

Due after ten years

       4,530           5,012   
    

 

 

      

 

 

 
     $ 16,861         $ 18,472   
    

 

 

      

 

 

 

The Company had no securities in an unrealized loss position at December 31, 2011 or September 30, 2011.

 

 

8


Note 5 — Loans

Major classifications of loans are as follows at December 31, 2011 and September 30, 2011:

 

September 30, September 30,
       December 31,      September 30,  
       2011      2011  

One- to four-family real estate

     $ 45,312,957       $ 45,144,727   

Construction

       3,225,855         2,267,540   

Multi-family real estate

       13,338,868         13,494,703   

Commercial real estate

       20,272,128         20,432,896   

Home equity and second mortgages

       1,315,465         1,259,440   

Secured loans

       259,861         338,213   

Unsecured improvement loans

       20,872         22,111   

Commercial leases

       19,285,889         18,345,706   

Commercial lines of credit

       4,981,933         4,339,544   
    

 

 

    

 

 

 
       108,013,828         105,644,880   

Plus:

       

Unamortized loan premiums

       16,877         17,334   

Less:

       

Unamortized loan fees and costs, net

       (199,287      (206,344

Allowance for loan losses

       (1,020,038      (1,000,038
    

 

 

    

 

 

 
     $ 106,811,380       $ 104,455,832   
    

 

 

    

 

 

 

Loan Portfolio Composition

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 the maximum loan-to-value ratio can extend up to 95%. Due to our stringent underwriting, historical losses, and location of the majority of the portfolio, the Bank’s risk on this segment of the portfolio 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.

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, the location of the property, 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, the location of the property, 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 lines of credit. The maximum loan amount is $100,000. The first and second lien combined cannot 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.

 

9


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 either equipment or vehicles. Forms under the Uniform Commercial Code 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 and can fluctuate as the market and economic climate 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 commercial property, equipment or receivables. The loan amount is determined by the borrower’s 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 Bank’s 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.

Rating 2 — Special Mention

A special mention asset has a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s 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.

 

10


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 a specific 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 December 31, 2011 were as follows:

 

September 30, September 30, September 30, September 30, September 30, September 30,
       Pass        Special
Mention
       Substandard        Doubtful        Loss        Total  

One- to four-family real estate

     $ 23,965,576         $           $ 50,866         $ —           $ —           $ 24,016,442   

Construction

       3,225,855           —             —             —             —             3,225,855   

Multi-family

       13,338,868           —             —             —             —             13,338,868   

Commercial real estate

       20,272,128           —             —             —             —             20,272,128   

Commercial leases

       18,970,868           —             315,021           —             —             19,285,889   

Commercial lines of credit

       4,484,881           432,955           64,097           —             —             4,981,933   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 
     $ 84,258,176         $ 432,955         $ 429,984         $ —           $ —           $ 85,121,115   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Credit quality indicators as of September 30, 2011 were as follows:

 

September 30, September 30, September 30, September 30, September 30, September 30,
       Pass        Special
Mention
       Substandard        Doubtful        Loss        Total  

One- to four-family real estate

     $ 23,864,783         $ 226,285         $ —           $ —           $ —           $ 24,091,068   

Construction

       2,267,540           —             —             —             —             2,267,540   

Multi-family

       13,494,703           —             —             —             —             13,494,703   

Commercial real estate

       20,432,896           —             —             —             —             20,432,896   

Commercial leases

       17,975,209           —             370,497           —             —             18,345,706   

Commercial lines of credit

       3,915,627           423,917           —             —             —             4,339,544   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 
     $ 81,950,758         $ 650,202         $ 370,497         $ —           $ —           $ 82,971,457   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

 

11


The following tables present performing and non-performing residential real estate and consumer loans based on payment activity for the periods ended December 31, 2011 and September 30, 2011. Payment activity is reviewed by management on a monthly basis to determine how loans are performing. Loans are considered to be non-performing when they become 90 days past due.

