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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-Q

 

 

(Mark one)

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

For the quarterly period ended March 31, 2015

OR

 

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

For the transition period from                      to                     

Commission file number: 0-54238

 

 

EUREKA FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland		27-3671639
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

3455 Forbes Avenue, Pittsburgh, Pennsylvania		15213
(Address of principal executive offices)		(Zip Code)

(412) 681-8400

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

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

As of May 11, 2015, there were 1,207,408 shares of the registrant’s common stock outstanding.

 

 

 

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EUREKA FINANCIAL CORP.

Table of Contents

 

				Page Number
PART I - FINANCIAL INFORMATION
Item 1:		Financial Statements			3
		Consolidated Balance Sheets as of March 31, 2015 and September 30, 2014 (unaudited)			3
		Consolidated Statements of Income for the Three and Six Months Ended March 31, 2015 and 2014 (unaudited)			4
		Consolidated Statements of Comprehensive Income for the Three and Six Months Ended March 31, 2015 and 2014 (unaudited)			5
		Consolidated Statement of Changes in Stockholders’ Equity for the Six Months Ended March 31, 2015 (unaudited)			6
		Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2015 and 2014 (unaudited)			7
		Notes to Consolidated Financial Statements (unaudited)			8
Item 2:		Management’s Discussion and Analysis of Financial Condition and Results of Operations			31
Item 3:		Quantitative and Qualitative Disclosures About Market Risk			39
Item 4:		Controls and Procedures			39
PART II - OTHER INFORMATION
Item 1:		Legal Proceedings			39
Item 1A:		Risk Factors			39
Item 2:		Unregistered Sales of Equity Securities and Use of Proceeds			39
Item 3:		Defaults Upon Senior Securities			40
Item 4:		Mine Safety Disclosures			40
Item 5:		Other Information			40
Item 6:		Exhibits			40
SIGNATURES					41

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PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

EUREKA FINANCIAL CORP. AND SUBSIDIARY

Consolidated Balance Sheets

(unaudited)

 

		March 31, 2015				September 30, 2014
Assets:
Cash and due from banks		$	628,683			$	698,899
Interest-bearing deposits in other banks			10,339,260				8,941,044
Cash and cash equivalents			10,967,943				9,639,943
Investment securities available for sale			6,546,445				8,403,565
Investment securities held to maturity (fair value of $2,834,857 and $2,740,940, respectively)			2,768,192				2,772,470
Mortgage-backed securities available for sale			3,755				5,585
Federal Home Loan Bank (“FHLB”) stock, at cost			125,600				302,500
Loans receivable, net of allowance for loan losses of $1,421,038 and $1,361,038, respectively			131,542,911				128,030,483
Premises and equipment, net			1,064,569				1,073,073
Deferred tax asset, net			814,988				832,735
Accrued interest receivable and other assets			1,956,928				1,126,697
Total Assets		$	155,791,331			$	152,187,051
Liabilities and Stockholders’ Equity:
Deposits:
Non-interest bearing		$	4,920,518			$	5,639,321
Interest bearing			126,078,159				122,221,240
Total deposits			130,998,677				127,860,561
Advances from borrowers for taxes and insurance			405,121				633,159
Accrued interest payable and other liabilities			1,225,833				999,554
Total Liabilities			132,629,631				129,493,274
Stockholders’ Equity:
Common stock, $.01 par value; 10,000,000 shares authorized; 1,207,460 shares outstanding at March 31, 2015; 1,213,986 shares outstanding at September 30, 2014			12,075				12,140
Paid-in capital			9,981,513				10,025,400
Retained earnings - substantially restricted			13,568,727				13,179,662
Accumulated other comprehensive loss			(27,786	)			(121,279	)
Unearned ESOP shares			(372,829	)			(402,146	)
Total Stockholders’ Equity			23,161,700				22,693,777
Total Liabilities and Stockholders’ Equity		$	155,791,331			$	152,187,051

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

 

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EUREKA FINANCIAL CORP. AND SUBSIDIARY

Consolidated Statements of Income

(unaudited)

 

		Three Months Ended March 31,								Six Months Ended March 31,
		2015				2014				2015				2014
Interest Income
Loans, including fees		$	1,638,748			$	1,615,305			$	3,277,847			$	3,226,776
Investment securities and other interest-earning assets:
Taxable			74,074				45,515				150,328				90,011
Tax exempt			21,983				24,089				44,435				45,110
Mortgage-backed securities			73				127				159				269
Total Interest Income			1,734,878				1,685,036				3,472,769				3,362,166
Interest Expense
Deposits			205,549				208,686				411,877				447,742
FHLB advances			—				3,580				—				6,616
Total Interest Expense			205,549				212,266				411,877				454,358
Net Interest Income			1,529,329				1,472,770				3,060,892				2,907,808
Provision for Loan Losses			30,000				15,000				60,000				25,000
Net Interest Income after Provision for Loan Losses			1,499,329				1,457,770				3,000,892				2,882,808
Non-Interest Income
Fees on deposit accounts			7,278				7,472				18,075				15,746
Other income			26,589				8,572				40,439				24,920
Total Non-Interest Income			33,867				16,044				58,514				40,666
Non-Interest Expense
Salaries and benefits			554,987				543,142				1,101,048				1,062,188
Occupancy			92,928				91,796				182,076				179,704
Data processing			65,204				64,122				127,613				133,689
Professional fees			89,359				83,961				198,271				159,379
Federal Deposit Insurance Corporation premiums			18,150				17,050				36,300				33,550
Other			141,041				139,163				255,001				249,356
Total Non-Interest Expenses			961,669				939,234				1,900,309				1,817,866
Income Before Income Tax Provision			571,527				534,580				1,159,097				1,105,608
Income Tax Provision			199,190				188,462				406,666				393,861
Net Income		$	372,337			$	346,118			$	752,431			$	711,747
Earnings per Common Share - Basic		$	0.32			$	0.29			$	0.65			$	0.60
Earnings per Common Share - Diluted			0.32				0.29				0.64				0.60

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

 

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EUREKA FINANCIAL CORP. AND SUBSIDIARY

Consolidated Statement of Comprehensive Income

(unaudited)

 

		For the Three Months Ended March 31,								For the Six Months Ended March 31,
		2015				2014				2015				2014
Net income		$	372,337			$	346,118			$	752,431			$	711,747
Other comprehensive income:
Decrease in unrealized losses on available for sale securities			27,681				303,601				141,656				187,164
Income tax effect			(9,412	)			(103,224	)			(48,163	)			(63,635	)
Other comprehensive income, net of tax:			18,269				200,377				93,493				123,529
Total comprehensive income		$	390,606			$	546,495			$	845,924			$	835,276

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

 

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EUREKA FINANCIAL CORP. AND SUBSIDIARY

Consolidated Statement of Changes in Stockholders’ Equity

For the Six Months Ended March 31, 2015

(unaudited)

 

		Common Stock Shares Outstanding				Common Stock				Paid-In Capital				Retained Earnings				Accumulated Other Comprehensive (Loss)				Unearned ESOP Shares				Total
Balance, September 30, 2014			1,213,986			$	12,140			$	10,025,400			$	13,179,662			$	(121,279	)		$	(402,146	)		$	22,693,777
Net income			—				—				—				752,431				—				—				752,431
Other comprehensive income			—				—				—				—				93,493				—				93,493
Compensation expense related to restricted stock			—				—				39,564				—				—				—				39,564
Compensation expense related to stock options			—				—				8,670				—				—				—				8,670
Compensation expense on ESOP			—				—				31,609				—				—				29,317				60,926
Retirement of common stock			(6,526	)			(65	)			(123,730	)			—				—				—				(123,795	)
Dividends on common stock ($.30 per share)			—				—				—				(363,366	)			—				—				(363,366	)
Balance, March 31, 2015			1,207,460			$	12,075			$	9,981,513			$	13,568,727			$	(27,786	)		$	(372,829	)		$	23,161,700

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

 

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EUREKA FINANCIAL CORP. AND SUBSIDIARY

Consolidated Statements of Cash Flows

(unaudited)

 

