Attached files
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EXCEL - IDEA: XBRL DOCUMENT - Eureka Financial Corp. | Financial_Report.xls |
EX-31.2 - EX-31.2 - Eureka Financial Corp. | d352466dex312.htm |
EX-32.0 - EX-32.0 - Eureka Financial Corp. | d352466dex320.htm |
EX-31.1 - EX-31.1 - Eureka Financial Corp. | d352466dex311.htm |
Table of Contents
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 |
March 31, 2012 For the quarterly period ended March 31, 2012
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
(Registrants telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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 May 10, 2012, there were 1,311,429 shares of the registrants common stock outstanding.
Table of Contents
EUREKA FINANCIAL CORP.
Page Number |
||||||||
PART I - FINANCIAL INFORMATION | ||||||||
Item 1: | 1 | |||||||
Consolidated Balance Sheets as of March 31, 2012 and September 30, 2011 (unaudited) |
1 | |||||||
2 | ||||||||
3 | ||||||||
Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2012 and 2011 (unaudited) |
4 | |||||||
5 | ||||||||
Item 2: | Managements Discussion and Analysis of Financial Condition and Results of Operations |
23 | ||||||
Item 3: | 29 | |||||||
Item 4: | 30 | |||||||
PART II - OTHER INFORMATION | ||||||||
Item 1: | Legal Proceedings | 30 | ||||||
Item 1A: | Risk Factors | 30 | ||||||
Item 2: | Unregistered Sales of Equity Securities and Use of Proceeds | 30 | ||||||
Item 3: | Defaults Upon Senior Securities | 31 | ||||||
Item 4: | Mine Safety Disclosures | 31 | ||||||
Item 5: | Other Information | 31 | ||||||
Item 6: | Exhibits | 31 | ||||||
SIGNATURES |
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements |
EUREKA FINANCIAL CORP. AND SUBSIDIARY
Consolidated Balance Sheets
(unaudited)
March 31, 2012 |
September 30, 2011 |
|||||||
Assets: |
||||||||
Cash and due from banks |
$ | 4,464,559 | $ | 1,501,421 | ||||
Interest-bearing deposits in other banks |
4,159,226 | 9,846,340 | ||||||
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|
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Cash and cash equivalents |
8,623,785 | 11,347,761 | ||||||
Investment securities held to maturity (fair value of $15,908,040 and $17,064,650, respectively) |
15,932,260 | 16,966,542 | ||||||
Mortgage-backed securities available for sale |
17,485 | 25,592 | ||||||
Federal Home Loan Bank (FHLB) stock, at cost |
585,100 | 648,400 | ||||||
Loans receivable, net of allowance for loan losses of $1,050,038 and $1,000,038, respectively |
109,503,841 | 104,455,832 | ||||||
Premises and equipment, net |
1,298,127 | 1,238,667 | ||||||
Deferred tax asset, net |
1,230,565 | 1,533,287 | ||||||
Accrued interest receivable and other assets |
1,338,828 | 1,298,913 | ||||||
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Total Assets |
$ | 138,529,991 | $ | 137,514,994 | ||||
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Liabilities and Stockholders Equity: |
||||||||
Deposits: |
||||||||
Non-interest bearing |
$ | 4,038,636 | $ | 3,384,974 | ||||
Interest bearing |
110,912,507 | 111,399,324 | ||||||
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Total deposits |
114,951,143 | 114,784,298 | ||||||
Advances from borrowers for taxes and insurance |
544,988 | 472,816 | ||||||
Accrued interest payable and other liabilities |
881,162 | 793,154 | ||||||
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Total Liabilities |
116,377,293 | 116,050,268 | ||||||
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Total Commitments and Contingencies |
| | ||||||
Stockholders Equity: |
||||||||
Common stock, $0.01 par value; 10,000,000 shares authorized; 1,314,705 shares issued and 1,311,429 outstanding at March 31, 2012 and 1,314,705 shares issued and outstanding at September 30, 2011 |
13,147 | 13,147 | ||||||
Paid-in capital |
11,957,946 | 11,945,757 | ||||||
Retained earnings substantially restricted |
10,759,059 | 10,072,616 | ||||||
Accumulated other comprehensive income |
1,013 | 1,336 | ||||||
Unearned ESOP shares |
(531,470 | ) | (568,130 | ) | ||||
Treasury stock, 3,276 shares |
(46,997 | ) | | |||||
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|
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Total Stockholders Equity |
22,152,698 | 21,464,726 | ||||||
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Total Liabilities and Stockholders Equity |
$ | 138,529,991 | $ | 137,514,994 | ||||
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
1
Table of Contents
EUREKA FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Income
(unaudited)
Three Months Ended March 31, |
Six Months Ended March 31, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Interest Income |
||||||||||||||||
Loans, including fees |
$ | 1,569,751 | $ | 1,527,154 | $ | 3,121,960 | $ | 3,026,329 | ||||||||
Investment securities and other interest-earning assets: |
||||||||||||||||
Taxable |
176,891 | 136,202 | 340,784 | 237,307 | ||||||||||||
Tax exempt |
7,296 | 7,218 | 17,614 | 14,520 | ||||||||||||
Mortgage-backed securities |
244 | 604 | 714 | 1,273 | ||||||||||||
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Total Interest Income |
1,754,182 | 1,671,178 | 3,481,072 | 3,279,429 | ||||||||||||
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Interest Expense |
||||||||||||||||
Deposits |
327,471 | 450,649 | 670,626 | 929,499 | ||||||||||||
FHLB advances |
| | | 7,259 | ||||||||||||
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Total Interest Expense |
327,471 | 450,649 | 670,626 | 936,758 | ||||||||||||
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Net Interest Income |
1,426,711 | 1,220,529 | 2,810,446 | 2,342,671 | ||||||||||||
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Provision for Loan Losses |
30,000 | 17,600 | 50,000 | 35,000 | ||||||||||||
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Net Interest Income after Provision for Loan Losses |
1,396,711 | 1,202,929 | 2,760,446 | 2,307,671 | ||||||||||||
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Non-Interest Income |
||||||||||||||||
Service fees on deposit accounts |
8,810 | 6,714 | 17,611 | 15,176 | ||||||||||||
Other income |
10,063 | 10,698 | 21,644 | 21,453 | ||||||||||||
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|
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Total Non-Interest Income |
18,873 | 17,412 | 39,255 | 36,629 | ||||||||||||
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Non-Interest Expenses |
||||||||||||||||
Salaries and benefits |
475,243 | 404,033 | 910,447 | 809,424 | ||||||||||||
Occupancy |
93,163 | 85,985 | 182,360 | 176,366 | ||||||||||||
Data processing |
63,065 | 52,360 | 109,066 | 98,905 | ||||||||||||
Professional fees |
68,489 | 59,614 | 131,632 | 112,322 | ||||||||||||
FDIC insurance premiums |
13,710 | 35,827 | 27,183 | 73,180 | ||||||||||||
Other |
77,211 | 76,935 | 185,263 | 156,556 | ||||||||||||
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Total Non-Interest Expenses |
790,881 | 714,754 | 1,545,951 | 1,426,753 | ||||||||||||
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Income before Income Tax Provision |
624,703 | 505,587 | 1,253,750 | 917,547 | ||||||||||||
Income Tax Provision |
234,477 | 206,339 | 475,277 | 375,894 | ||||||||||||
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Net Income |
$ | 390,226 | $ | 299,248 | $ | 778,473 | $ | 541,653 | ||||||||
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Earnings per Common Share Basic and Diluted |
$ | 0.31 | $ | 0.23 | $ | 0.62 | $ | 0.41 | ||||||||
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
2
Table of Contents
EUREKA FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statement of Changes in Stockholders Equity
For the Six Months Ended March 31, 2012
(unaudited)
Common Stock |
Paid-In Capital |
Retained Earnings |
Accumulated Other Comprehensive Income (Loss) |
Unearned ESOP Shares |
Treasury Stock |
Total | ||||||||||||||||||||||
Balance at September 30, 2011 |
$ | 13,147 | $ | 11,945,757 | $ | 10,072,616 | $ | 1,336 | $ | (568,130 | ) | $ | | $ | 21,464,726 | |||||||||||||
Comprehensive Income: |
||||||||||||||||||||||||||||
Net income |
| | 778,473 | | | | 778,473 | |||||||||||||||||||||
Other comprehensive (loss), net of tax: |
||||||||||||||||||||||||||||
Change in net unrealized gain on available for sale securities, net of deferred income tax of $166 |
| | | (323 | ) | | | (323 | ) | |||||||||||||||||||
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Total Comprehensive Income |
778,150 | |||||||||||||||||||||||||||
ESOP shares earned |
| 12,189 | | | 36,660 | | 48,849 | |||||||||||||||||||||
Dividends on common stock ($0.07 per shares) |
| | (92,030 | ) | | | | (92,030 | ) | |||||||||||||||||||
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Treasury stock acquired |
| | | | | (46,997 | ) | (46,997 | ) | |||||||||||||||||||
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Balance at March 31, 2012 |