 

September 30, September 30, September 30,

December 31, 2011

     Non-Performing
Loans
       Performing
Loans
       Total  

Owner occupied one- to four-family real estate

     $ 5,765         $ 21,290,750         $ 21,296,515   

Home equity and second mortgages

       —             1,315,465           1,315,465   

Secured loans

       —             259,861           259,861   

Unsecured improvement loans

       —             20,872           20,872   
    

 

 

      

 

 

      

 

 

 
     $ 5,765         $ 22,029,107         $ 22,892,713   
    

 

 

      

 

 

      

 

 

 

 

September 30, September 30, September 30,

September 30, 2011

     Non-Performing
Loans
       Performing
Loans
       Total  

Owner occupied one- to four-family real estate

     $ 22,459         $ 21,031,200         $ 21,053,659   

Home equity and second mortgages

       —             1,259,440           1,259,440   

Secured loans

       —             338,213           338,213   

Unsecured improvement loans

       —             22,111           22,111   
    

 

 

      

 

 

      

 

 

 
     $ 22,459         $ 22,650,964         $ 22,673,423   
    

 

 

      

 

 

      

 

 

 

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 borrower’s 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 loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. There were no impaired loans as of December 31, 2011 or September 30, 2011.

 

12


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 December 31, 2011:

 

000000 000000 000000 000000 000000 000000 000000
    30-59 Days
Past Due
    60-89 Days
Past Due
    Greater
than 90
Days
    Total Past
Due
    Current     Total Loans
Receivables
    Non-accrual
Loans
 

One- to four-family real estate

  $ 771,500      $ 24,576      $ 5,765      $ 801,841      $ 44,511,116      $ 45,312,957      $ 5,765   

Construction

    —          —          —          —          3,225,855        3,225,855        —     

Multi-family real estate

    —          —          —          —          13,338,868        13,338,868        —     

Commercial real estate

    —          —          —          —          20,272,128        20,272,128        —     

Home equity and second mortgages

    —          —          —          —          1,315,465        1,315,465        —     

Secured loans

    —          —          —          —          259,861        259,861        —     

Unsecured improvement loans

    —          —          —          —          20,872        20,872        —     

Commercial leases

    —          —          —          —          19,285,889        19,285,889        —     

Commercial lines of credit

    432,955        64,097        —          497,052        4,484,881        4,981,933        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 1,204,455      $ 88,673      $ 5,765      $ 1,298,893      $ 106,714,935      $ 108,013,828      $ 5,765   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents the classes of the loan portfolio summarized by the past due status as of September 30, 2011:

 

000000 000000 000000 000000 000000 000000 000000
    30-59 Days
Past Due
    60-89 Days
Past Due
    Greater
than 90
Days
    Total Past
Due
    Current     Total Loans
Receivables
    Non-accrual
Loans
 

One- to four-family real estate

  $ 221,153      $ —        $ 22,459      $ 243,612      $ 44,901,115      $ 45,144,727      $ 22,459   

Construction

    —          —          —          —          2,267,540        2,267,540        —     

Multi-family real estate

    —          —          —          —          13,494,703        13,494,703        —     

Commercial real estate

    —          —          —          —          20,432,896        20,432,896        —     

Home equity and second mortgages

    —          —          —          —          1,259,440        1,259,440        —     

Secured loans

    —          —          —          —          338,213        338,213        —     

Unsecured improvement loans

    —          —          —          —          22,111        22,111        —     

Commercial leases and loans

    177,541        —          —          177,541        18,168,165        18,345,706        —     

Commercial lines of credit

    —          —          —          —          4,339,544        4,339,544        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 398,694      $ —        $ 22,459      $ 421,153      $ 105,223,727      $ 105,644,880      $ 22,459   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 December 31, 2011 and September 30, 2011 were approximately $6,000 and $22,000, respectively. The foregone interest on non-accrual loans was approximately $100 and $849 for the three months ended December 31, 2011 and 2010, respectively. As of December 31, 2011 and September 30, 2011, there were no loans that were 90 days or more delinquent and still accruing interest.

 

13


The following table details the allowance for loan losses and loan receivable balances at the dates indicated below. An allocation of the allowance to one category of loans does not prevent the Company’s ability to utilize the allowance to absorb losses in a different category. The loans receivable are disaggregated on the basis of the Company’s impairment methodology.