		Six Months Ended March 31,
		2015				2014
OPERATING ACTIVITIES
Net income		$	752,431			$	711,747
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of premises and equipment			71,706				75,901
Provision for loan losses			60,000				25,000
Net accretion/amortization of discounts and premiums on securities and unamortized loan fees and costs			(1,733	)			2,153
Compensation expense for ESOP, restricted stock, and stock options			109,160				100,704
Deferred federal income taxes			(30,416	)			(18,140	)
Decrease (increase) in accrued interest receivable			62,297				(32,680	)
Increase in prepaid/accrued income tax			(30,718	)			(249,998	)
Increase (decrease) in accrued interest payable			11,152				(10,613	)
Increase retirement fund obligation			(161,500	)			(115,707	)
Other, net			(484,531	)			62,537
Net cash provided by operating activities			357,848				550,904
INVESTING ACTIVITIES
Proceeds from maturities and redemptions of investment securities available for sale			2,000,000				5,000
Proceeds from maturities and redemptions of investment securities held to maturity			5,000				—
Purchase of investment securities available for sale			—				(1,250,000	)
Net paydowns in mortgage-backed securities available for sale			1,616				1,541
Purchase of FHLB stock			(22,500	)			(320,000	)
Redemption of FHLB stock			199,400				100,000
Net decrease (increase) in loans			1,643,544				(54,932	)
Commercial leases purchased			(5,215,971	)			(3,172,559	)
Premises and equipment expenditures			(63,202	)			(46,822	)
Net cash used for investing activities			(1,452,113	)			(4,737,772	)
FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts			3,138,116				(928,435	)
Proceeds from FHLB borrowings			—				5,500,000
Net decrease in advances from borrowers for taxes and insurance			(228,038	)			(202,403	)
Purchase and retirement of common stock			(123,795	)			(149,540	)
Payment of dividends			(364,018	)			(250,197	)
Net cash provided by financing activities			2,422,265				3,969,425
Net increase (decrease) in cash and cash equivalents			1,328,000				(217,443	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR			9,639,943				7,181,069
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	10,967,943			$	6,963,626
SUPPLEMENTAL INFORMATION
Cash paid during the period for:
Interest paid		$	400,725			$	464,971
Income taxes paid		$	467,000			$	612,000

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

 

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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 Bank’s 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.

Unaudited Interim Financial Statements

The accompanying unaudited consolidated financial statements were prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) for interim information. The accompanying unaudited consolidated financial statements for the interim periods include all adjustments, consisting of normal recurring accruals, which are necessary, in the opinion of management, to fairly reflect Eureka Financial Corp.’s consolidated financial position and results of operations. Additionally, these consolidated financial statements for the interim periods have been prepared in accordance with the instructions to the SEC’s Form 10-Q and Article 10 of Regulation S-X and therefore do not include all information or footnotes necessary for a complete presentation of financial condition, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). For further information, refer to the audited consolidated financial statements and footnotes thereto for the year ended September 30, 2014, as contained in the Company’s Annual Report on Form 10-K filed with the SEC on December 29, 2014.

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, valuation of deferred tax assets and 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 Bank’s employee stock ownership plan are not deemed outstanding for earnings per share calculations. Diluted earnings per share is computed by dividing net income by weighted-average shares outstanding plus potential common stock resulting from dilutive stock options. Common shares that have been repurchased are not deemed outstanding for earnings per share calculations.

 

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The following is a reconciliation of the numerator and denominator of the basic and dilutive earnings per share computations for net income for the three and six months ended March 31, 2015 and 2014.

 

		For the Three Months Ended March 31,								For the Six Months Ended March 31,
		2015				2014				2015				2014
Weighted average common shares			1,210,733				1,251,814				1,212,283				1,252,149
Average unearned ESOP shares			(35,653	)			(41,763	)			(36,424	)			(42,534	)
Average unearned restricted shares			(11,546	)			(16,739	)			(12,057	)			(17,392	)
Weighted average common shares and stock equivalents used to calculate basic and diluted earnings per share			1,163,534				1,193,312				1,163,802				1,192,223
Additional common stock equivalents (restricted stock) used to calculate diluted earnings per share			1,300				1,096				824				454
Additional common stock equivalents (stock options) used to calculate diluted earnings per share			4,386				2,813				2,631				1,471
Weighted average common shares and common stock equivalents used to calculate basic and diluted earnings per share			1,169,220				1,197,221				1,167,257				1,194,148
Basic earnings per share		$	0.32			$	0.29			$	0.65			$	0.60
Diluted earnings per share			0.32				0.29				0.64				0.60

Options to purchase 64,907 shares of common stock at a price of $15.24 per share were outstanding at March 31, 2015 and 2014. All of the options were considered dilutive based on the weighted average market value exceeding the weighted average stock price.

 

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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 — Accumulated Other Comprehensive Loss

The following table presents the changes in accumulated other comprehensive loss by component net of tax for the three and six month periods ended March 31, 2015:

 

		Unrealized Losses on Available for Sale Securities						Unrealized Losses on Available for Sale Securities
Balance as of December 31, 2014		$	(46,055	)		Balance as of September 30, 2014		$	(121,279	)
Other comprehensive income before reclassification			18,269			Other comprehensive income before reclassification			93,493
Amount reclassified from accumulated other comprehensive loss			—			Amount reclassified from accumulated other comprehensive loss			—
Total other comprehensive income			18,269			Total other comprehensive income			93,493
Balance as of March 31, 2015		$	(27,786	)		Balance as of March 31, 2015		$	(27,786	)

 

		Unrealized Losses on Available for Sale Securities						Unrealized Losses on Available for Sale Securities
Balance as of December 31, 2013		$	(433,585	)		Balance as of September 30, 2013		$	(361,394	)
Other comprehensive income before reclassification			195,720			Other comprehensive income before reclassification			123,529
Amount reclassified from accumulated other comprehensive loss			—			Amount reclassified from accumulated other comprehensive loss			—
Total other comprehensive income			195,720			Total other comprehensive income			123,529
Balance as of March 31, 2014		$	(237,865	)		Balance as of March 31, 2014		$	(237,865	)

 

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Note 3 — Investment Securities

Investment securities available for sale consisted of the following at March 31, 2015 and September 30, 2014:

 

		March 31, 2015
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Obligations of states and political subdivisions		$	590,852			$	1,743			$	—			$	592,595
U.S. government agency securities			5,997,994				4,394				(48,538	)			5,953,850
		$	6,588,846			$	6,137			$	(48,538	)		$	6,546,445

 

		September 30, 2014
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Obligations of states and political subdivisions		$	591,350			$	535			$	(4,770	)		$	587,115
U.S. government agency securities			7,996,488				975				(181,013	)			7,816,450
		$	8,587,838			$	1,510			$	(185,783	)		$	8,403,565

U.S. government agency securities with carrying values of $5,953,850 and $5,070,700 at March 31, 2014 and September 30, 2014, respectively, were pledged to secure public deposits held by the Company.

There were no sales of available for sale investment securities during the six months ended March 31, 2015 or 2014.

The amortized cost and fair value of securities available for sale at March 31, 2015 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, 2015
		Amortized Cost				Fair Value
Due in one year or less		$	145,320			$	145,362
Due after one year through five years			145,532				145,913
Due after ten years			6,297,994				6,255,170
		$	6,588,846			$	6,546,445

 

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Investment securities held to maturity consisted of the following at March 31, 2015 and September 30, 2014:

 

		March 31, 2015
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Obligations of states and political subdivisions		$	2,018,192			$	95,632			$	(15,467	)		$	2,098,357
U.S. government agency securities			750,000				—				(13,500	)			736,500
Total		$	2,768,192			$	95,632			$	(28,967	)		$	2,834,857

 

		September 30, 2014
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Obligations of states and political subdivisions		$	2,022,470			$	58,846			$	(24,752	)		$	2,056,565
U.S. government agency securities			750,000				—				(65,625	)			684,375
Total		$	2,772,470			$	58,846			$	(90,377	)		$	2,740,940

U.S. government agency securities with carrying values of $736,500 and $750,000 at March 31, 2015 and September 30, 2014, respectively, were pledged to secure public deposits held by the Company.