$ | 13,147 | $ | 11,957,946 | $ | 10,759,059 | $ | 1,013 | $ | (531,470 | ) | $ | (46,997 | ) | $ | 22,152,698 | ||||||||||||
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
Table of Contents
EUREKA FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(unaudited)
Six Months
Ended March 31, |
||||||||
2012 | 2011 | |||||||
Cash Flows from Operating Activities |
||||||||
Net income |
$ | 778,473 | $ | 541,653 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation of premises and equipment |
83,830 | 80,015 | ||||||
Provision for loan losses |
50,000 | 35,000 | ||||||
Net accretion/amortization of discounts and premiums on securities and unamortized loan fees and costs |
(29,271 | ) | 6,621 | |||||
Compensation expense for ESOP |
48,849 | 6,873 | ||||||
Deferred tax expense |
302,887 | 180,697 | ||||||
Decrease (increase) in accrued interest receivable |
10,171 | (63,002 | ) | |||||
Decrease (increase) in other assets |
(50,085 | ) | 750,928 | |||||
(Decrease) in accrued interest payable |
(49,804 | ) | (9,410 | ) | ||||
Increase in other liabilities |
137,812 | 321,632 | ||||||
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Net Cash Provided by Operating Activities |
1,282,862 | 1,851,007 | ||||||
Cash Flows from Investing Activities |
||||||||
Proceeds from maturities and redemptions of investment securities held to maturity |
10,505,000 | 3,500,000 | ||||||
Purchase of investment securities held to maturity |
(9,450,000 | ) | (7,227,531 | ) | ||||
Redemption of FHLB stock |
63,300 | 77,800 | ||||||
Net loans made to customers |
(4,015,443 | ) | (1,933,821 | ) | ||||
Net increase in commercial leases |
(1,074,104 | ) | (666,347 | ) | ||||
Net paydowns in mortgage-backed securities |
7,708 | 9,411 | ||||||
Premises and equipment expenditures |
(143,290 | ) | (33,325 | ) | ||||
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Net Cash Used in Investing Activities |
(4,106,829 | ) | (6,273,813 | ) | ||||
Cash Flows from Financing Activities |
||||||||
Net increase in deposit accounts |
166,845 | 4,032,940 | ||||||
Net increase (decrease) in advances from borrowers for taxes and insurance |
72,173 | (94,790 | ) | |||||
Payment of long term FHLB advances |
| (1,000,000 | ) | |||||
Payment of dividends |
(92,030 | ) | (171,679 | ) | ||||
Purchase of treasury stock |
(46,997 | ) | | |||||
Proceeds from stock offering, net of expenses |
| 6,085,460 | ||||||
Proceeds from equity exchange of Eureka Bancorp, MHC |
| 214,843 | ||||||
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Net Cash Provided by Financing Activities |
99,991 | 9,066,774 | ||||||
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Net (Decrease) Increase In Cash and Cash Equivalents |
(2,723,976 | ) | 4,643,968 | |||||
Cash and Cash Equivalents Beginning |
11,347,761 | 11,650,201 | ||||||
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Cash and Cash Equivalents Ending |
$ | 8,623,785 | $ | 16,294,169 | ||||
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Supplementary Cash Flows Information |
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Interest paid |
$ | 720,430 | $ | 946,168 | ||||
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
Table of Contents
EUREKA FINANCIAL CORP. AND SUBSIDIARY
Notes to Unaudited 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 Banks primary deposit products are interest-bearing checking accounts, savings accounts and certificates of deposits. Its primary lending products are single-family residential loans, multi-family and commercial real estate loans, and commercial leases.
The Company was incorporated in September 2010 to be the Banks holding company upon completion of the Banks second-step conversion from the mutual holding company to the stock holding company form of organization, which occurred on February 28, 2011, and to serve as the successor entity to old Eureka Financial Corp., a federally chartered corporation previously existing as the mid-tier holding company for the Bank.
Unaudited Interim Financial Statements
The accompanying unaudited consolidated financial statements were prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (the SEC) for interim information. The accompanying unaudited consolidated financial statements for the interim periods include all adjustments, consisting of normal recurring accruals, which are necessary, in the opinion of management, to fairly reflect Eureka Financial Corp.s consolidated financial position and results of operations. Additionally, these consolidated financial statements for the interim periods have been prepared in accordance with the instructions to the SECs Form 10-Q and Article 10 of Regulation S-X and therefore do not include all information or footnotes necessary for a complete presentation of financial condition, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America (GAAP). For further information, refer to the audited consolidated financial statements and footnotes thereto for the year ended September 30, 2011, as contained in the Companys 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, deferred income taxes, fair value of financial instruments, 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.
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 Banks 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
Table of Contents
The following is a reconciliation of the numerators and denominators of the basic and dilutive earnings per share computations for net income for the three and six months ended March 31, 2012 and 2011. The share totals listed below reflect the conversion ratio of 1.0457 implemented in connection with the Banks second step conversion.
Three Months Ended March 31, 2012 | ||||||||||||
Income | Weighted Average Shares |
Per
Share Amount |
||||||||||
Basic and diluted earnings per share |
$ | 390,226 | 1,259,539 | $ | 0.31 | |||||||
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Three Months Ended March 31, 2011 | ||||||||||||
Income | Weighted Average Shares |
Per Share Amount |
||||||||||
Basic and diluted earnings per share |
$ | 299,248 | 1,295,885 | $ | 0.23 | |||||||
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Six Months Ended March 31, 2012 | ||||||||||||
Income | Weighted Average Shares |
Per Share Amount |
||||||||||
Basic and diluted earnings per share |
$ | 778,473 | 1,259,632 | $ | 0.62 | |||||||
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Six Months Ended March 31, 2011 | ||||||||||||
Income | Weighted Average Shares |
Per Share Amount |
||||||||||
Basic and diluted earnings per share |
$ | 541,653 | 1,307,503 | $ | 0.41 | |||||||
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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 Comprehensive Income
Total comprehensive income is summarized as follows:
Three Months Ended March 31, |
Six Months Ended March 31, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Unrealized gains, beginning of period |
$ | 1,063 | $ | 2,105 | $ | 1,336 | $ | 97 | ||||||||
Gross unrealized gains (losses) arising during the period on available-for-sale securities |
(76 | ) | (389 | ) | (489 | ) | 2,653 | |||||||||
Tax effect |
26 | 132 | 166 | (902 | ) | |||||||||||
Unrealized gain, end of period |
1,013 | 1,848 | 1,013 | 1,848 | ||||||||||||
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Net income |
390,226 | 299,248 | 778,473 | 541,653 | ||||||||||||
Other comprehensive income (loss), net of tax: |
||||||||||||||||
Unrealized gains (losses) arising during the period |
(50 | ) | (257 | ) | (323 | ) | 1,751 | |||||||||
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Comprehensive income |
$ | 390,176 | $ | 298,991 | $ | 778,150 | $ | 543,404 | ||||||||
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6
Table of Contents
Note 3 Investment Securities
There were no investment securities available for sale at March 30, 2012 or September 30, 2011 and no sales of investment securities during the six months ended March 31, 2012 and 2011.
Investment securities held to maturity consisted of the following at March 30, 2012 and September 30, 2011:
March 30, 2012 | ||||||||||||||||
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | |||||||||||||
Obligations of states and political subdivisions |
$ | 492,776 | | $ | (45,246 | ) | $ | 447,530 | ||||||||
Government agency debentures |
15,439,485 | 23,725 | (2,700 | ) | 15,460,510 | |||||||||||
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$ | 15,932,260 | $ | 23,725 | $ | (47,946 | ) | $ | 15,908,040 | ||||||||
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September 30, 2011 | ||||||||||||||||
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | |||||||||||||
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 | |||||||||||
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$ | 16,966,542 | $ | 101,708 | $ | (3,600 | ) | $ | 17,064,650 | ||||||||
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At March 31, 2012 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 March 31, 2012 and September 30, 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.