 

000000 000000 000000 000000 000000 000000 000000 000000 000000 000000 000000
    One- to four
family real
estate
    Construction     Multi-family
real estate
    Commercial
real estate
    Home equity
and second
mortgages
    Secured
loans
    Unsecured
improvement
loans
    Commercial
leases
    Commercial
lines of
credit
    Unallocated     Total  

Allowance for credit losses:

                     

Beginning balance 10/01/2011

  $ 308,028      $ 2,615      $ 121,452      $ 284,883      $ 7,049      $ —        $ —        $ 216,894      $ —        $ 59,117      $ 1,000,038   

Charge offs

    —          —          —          —          —          —          —          —          —          —          —     

Recoveries

    —          —          —          —          —          —          —          —          —          —          —     

Provisions

    102        1,317        4,048        9,265        301        —          —          6,550        17,630        (19,213     20,000   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance 12/31/2011

  $ 308,130      $ 3,932      $ 125,500      $ 294,148      $ 7,350      $ —        $ —        $ 223,444      $ 17,630      $ 39,904      $ 1,020,038   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Beginning balance 10/01/2010

  $ 135,785      $ 8,941      $ 108,970      $ 338,013      $ 16,515      $ —        $ —        $ 285,630      $ —        $ 11,184      $ 905,038   

Charge offs

    —          —          —          —          —          —          —          —          —          —          —     

Recoveries

    —          —          —          —          —          —          —          —          —          —          —     

Provisions

    (10,499     1,782        608        (57,037     (2,365     —          —          53,512        —          31,399        17,400   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance 12/31/2010

  $ 125,286      $ 10,723      $ 109,578      $ 280,976      $ 14,150      $ —        $ —        $ 339,142      $ —        $ 42,583      $ 922,438   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for credit losses:

                     

Ending balance 12/31/2011

  $ 308,130      $ 3,932      $ 125,500      $ 294,148      $ 7,350      $ —        $ —        $ 223,444      $ 17,630      $ 39,904      $ 1,020,038   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

  $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

  $ 308,130      $ 3,932      $ 125,500      $ 294,148      $ 7,350      $ —        $ —        $ 223,444      $ 17,630      $ 39,904      $ 1,020,038   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans receivable:

                     

Ending balance 12/31/2011

  $ 45,312,957      $ 3,225,855      $ 13,338,868      $ 20,272,128      $ 1,315,465      $ 259,861      $ 20,872      $ 19,285,889      $ 4,981,933      $ —        $ 108,013,828   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

  $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

  $ 45,312,957      $ 3,225,855      $ 13,338,868      $ 20,272,128      $ 1,315,465      $ 259,861      $ 20,872      $ 19,285,889      $ 4,981,933      $ —        $ 108,013,828   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for credit losses:

                     

Ending balance 09/30/2011

  $ 308,028      $ 2,615      $ 121,452      $ 284,883      $ 7,049      $ —        $ —        $ 216,894      $ —        $ 59,117      $ 1,000,038   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

  $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

  $ 308,028      $ 2,615      $ 121,452      $ 284,883      $ 7,049      $ —        $ —        $ 216,894      $ —        $ 59,117      $ 1,000,038   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans receivable:

                     

Ending balance 09/30/2011

  $ 45,144,727      $ 2,267,540      $ 13,494,703      $ 20,432,896      $ 1,259,440      $ 338,213      $ 22,111      $ 18,345,706      $ 4,339,544      $ —        $ 105,644,680   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

  $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

  $ 45,312,957      $ 3,225,855      $ 13,338,868      $ 20,272,128      $ 1,315,465      $ 259,861      $ 20,872      $ 19,285,889      $ 4,981,933      $ —        $ 108,013,828   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

14


An allowance for loan and lease losses (“ALLL”) is maintained to absorb losses from the loan and lease portfolio. The ALLL is based on management’s 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.

Note 6 — Commitments

The Company’s maximum exposure to credit loss for loan and lease commitments (unfunded loans and leases) at December 31, 2011 and September 30, 2011 was approximately $11,075,000 and $9,961,000, respectively, with interest rates from 2.75% to 6.75% and 2.75% to 7.00%, respectively. Fixed rate loan commitments at December 31, 2011 and September 30, 2011 were approximately $4,112,000 and $3,167,000, respectively, with fixed rates of interest ranging from 3.50% to 6.75% and 4.00% to 7.00%, 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 the Company’s customers. These arrangements have credit risk essentially the same as that involved in extending loans to customers and are subject to the Company’s normal credit policies and loan underwriting standards. Collateral is obtained based on management’s 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 the Company’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 the Company 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.