The amortized cost and fair value of securities held to maturity at March 31, 2015 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, 2015
		Amortized Cost				Fair Value
Due after five years through ten years		$	483,396			$	544,122
Due after ten years			2,284,796				2,290,735
Total		$	2,768,192			$	2,834,857

 

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Temporarily impaired investments consisted of the following at March 31, 2015 and September 30, 2014:

 

		March 31, 2015
		Less than 12 Months								More than 12 Months								Total
		Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses
Obligations of states and political subdivisions		$	—			$	—			$	285,420			$	(15,467	)		$	285,420			$	(15,467	)
U.S. government agency securities			745,050				(4,951	)			3,441,575				(57,087	)			4,186,625				(62,038	)
		$	745,050			$	(4,951	)		$	3,726,995			$	(72,554	)		$	4,472,045			$	(77,505	)

 

		September 30, 2014
		Less than 12 Months								More than 12 Months								Total
		Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses
Obligations of states and political subdivisions		$	297,030			$	(1,310	)		$	572,700			$	(28,212	)		$	869,730			$	(29,522	)
U.S. government agency securities			2,490,575				(7,975	)			4,759,275				(238,663	)			7,249,850				(246,638	)
		$	2,787,605			$	(9,285	)		$	5,331,975			$	(266,875	)		$	8,119,580			$	(276,160	)

The Company reviews its position quarterly. At March 31, 2015, 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.

The Company had 8 securities in an unrealized loss position at March 31, 2015. The Company has concluded that the unrealized losses disclosed above are temporary and the result of interest rate changes or sector credit ratings changes that are not expected to result in the non-collection of principal and interest during the period. The Company’s current intention is not to sell any impaired securities and it is more likely than not it will not be required to sell these securities before the recovery of its amortized cost basis.

 

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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, 2015
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Freddie Mac Certificates		$	682			$	50			$	—			$	732
Fannie Mae Certificates			2,772				251				—				3,023
		$	3,454			$	301			$	—			$	3,755

 

		September 30, 2014
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Freddie Mac Certificates		$	822			$	60			$	—			$	882
Fannie Mae Certificates			4,246				457				—				4,703
		$	5,068			$	517			$	—			$	5,585

There were no sales of mortgage-backed securities during the three and six months ended March 31, 2015 and 2014 and there were no temporarily impaired mortgage-backed securities at March 31, 2015 or September 30, 2014. In addition, the Company had no securities in an unrealized loss position at March 31, 2015 or September 30, 2014.

The amortized cost and fair values of mortgage-backed securities at March 31, 2015 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, 2015
		Amortized Cost				Fair Value
Due after one year through five years		$	2,046			$	2,194
Due after five years through ten years			432				471
Due after ten years			976				1,090
		$	3,454			$	3,755

 

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Note 5 — Loans

Major classifications of loans are as follows at March 31, 2015 and September 30, 2014:

 

		March 31, 2015				September 30, 2014
One-to four-family real estate - owner occupied		$	22,080,499			$	21,556,222
One-to four-family real estate - non-owner occupied			40,339,704				39,185,939
Construction			3,579,725				2,562,823
Multi-family real estate			18,129,327				18,699,192
Commercial real estate			23,923,527				21,635,758
Home equity and second mortgages			1,979,431				1,880,546
Secured loans			147,283				158,512
Commercial leases and loans			18,724,799				19,231,496
Commercial lines of credit			4,415,702				4,790,107
			133,319,997				129,700,595
Plus:
Unamortized loan premiums			11,389				12,176
Less:
Unamortized loan fees and costs, net			(367,437	)			(321,250	)
Allowance for loan losses			(1,421,038	)			(1,361,038	)
		$	131,542,911			$	128,030,483

Loan Portfolio Composition

The loan and lease receivable portfolio is broken down into the following categories: (1) one- to four-family real estate loans - owner occupied and non-owner occupied; (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) commercial loans and leases; and (8) 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 Bank’s risk on this segment of the portfolio is considered minimal.

Construction loans include dwelling and land loans where funds are being held by the Bank until the construction has 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 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 maximum 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 the 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 the 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

 

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and second lien combined cannot exceed 80% of the appraised value of the property. The risk to the Bank depends on whether we hold the first and/or second lien. We rely heavily on the appraised value to ensure equity is available, as well as the strength of the borrower. These loans are not considered to be more than moderate risk.

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 residential property is used as collateral. These loans are made to individuals as well as companies, and are collateralized by commercial property, equipment or receivables. The loan amount is determined by the borrower’s financial strength as well as the collateral. The lines are based on the collateral and the ability of the borrower(s) to repay the debt. The lines are closely monitored and limits adjusted accordingly based on updated tax returns and/or other changes to the financial wellbeing of the borrower(s). Subsequently, risk is controlled but considered moderate based on the collateral and nature of the loan.

Credit Quality

The Bank’s risk rating system is made up of five loan grades (1, 2, 3, 4 and 5). A description of the general characteristics of the risk grades follows:

Rating 1 – Pass

Rating 1 has asset risks ranging from excellent low risk to acceptable. This rating considers a customer’s history of earnings, cash flow, liquidity, leverage, capitalization, consistency of debt service coverage, the nature and extent of customer relationship and other relevant specific business factors such as the stability of the industry or market area, changes to management, litigation or unexpected events that could have an impact on risks.

Rating 2 – Special Mention

A special mention asset has a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. The special mention classification is a transitory one and is the first classification that requires an action plan to resolve the weaknesses inherent to the credit. These relationships will be reviewed at least quarterly.

Rating 3 – Substandard

Substandard assets are assets that are inadequately protected by the sound worth or paying capacity of the borrower or of the collateral pledged. These assets have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified as substandard. The loans may have a delinquent history or combination of weak collateral, weak guarantor strength or income statement losses. These assets listed may include assets with histories of repossessions or some that are non-performing bankruptcies. These relationships will be reviewed at least quarterly.

 

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Rating 4 – Doubtful

Doubtful assets have many of the same characteristics of substandard assets with the exception that the Bank has determined that loss is not only possible but is probable and the risk is close to certain that loss will occur. When a loan is assigned to this category the Bank will identify the probable loss and it will receive allocation in the loan loss reserve analysis. These relationships will be reviewed at least quarterly.

Rating 5 – Loss

Once an asset is identified as a definite loss to the Bank, it will receive the classification of “loss.” There may be some future potential recovery; however it is more practical to write off the loan at the time of classification. Losses will be taken in the period in which they are determined to be uncollectable. Credit quality indicators as of March 31, 2015 were as follows:

 

		Pass				Special Mention				Substandard				Doubtful				Loss				Total
One-to four-family real estate non-owner occupied		$	40,339,704			$	—			$	—			$	—			$	—			$	40,339,704
Construction			3,579,725				—				—				—				—				3,579,725
Multi-family real estate			18,129,327				—				—				—				—				18,129,327
Commercial real estate			23,908,481				15,046				—				—				—				23,923,527
Commercial leases and loans			18,423,071				—				301,728				—				—				18,724,799
Commercial lines of credit			4,240,232				12,311				163,159				—				—				4,415,702
		$	108,620,540			$	27,357			$	464,887			$	—			$	—			$	109,112,784

Credit quality indicators as of September 30, 2014 were as follows:

 

		Pass				Special Mention				Substandard				Doubtful				Loss				Total
One-to four-family real estate non-owner occupied		$	39,185,939			$	—			$	—			$	—			$	—			$	39,185,939
Construction			2,562,823				—				—				—				—				2,562,823
Multi-family real estate			18,699,192				—				—				—				—				18,699,192
Commercial real estate			21,635,758				—				—				—				—				21,635,758
Commercial leases and loans			18,843,633				—				387,863				—				—				19,231,496
Commercial lines of credit			4,174,051				192,139				423,917				—				—				4,790,107
		$	105,101,396			$	192,139			$	811,780			$	—			$	—			$	106,105,315

 

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The following table presents performing and non-performing residential real estate and consumer loans based on payment activity as of March 31, 2015 and September 30, 2014. 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.

 

		March 31, 2015
		Nonperforming Loans				Performing Loans				Total
One-to four-family real estate - owner occupied		$	36,263			$	22,044,236			$	22,080,499
Home equity and second mortgages			—				1,979,431				1,979,431
Secured loans			—				147,283				147,283
		$	36,263			$	24,170,950			$	24,207,213

 

		September 30, 2014
		Nonperforming Loans				Performing Loans				Total
One-to four-family real estate - owner occupied		$	36,263			$	21,519,959			$	21,556,222
Home equity and second mortgages			—				1,880,546				1,880,546
Secured loans			—				158,512				158,512
		$	36,263			$	23,559,017			$	23,595,280

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. There was one impaired loans as of March 31, 2015, with no related allowance. The Company did not recognize any interest income from this loan for the three and six month period ended March 31, 2015. There were two impaired loans at September 30, 2014.