March 31, 2012 | ||||||||
Amortized Cost |
Fair Value |
|||||||
Due after five years through ten years |
$ | 750,000 | $ | 750,000 | ||||
Due after ten years |
15,182,260 | 15,158,040 | ||||||
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$ | 15,932,260 | $ | 15,908,040 | |||||
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September 30, 2010 | ||||||||
Amortized Cost |
Fair Value |
|||||||
Due after five years through ten years |
$ | 750,000 | $ | 755,775 | ||||
Due after ten years |
16,216,542 | 16,308,875 | ||||||
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$ | 16,966,542 | $ | 17,064,650 | |||||
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7
Table of Contents
Temporarily impaired investments consisted of the following at March 31, 2012 and September 30, 2011:
March 31, 2012 | ||||||||||||||||||||||||
Less than 12 Months | More than 12 Months | Total | ||||||||||||||||||||||
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
|||||||||||||||||||
Obligations of states and political subdivisions |
$ | 447,530 | $ | (45,246 | ) | $ | | $ | | $ | 447,530 | $ | (45,246 | ) | ||||||||||
Government agency debentures |
2,247,300 | (2,700 | ) | | | 2,247,300 | (2,700 | ) | ||||||||||||||||
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|
|
|
|
|
|
|
|
|
|||||||||||||
$ | 2,694,830 | $ | (47,946 | ) | $ | | $ | | $ | 2,694,830 | $ | (47,946 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
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 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
$ | 3,746,400 | $ | (3,600 | ) | $ | | $ | | $ | 3,746,400 | $ | (3,600 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The Company reviews its position quarterly and has asserted that at March 31, 2012, the declines outlined in the above table represent temporary declines. The Company does not intend to sell and does not believe they will be required to sell these securities before recovery of their cost basis, which may be at maturity. All investments are interest rate sensitive. These investments earn 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.
Eureka Financial Corp. had four securities in an unrealized loss position at March 31, 2012 and five securities in an unrealized position at September 30, 2011. Accrued interest relating to investments was approximately $186,000 and $201,186 as of March 31, 2012 and September 30, 2011, respectively. Eureka Financial Corp.s current intention is not to sell any of these securities and it is more likely than not that it will not be required to sell these securities before the recovery of its amortized cost basis.
Note 4 Mortgage-Backed Securities
The amortized cost and fair values of mortgage-backed securities, all of which are government-sponsored entities secured by residential real estate and are available for sale, are summarized as follows:
March 31, 2012 | ||||||||||||||||
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
|||||||||||||
Freddie Mac certificates |
$ | 1,732 | $ | 181 | $ | | $ | 1,913 | ||||||||
Fannie Mae certificates |
14,217 | 1,355 | | 15,572 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 15,949 | $ | 1,536 | $ | | $ | 17,485 | |||||||||
|
|
|
|
|
|
|
|
|||||||||
September 30, 2011 | ||||||||||||||||
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
|||||||||||||
Freddie Mac certificates |
$ | 5,924 | $ | 438 | $ | | $ | 6,362 | ||||||||
Fannie Mae certificates |
17,644 | 1,586 | | 19,230 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 23,568 | $ | 2,024 | $ | | $ | 25,592 | |||||||||
|
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|
|
|
|
|
8
Table of Contents
The amortized cost and fair values of mortgage-backed securities at March 31, 2012 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers have the right to repay obligations without penalty.
March 31, 2012 | ||||||||
Amortized Cost |
Fair Value |
|||||||
Due after one year through five years |
$ | 5,458 | $ | 5,835 | ||||
Due after five years through ten years |
6,023 | 6,648 | ||||||
Due after ten years |
4,468 | 5,002 | ||||||
|
|
|
|
|||||
$ | 15,949 | $ | 17,485 | |||||
|
|
|
|
There were no sales of mortgage-backed securities during the six months ended March 31, 2012 and 2011 and there were no temporarily impaired mortgage-backed securities at March 31, 2012 or September 30, 2011. In addition, the Company had no securities in an unrealized loss position at March 31, 2012 or September 30, 2011.
Note 5 Loans
Major classifications of loans are as follows at March 31, 2012 and September 30, 2011:
March 31, 2012 |
September 30, 2011 |
|||||||
One- to four-family real estate |
$ | 48,902,848 | $ | 45,144,727 | ||||
Construction |
1,542,291 | 2,267,540 | ||||||
Multi-family real estate |
14,319,048 | 13,494,703 | ||||||
Commercial real estate |
19,987,989 | 20,432,896 | ||||||
Home equity and second mortgages |
1,215,227 | 1,259,440 | ||||||
Secured loans |
247,346 | 338,213 | ||||||
Unsecured improvement loans |
19,378 | 22,111 | ||||||
Commercial leases |
19,402,279 | 18,345,706 | ||||||
Commercial lines of credit |
5,094,856 | 4,339,544 | ||||||
|
|
|
|
|||||
110,731,262 | 105,644,880 | |||||||
Plus: |
||||||||
Unamortized loan premiums |
16,424 | 17,334 | ||||||
Less: |
||||||||
Unamortized loan fees and costs, net |
193,807 | 206,344 | ||||||
Allowance for loan losses |
1,050,038 | 1,000,038 | ||||||
|
|
|
|
|||||
$ | 109,503,841 | $ | 104,455,832 | |||||
|
|
|
|
Loan Portfolio Composition
The loan and lease receivable portfolio is broken down into the following categories: (1) one- to four-family real estate loans; (2) construction loans; (3) multi-family real estate loans; (4) commercial real estate loans; (5) home equity and second mortgage loans; (6) secured loans; (7) unsecured improvement loans; (8) commercial leases; and (9) commercial lines of credit.
One- to four-family real estate loans include residential first mortgage loans originated by the Bank in the greater Pittsburgh metropolitan area. We currently originate fully amortizing loans with maturities up to 30 years. These loans have a maximum loan-to-value ratio of 80%, unless they fall into our first time homebuyer program in our CRA Assessment Area, and then 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 Banks 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 been completed. Dwelling construction consists of new construction and upgrades to existing dwellings. The normal construction period is six months. Construction loans on land are originated for
9
Table of Contents
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, location, the strength of borrower, rent rolls and total lending relationship with the borrower(s).
Commercial real estate loans consist of loans that are originated where a commercial property is being used as collateral. These loans also produce a higher risk to the Bank and have the same maximum terms and loan-to-value ratios as the multi-family loans. The risks associated with these loans are affected by economic conditions, location, strength of borrower, rent rolls and potential resale value should foreclosure become necessary.
Home equity and second mortgages include loans as first or second liens to any applicant who maintains an owner occupied or single family dwelling. These loans also include home equity lines of credit. The maximum loan amount is $100,000. The first and second lien combined can not exceed 80% of the appraised value of the property. The risk to the Bank depends on whether we hold the first and/or second lien. We rely heavily on the appraised value to ensure equity is available, as well as the strength of the borrower. These loans are not considered to be more than moderate risk.
Secured loans are made to applicants who maintain deposit accounts at the Bank. The Bank will originate these loans up to a term of five years or to maturity date whichever comes first. These loans pose no risk to the Bank as the loan amount will never exceed the collateral that is securing the loan.
Unsecured improvement loans consist of loans that have no or very little useful collateral and therefore pose a greater risk to the Bank. These loans generally have a higher interest rate assigned to them and a maximum term of up to five years. Well documented underwriting is in place to ensure that the borrower has the ability to repay the debt. While the Bank does not originate a significant amount of these types of loans, they are considered to be moderate to high risk due to the unsecured nature of the loan.
Commercial leases consist of loans that typically are collateralized by 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 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 borrowers financial strength as well as the collateral. The lines are based on the collateral and the ability of the borrower(s) to repay the debt. The lines are closely monitored and limits adjusted accordingly based on updated tax returns and/or other changes to the financial well being of the borrower(s). Subsequently, risk is controlled but considered moderate based on the collateral and nature of the loan.
10
Table of Contents
Credit Quality
The Banks risk rating system is made up of five loan grades (1, 2, 3, 4 and 5). A description of the general characteristics of the risk grades follows:
Rating 1 Pass
Rating 1 has asset risks ranging from excellent low risk to acceptable. This rating considers customer history of earnings, cash flow, liquidity, leverage, capitalization, consistency of debt service coverage, the nature and extent of customer relationship and other relevant specific business factors such as the stability of the industry or market area, changes to management, litigation or unexpected events that could have an impact on risks.