The Company follows 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 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 asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

 

15


For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2011 and September 30, 2011 are as follows:

 

September 30, September 30, September 30, September 30,
       December 31,
2011
       (Level 1)
Quoted Prices
in Active
Markets for
Identical
Assets
       (Level 2)
Significant
Other
Observable
Inputs
       (Level 3)
Significant
Unobservable
Inputs
 

Mortgage-backed securities available for sale

     $ 18,472         $ —           $ 18,472         $ —     

 

September 30, September 30, September 30, September 30,
       September 30,
2011
       (Level 1)
Quoted Prices
in Active
Markets for
Identical
Assets
       (Level 2)
Significant
Other
Observable
Inputs
       (Level 3)
Significant
Unobservable
Inputs
 

Mortgage-backed securities available for sale

     $ 25,592         $         $ 25,592         $   

There are no non-financial assets or liabilities measured at fair value as of December 31, 2011 or September 30, 2011.

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 the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’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 the Company’s financial instruments at December 31, 2011 and September 30, 2011:

 

September 30, September 30, September 30, September 30,
       December 31,        September 30,  
       2011        2011  
       Carrying
Amount
       Fair Market
Value
       Carrying
Amount
       Fair Market
Value
 

Financial assets:

                   

Cash and cash equivalents

     $ 7,932,890         $ 7,932,890         $ 11,347,761         $ 11,347,761   

Mortgage-backed securities available for sale

       18,472           18,472           25,592           25,592   

Investment securities held to maturity

       17,911,561           17,759,531           16,966,542           17,064,650   

Federal Home Loan Bank stock

       615,900           615,900           648,400           648,400   

Loans receivable, net

       106,811,380           111,184,000           104,455,832           109,811,000   

Accrued interest receivable

       534,890           534,890           613,815           613,815   

Financial Liabilities:

                   

Deposits

       113,750,447           116,608,000           114,784,298           116,019,000   

Advances from borrowers for taxes and insurance

       758,403           758,403           472,816           472,816   

Accrued interest payable

       127,662           127,662           157,703           157,703   

 

16


Cash and Cash Equivalents

The carrying amount is a reasonable estimate of fair value.

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, management’s best estimate is used. Management’s 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 the Company’s own product pricing schedule for loans with terms similar to the Company’s. 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.

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 FHLB 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.

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.

 

17


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 Bank’s 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 Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors.

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.

The Bank is “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 institution’s category. The following shows the Bank’s compliance with regulatory capital standards at December 31, 2011 and September 30, 2011:

 

September 30, September 30, September 30, September 30, September 30, September 30,
       Actual     For Capital Adequacy
Purposes
    To be well Capitalized
under Prompt
Corrective Action
Provisions
 
       Amount        Ratio     Amount        Ratio     Amount        Ratio  
       (in
thousands)
             (in
thousands)
             (in
thousands)
          

As of December 31, 2011

                       

Total capital (to risk-weighted assets)

     $ 19,523           > 22.52   $ 6,936           > 8.00   $ 8,670           > 10.00

Tier 1 capital (to risk-weighted assets)

       18,508           > 21.35        3,468           > 4.00        5,202           > 6.00   

Core (Tier 1) capital (to adjusted total assets)

       18,508           > 13.59        5,448           > 4.00        6,810           > 5.00   

As of September 30, 2011

                       

Total capital (to risk-weighted assets)

     $ 19,121           > 22.51   $ 6,795           > 8.00   $ 8,493           > 10.00

Tier 1 capital (to risk-weighted assets)

       18,106           > 21.32        3,397           > 4.00        5,096           > 6.00   

Core (Tier 1) capital (to adjusted total assets)

       18,106           > 13.26        5,461           > 4.00        6,827           > 5.00   

The following is a reconciliation of the Bank’s equity under accounting principles generally accepted in the United States of America to regulatory capital as of December 31, 2011 and September 30, 2011:

 

September 30, September 30,
       December 31,
2011
     September 30,
2011
 
       (in thousands)      (in thousands)  

Total equity

     $ 19,523       $ 19,121   

Unrealized gains on securities available-for-sale

       (1      (1

Deferred tax asset – disallowed portion

       (1,014      (1,014
    

 

 

    

 

 

 

Tier 1 capital

     $ 18,508         18,106   

Other adjustments:

       —           —     

Allowable allowances for loan and lease losses

       1,020         1,000   
    

 

 

    

 

 

 

Total regulatory capital

     $ 19,528       $ 19,106   
    

 

 

    

 

 

 

Note 9 — Recent Accounting Pronouncements

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 entity’s allowance for credit losses and the credit

 

18


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 entity’s 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.