 

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		Impaired Loans with Specific Allowance								Impaired Loans with No Specific Allowance				Total Impaired Loans
		Recorded Investment				Related Allowance				Recorded Investment				Recorded Investment				Unpaid Principal Balance				Average Recorded Investment				Interest Income Recognized
March 31, 2015
Commercial leases and loans		$	—			$	—			$	301,728			$	301,728			$	301,728			$	344,795			$	—

 

		Impaired Loans with Specific Allowance								Impaired Loans with No Specific Allowance				Total Impaired Loans
		Recorded Investment				Related Allowance				Recorded Investment				Recorded Investment				Unpaid Principal Balance				Average Recorded Investment				Interest Income Recognized
September 30, 2014
Commercial leases and loans		$	—			$	—			$	387,863			$	387,863			$	387,863			$	415,179			$	15,175
Commercial lines of credit			—				—				423,917				423,917				423,917				423,917				—
		$	—			$	—			$	811,780			$	811,780			$	811,780			$	839,096			$	15,175

The Bank did not have any TDRs in the periods ended March 31, 2015 and 2014. Nor did it have any TDRs within the year ended September 30, 2014.

 

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The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due status as of March 31, 2015:

 

		30-59 Days Past Due				60-89 Days Past Due				Greater than 90 Days Past Due				Total Past Due				Current				Total Loans				Nonaccrual Loans
One-to four-family real estate owner occupied		$	142,075			$	596,171			$	36,263			$	774,509			$	21,305,990			$	22,080,499			$	36,263
One-to four family real estate non-owner occupied			—				—				—				—				40,339,704				40,339,704				—
Construction			—				—				—				—				3,579,725				3,579,725				—
Multi-family real estate			—				—				—				—				18,129,327				18,129,327				—
Commercial real estate			—				—				—				—				23,923,527				23,923,527				—
Home equity and second mortgages			—				—				—				—				1,979,431				1,979,431				—
Secured loans			—				—				—				—				147,283				147,283				—
Commercial leases and loans			—				—				301,728				301,728				18,423,071				18,724,799				301,728
Commercial lines of credit			—				—				—				—				4,415,702				4,415,702				—
		$	142,075			$	596,171			$	337,991			$	1,076,237			$	132,243,760			$	133,319,997			$	337,991

The following table presents the classes of the loan portfolio summarized by the past due status as of September 30, 2014:

 

		30-59 Days Past Due				60-89 Days Past Due				Greater than 90 Days Past Due				Total Past Due				Current				Total Loans				Nonaccrual Loans
One-to four-family real estate owner occupied		$	256,707			$	—			$	36,263			$	292,970			$	21,263,252			$	21,556,222			$	36,263
One-to four family real estate non-owner occupied			—				—				—				—				39,185,939				39,185,939				—
Construction			—				—				—				—				2,562,823				2,562,823				—
Multi-family real estate			—				—				—				—				18,699,192				18,699,192				—
Commercial real estate			—				—				—				—				21,635,758				21,635,758				—
Home equity and second mortgages			—				—				—				—				1,880,546				1,880,546				—
Secured loans			—				—				—				—				158,512				158,512				—
Commercial leases and loans			—				—				387,863				387,863				18,843,633				19,231,496				387,863
Commercial lines of credit			—				—				423,917				423,917				4,366,190				4,790,107				423,917
		$	256,707			$	—			$	848,043			$	1,104,750			$	128,595,845			$	129,700,595			$	848,043

Eureka Bank primarily grants loans to customers throughout Southwestern Pennsylvania. Eureka Bank maintains a diversified loan portfolio and the ability of its debtors to honor their obligations is not substantially dependent on any particular economic business sector. Loans on non-accrual at March 31, 2015 and September 30, 2014 were approximately $338,000 and $848,000, respectively. The foregone interest on non-accrual loans was $4,192 and $12,593 for the three months ended March 31, 2015 and 2014 and $35,887 and $26,654 for the six months ended March 31, 2015 and 2014, respectively. As of March 31, 2015 and September 30, 2014, there were no loans that were 90 days or more delinquent and still accruing interest.

 

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The following tables detail the allowance for loan losses and loan receivable balances at March 31, 2015 and September 30, 2014. An allocation of the allowance to one category of loans does not prevent the Company’s ability to utilize the allowance to absorb losses in a different category. The loans receivable are disaggregated on the basis of the Company’s impairment methodology.

 

		One-to four-family real estate - owner occupied				One-to four-family real estate - non-owner occupied				Construction				Multi- family real estate				Commercial real estate				Home equity and second mortgages				Secured loans				Commercial leases and loans				Commercial lines of credit				Non-allocated				Total
Allowance for credit losses:
Beginning balance 1/1/2015		$	161,720			$	317,368			$	61,424			$	103,116			$	265,960			$	18,766			$	—			$	350,785			$	48,401			$	63,498			$	1,391,038
Charge-offs			—				—				—				—				—				—				—				—				—				—				—
Recoveries			—				—				—				—				—				—				—				—				—				—				—
Provisions (credits)			(32,278	)			(53,530	)			7,354				221				(31,561	)			140				—				(37,694	)			(5,127	)			182,475				30,000
Ending balance 3/31/15		$	129,442			$	263,838			$	68,778			$	103,337			$	234,399			$	18,906			$	—			$	313,091			$	43,274			$	245,973			$	1,421,038
Beginning balance 10/1/2014		$	155,957			$	307,400			$	36,253			$	141,179			$	222,886			$	8,302			$	—			$	271,367			$	50,333			$	167,361			$	1,361,038
Charge-offs			—				—				—				—				—				—				—				—				—				—				—
Recoveries			—				—				—				—				—				—				—				—				—				—				—
Provisions (credits)			(26,515	)			(43,562	)			32,525				(37,842	)			11,513				10,604				—				41,724				(7,059	)			78,612				60,000
Ending balance 3/31/15		$	129,442			$	263,838			$	68,778			$	103,337			$	234,399			$	18,906			$	—			$	313,091			$	43,274			$	245,973			$	1,421,038
Beginning balance 1/1/2014		$	151,845			$	282,772			$	21,110			$	143,801			$	262,131			$	6,972			$	—			$	246,734			$	49,581			$	144,092			$	1,309,038
Charge-offs			—				—				—				—				—				—				—				—				—				—				—
Recoveries			—				—				—				—				—				—				—				—				—				—				—
Provisions (credits)			(3,540	)			1,555				20,077				(450	)			51,707				1,897				—				17,830				(307	)			(73,769	)			15,000
Ending balance 3/31/14		$	148,305			$	284,327			$	41,187			$	143,351			$	313,838			$	8,869			$	—			$	264,564			$	49,274			$	70,323			$	1,324,038
Beginning balance 10/1/2013		$	156,975			$	267,895			$	19,435			$	141,683			$	269,940			$	7,471			$	—			$	246,978			$	46,381			$	142,280			$	1,299,038
Charge-offs			—				—				—				—				—				—				—				—				—				—				—
Recoveries			—				—				—				—				—				—				—				—				—				—				—
Provisions (credits)			(8,670	)			16,432				21,752				1,668				43,898				1,398				—				17,586				2,893				(71,957	)			25,000
Ending balance 3/31/14		$	148,305			$	284,327			$	41,187			$	143,351			$	313,838			$	8,869			$	—			$	264,564			$	49,274			$	70,323			$	1,324,038
Allowance for credit losses:
Ending balance 3/31/2015		$	129,442			$	263,838			$	68,778			$	103,337			$	234,399			$	18,906			$	—			$	313,091			$	43,274			$	245,973			$	1,421,038
Ending balance: individually evaluated for impairment		$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—
Ending balance: collectively evaluated for impairment		$	129,442			$	263,838			$	68,778			$	103,337			$	234,399			$	18,906			$	—			$	313,091			$	43,274			$	245,973			$	1,421,038
Loans receivables:
Ending balance 3/31/2015		$	22,080,499			$	40,339,704			$	3,579,725			$	18,129,327			$	23,923,527			$	1,979,431			$	147,283			$	18,724,799			$	4,415,702			$	—			$	133,319,997
Ending balance: individually evaluated for impairment		$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	301,728			$	—			$	—			$	301,728
Ending balance: collectively evaluated for impairment		$	22,080,499			$	40,339,704			$	3,579,725			$	18,129,327			$	23,923,527			$	1,979,431			$	147,283			$	18,423,071			$	4,415,702			$	—			$	133,018,269
Allowance for credit losses:
Ending balance 9/30/2014		$	155,957			$	307,400			$	36,253			$	141,179			$	222,886			$	8,302			$	—			$	271,367			$	50,333			$	167,361			$	1,361,038
Ending balance: individually evaluated for impairment		$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—
Ending balance: collectively evaluated for impairment		$	155,957			$	307,400			$	36,253			$	141,179			$	222,886			$	8,302			$	—			$	271,367			$	50,333			$	167,361			$	1,361,038
Loans receivables:
Ending balance 9/30/2014		$	21,556,222			$	39,185,939			$	2,562,823			$	18,699,192			$	21,635,758			$	1,880,546			$	158,512			$	19,231,496			$	4,790,107			$	—			$	129,700,595
Ending balance: individually evaluated for impairment		$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	387,863			$	423,917			$	—			$	811,780
Ending balance: collectively evaluated for impairment		$	21,556,222			$	39,185,939			$	2,562,823			$	18,699,192			$	21,635,758			$	1,880,546			$	158,512			$	18,843,633			$	4,366,190			$	—			$	128,888,815