Rating 2 Special Mention
A special mention asset has a potential weakness that deserves managements close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institutions credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. The special mention classification is a transitory one and is the first classification that requires an action plan to resolve the weaknesses inherent to the credit. These relationships will be reviewed at least quarterly.
Rating 3 Substandard
Substandard assets are assets that are inadequately protected by the sound worth or paying capacity of the borrower or of the collateral pledged. These assets have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified as substandard. The loans may have a delinquent history or combination of weak collateral, weak guarantor strength or income statement losses. These assets listed may include assets with histories of repossessions or some that are non-performing bankruptcies. These relationships will be reviewed at least quarterly.
Rating 4 Doubtful
Doubtful assets have many of the same characteristics of substandard assets with the exception that the Bank has determined that loss is not only possible but is probable and the risk is close to certain that loss will occur. When a loan is assigned to this category the Bank will identify the probable loss and it will receive allocation in the loan loss reserve analysis. These relationships will be reviewed at least quarterly.
Rating 5 Loss
Once an asset is identified as a definite loss to the Bank, it will receive the classification of loss. There may be some future potential recovery; however it is more practical to write off the loan at the time of classification. Losses will be taken in the period in which they are determined to be uncollectable.
11
Table of Contents
Credit quality indicators as of March 31, 2012 were as follows:
Pass | Special Mention |
Substandard | Doubtful | Loss | Total | |||||||||||||||||||
Non-owner occupied one- to four-family real estate |
$ | 25,329,814 | $ | 240,947 | $ | 5,394 | $ | | $ | | $ | 25,576,155 | ||||||||||||
Construction |
1,542,291 | | | | | 1,542,291 | ||||||||||||||||||
Multi-family |
14,319,048 | | | | | 14,319,048 | ||||||||||||||||||
Commercial real estate |
19,987,989 | | | | | 19,987,989 | ||||||||||||||||||
Commercial leases |
19,096,389 | | 305,890 | | | 19,402,279 | ||||||||||||||||||
Commercial lines of credit |
4,376,414 | 718,442 | | | | 5,094,856 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
$ | 84,651,945 | $ | 959,389 | $ | 311,284 | $ | | $ | | $ | 85,922,618 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Credit quality indicators as of September 30, 2011 were as follows:
Pass | Special Mention |
Substandard | Doubtful | Loss | Total | |||||||||||||||||||
Non-owner occupied 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 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The following tables present performing and non-performing residential real estate and consumer loans based on payment activity for the periods ended March 31, 2012 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.
Non-Performing Loans |
Performing Loans |
Total | ||||||||||
March 31, 2012 |
||||||||||||
Owner occupied one- to four-family real estate |
$ | | $ | 23,326,693 | $ | 23,326,693 | ||||||
Home equity and second mortgages |
| 1,215,227 | 1,215,227 | |||||||||
Secured loans |
| 247,346 | 247,346 | |||||||||
Unsecured improvement loans |
| 19,378 | 19,378 | |||||||||
|
|
|
|
|
|
|||||||
$ | | $ | 24,808,644 | $ | 24,808,644 | |||||||
|
|
|
|
|
|
Non-Performing Loans |
Performing Loans |
Total | ||||||||||
September 30, 2011 | ||||||||||||
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 | |||||||
|
|
|
|
|
|
12
Table of Contents
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrowers prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loans effective interest rate, the loans observable market price or the fair value of the collateral if the loan is collateral dependent. There were no impaired loans at March 31, 2012 or September 30, 2011.
The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due status as of March 31, 2012:
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 |
$ | 259,304 | $ | 5,394 | $ | | $ | 264,698 | $ | 48,638,150 | $ | 48,902,848 | $ | | ||||||||||||||
Construction |
| | | | 1,542,291 | 1,542,291 | | |||||||||||||||||||||
Multi-family real estate |
| | | | 14,319,048 | 14,319,048 | | |||||||||||||||||||||
Commercial real estate |
| | | | 19,987,989 | 19,987,989 | | |||||||||||||||||||||
Home equity and second mortgages |
199,506 | | | 199,506 | 1,015,721 | 1,215,227 | | |||||||||||||||||||||
Secured loans |
| | | | 247,346 | 247,346 | | |||||||||||||||||||||
Unsecured improvement loans |
| | | | 19,378 | 19,378 | | |||||||||||||||||||||
Commercial leases |
| 305,891 | | 305,891 | 19,096,388 | 19,402,279 | | |||||||||||||||||||||
Commercial lines of credit |
518,936 | | | 518,936 | 4,575,920 | 5,094,856 | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
$ | 977,746 | $ | 311,285 | $ | | $ | 1,289,031 | $ | 109,442,231 | $ | 110,731,262 | $ | | |||||||||||||||
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The following table presents the classes of the loan portfolio summarized by the past due status as of September 30, 2011:
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 | |||||||||||||||
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|
Eureka Financial Corp. primarily grants loans to customers throughout Southwestern Pennsylvania. Eureka Financial Corp. maintains a diversified loan portfolio and the ability of its debtors to honor their obligations is not substantially dependant on any particular economic business sector. Loans on non-accrual at March 31, 2012 and September 30, 2011 were approximately $0 and $22,000, respectively. The foregone interest on non-accrual loans
13
Table of Contents
was approximately $0 and $1,835 for the six months ended March 31, 2012 and 2011, respectively. The foregone interest on non-accrual loans was approximately $0 and $907 for the three months ended March 31, 2012 and 2011, respectively. As of March 31, 2012 and September 30, 2011, there were no loans that were 90 days or more delinquent and still accruing interest.
14
Table of Contents
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 Companys ability to utilize the allowance to absorb losses in a different category. The loans receivable are disaggregated on the basis of the Companys impairment methodology.
1-4 family real estate |
Construction | Multi-family real estate |
Commercial real estate |
Home equity and second mortgages |
Secured loans |
Unsecured improve- ment loans |
Commer- cial leases and loans |
Commercial lines of credit |
Non-allocated | Total | ||||||||||||||||||||||||||||||||||
Allowance for credit losses: |
||||||||||||||||||||||||||||||||||||||||||||
Beginning Balance 1/1/2012 |
$ | 308,028 | $ | 2,615 | $ | 121,452 | $ | 284,883 | $ | 7,049 | $ | | $ | | $ | 216,894 | $ | | $ | 59,117 | $ | 1,000,038 | ||||||||||||||||||||||
Charge-offs |
| | | | | | | | | | | |||||||||||||||||||||||||||||||||
Recoveries |
| | | | | | | | | | | |||||||||||||||||||||||||||||||||
Provisions (credits) |
(138,646 | ) | 1,249 | (14,059 | ) | 96,240 | 5,664 | | | 93,988 | | 5,564 | 50,000 | |||||||||||||||||||||||||||||||
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|
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|
|||||||||||||||||||||||
Ending balance 3/31/2012 |
$ | 169,382 | $ | 3,864 | $ | 107,393 | $ | 381,123 | $ | 12,713 | $ | | $ | | $ | 310,882 | $ | | $ | 64,681 | $ | 1,050,038 | ||||||||||||||||||||||
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|
|||||||||||||||||||||||
Beginning Balance 1/1/2011 |
$ | 125,286 | $ | 10,723 | $ | 109,578 | $ | 296,313 | $ | 14,150 | $ | | $ | | $ | 280,976 | $ | 42,629 | $ | 42,783 | $ | 922,438 | ||||||||||||||||||||||
Charge-offs |
| | | | | | | | | | | |||||||||||||||||||||||||||||||||
Recoveries |
| | | | | | | | | | | |||||||||||||||||||||||||||||||||
Provisions (credits) |
27,416 | 7,082 | 366 | (7,065 | ) | 681 | | | 9,690 | 3,164 | (23,734 | ) | 17,600 | |||||||||||||||||||||||||||||||
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|
|||||||||||||||||||||||
Ending balance 3/31/2011 |
$ | 152,702 | $ | 17,805 | $ | 109,944 | $ | 289,248 | $ | 14,831 | $ | | $ | | $ | 290,666 | $ | 45,793 | $ | 19,049 | $ | 940,038 | ||||||||||||||||||||||
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|||||||||||||||||||||||
Allowance for credit losses: |
||||||||||||||||||||||||||||||||||||||||||||
Ending balance 3/31/2012: |
$ | 169,382 | $ | 3,864 | $ | 107,393 | $ | 381,123 | $ | 12,713 | $ | | $ | | $ | 310,882 | $ | | $ | 64,681 | $ | 1,050,038 | ||||||||||||||||||||||
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Ending balance: individually evaluated for impairment |
| | | | | | | | | | | |||||||||||||||||||||||||||||||||
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Ending balance: collectively evaluated for impairment |
$ | 169,382 | $ | 3,864 | $ | 107,393 | $ | 381,123 | $ | 12,713 | $ | | $ | | 310,882 | $ | | $ | 64,681 | $ | 1,050,038 | |||||||||||||||||||||||