In April 2011, the FASB issued ASU 2011-02, “Receivables (“Subtopic 310”): “A Creditor’s 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 Company’s 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 Company’s consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in this Update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The amendments in this Update are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. For nonpublic entities, the amendments are effective for annual periods beginning after December 15, 2011. Early application by public entities is not permitted. This ASU is not expected to have a significant impact on the Company’s financial statements or the Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income. The amendments in this Update improve the comparability, clarity, consistency, and transparency of financial reporting and increase the prominence of items reported in other comprehensive income. To increase the prominence of items reported in other comprehensive income and to facilitate convergence of U.S. GAAP and IFRS, the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. All entities that report items of comprehensive income, in any period presented, will be affected by the changes in this Update. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. For nonpublic entities, the amendments are effective for fiscal years ending after December 15, 2012, and interim and annual periods thereafter. The amendments in this Update should be applied retrospectively, and early adoption is permitted. This ASU is not expected to have a significant impact on the Company’s financial statements or the Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

 

19


Item 2. Management’s 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 Company’s 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 Company’s 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; changes in real estate property values in our market area; competition; and changes in accounting principles and guidelines. Additional factors that may affect our results are discussed in the Company’s Annual Report on Form 10-K for the year ended September 30, 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 our 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.

Allowance for Loan Losses. The allowance for loan losses is maintained at a level representing management’s best estimate of known and inherent losses in the loan portfolio, based on management’s evaluation of the portfolio’s 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 allowance based on the expected discounted cash flows of the loan, or for loans determined to be collateral dependent, a specific allowance 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 the Comptroller of the Currency, 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.

 

20


Valuation of Deferred Tax Assets. 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 asset, 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 December 31, 2011 and September 30, 2011

Assets decreased $277,000 to $137.2 million at December 31, 2011 from $137.5 million at September 30, 2011, primarily due to a $3.4 million decrease in cash and cash equivalents and a $156,000 decrease in the deferred tax asset offset by a $2.3 million increase in loans and a $945,000 increase in investment securities. The decrease in cash and cash equivalents was used to fund investment security and loan growth as well as funding deposit outflows. The increase in investment securities was the result of the purchase of government debentures. Loans receivable, net, increased $2.3 million to $106.8 million at December 31, 2011 from $104.5 million at September 30, 2011, primarily due to an increase of $1.0 million in construction loans and an increase of $1.6 million in commercial leases and lines of credit, which were offset by a $300,000 decrease in multi-family and commercial real estate loans and a $100,000 decrease in secured loans.

Eureka Financial Corp. actively manages credit risk through its underwriting practices and collection operations and it does not offer nor has it historically offered residential mortgage and other consumer loans to subprime or Alt-A borrowers. Non-accrual loans totaled $6,000, or 0.01% of net loans, at December 31, 2011 compared to $22,000, or 0.02% of net loans, at September 30, 2011. The non-accrual loan total for both December 31, 2011 and September 30, 2011 was comprised of one one- to four-family real estate loan.

Total liabilities decreased by $596,000 at December 31, 2011 from September 30, 2011. This decrease was primarily attributable to a decrease in NOW accounts and certificates of deposits of $1.0 million offset by an increase of $286,000 in advances from borrowers for taxes and insurance and a $152,000 increase in accrued interest payable and other liabilities.

Stockholders’ equity increased $319,000 to $21.8 million at December 31, 2011 from $21.5 million at September 30, 2011. The increase was primarily the result of an increase in net income, offset by dividends paid to stockholders in the amount of $92,000. As a result of interest rate volatility, accumulated other comprehensive income and stockholders’ equity could materially fluctuate in future periods.

 

21


Results of Operations for the Three Months Ended December 31, 2011 and 2010

Overview.

 

September 30, September 30,
       Three Months Ended
December 31,
 
       2011     2010  
      

(Dollars in thousands, except

per share amounts)

 

Net income

     $ 388      $ 242   

Basic and diluted earnings per share

       0.31        0.19   

Average equity to average assets

       14.13     10.91

The increase in net income for the three months ended December 31, 2011 was attributable to increased income from loans and investment securities and a decrease in the cost of funds, offset by an increase in non-interest expenses.