 

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Note 6 — Commitments

The Company’s maximum exposure to credit loss for loan and lease commitments (unfunded loans and leases) at March 31, 2015 and September 30, 2014 was approximately $11,280,000 and $12,283,000, respectively, with interest rates from 2.25% to 6.00%. Fixed rate loan commitments at March 31, 2015 and September 30, 2014 were approximately $4,969,000 and $5,660,000, respectively, with fixed rates of interest ranging from 3.75% to 5.50% and 3.00% to 6.75%, respectively.

In the normal course of business, there are various outstanding commitments and contingent liabilities, such as commitments to extend credit which are not reflected in the accompanying consolidated financial statements. These commitments involve, to varying degrees, elements of credit risk in excess of amounts recognized in the consolidated balance sheets.

Loan commitments are made to accommodate the financial needs of the Company’s customers. These arrangements have credit risk essentially the same as that involved in extending loans to customers and are subject to the Company’s normal credit policies and loan underwriting standards. Collateral is obtained based on management’s credit assessment of the customer. Management currently expects no loss from these activities.

 

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Note 7 — Fair Value Measurements and Fair Values of Financial Instruments

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective year-ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year-end.

The Company follows a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy as follows:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).

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

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, 2015 and September 30, 2014 are as follows:

 

		March 31, 2015
		Level I				Level II				Level III				Total
Description
Available for Sale Investments:
Mortgage-backed securities		$	—			$	3,755			$	—			$	3,755
Obligations of states and political subdivisions			—				592,595				—				592,595
U.S. government agency securities			—				5,953,850				—				5,953,850
Total		$	—			$	6,550,200			$	—			$	6,550,200

 

		September 30, 2014
		Level I				Level II				Level III				Total
Description
Available for Sale Investments:
Mortgage-backed securities		$	—			$	5,585			$	—			$	5,585
Obligations of states and political subdivisions			—				587,115				—				587,115
U.S. government agency securities			—				7,816,450				—				7,816,450
Total		$	—			$	8,409,150			$	—			$	8,409,150

 

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The following tables present the financial assets measured at fair value on a nonrecurring basis as of March 31, 2015 and September 30, 2014 by level within the fair value hierarchy. Impaired loans that are collateral dependent are written down to fair value through the establishment of specific reserves. Techniques used to value the collateral that secure the impaired loan include: quoted market prices for identical assets classified as Level I inputs, employed by certified appraisers, for similar assets classified as Level II inputs. In cases where valuation techniques include inputs that are unobservable and are based on estimates and assumptions developed by management based on the best information available under each circumstance, the asset valuation is classified as Level III inputs.

 

		March 31, 2015
		Level I				Level II				Level III				Total
Description
Assets measured at fair value on a nonrecurring basis:
Impaired loans		$	—			$	—			$	301,728			$	301,728

 

		September 30, 2014
		Level I				Level II				Level III				Total
Description
Assets measured at fair value on a nonrecurring basis:
Impaired loans		$	—			$	—			$	811,780			$	811,780

The following tables present additional quantitative information about level III assets measured at fair value on a nonrecurring basis as of March 31, 2015 and September 30, 2014 and for which the Bank uses Level III inputs to determine fair value:

 

March 31, 2015

Fair Value

Valuation Technique

Unobservable Inputs

Range (Weighted Average)

Impaired Loans

$

301,728

Discounted    cash flow

Probability of  default

—

September 30, 2014

Fair Value

Valuation Technique

Unobservable Inputs

Range (Weighted Average)

Impaired Loans

$

387,863

Discounted cash flow

Probability of default

—

423,917

Fair Value of collateral (1)

Appraisal adjustments (2)

20 (20

%  )

$

811,780

 

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(1)	Fair value is generally determined through independent appraisals of the underlying collateral, which generally includes various Level III inputs which are not identifiable.

(2)	Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

 

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The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions that are presented below the following tables were used to estimate fair values of the Company’s financial instruments at March 31, 2015 and September 30, 2014:

 

		March 31, 2015
		Carrying Value				Level I				Level II				Level III				Total Fair Value
Financial assets:
Cash and cash equivalents		$	10,967,943			$	10,967,943			$	—			$	—			$	10,967,943
Investment securities available for sale			6,546,445				—				6,546,445				—				6,546,445
Investment securities held to maturity			2,768,192				—				2,834,857				—				2,834,857
Mortgage-backed securities available for sale			3,755				—				3,755				—				3,755
FHLB stock			125,600				125,600				—				—				125,600
Cash surrender value of life insurance			308,087				308,087												308,087
Loans receivable, net			131,542,911				—				—				138,925,000				138,925,000
Accrued interest receivable			521,092				521,092				—				—				521,092
Financial liabilities:
Deposits		$	130,998,677			$	59,913,773			$	—			$	71,316,000			$	131,229,773
Advances from borrowers for taxes and insurance			405,121				405,121				—				—				405,121
Accrued interest payable			82,493				82,493				—				—				82,493

 

		September 30, 2014
		Carrying Value				Level I				Level II				Level III				Total Fair Value
Financial assets:
Cash and cash equivalents		$	9,639,943			$	9,639,943			$	—			$	—			$	9,639,943
Investment securities available for sale			8,403,565				—				8,403,565				—				8,403,565
Investment securities held to maturity			2,772,470				—				2,740,940				—				2,740,940
Mortgage-backed securities available for sale			5,585				—				5,585				—				5,585
FHLB stock			302,500				302,500				—				—				302,500
Cash surrender value of life insurance			286,762				286,762												286,762
Loans receivable, net			128,030,483				—				—				134,453,483				134,453,483
Accrued interest receivable			583,389				583,389				—				—				583,389
Financial liabilities:
Deposits		$	127,860,561			$	57,486,788			$	—			$	70,261,774			$	127,748,562
Advances from borrowers for taxes and insurance			633,159				633,159				—				—				633,159
Accrued interest payable			71,341				71,341				—				—				71,341

 

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Cash and Cash Equivalents

The carrying amount is a reasonable estimate of fair value.

Investment Securities and Mortgage Backed 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.

FHLB Stock

The carrying value of the FHLB stock is a reasonable estimate of fair value due to restrictions on the securities.

Loans Receivable

The fair values for one-to four-family residential loans are estimated using discounted cash flow analysis using fields from similar products in the secondary markets. The carrying amount of construction loans approximated its fair value given their short-term nature. The fair values of consumer and commercial loans are estimated using discounted cash flow analysis, using interest rates reported in various government releases and the Company’s own product pricing schedule for loans with terms similar to the Company’s. The fair values of multi-family and nonresidential mortgages are estimated using discounted cash flow analysis, using interest rates based on a national survey of similar loans.

Accrued Interest Receivable

The carrying amount is a reasonable estimate of fair value.

Deposits

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.

Cash Surrender Value of Life Insurance

The carrying amount is a reasonable estimate of fair value.

Off-Balance Sheet Commitments

The values of off-balance sheet commitments are based on their carrying value, taking into account the remaining terms and conditions of the agreement.