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15
Table of Contents
1-4 family real estate |
Construction | Multi- family real estate |
Commercial real estate |
Home equity and second mortgages |
Secured loans |
Unsecured improve- ment loans |
Commer- cial leases and loans |
Commercial lines of credit |
Non-allocated | Total | ||||||||||||||||||||||||||||||||||
Loans Receivables: |
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Ending balance 3/31/2012 |
$ | 48,902,848 | $ | 1,542,291 | $ | 14,319,048 | $ | 19,987,989 | $ | 1,215,227 | $ | 247,346 | $ | 19,378 | $ | 19,402,279 | $ | 5,094,856 | $ | | $ | 110,731,262 | ||||||||||||||||||||||
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Ending balance: individually evaluated for impairment |
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Ending balance: collectively evaluated for impairment |
$ | 48,902,848 | $ | 1,542,291 | $ | 14,319,048 | $ | 19,987,989 | $ | 1,215,227 | $ | 247,346 | $ | 19,378 | $ | 19,402,279 | $ | 5,094,856 | $ | | $ | 110,731,262 | ||||||||||||||||||||||
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Allowance for credit losses: |
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Ending balance 9/30/2011: |
$ | 308,028 | $ | 2,615 | $ | 121,452 | $ | 284,883 | $ | 7,049 | $ | | $ | | $ | 216,894 | | $ | 59,117 | $ | 1,000,038 | |||||||||||||||||||||||
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Ending balance: individually evaluated for impairment |
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Ending balance: collectively evaluated for impairment |
$ | 308,028 | $ | 2,615 | $ | 121,452 | $ | 284,883 | $ | 7,049 | $ | | $ | | $ | 216,894 | | $ | 59,117 | $ | 1,000,038 | |||||||||||||||||||||||
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Loans Receivables: |
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Ending balance 9/30/2011 |
$ | 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 | $ | | $ | 105,644,880 | ||||||||||||||||||||||
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Ending balance: individually evaluated for impairment |
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Ending balance: collectively evaluated for impairment |
$ | 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 | $ | | $ | 105,644,880 | ||||||||||||||||||||||
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16
Table of Contents
An allowance for loan and lease losses (ALLL) is maintained to absorb losses from the loan and lease portfolio. The ALLL is based on managements continuing evaluation of the risk classifications and credit quality of the loan and lease portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans. Management reviews the loan and lease portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALLL.
Changes in the allowance for loan losses were as follows for the three and six months ended March 31, 2012 and 2011:
Three Months Ended March 31, |
Six Months Ended March 31, |
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2012 | 2011 | 2012 | 2011 | |||||||||||||
Balance beginning of period |
$ | 1,020,038 | $ | 922,438 | $ | 1,000,038 | $ | 905,038 | ||||||||
Provision charged to operations |
30,000 | 17,600 | 50,000 | 35,000 | ||||||||||||
Net charge-offs |
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Recoveries |
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Balance end of period |
$ | 1,050,038 | $ | 940,038 | $ | 1,050,038 | $ | 940,038 | ||||||||
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Note 6 Commitments
The Companys maximum exposure to credit loss for loan and lease commitments (unfunded loans and leases) at March 31, 2012 and September 30, 2011 was approximately $8,526,000 and $9,961,000, respectively, with interest rates from 2.25% to 6.75% and 2.75% to 7.00%, respectively. Fixed rate loan commitments at March 31, 2012 and September 30, 2011 were approximately $2,878,000 and $3,847,000, respectively, with fixed rates of interest ranging from 4.00% 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 Companys customers. These arrangements have credit risk essentially the same as that involved in extending loans to customers and are subject to the Companys normal credit policies and loan underwriting standards. Collateral is obtained based on managements credit assessment of the customer. Management currently expects no loss from these activities.
Note 7 Fair Value Measurements and Fair Values of Financial Instruments
Management uses its best judgment in estimating the fair value of the Companys 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.
17
Table of Contents
Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).
An assets or liabilitys level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2012 and September 30, 2011 are as follows:
Description |
March 31, 2012 |
(Level
1) Quoted Prices in Active Markets for Identical Assets |
(Level 2) Significant Other Observable Inputs |
(Level 3) Significant Unobservable Inputs |
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Mortgage-backed securities available for sale |
$ | 17,485 | $ | | $ | 17,485 | $ | |
Description |
September 30, 2011 |
(Level
1) Quoted Prices in Active Markets for Identical Assets |
(Level 2) Significant Other Observable Inputs |
(Level 3) Significant Unobservable Inputs |
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Mortgage-backed securities available for sale |
$ | 25,592 | $ | | $ | 25,592 | $ | |
There are no non-financial assets or liabilities measured at fair value as of March 31, 2012 or September 30, 2011.
18
Table of Contents
The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Companys assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Companys 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 Companys financial instruments at March 31, 2012 and September 30, 2011:
March 31, 2012 | ||||||||||||||||||||
Carrying Value |
Level I | Level II | Level III | Total Fair Value |
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Financial assets: |
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Cash and cash equivalents |
$ | 8,623,785 | $ | 8,623,785 | $ | | $ | | $ | 8,623,785 | ||||||||||
Mortgage-backed securities |
17,485 | | 17,485 | | 17,485 | |||||||||||||||
Held to maturity securities |
15,932,260 | | 15,908,040 | | 15,908,040 | |||||||||||||||
Federal Home Loan Bank stock |
585,100 | 585,100 | | | 585,100 | |||||||||||||||
Loans receivable, net |
109,543,841 | | | 115,492,000 | 115,492,000 | |||||||||||||||
Accrued interest receivable |
530,349 | 530,349 | | | 530,349 | |||||||||||||||
Financial liabilities: |
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Deposits |
114,951,143 | $ | 46,503,093 | $ | | $ | 69,703,907 | $ | 116,207,000 | |||||||||||
Advances from borrowers for taxes and insurance |
544,988 | 544,988 | | | 544,988 | |||||||||||||||
Accrued interest payable |
143,854 | 143,854 | | | 143,854 |
March 31, 2012 | September 30, 2011 | |||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
Financial assets: |
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Cash and cash equivalents |
$ | 8,623,785 | $ | 8,623,785 | $ | 11,347,761 | $ | 11,347,761 | ||||||||
Mortgage-backed securities |
17,485 | 17,485 | 25,592 | 25,592 | ||||||||||||
Held to maturity securities |
15,932,260 | 15,908,040 | 16,966,542 | 17,064,650 | ||||||||||||
Federal Home Loan Bank stock |
585,100 | 585,100 | 648,400 | 648,400 | ||||||||||||
Loans receivable, net |
109,543,841 | 115,492,000 | 104,455,832 | 109,811,000 | ||||||||||||
Accrued interest receivable |
603,644 | 603,644 | 613,815 | 613,815 | ||||||||||||
Financial liabilities: |
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Deposits |
114,951,143 | 116,207,000 | 114,748,298 | $ | 116,019,000 | |||||||||||
Advances from borrowers for taxes and insurance |
544,988 | 544,988 | 472,816 | 472,816 | ||||||||||||
Accrued interest payable |
107,899 | 107,899 | 157,703 | 157,703 |
19
Table of Contents
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, managements best estimate is used. Managements best estimate consists of both internal and external support on certain Level 3 investments. Internal cash flow models using a present value formula that includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) were used to support fair values of certain Level 3 investments.
Federal Home Loan Bank Stock
The carrying value of the FHLB stock is a reasonable estimate of fair value due to restrictions on the securities.
Loans Receivable
The fair values for one-to four-family residential loans are estimated using discounted cash flow analysis using fields from similar products in the secondary markets. The carrying amount of construction loans approximated its fair value given their short-term nature. The fair values of consumer and commercial loans are estimated using discounted cash flow analysis, using interest rates reported in various government releases and the Companys own product pricing schedule for loans with terms similar to the Companys. 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.
