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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-Q

 

 

(Mark one)

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

For the quarterly period ended June 30, 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 August 13, 2015, there were 1,207,408 shares of the registrant’s common stock outstanding.

 

 

 


Table of Contents

EUREKA FINANCIAL CORP.

Table of Contents

 

     Page
Number
 

PART I - FINANCIAL INFORMATION

  

Item 1:

 

Financial Statements

  
 

Consolidated Balance Sheets as of June 30, 2015 and September 30, 2014 (unaudited)

     3   
 

Consolidated Statements of Income for the Three and Nine Months Ended June 30, 2015 and 2014 (unaudited)

     4   
 

Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended June 30, 2015 and 2014 (unaudited)

     5   
 

Consolidated Statement of Changes in Stockholders’ Equity for the Nine Months Ended June 30, 2015 (unaudited)

     6   
 

Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 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

     32   

Item 3:

 

Quantitative and Qualitative Disclosures About Market Risk

     40   

Item 4:

 

Controls and Procedures

     40   

PART II - OTHER INFORMATION

  

Item 1:

 

Legal Proceedings

     40   

Item 1A:

 

Risk Factors

     40   

Item 2:

 

Unregistered Sales of Equity Securities and Use of Proceeds

     40   

Item 3:

 

Defaults Upon Senior Securities

     41   

Item 4:

 

Mine Safety Disclosures

     41   

Item 5:

 

Other Information

     41   

Item 6:

 

Exhibits

     41   

SIGNATURES

     42   


Table of Contents
PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

EUREKA FINANCIAL CORP. AND SUBSIDIARY

Consolidated Balance Sheets

(unaudited)

 

     June 30,
2015
    September 30,
2014
 

Assets:

    

Cash and due from banks

   $ 848,454     $ 698,899  

Interest-bearing deposits in other banks

     7,434,313       8,941,044  
  

 

 

   

 

 

 

Cash and cash equivalents

     8,282,767       9,639,943  

Investment securities available for sale

     6,428,700       8,403,565  

Investment securities held to maturity (fair value of $2,749,736 and $2,740,940, respectively)

     2,768,553       2,772,470  

Mortgage-backed securities available for sale

     3,374       5,585  

Federal Home Loan Bank (“FHLB”) stock, at cost

     131,900       302,500  

Loans receivable, net of allowance for loan losses of $1,431,038 and $1,361,038, respectively

     133,129,811       128,030,483  

Premises and equipment, net

     1,034,296       1,073,073  

Deferred tax asset, net

     893,842       832,735  

Other real estate owned

     539,735       —     

Accrued interest receivable and other assets

     1,412,606       1,126,697  
  

 

 

   

 

 

 

Total Assets

   $ 154,625,584     $ 152,187,051  
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity:

    

Deposits:

    

Non-interest bearing

   $ 5,146,561     $ 5,639,321  

Interest bearing

     123,965,426       122,221,240  
  

 

 

   

 

 

 

Total deposits

     129,111,987       127,860,561  

Advances from borrowers for taxes and insurance

     710,365       633,159  

Accrued interest payable and other liabilities

     1,384,694       999,554  
  

 

 

   

 

 

 

Total Liabilities

     131,207,046       129,493,274  
  

 

 

   

 

 

 

Stockholders’ Equity:

    

Common stock, $.01 par value; 10,000,000 shares authorized; 1,207,408 shares outstanding at June 30, 2015; 1,213,986 shares outstanding at September 30, 2014

     12,074       12,140  

Paid-in capital

     10,030,616       10,025,400  

Retained earnings - substantially restricted

     13,839,138       13,179,662  

Accumulated other comprehensive loss

     (105,354     (121,279

Unearned ESOP shares

     (357,936     (402,146
  

 

 

   

 

 

 

Total Stockholders’ Equity

     23,418,538       22,693,777  
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 154,625,584     $ 152,187,051  
  

 

 

   

 

 

 

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

 

3


Table of Contents

EUREKA FINANCIAL CORP. AND SUBSIDIARY

Consolidated Statements of Income

(unaudited)

 

     Three Months Ended
June 30,
     Nine Months Ended
June 30,
 
     2015      2014      2015      2014  

Interest Income

           

Loans, including fees

   $ 1,640,846      $ 1,627,134      $ 4,918,693      $ 4,853,910  

Investment securities and other interest-earning assets:

           

Taxable

     53,206        58,673        203,534        148,684  

Tax exempt

     20,440        22,198        64,875        67,308  

Mortgage-backed securities

     59        90        217        359  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Interest Income