 

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Note 8 — Capital Requirements

The Company and the Bank are subject to regulatory capital adequacy requirements promulgated by federal bank regulatory agencies. Failure by the Company or the Bank to meet minimum capital requirements could result in certain mandatory and discretionary actions by regulators that could have a material adverse effect on our consolidated financial statements. The Federal Reserve Board establishes capital requirements for the Company and the OCC has similar requirements for the Bank. The following tables present regulatory capital information for the Company and the Bank. Information presented for March 31, 2015 reflects the Basel III capital requirements that became effective January 1, 2015 for both the Company and the Bank. Prior to January 1, 2015, the Bank was subject to capital requirements under Basel I and there were no capital requirements for the Company. Under these capital requirements and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings and other factors.

Quantitative measures established by regulation require the Company and the Bank to maintain certain minimum capital amounts and ratios. Federal bank regulators require the Company and the Bank to maintain minimum ratios of core capital to adjusted average assets of 4.0%, common equity tier 1 capital to risk-weighted assets of 4.5%, tier 1 capital to risk-weighted assets of 6.0% and total risk-based capital to risk-weighted assets of 8.0%. At March 31, 2015, the Company and the Bank met all the capital adequacy requirements to which they were subject. At March 31, 2015, the Company and the Bank were “well capitalized” under the regulatory framework for prompt corrective action. To be “well capitalized,” the Company and the Bank must maintain minimum leverage, common equity tier 1 risk-based, tier 1 risk-based and total risk-based capital ratios of at least 5.0%, 6.5%, 8.0% and 10.0%, respectively. Management believes that no conditions or events have occurred since March 31, 2015 that would materially adversely change the Company’s and the Bank’s capital classifications.

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 established in connection with the Bank’s “second-step” conversion 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 institution’s category.

The following table illustrates the Company’s actual regulatory capital levels compared with its regulatory capital requirements at March 31, 2015.

 

		Actual								For Capital Adequacy Purposes								To be well Capitalized under Prompt Corrective Action Provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
		(in thousands)
As of March 31, 2015
Common equity Tier I capital to total risk-weighted assets			$21,929				21.51	%		>	$4,589			>	4.50	%		>	$  6,628			>	6.50	%
Tier I capital to total risk-weighted assets			21,929				21.51	%		>	6,118			>	6.00	%		>	8,157			>	8.00	%
Total capital to total risk-weighted assets			23,205				22.76	%		>	8,157			>	8.00	%		>	10,197			>	10.00	%
Tier I leverage capital to average assets			21,929				14.01	%		>	6,262			>	4.00	%		>	7,827			>	5.00	%

Beginning January 1, 2016, Basel III implements a requirement for all banking organizations to maintain a capital conservation buffer above the minimum risk-based capital requirements in order to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers. The capital conservation buffer will be exclusively composed of common equity tier 1 capital, and it applies to each of the three risk-based capital ratios but not the leverage ratio. On January 1, 2016, the Company and the Bank will be expected to comply with the capital conservation buffer requirement, which will increase the three risk-based capital ratios by 0.625% each year through 2019, at which point, the minimum common equity tier 1 risk-based, tier 1 risk-based and total risk-based capital ratios will be 7.0%, 8.5% and 10.5%, respectively.

 

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The following is a reconciliation of the Bank’s equity under accounting principles generally accepted in the United States of America to regulatory capital as of March 31, 2015 and September 30, 2014:

 

		March 31, 2015				September 30, 2014
		(in thousands)				(in thousands)
Total equity		$	21,901			$	21,972
Unrealized loss on securities available-for-sale			28				121
Tier 1 capital		$	21,929				22,093
Allowable allowances for loan and lease losses			1,276				1,234
Total risk-based capital		$	23,205			$	23,327

Note 9 – Recent Accounting Pronouncements

In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-01, Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects. The amendments in this Update permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The amendments in this Update should be applied retrospectively to all periods presented. A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those preexisting investments. The amendments in this Update are effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted. This Update did not have a significant impact on the Company’s financial statements.

In January 2014, the FASB issued ASU 2014-04, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The amendments in this Update clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this Update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. An entity can elect to adopt the amendments in this Update using either a modified retrospective transition method or a prospective transition method. This Update did not have a significant impact on the Company’s financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (a new revenue recognition standard). The Update’s core principle is that a company will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. This Update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is evaluating the effect of adopting this new accounting Update.

In June 2014, the FASB issued ASU 2014-10, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The amendments in this Update change the accounting for repurchase-to-maturity transactions to secured borrowing accounting. For repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. The amendments also require enhanced disclosures. The accounting changes in this Update are effective for the first interim or annual period beginning after December 15, 2014. An entity is required to present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Earlier application is prohibited. The disclosure for certain transactions accounted for as a sale is required to be presented for interim and annual periods beginning after December 15, 2014, and the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for

 

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as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. The disclosures are not required to be presented for comparative periods before the effective date. This Update did not have a significant impact on the Company’s financial statements.

In June 2014, the FASB issued ASU 2014-12, Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments when the Terms of an Award Provide that a Performance Target Could Be Achieved After the Requisite Service Period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. Entities may apply the amendments in this Update either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this Update as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. Additionally, if retrospective transition is adopted, an entity may use hindsight in measuring and recognizing the compensation cost. This Update is not expected to have a significant impact on the Company’s financial statements.

In August 2014, the FASB issued ASU 2014-14, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40). The amendments in this Update require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) the loan has a government guarantee that is not separable from the loan before foreclosure, (2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim, and (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The amendments in this Update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. This Update did not have a significant impact on the Company’s financial statements.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements -Going Concern (Subtopic 205-40). The amendments in this Update provide guidance in accounting principles generally accepted in the United States of America about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. This Update is not expected to have a significant impact on the Company’s financial statements.

In November 2014, the FASB issued ASU 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity (a consensus of the FASB Emerging Issues Task Force). This ASU clarifies how current U.S. GAAP should be interpreted in subjectively evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Public business entities are required to implement the new requirements in fiscal years and interim periods within those fiscal years beginning after December 15, 2015. This Update is not expected to have a significant impact on the Company’s financial statements.

In November 2014, the FASB issued ASU 2014-17, Business Combinations (Topic 805): Pushdown Accounting. The amendments in this Update apply to the separate financial statements of an acquired entity and its subsidiaries that are a business or nonprofit activity (either public or nonpublic) upon the occurrence of an event in which an acquirer (an individual or an entity) obtains control of the acquired entity. An acquired entity may elect the option to apply pushdown accounting in the reporting period in which the change-in-control event occurs. If pushdown accounting is not applied in the reporting period in which the change-in-control event occurs, an acquired entity will have the option to elect to apply pushdown accounting in a subsequent reporting period to the acquired entity’s most recent change-in-control event. The amendments in this Update are effective on November 18, 2014. After the effective date, an acquired entity can make an election to apply the guidance to future change-in-control events or to its most recent change-in-control event. This Update is not expected to have a significant impact on the Company’s financial statements.

In January 2015, the FASB issued ASU 2015-01, Income Statement –Extraordinary and Unusual Items, as part of its initiative to reduce complexity in accounting standards. This Update eliminates from GAAP the concept of extraordinary items. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. This Update is not expected to have a significant impact on the Company’s financial statements.

 

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In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810). The amendments in this Update affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments (1) Modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities; (2) Eliminate the presumption that a general partner should consolidate a limited partnership; (3) Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; (4) Provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The amendments in this Update are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, and for interim periods within fiscal years beginning after December 15, 2017. This Update is not expected to have a significant impact on the Company’s financial statements.

In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30), as part of its initiative to reduce complexity in accounting standards. To simplify presentation of debt issuance costs, the amendments in this Update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update. For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. An entity should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. This Update is not expected to have a significant impact on the Company’s financial statements.

In April 2015, the FASB issued ASU 2015-04, Compensation-Retirement Benefits (Topic 715), as part of its initiative to reduce complexity in accounting standards. For an entity with a fiscal year-end that does not coincide with a month-end, the amendments in this Update provide a practical expedient that permits the entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal year-end and apply that practical expedient consistently from year to year. The practical expedient should be applied consistently to all plans if an entity has more than one plan. The amendments in this Update are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. Earlier application is permitted. This Update is not expected to have a significant impact on the Company’s financial statements.