20
Table of Contents
Off-Balance Sheet Commitments
The values of off-balance sheet commitments are based on their carrying value, taking into account the remaining terms and conditions of the agreement.
Note 8 Capital Requirements
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Banks financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Banks assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Banks capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors.
The 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 most recent notification from the Office of the Comptroller of the Currency categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk based, core and tangible ratios as set forth in the accompanying table. There are no conditions or events since the notification that management believed has changed the institutions category. The following shows the Banks compliance with regulatory capital standards at March 31, 2012 and September 30, 2011:
Actual | For Capital
Adequacy Purposes |
To be well
Capitalized under Prompt Corrective Action Provisions |
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Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||||||||||||||
As of March 31, 2012 |
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Total capital (to risk-weighted assets) |
$ | 19,939 | 22.53 | % | > | $ 7,080 | > | 8.00 | % | > | $ 8,850 | > | 10.00 | % | ||||||||||
Tier 1 capital (to risk-weighted assets) |
19,188 | 21.68 | > | 3,540 | > | 4.00 | > | 5,310 | > | 6.00 | ||||||||||||||
Core (Tier 1) capital (to adjusted total assets) |
19,188 | 13.90 | > | 5,522 | > | 4.00 | > | 6,903 | > | 5.00 | ||||||||||||||
As of September 30, 2011 |
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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 Banks equity under accounting principles generally accepted in the United States of America to regulatory capital as of March 31, 2012 and September 30, 2011:
March 31, 2012 |
September 30, 2011 |
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(in thousands) | (in thousands) | |||||||
Total equity |
$ | 19,939 | $ | 19,121 | ||||
Unrealized gains on securities available-for-sale |
(1 | ) | (1 | ) | ||||
Deferred tax asset disallowed portion |
(750 | ) | (1,014 | ) | ||||
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Tier 1 capital |
19,188 | 18,106 | ||||||
Other adjustments: |
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Allowable allowances for loan and lease losses |
1,050 | 1,000 | ||||||
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$ | 20,238 | $ | 19,106 | ||||
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21
Table of Contents
Note 9 Recent Accounting Pronouncements
In April 2011, the Financial Accounting Standards Board (FASB) issued ASU 2011-03, Transfers and Services (Topic 860): Reconsideration of Effective Control for Repurchase Agreements. The main objective in developing this Update is to improve the accounting for repurchase agreements (repos) and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The amendments in this Update remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. The amendments in this Update apply to all entities, both public and nonpublic. The amendments affect all entities that enter into agreements to transfer financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity. The guidance in this Update is effective for the first interim or annual period beginning on or after December 15, 2011 and should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. This ASU is not expected to have a significant impact on the Companys financial statements.
In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): 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. The Company has provided the necessary disclosures in Note 7.
In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): 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 Companys financial position or results of operations.
In September 2011, the FASB issued ASU 2011-09, Compensation-Retirement Benefits-Multiemployer Plans (Subtopic 715-80): Disclosures about an Employers Participation in a Multiemployer Plan. The amendments in this Update will require additional disclosures about an employers participation in a multiemployer pension plan to enable users of financial statements to assess the potential cash flow implications relating to an employers participation in multiemployer pension plans. The disclosures also will indicate the financial health of all of the significant plans in which the employer participates and assist a financial statement user to access additional information that is available outside the financial statements. For public entities, the amendments in this Update are effective for annual periods for fiscal years ending after December 15, 2011, with early adoption permitted. For nonpublic entities, the amendments are effective for annual periods of fiscal years ending after December 15, 2012, with early adoption permitted. The amendments should be applied retrospectively for all prior periods presented. The Company is currently evaluating the impact the adoption of the standard will have on the Companys financial statements.
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Table of Contents
In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. In order to defer only those changes in Update 2011-05 that relate to the presentation of reclassification adjustments, the paragraphs in this Update supersede certain pending paragraphs in Update 2011-05. Entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before Update 2011-05. All other requirements in Update 2011-05 are not affected by this Update, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. Nonpublic entities should begin applying these requirements for fiscal years ending after December 15, 2012, and interim and annual periods thereafter. This ASU is not expected to have a significant impact on the Companys financial statements.
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operation |
Safe Harbor Statement for Forward-Looking Statements
This report may contain forward-looking statements within the meaning of the federal securities laws. These statements are not historical facts; rather they are statements based on the Companys current expectations regarding its business strategies and its intended results and future performance. Forward-looking statements are preceded by terms such as expects, believes, anticipates, intends and similar expressions.
Forward-looking statements are not guarantees of future performance. Numerous risks and uncertainties could cause or contribute to the Companys actual results, performance and achievements being materially different from those expressed or implied by the forward-looking statements. Factors that may cause or contribute to these differences include, without limitation, general economic conditions, including changes in market interest rates and changes in monetary and fiscal policies of the federal government; legislative and regulatory changes; the quality and composition of the loan and investment securities portfolio; loan demand; deposit flows; competition; and changes in accounting principles and guidelines. Additional factors that may affect our results are discussed in the Companys in the Companys Annual Report on Form 10-K, as filed with the SEC on December 29, 2011, under the section titled Risk Factors. These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company assumes no obligation and disclaims any obligation to update any forward-looking statements.
Critical Accounting Policies
The discussion and analysis of Eureka Financial Corp.s financial condition and results of operations are based on our consolidated financial statements, which are prepared in conformity with generally accepted accounting principles in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of income and expenses. We consider the accounting policies discussed below to be critical accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.
Allowance for Loan Losses. The allowance for loan losses is maintained at a level representing managements best estimate of known and inherent losses in the loan portfolio, based on managements evaluation of the portfolios collectability. The allowance is established through the provision for loan losses, which is charged against income. Management estimates the allowance balance required using loss experience in particular segments of the portfolio, the size and composition of the loan portfolio, trends and absolute levels of non-performing loans, classified and criticized loans and delinquent loans, trends in risk ratings, trends in industry charge-offs by particular segments and changes in existing general economic and business conditions affecting our lending areas and the national economy. Additionally, for loans identified by management as impaired, management will provide a specific provision for loan loss based on the expected discounted cash flows of the loan, or for loans determined to be collateral dependent, a specific provision for loan loss is established based on appraised value less costs to sell. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the
23
Table of Contents
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.
Deferred Income Taxes. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion of the deferred tax asset will not be realized. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to make projections of future tax rates and taxable income. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on a continual basis as regulatory and business factors change. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax asset.
Valuation of Other-Than-Temporary Impairment of Investment Securities. We evaluate our investment securities portfolio on a quarterly basis for indicators of other-than-temporary impairment, which requires significant judgment. We assess whether other-than-temporary impairment has occurred when the fair value of a debt security is less than the amortized cost basis at the balance sheet date. Under these circumstances, other-than-temporary impairment is considered to have occurred: (1) if we intend to sell the security; (2) if it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of the expected cash flows is not sufficient to recover the entire amortized cost basis. For securities that we do not expect to sell or that we are not more likely than not to be required to sell, the other-than-temporary impairment is separated into credit and non-credit components. The credit-related other-than-temporary impairment, represented by the expected loss in principal, is recognized in non-interest income, while noncredit-related other-than-temporary impairment is recognized in other comprehensive income (loss). Noncredit-related other-than-temporary impairment results from other factors, including increased liquidity spreads and extension of the security. For securities which we do expect to sell, all other-than-temporary impairment is recognized in earnings. Other-than-temporary impairment is presented in the income statement on a gross basis with a reduction for the amount of other-than-temporary impairment recognized in other comprehensive income (loss). Once an other-than-temporary impairment is recorded, when future cash flows can be reasonably estimated, future cash flows are re-allocated between interest and principal cash flows to provide for a level-yield on the security.
Comparison of Financial Condition at March 31, 2012 and September 30, 2011
Assets increased $1.1 million, or 0.8%, to $138.6 million at March 31, 2012 from $137.5 million at September 30, 2011, primarily due to a $5.1 million increase in loans receivable offset by a $2.7 million decrease in cash and cash equivalents and a $1.0 million decrease in investment securities. The increase in loans was primarily due to a $3.8 million increase in one- to four-family real estate loans, a $1.1 million increase in commercial loans and an $824,000 increase in multi-family real estate loans, offset by a $725,000 decrease in construction loans. Investment securities decreased due to a decrease in government debentures.