Net Interest Income. Net interest income increased $262,000 to $1.4 million for the three months ended December 31, 2011 from $1.1 million for the comparable 2010 period. Higher net interest income was the result of an increase of $119,000 in interest income and a decrease of $142,000 in interest expense over the comparable 2010 period. Total interest income increased $119,000 to $1.7 million for the three months ended December 31, 2011 as compared to $1.6 million for the comparable 2010 period, primarily due to a $53,000 increase in interest income from loans and a $66,000 increase in interest from investment securities. Total interest expense decreased $143,000 to $343,000 for the three month period ended December 31, 2011 as compared to $486,000 for the comparable 2010 period, due to a $136,000 decrease in deposit interest expense due to lower interest rates, primarily in certificates of deposit, and a $7,000 decrease in interest expense related to Federal Home Loan Bank advances.

 

22


Rate/Volume Analysis. The following table sets 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 this table, 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.

 

September 30, September 30, September 30,
       Three Months Ended
December 31, 2011
Compared to
Three Months Ended
December 31, 2010
 
       Increase
(Decrease)
Due to
     Net  
       Rate      Volume     
       (In thousands)  

Interest income:

          

Loans receivable

     $ (53    $ 106       $ 53   

Investment securities

       52         14         66   
    

 

 

    

 

 

    

 

 

 

Total interest-earning assets

       (1      120         119   
    

 

 

    

 

 

    

 

 

 

Interest Expense:

          

NOW money markets accounts

       (33      (2      (35

Passbook and club accounts

       (17      —           (17

IRA accounts

       (10      (1      (11

Certificates of deposit

       (72      —           (72

CDARS

       (1      —           (1

Borrowings

       (10      3         (7
    

 

 

    

 

 

    

 

 

 

Total interest-bearing liabilities

       (143      —           (143
    

 

 

    

 

 

    

 

 

 

Net change in net interest income

     $ 142       $ 120         262   

Provision for Loan Losses. The provision for loan losses for the three months ended December 31, 2011 was $20,000 compared to $17,000 for the comparable 2010 period. The increased provision reflects growth in the loan portfolio.

Non-performing loans decreased $16,000 to $6,000 at December 31, 2011 from $22,000 at September 30, 2011. There were no net charge-offs for the three months ended December 31, 2011 or December 31, 2010.

Non-interest Income. The following table shows the components of non-interest income and the percentage changes for the three months ended December 31, 2011 and 2010.

 

September 30, September 30, September 30, September 30,
       Three Months Ended
December 31,
                   
       2011        2010        $ Change        % Change  

Fees on deposit accounts

     $ 8,801         $ 8,462         $ 339           4.01

Other income

       11,581           10,172           1,409           13.85   
    

 

 

      

 

 

      

 

 

      

 

 

 

Total non-interest income

     $ 20,382         $ 18,634         $ 1,748           9.38
    

 

 

      

 

 

      

 

 

      

 

 

 

 

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Non-interest Expense. The following table shows the components of non-interest expense and the percentage changes for the three months ended December 31, 2011 and 2010.

 

September 30, September 30, September 30, September 30,
       Three Months Ended
December 31,
                 
       2010        2010        $ Change      % Change  
       (Dollars in thousands)  

Salary and benefits

     $ 435,324         $ 405,495         $ 29,829         7.36

Occupancy

       89,197           90,381           (1,184      (1.31

Computer

       46,001           46,545           (544      (1.17

Legal and accounting

       63,143           52,708           10,435         19.80   

FDIC insurance premiums

       13,473           37,353           (23,880      (63.93

Other

       107,933           77,634           30,299         39.03   
    

 

 

      

 

 

      

 

 

    

 

 

 

Total non-interest expense

     $ 755,071         $ 711,416         $ 43,655         6.14
    

 

 

      

 

 

      

 

 

    

 

 

 

Salary and benefits expense increased $30,000 for the three months ended December 31, 2011 due primarily to an approximate $23,000 increase in salary and benefits expenses and a $7,000 increase in retirement fund contributions. The decrease in Federal Deposit Insurance Corporation (the “FDIC”) premiums was the result of the deposit insurance assessment changes made by the FDIC. Effective April 1, 2011, the FDIC changed the assessment base used to calculate an institution’s federal deposit insurance premium to average consolidated assets minus average tangible equity, rather than the balance of deposits. Legal and accounting expense increased for the three months ended December 31, 2011 due to increased accounting expense in connection with being a public company. The increase in other expenses was related to the ESOP expense of $18,000, an increase in processing fees and office supplies expense of $6,000 and an increase in insurance and surety bond premiums of $ 5,000.