In April 2015, the FASB issued ASU 2015-05, Intangible – Goodwill and Other Internal Use Software (Topic 350-40), as part of its initiative to reduce complexity in accounting standards. This guidance will help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement. The amendments in this Update provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. For public business entities, the Board decided that the amendments will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. For all other entities, the amendments will be effective for annual periods beginning after December 15, 2015, and interim periods in annual periods beginning after December 15, 2016. Early adoption is permitted for all entities. This Update is not expected to have a significant impact on the Company’s financial statements.

 

Item 2.

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

Safe Harbor Statement for Forward-Looking Statements

This report may contain forward-looking statements within the meaning of the federal securities laws. These statements are not historical facts; rather they are statements based on the Company’s current expectations regarding its business strategies and its intended results and future performance. Forward-looking statements are preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and similar expressions.

Forward-looking statements are not guarantees of future performance. Numerous risks and uncertainties could cause or contribute to the Company’s actual results, performance and achievements being materially different from those expressed or implied

 

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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; real estate values in our market area; loan demand; deposit flows; competition; and changes in accounting principles and guidelines. Additional factors that may affect our results are discussed in the Company’s in the Company’s Annual Report on Form 10-K, as filed with the SEC on December 29, 2014, 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 management’s best estimate of known and inherent losses in the loan portfolio, based on management’s evaluation of the portfolio’s collectability. The allowance is established through the provision for loan losses, which is charged against income. Management estimates the allowance balance required using loss experience in particular segments of the portfolio, the size and composition of the loan portfolio, trends and absolute levels of non-performing loans, classified and criticized loans and delinquent loans, trends in risk ratings, trends in industry charge-offs by particular segments and changes in existing general economic and business conditions affecting our lending areas and the national economy. Additionally, for loans identified by management as impaired, management will provide a specific provision for loan losses based on the expected discounted cash flows of the loan, or for loans determined to be collateral dependent, a specific provision for loan losses is established based on appraised value less costs to sell. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are: loss exposure at default; the amount and timing of future cash flows on impaired loans; value of collateral; and determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if actual conditions differ substantially from the assumptions used in making the evaluation. Further, current economic conditions have increased the uncertainty inherent in these estimates and assumptions. In addition, the Office of the Comptroller of the Currency, as an integral part of its examination process, periodically reviews our allowance for loan losses. Such agency may require us to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would negatively affect earnings.

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

 

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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, 2015 and September 30, 2014

Assets increased $3.6 million, or 2.4%, to $155.8 million at March 31, 2015 from $152.2 million at September 30, 2014, primarily due to a $1.3 million increase in cash and cash equivalents, and a $3.5 million net increase in loans receivable and a $830,000 increase in other assets offset by a $1.9 million decrease in investment securities available for sale, a $177,000 decrease in FHLB stock. The increase in cash and cash equivalents was the result of deposits received through the CDARS program and the decrease in investment securities. The decrease in investment securities available for sale was the result of bond calls. The decrease in FHLB stock was due to the repayment of borrowings.

The increase in loans was primarily due to a $2.3 million increase in commercial real estate loans, a $1.2 million increase in one-to four-family real estate – non-owner occupied loans, a $1.0 million increase in construction loans, a $524,000 increase in one-to four-family real estate owner occupied loans and a $99,000 increase in home equity and second mortgages, offset by a $570,000 decrease in multi-family real estate loans, a $507,000 decrease in commercial leases and loans, and a $374,000 decrease in commercial lines of credit. The increases were primarily the result of our continued offering of competitive rates, strong customer service and borrowings by long-standing and new lending relationships.

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 two non-accrual loans at March 31, 2015 totaling $338,000, or 0.25% of total loans. There were three non-accrual loans that existed at September 30, 2014 totaling $848,000, or 0.65% of total loans. The non-accrual loans at March 31, 2015 consisted of a $302,000 commercial line of credit and a $36,000 one-to four-family real estate owner occupied loan.

Total liabilities increased by $3.1 million, or 2.4%, to $132.6 million at September 31, 2014 from $129.5 million at September 30, 2014. This increase was primarily attributable to an increase in deposits of $3.1 million, offset by a $228,000 decrease in advances from borrowers for taxes and insurance and a $226,000 increase in accrued interest payable and other liabilities. The increase in deposits was primarily due to a $5.0 million increase in CDARS deposits, a $2.1 million increase in NOW and money market accounts, a $1.0 million increase in savings deposits, offset by a $5.0 million decrease in certificates of deposit. The increase in CDARS deposits is the result of the Bank’s participation in the CDARS one-way buy program. The decrease in certificates of deposit is partially due to special rate programs being offered by other local financial institutions. The CDARS program allows the Bank to attract term deposits at lower cost compared to the Bank’s internal offering rates and FHLB borrowing rates.

Stockholders’ equity increased $468,000 to $23.2 million at March 31, 2015 from $22.7 million at September 30, 2014. The increase was primarily the result of net income totaling $752,000, a $94,000 decrease in accumulated other comprehensive loss, $61,000 related to the allocation of ESOP shares and, $48,000 related to the stock benefit plans, offset by dividends totaling $363,000, and the retirement of 6,526 shares at a cost of $124,000 during the period.

 

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Results of Operations for the Three and Six Months Ended March 31, 2015 and 2014

Overview.

 

		For the Three Months Ended March 31,
		2015				2014
		(Dollars in thousands, except per share amounts)
Net income		$	372			$	346
Basic and earnings per share			0.32				0.29
Diluted earnings per share			0.32				0.29
Average equity to average assets			14.79	%			15.32	%

 

		For the Six Months Ended March 31,
		2015				2014
		(Dollars in thousands, except per share amounts)
Net income		$	752			$	712
Basic earnings per share			0.65				0.60
Diluted earnings per share			0.64				0.60
Average equity to average assets			14.74	%			15.32	%

The increase in net income for the three months ended March 31, 2015 was primarily attributable to a $57,000 increase in net interest income and an $18,000 increase in non-interest income, offset by a $22,000 increase in non-interest expense, and a $15,000 increase in the provision for loan losses. The increase in net income for the six months ended March 31, 2015 was primarily attributable to a $153,000 increase in net interest income and an $18,000 increase in non-interest income offset by an $82,000 increase in non-interest expense.

Net Interest Income. Net interest income increased $57,000 compared to the same period of the prior year to $1.5 million for the three months ended March 31, 2015. For the three months ended March 31, 2015, higher net interest income was the result of a $50,000 increase in total interest income, a decrease of $3,000 in deposit interest expense and a $4,000 decrease in FHLB borrowing expense. For the three months ended March 31, 2015, the average balance of loans receivable increased $6.6 million, offset by a five basis point decrease in the average yield compared to the three months ended March 31, 2014. For the three months ended March 31, 2015, the average balance of investment securities and interest bearing deposits increased $5.6 million compared to the three months ended March 31, 2014.

For the six months ended March 31, 2015, net interest income increased $153,000 to $3.1 million. Higher net interest income was the result of an $111,000 increase in total interest income, a decrease of $36,000 in deposit interest expense and a $7,000 decrease in FHLB borrowing expense. For the six months ended March 31, 2015, the increase in interest income resulted from a $6.1 million increase in the average balance of loans, and a $6.5 million increase in the average balance of investment securities offset by a 12 basis point decrease in the average yield of interest-earning assets. The decrease in total interest expense for the six months ended March 31, 2015 was primarily attributable to an $8.0 million decrease in the average balance of certificates of deposits and a five basis point decrease in their average cost.