Eureka Financial Corp. actively manages credit risk through its underwriting practices and collection operations and it does not offer nor has it historically offered loans to subprime or Alt-A borrowers. There were no non-accrual loans at March 31, 2012 compared to $22,000, or 0.02% of total net loans, at September 30, 2011. The non-accrual loan total for September 30, 2011 consisted of a one- to four-family real estate loan.
Total liabilities increased by $327,000, or 0.3%, to $116.4 million at March 31, 2012 from $116.1 million at September 30, 2011. This increase was primarily attributable to an increase in deposits of $167,000, or 0.15%, an increase of $88,000 in accrued interest payable and other liabilities and a $72,000 increase in advances from borrowers for taxes and insurance.
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Stockholders equity increased $688,000 to $22.2 million at March 31, 2012 from $21.5 million at September 30, 2011. The increase was primarily the result of net income of $778,000 and $49,000 related to the ESOP offset by cash dividends of $92,000.
Results of Operations for the Three and Six Months Ended March 31, 2012 and 2011
Overview.
Three Months Ended March 31, | ||||||||
2012 | 2011 | |||||||
(Dollars in thousands, except per share amounts) |
||||||||
Net income |
$ | 390 | $ | 299 | ||||
Basic earnings per share |
0.31 | 0.23 | ||||||
Diluted earnings per share |
0.31 | 0.23 | ||||||
Average equity to average assets |
14.28 | % | 12.48 | % |
Six Months Ended March 31, | ||||||||
2012 | 2011 | |||||||
(Dollars in thousands, except per share amounts) |
||||||||
Net income |
$ | 778 | $ | 542 | ||||
Basic earnings per share |
0.62 | 0.41 | ||||||
Diluted earnings per share |
0.62 | 0.41 | ||||||
Average equity to average assets |
14.21 | % | 11.70 | % |
The increase in net income for the three and six months ended March 31, 2012 was attributable to increased income from loans and investment securities and a decreased cost of funds, offset by increased non-interest expenses.
Net Interest Income. Net interest income increased $206,000 to $1.4 million for the three months ended March 31, 2012 from $1.2 million for the comparable 2011 period. For the six months ended March 31, 2012, net interest income increased $468,000 to $2.8 million from $2.3 million for the comparable 2011 period. For the three and six month periods ended March 31, 2012, respectively, higher net interest income was the result of a $83,000 and $202,000 increase in interest income, respectively, and a decrease of $123,000 and $266,000 in interest expense over the comparable 2011 periods, respectively. The total interest income increases for each period were primarily due to an increase in yield earned on securities and an increase in the average balance of loans. The decrease in total interest expense for the three and six month periods ended March 31, 2012 was primarily attributable to decreases in deposit interest expense due to lower interest rates.
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Rate/Volume Analysis. The following tables set forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by current volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of these tables, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionally based on the changes due to rate and the changes due to volume.
Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011 |
||||||||||||
Increase (Decrease) Due to |
Net | |||||||||||
Rate | Volume | |||||||||||
(In thousands) | ||||||||||||
Interest income: |
||||||||||||
Loans receivable |
$ | (67 | ) | $ | 110 | $ | 43 | |||||
Investment securities |
55 | (15 | ) | 40 | ||||||||
|
|
|
|
|
|
|||||||
Total interest-earning assets |
(12 | ) | 95 | 83 | ||||||||
|
|
|
|
|
|
|||||||
Interest Expense: |
||||||||||||
NOW money markets accounts |
(31 | ) | (3 | ) | (34 | ) | ||||||
Passbook and club accounts |
(15 | ) | 1 | (14 | ) | |||||||
IRA accounts |
(16 | ) | (4 | ) | (20 | ) | ||||||
Certificates of deposit |
(47 | ) | (5 | ) | (52 | ) | ||||||
CDARS |
(4 | ) | 1 | (3 | ) | |||||||
|
|
|
|
|
|
|||||||
Total interest-bearing liabilities |
(113 | ) | (10 | ) | (123 | ) | ||||||
|
|
|
|
|
|
|||||||
Net change in net interest income |
$ | 101 | $ | 105 | $ | 206 | ||||||
|
|
|
|
|
|
|||||||
Six Months Ended March 31, 2012 Compared to Six Months Ended March 31, 2011 |
||||||||||||
Increase (Decrease) Due to |
Net | |||||||||||
Rate | Volume | |||||||||||
(In thousands) | ||||||||||||
Interest income: |
||||||||||||
Loans receivable |
$ | (121 | ) | $ | 217 | $ | 96 | |||||
Investment securities |
106 | | 106 | |||||||||
|
|
|
|
|
|
|||||||
Total interest-earning assets |
(15 | ) | 217 | 202 | ||||||||
|
|
|
|
|
|
|||||||
Interest Expense: |
||||||||||||
NOW money markets accounts |
(64 | ) | (5 | ) | (69 | ) | ||||||
Passbook and club accounts |
(32 | ) | 1 | (31 | ) | |||||||
IRA accounts |
(26 | ) | (5 | ) | (31 | ) | ||||||
Certificates of deposit |
(120 | ) | (5 | ) | (125 | ) | ||||||
CDARS |
(4 | ) | 1 | (3 | ) | |||||||
Borrowings |
(10 | ) | 3 | (7 | ) | |||||||
|
|
|
|
|
|
|||||||
Total interest-bearing liabilities |
(256 | ) | (10 | ) | (266 | ) | ||||||
|
|
|
|
|
|
|||||||
Net change in net interest income |
$ | 241 | $ | 227 | $ | 468 | ||||||
|
|
|
|
|
|
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Provision for Loan Losses. The provision for loan losses for the three and six months ended March 31, 2012, was $30,000 and $50,000, respectively, compared to $17,600 and $35,000, respectively, for the comparable 2011 periods. The increased provision in the 2011 periods reflects growth in the loan portfolio with consideration given to the absence of charge-offs and decreased non-performing loans and classified and criticized assets.
There were no non-performing loans at March 31, 2012 compared to $22,000 in non-performing loans at September 30, 2011. There were no net charge-offs for the three and six months ended March 31, 2012 and March 31, 2011.
Non-Interest Income. The following tables show the components of non-interest income and the percentage changes for the three and six months ended March 31, 2012 and 2011.
Three Months Ended March 31, |
||||||||||||||||
2012 | 2011 | $ Change | % Change | |||||||||||||
Fees on NOW accounts |
$ | 8,810 | $ | 6,714 | $ | 2,096 | 31.2 | % | ||||||||
Other income |
10,063 | 10,698 | (635 | ) | (5.9 | ) | ||||||||||
|
|
|
|
|
|
|||||||||||
Total non-interest income |
$ | 18,873 | $ | 17,412 | $ | 1,461 | 8.4 | |||||||||
|
|
|
|
|
|
|||||||||||
Six Months Ended March 31, |
||||||||||||||||
2012 | 2011 | $ Change | % Change | |||||||||||||
Fees on NOW accounts |
$ | 17,611 | $ | 15,176 | $ | 2,435 | 16.0 | % | ||||||||
Other income |
21,644 | 21,453 | 191 | 0.9 | ||||||||||||
|
|
|
|
|
|
|||||||||||
Total non-interest income |
$ | 39,255 | $ | 36,629 | $ | 2,626 | 7.2 | |||||||||
|
|
|
|
|
|
Non-interest Expense. The following tables show the components of non-interest expense and the percentage changes for the three and six months ended March 31, 2012 and 2011.
Three Months
Ended March 31, |
||||||||||||||||
2012 | 2011 | $ Change | % Change | |||||||||||||
Salary and benefits |
$ | 475,243 | $ | 404,033 | $ | 71,210 | 17.6 | % | ||||||||
Occupancy |
93,163 | 85,985 | 7,178 | 8.3 | ||||||||||||
Data processing |
63,065 | 52,360 | 10,705 | 20.4 | ||||||||||||
Professional fees |
68,489 | 59,614 | 8,875 | 14.9 | ||||||||||||
FDIC insurance premiums |
13,710 | 35,827 | (22,117 | ) | (61.7 | ) | ||||||||||
Other |
77,211 | 76,935 | 276 | 0.4 | ||||||||||||
|
|
|
|
|
|
|||||||||||
Total non-interest expense |
$ | 790,881 | $ | 714,754 | $ | 76,127 | 10.7 | % | ||||||||
|
|
|
|
|
|
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Salaries and benefits expense increased $76,000 for the three months ended March 31, 2012 due primarily to a $21,000 increase in salary and benefits expense, a $14,000 increase in retirement fund contributions and an $36,000 increase in employee stock ownership plan expense related to the new employee stock ownership plan implemented in connection with the Banks second-step conversion. Computer expense increased $11,000 due to the costs of additional services. Legal and accounting expense increased $9,000 due to SEC public document filing costs. FDIC insurance premiums decreased $22,000 due to a lower assessment rate.