     1,714,551        1,708,095        5,187,319        5,070,261  
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest Expense

           

Deposits

     211,091        205,465        622,967        653,207  

FHLB advances

     —           3,531        —           10,147  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Interest Expense

     211,091        208,996        622,967        663,354  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Interest Income

     1,503,460        1,499,099        4,564,352        4,406,907  

Provision for Loan Losses

     10,000        25,000        70,000        50,000  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Interest Income after Provision for Loan Losses

     1,493,460        1,474,099        4,494,352        4,356,907  
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-Interest Income

           

Fees on deposit accounts

     10,172        8,452        28,248        24,198  

Other income

     9,978        37,814        50,416        62,734  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-Interest Income

     20,150        46,266        78,664        86,932  
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-Interest Expense

           

Salaries and benefits

     574,313        547,466        1,675,361        1,609,654  

Occupancy

     85,408        84,694        267,485        264,398  

Data processing

     64,377        68,708        191,990        202,397  

Professional fees

     76,252        90,665        274,523        250,044  

Federal Deposit Insurance Corporation premiums

     18,150        18,150        54,450        51,700  

Other

     118,710        102,271        373,711        351,627  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-Interest Expenses

     937,210        911,954        2,837,520        2,729,820  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income Before Income Tax Provision

     576,400        608,411        1,735,496        1,714,019  

Income Tax Provision

     185,248        206,017        591,914        599,878  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income

   $ 391,152      $ 402,394      $ 1,143,582      $ 1,114,141  
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per Common Share - Basic

   $ 0.34      $ 0.34      $ 0.98      $ 0.93  

Earnings per Common Share - Diluted

     0.34        0.34        0.98        0.93  

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

 

4


Table of Contents

EUREKA FINANCIAL CORP. AND SUBSIDIARY

Consolidated Statement of Comprehensive Income

(unaudited)

 

     For the Three Months Ended
June 30,
    For the Nine Months Ended
June 30,
 
     2015     2014     2015     2014  

Net income

   $ 391,152     $ 402,394     $ 1,143,582     $ 1,114,141  

Other comprehensive income:

        

(Increase) decrease in unrealized losses on available for sale securities

     (117,558     140,279       24,098       327,443  

Income tax effect

     39,990       (47,695     (8,173     (111,330
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income, net of tax:

     (77,568     92,584       15,925       216,113  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 313,584     $ 494,978     $ 1,159,507     $ 1,330,254  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

5


Table of Contents

EUREKA FINANCIAL CORP. AND SUBSIDIARY

Consolidated Statement of Changes in Stockholders’ Equity

For the Nine Months Ended June 30, 2015

(unaudited)

 

    Common Stock
Shares
Outstanding
    Common
Stock
    Paid-In
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Gain (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

    —          —          —          1,143,582        —          —          1,143,582   

Other comprehensive income

    —          —          —          —          15,925        —          15,925   

Compensation expense related to restricted stock

    —          —          64,397        —          —          —          64,397   

Compensation expense related to stock options

    —          —          15,350        —          —          —          15,350   

Compensation expense on ESOP

    —          —          50,187        —          —          44,210        94,397   

Retirement of common stock

    (6,578     (66     (124,718     —          —          —          (124,784

Dividends on common stock ($.40 per share)

    —          —          —          (484,106     —          —          (484,106
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2015

    1,207,408      $ 12,074      $ 10,030,616      $ 13,839,138      $ (105,354   $ (357,936   $ 23,418,538   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

6


Table of Contents

EUREKA FINANCIAL CORP. AND SUBSIDIARY

Consolidated Statements of Cash Flows

(unaudited)

 

     Nine Months Ended
June 30,
 
     2015     2014  

OPERATING ACTIVITIES

    

Net income

   $ 1,143,582     $ 1,114,141  

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

    

Depreciation of premises and equipment

     104,886       112,449  

Provision for loan losses

     70,000       50,000  

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

     (1,875     1,050  

Compensation expense for ESOP, restricted stock, and stock options

     174,144       152,504  

Increase in deferred tax expense

     (69,280     (18,140

Decrease in accrued interest receivable

     28,944       29,801  

Decrease in prepaid income tax

     18,394       —     

Increase (decrease) in accrued interest payable

     23,965       (1,646

Decrease in retirement fund obligation

     (80,979     (33,957

Other, net

     106,804       (205,121
  

 

 

   

 

 

 

Net cash provided by operating activities

     1,518,585       1,201,081  
  

 

 

   

 

 

 

INVESTING ACTIVITIES

    