 

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Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by current volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of 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, 2015 Compared to Three Months Ended March 31, 2014
		Increase (Decrease) Due to
		Rate				Volume				Net
		(In thousands)
Interest Income:
Loans receivable		$	(60	)		$	84			$	24
Investment securities			1				25				26
Total interest-earning assets			(59	)			109				50
Interest Expense:
NOW and money market accounts			1				3				4
Passbook and club accounts			1				—				1
IRA accounts			(4	)			—				(4	)
Certificates of deposit			118				(144	)			(26	)
CDARS			(1	)			23				22
FHLB advances			(2	)			(2	)			(4	)
			113				(120	)			(7	)
Net change in net interest income		$	(172	)		$	229			$	57

 

		Six Months Ended March 31, 2015 Compared to Six Months Ended March 31, 2014
		Increase (Decrease) Due to
		Rate				Volume				Net
		(In thousands)
Interest Income:
Loans receivable		$	(105	)		$	156			$	51
Investment securities			4				56				60
Total interest-earning assets			(101	)			212				111
Interest Expense:
NOW and money market accounts			3				6				9
Passbook and club accounts			—				1				1
IRA accounts			(8	)			(1	)			(9	)
Certificates of deposit			(26	)			(48	)			(74	)
CDARS			1				36				37
FHLB advances			(4	)			(3	)			(7	)
			(34	)			(9	)			(43	)
Net change in net interest income		$	(67	)		$	221			$	154

 

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Provision for Loan Losses. The provision for loan losses for the three and six months ended March 31, 2015 was $30,000 and $60,000, respectively compared to $15,000 and $25,000, respectively for the comparable 2014 periods. The increase in the provision was based on methodology used to determine an adequate level of allowance for loan losses, including the $3.5 million increase in loans originated during the six-month period ended March 31, 2015 and the level of non-performing loans.

There was $338,000 in non-accruing loans at March 31, 2015 compared to $848,000 at September 30, 2014. There were no net charge-offs for the six months ended March 31, 2015 and 2014.

Non-Interest Income. The following tables show the components of non-interest income and the percentage changes for the three month periods ended March 31, 2015 and 2014.

 

		Three Months Ended March 31,
		2015				2014				$ Change				% Change
Fees on deposit accounts		$	7,278			$	7,472			$	(194	)			(2.6	)%
Other income			26,589				8,572				18,017				210.2	%
Total non-interest income		$	33,867			$	16,044			$	17,823				111.1	%
		Six Months Ended March 31,
		2015				2014				$ Change				% Change
Fees on deposit accounts		$	18,075			$	15,746			$	2,329				14.8	%
Other income			40,439				24,920				15,519				62.3	%
Total non-interest income		$	58,514			$	40,666			$	17,848				43.9	%

For the three month period ended March 31, 2015, other income includes a $16,325 increase in the cash surrender value of insurance policies compared to no such income for the three month period ended March 31, 2014.

For the six month period ended March 31, 2015, other income includes a $21,325 increase in the cash surrender value of insurance policies compared to $6,808 for the six-month period ended March 31, 2014.

 

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Non-Interest Expense. The following tables show the components of non-interest expense and the percentage changes for the three and six month periods ended March 31, 2015 and 2014.

 

		Three Months Ended March 31,
		2015				2014				$ Change				% Change
Salaries and benefits		$	554,987			$	543,142			$	11,845				2.2	%
Occupancy			92,928				91,796				1,132				1.2	%
Data processing			65,204				64,122				1,082				1.7	%
Professional fees			89,359				83,961				5,398				6.4	%
FDIC insurance premiums			18,150				17,050				1,100				6.5	%
Other			141,041				139,163				1,878				1.3	%
Total non-interest expense		$	961,669			$	939,234			$	22,435				2.4	%

Salaries and benefits expense increased $12,000 for the three months ended March 31, 2015 due primarily to a $9,000 increase in retirement fund contributions and a $3,000 increase in ESOP expense. Professional fees increased $5,000 primarily due to the increased use of consultants in order to maintain compliance with increasing regulatory compliance requirements.

 

		Six Months Ended March 31,
		2015				2014				$ Change				% Change
Salaries and benefits		$	1,101,048			$	1,062,188			$	38,860				3.7	%
Occupancy			182,076				179,704				2,372				1.3	%
Data processing			127,613				133,689				(6,076	)			(4.5	)%
Professional fees			198,271				159,379				38,892				24.4	%
FDIC insurance premiums			36,300				33,550				2,750				8.2	%
Other			255,001				249,356				5,645				2.3	%
Total non-interest expense		$	1,900,309			$	1,817,866			$	82,443				4.5	%

Salaries and benefits expense increased $39,000 for the six months ended March 31, 2015 due to a $19,000 increase in retirement fund contributions, an $11,000 increase in salary and benefits expense, and a $9,000 increase in ESOP expense. Professional fees increased $39,000 primarily due to the increased use of consultants in order to maintain compliance with increasing regulatory compliance requirements.

Income Taxes. Income tax expense was $199,000 and $407,000 for the three and six months ended March 31, 2015 compared to $188,000 and $394,000 for the comparable period in 2014. The increase in income tax expense in the 2015 period was primarily the result of an increase in pre-tax income as the effective tax rate was comparable throughout the periods at approximately 35%.

 

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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, FHLB advances, loan repayments and maturities of investment securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

We regularly adjust our investments in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities and (4) the objectives of our asset/liability management policy.

Our most liquid assets are cash and cash equivalents. The level of these assets depends on our operating, financing, lending and investing activities during any given period. At March 31, 2015, cash and cash equivalents totaled $11.0 million. In addition, at March 31, 2015, we had the ability to borrow a total of approximately $70.0 million from the Federal Home Loan Bank of Pittsburgh. At March 31, 2015, we had no FHLB advances outstanding.

At March 31, 2015, we had $11.3 million in loan commitments outstanding, which consisted of commitments to grant $1.2 million in loans and $1.2 million in commercial leases. At March 31, 2015, we had $5.9 million in undisbursed lines of credit, $2.5 million in undisbursed construction loans and $500,000 in undisbursed loans in process.

Certificates of deposit due within one year of March 31, 2015 totaled $25.5 million, representing 48.6% of certificates of deposit, and 19.5% of total deposits at March 31, 2015. We believe, based on past experience, that we will retain a significant portion of these deposits at maturity. However, if these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. For the three months ended March 31, 2015, we acquired an additional $1.1 in CDARS deposits to offset a $1.9 million decline in certificates for the three months ended March 31, 2015. 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, 2016.

The Company is a separate legal entity from the Bank and provides for its own liquidity to pay its operating expenses and other financial obligations. At March 31, 2015, the Company had $1.2 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, 2015, 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 22.76%, 21.51% and 14.01%, respectively. The regulatory requirements at that date were 8.0%, 4.0% and 4.0%, respectively. At March 31, 2015, the Bank was considered “well-capitalized” under applicable regulatory guidelines.

Off-Balance Sheet Arrangements

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, unused lines of credit and letters of credit. For information about our loan commitments, unused lines of credit and letters of credit, see note 5 to the consolidated financial statements included in this Form 10-Q and in the Company’s audited consolidated financial statements for the year ended September 30, 2014.

For the three months ended March 31, 2015, the Bank did not engage in any off-balance sheet transactions reasonably likely to have a material effect on the Bank’s financial condition, results of operations or cash flows.

 

 

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Item 3.

Quantitative and Qualitative Disclosure About Market Risk

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

 

Item 4.

Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, no change in the Company’s internal control over financial reporting occurred during the quarter ended March 31, 2015 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

The Company is not involved in any pending legal proceedings. The Bank is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. The Bank’s management believes that such routine legal proceedings, in the aggregate, are immaterial to the Bank’s financial condition and results of operations.

 

Item 1A.

Risk Factors

For information regarding the Company’s risk factors, see “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended September 30, 2014, as filed with the SEC on December 29, 2014. As of March 31, 2015, 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 Publically Announced Plans or Programs				(d) Maximum Number of Shares Yet To Be Purchased Under the Plans or Programs (1)
January 1 through January 31			104			$	18.95				104				120,667
February 1 through February 28			622				19.02				622				120,045
March 1 through March 31			4,024				19.02				4,024				116,021
Total			4,750								4,750

 

(1)

On September 16, 2014, the Board of Directors of the Company authorized the repurchase of up to 122,547 shares of the Company’s outstanding common stock, from time to time, depending on market conditions. 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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Item 3.

Defaults Upon Senior Securities

Not applicable.

 

Item 4.

Mine Safety Disclosures

Not applicable.

 

Item 5.

Other Information.

Not applicable.

 

Item 6.

Exhibits

 

 

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

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

								EUREKA FINANCIAL CORP.
Dated:		May 15, 2015				By:		/s/ Edward F. Seserko
								Edward F. Seserko
								President and Chief Executive Officer
								(principal executive officer)
Dated:		May 15, 2015				By:		/s/ Gary B. Pepper
								Gary B. Pepper
								Executive Vice President and Chief Financial Officer
								(principal accounting and financial officer)

 

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