Six Months
Ended March 31, |
||||||||||||||||
2011 | 2010 | $ Change | % Change | |||||||||||||
Salary and benefits |
$ | 910,447 | $ | 809,424 | $ | 101,023 | 12.5 | % | ||||||||
Occupancy |
182,360 | 176,366 | 5,994 | 3.4 | ||||||||||||
Computer |
109,066 | 98,905 | 10,161 | 10.3 | ||||||||||||
Legal and accounting |
131,632 | 112,322 | 19,310 | 17.2 | ||||||||||||
FDIC insurance premiums |
27,183 | 73,180 | (45,997 | ) | (62.9 | ) | ||||||||||
Other |
185,263 | 156,556 | 28,707 | 18.3 | ||||||||||||
|
|
|
|
|
|
|||||||||||
Total non-interest expense |
$ | 1,545,951 | $ | 1,426,753 | $ | 119,198 | 8.4 | % | ||||||||
|
|
|
|
|
|
Salaries and benefits expense increased $101,000 for the six months ended March 31, 2012 due primarily to a $39,000 increase in salary and benefits expense, a $21,000 increase in retirement fund contributions and an $41,000 increase in employee stock ownership expense related to the new employee stock ownership plan implemented in connection with the Banks second-step conversion. Legal and accounting expense increased $19,000 due to SEC public document filing costs. Computer expense increased $10,000 during the six months ended March 31, 2012 due to the costs of additional services. FDIC insurance premiums decreased $46,000 as a result of a lower assessment rate.
Income Taxes. Income tax expense was $234,000 and $475,000, respectively, for the three and six month periods ended March 31, 2012, compared to $206,000 and $376,000 for the comparable periods in 2011. The increase in income tax expense in the 2012 periods was primarily the result of an increase in pre-tax income as the effective tax rate was comparable throughout the periods at 41%.
Liquidity and Capital Resources
Liquidity Management. Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, maturities of investment securities and borrowings from the Federal Home Loan Bank of Pittsburgh. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.
We regularly adjust our investments in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities and (4) the objectives of our asset/liability management policy.
Our most liquid assets are cash and cash equivalents. The level of these assets depends on our operating, financing, lending and investing activities during any given period. At March 31, 2012, cash and cash equivalents totaled $8.7 million. In addition, at March 31, 2012, we had the ability to borrow a total of approximately $52.0 million from the Federal Home Loan Bank of Pittsburgh. At March 31, 2012, we had no Federal Home Loan Bank advances outstanding.
At March 31, 2012, we had $2.3 million in loan commitments outstanding, which consisted of commitments to grant $2.0 million in loans and $234,000 in commercial leases. At March 31, 2012, we had $4.4 million in undisbursed lines of credit, $276,000 in undisbursed loans in process and $1.5 million in undisbursed construction loans.
Certificates of deposit due within one year of March 31, 2012 totaled $37.8 million, representing 55.8% of certificates of deposit, and 26.1% of total deposits at March 31, 2012. We believe, based on past experience, that we
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will retain a significant portion of these deposits at maturity. However, if these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before March 31, 2013.
The Company is a separate legal entity from the Bank and will have to provide for its own liquidity to pay its operating expenses and other financial obligations. Upon completion of the Banks conversion, the Companys primary source of liquidity will be the proceeds it retained from the stock offering and, in the future, dividends received from the Bank. The amount of dividends that the Bank may declare and pay to the Company in any calendar year, without the receipt of prior approval from the Office of 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 March 31, 2012, the Company had $1.6 million in liquid assets.
Capital Management. The Bank must maintain an adequate level of liquidity to ensure the availability of sufficient funds to support loan growth and deposit withdrawals, to satisfy financial commitments and to take advantage of investment opportunities. Historically, the Bank has been able to retain a significant amount of its deposits as they mature.
The Bank is required to maintain specific amounts of capital pursuant to Office of the Comptroller of the Currency regulatory requirements. As of March 31, 2012, 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 22.53%, 21.68% and 13.90%, respectively. The regulatory requirements at that date were 8.0%, 4.0% and 4.0%, respectively. At March 31, 2012, the Bank was considered well-capitalized under applicable regulatory guidelines.
The capital raised from our stock offering significantly increased our liquidity and capital resources. Over time, the initial level of liquidity will be reduced as net proceeds from the stock offering are used for general corporate purposes, including the funding of lending activities. Our financial condition and results of operations will likely be enhanced by the capital from the offering, resulting in increased net interest-earning assets and revenue. However, the large increase in equity resulting from the capital raised in the offering will, initially, have an adverse impact on our return on equity.
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 Banks audited consolidated financial statements for the year ended September 30, 2011.
For the three months ended March 31, 2012, the Bank did not engage in any off-balance sheet transactions reasonably likely to have a material effect on the Banks financial condition, results of operations or cash flows.
Item 3. | Quantitative and Qualitative Disclosure About Market Risk |
This item is not applicable as the Company is a smaller reporting company.
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Item 4. | Controls and Procedures |
The Companys management, including the Companys principal executive officer and principal financial officer, have evaluated the effectiveness of the Companys disclosure controls and procedures, as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the Exchange Act). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Companys disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the SEC) (1) is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and (2) is accumulated and communicated to the Companys management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, no change in the Companys internal control over financial reporting occurred during the quarter ended March 31, 2012 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. | Legal Proceedings |
The Company is not involved in any pending legal proceedings. The Bank is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. The Banks management believes that such routine legal proceedings, in the aggregate, are immaterial to the Banks financial condition and results of operations.
Item 1A. | Risk Factors |
For information regarding the Companys risk factors, see Risk Factors in the Companys Annual Report on Form 10-K for the year ended September 30, 2011, as filed with the SEC on December 29, 2011. As of March 31, 2012, the risk factors of the Company have not changed materially from those disclosed in the Annual Report on Form 10-K.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Period |
(a) Total Number of Shares Purchased |
(b) Average Price Paid Per Share |
(c) Total Number of Shares as Part of Publicly Announced Plans or Programs |
(d) Maximum Number of Shares Yet Be Purchased Under the Plans or Programs |
||||||||||||
January 1 through January 31, 2012 |
| | | | ||||||||||||
February 1 through February 29, 2012 (1) |
| | | | ||||||||||||
March 1 through March 31, 2012 (1) |
3,276 | $ | 14.30 | 131,470 | 128,194 | |||||||||||
|
|
|
|
|||||||||||||
Total |
3,276 | 131,470 | 128,194 | |||||||||||||
|
|
|
|
(1) | On February 22, 2012 authorized the repurchase of up to 131,470 shares of the Companys outstanding common stock. The stock repurchase program will expire upon the purchase of the maximum number of shares authorized under the program, unless the board of directors terminates the program earlier |
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Table of Contents
Item 3. | Defaults Upon Senior Securities |
Not applicable.
Item 4. | Mine Safety Disclosures |
Not applicable.
Item 5. | Other Information. |
Not applicable.
Item 6. | Exhibits |
2.1 | Plan of Conversion and Reorganization (1) | |
3.1 | Articles of Incorporation of Eureka Financial Corp. (1) | |
3.2 | Bylaws of Eureka Financial Corp. (1) | |
4.0 | Form of Stock Certificate of Eureka Financial Corp. (1) | |
10.0 | Eureka Financial Corp. 2012 Equity Incentive Plan (2) | |
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 Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, 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 Companys Registration Statement on Form S-1 (File No. 333-169767), as amended, initially filed with the Securities and Exchange Commission on October 5, 2010. |
(2) | Incorporated herein by reference to Appendix A to the Companys definitive proxy materials filed with the Securities and Exchange Commission on March 14, 2012. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
EUREKA FINANCIAL CORP. | ||||
Dated: May 14, 2012 | By: | /s/ Edward F. Seserko | ||
Edward F. Seserko | ||||
President and Chief Executive Officer | ||||
(principal executive officer) | ||||
Dated: May 14, 2012 | By: | /s/ Gary B. Pepper | ||
Gary B. Pepper | ||||
Executive Vice President and Chief Financial Officer | ||||
(principal accounting and financial officer) |