Income Taxes. Income tax expense was $241,000 for the three months ended December 31, 2011, compared to $170,000 for the three months ended December 31, 2010. The increase in income tax expense was primarily the result of an increase in taxable security interest income.

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, and maturities of investment securities. 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 December 31, 2011, cash and cash equivalents totaled $7.9 million. In addition, at December 31, 2011, we had the ability to borrow a total of approximately $52.2 million from the Federal Home Loan Bank of Pittsburgh. At December 31, 2011, we had no Federal Home Loan Bank advances outstanding.

Our liquidity risk management process utilizes measurements, monitoring ratios, limits and procedures to identify and control the Bank’s liquidity exposure. Unexpected emergency situations such as systemic disturbances in the financial markets, catastrophic events or Bank specific problems may limit or prohibit the Bank from utilizing its primary sources of liquidity. Management has therefore established a contingency funding plan in the event of emergency or distress situations. The contingency funding plan is periodically tested to ensure that it is operationally sound.

 

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At December 31, 2011, we had $11.1 million in loan commitments outstanding, which consisted of commitments to grant $4.3 million in loans and $233,000 in commercial leases. At December 31, 2011, we had $4.5 million in undisbursed lines of credit, $1.8 million in undisbursed construction loans and $300,000 in undisbursed loans in process.

Certificates of deposit due within one year of December 31, 2011 totaled $38.7 million, representing 58.2% of certificates of deposit at December 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 December 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. The Company’s primary source of liquidity is 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 the Comptroller of the Currency but with prior notice to the Office of the Comptroller of the Currency, cannot exceed net income for that year to date plus retained net income (as defined) for the preceding two calendar years. At December 31, 2011, the Company had $1.7 million in liquid assets.

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 applicable federal 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.

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 federal regulatory requirements. As of December 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 22.52%, 21.35% and 13.59%, respectively. The regulatory requirements at that date were 8.0%, 4.0% and 4.0%, respectively. At December 31, 2011, the Bank was considered “well-capitalized” under applicable regulatory guidelines.

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 Bank’s audited consolidated financial statements for the year ended September 30, 2011 included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2011.

For the three months ended December 31, 2011, the Bank did not engage in any off-balance sheet transactions reasonably likely to have a material effect on the Bank’s financial condition, results of operations or cash flows.

 

25


Item 3. Quantitative and Qualitative Disclosure About Market Risk

This item is not applicable as the Company is a smaller reporting company.

Item 4. Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “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 Company’s 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 SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s 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 Company’s internal control over financial reporting occurred during the quarter ended December 31, 2011 that has materially affected, or is reasonably likely to materially affect, the Company’s 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 Bank’s management believes that such routine legal proceedings, in the aggregate, are immaterial to the Bank’s financial condition and results of operations.

Item 1A. Risk Factors

For information regarding the Company’s risk factors, see “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended September 30, 2011, which was filed with the Securities and Exchange Commission on December 29, 2011. As of December 31, 2011, the risk factors of the Company have not changed materially from those disclosed in the Company’s Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information.

Not applicable.

 

26


Item 6. Exhibits

 

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)
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
101.0*    The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2011, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statement of Changes in Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements, tagged as blocks of text.

 

 

* Furnished, not filed.

 

(1) Incorporated herein by reference to the exhibits to the Company’s Registration Statement on Form S-1 (File No. 333-169767), as amended, initially filed with the Securities and Exchange Commission on October 5, 2010.

 

27


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: February 13, 2012     By:   /s/ Edward F. Seserko
      Edward F. Seserko
      President and Chief Executive Officer
      (principal executive officer)

 

Dated: February 13, 2012     By:   /s/ Gary B. Pepper
      Gary B. Pepper
      Executive Vice President and Chief Financial Officer
      (principal accounting and financial officer)