Proceeds from maturities and redemptions of investment securities available for sale

     3,500,000       1,500,000  

Proceeds from maturities and redemptions of investment securities held to maturity

     5,000       5,000  

Purchase of investment securities available for sale

     (1,500,000     (1,750,000

Net paydowns in mortgage-backed securities available for sale

     1,966       2,294  

Purchase of FHLB stock

     (52,000     (361,800

Redemption of FHLB stock

     222,600       100,000  

Net decrease (increase) in loans

     894,459       (1,263,194

Commercial leases purchased

     (6,600,761     (3,957,242

Premises and equipment expenditures

     (66,109     (47,356
  

 

 

   

 

 

 

Net cash used for investing activities

     (3,594,845     (5,772,298
  

 

 

   

 

 

 

FINANCING ACTIVITIES

    

Net increase in deposit accounts

     1,251,426       5,065,308  

Proceeds from FHLB borrowings

     —          8,000,000  

Repayment of FHLB borrowings

     —          (3,500,000

Net increase in advances from borrowers for taxes and insurance

     77,206       160,937  

Purchase and retirement of common stock

     (124,784     (160,827

Payment of dividends

     (484,764     (350,663
  

 

 

   

 

 

 

Net cash provided by financing activities

     719,084       9,214,755  
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (1,357,176     4,643,538  

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

     9,639,943       7,181,069  
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 8,282,767     $ 11,824,607  
  

 

 

   

 

 

 

SUPPLEMENTAL INFORMATION

    

Cash paid during the period for:

    

Interest paid

   $ 599,002     $ 667,618  

Income taxes paid

   $ 642,000     $ 787,000  

Noncash investing transaction:

    

Transfers from loans to other real estate owned

   $ 536,974     $ —     

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

 

7


Table of Contents

EUREKA FINANCIAL CORP. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

Note 1 — Nature of Operations and Significant Accounting Policies

Eureka Financial Corp., a Maryland corporation (the “Company”), and its wholly-owned subsidiary, Eureka Bank (the “Bank”), provide a variety of financial services to individuals and corporate customers through its main office and branch located in Southwestern Pennsylvania. The 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 and loans.

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.

 

8


Table of Contents

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 nine months ended June 30, 2015 and 2014.

 

    For the Three Months Ended     For the Nine Months Ended  
    June 30,     June 30,  
    2015     2014     2015     2014  

Weighted average common shares

    1,207,426        1,247,236        1,210,664        1,251,337   

Average unearned ESOP shares

    (34,126     (40,236     (35,658     (41,768

Average unearned restricted shares

    (12,305     (15,437     (11,631     (16,741
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares and stock equivalents used to calculate basic and diluted earnings per share

    1,160,995        1,191,563        1,163,375        1,192,828   
 

 

 

   

 

 

   

 

 

   

 

 

 

Additional common stock equivalents (restricted shares) used to calculate diluted earnings per share

    1,564        938        312        —     

Additional common stock equivalents (stock options) used to calculate diluted earnings per share

    3,390        2,425        1,463        1,797   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares and common stock equivalents used to calculate basic and diluted earnings per share

    1,165,949        1,194,926        1,165,150        1,194,625   
 

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted earnings per share

  $ 0.34      $ 0.34      $ 0.98      $ 0.93   

Options to purchase 64,907 shares of common stock at a price of $15.24 per share were outstanding at both June 30, 2015 and 2014. All of the options were considered dilutive based on the weighted average market value exceeding the weighted average stock price.

Options to purchase 3,818 shares of common stock at a price of $21.52 per share were outstanding at June 30, 2015. No shares were included in the computation of diluted earnings per share because doing so would have been anti-dilutive as the weighted average exercise price was in excess of the weighted average market value.

 

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Table of Contents

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 nine month periods ended June 30, 2015 and 2014:

 

    Unrealized Losses
on Available for Sale
Securities
        Unrealized Losses
on Available for Sale
Securities
 

Balance as of March 31, 2015

  $ (27,786  

Balance as of September 30, 2014

  $ (121,279

Other comprehensive loss before reclassification

    (77,568  

Other comprehensive income before reclassification

    15,925  

Amount reclassified from accumulated other comprehensive loss

    —       

Amount reclassified from accumulated other comprehensive loss

    —     

Total other comprehensive loss

    (77,568  

Total other comprehensive income

    15,925  
 

 

 

     

 

 

 

Balance as of June 30, 2015

  $ (105,354  

Balance as of June 30, 2015

  $ (105,354
 

 

 

     

 

 

 
    Unrealized Losses
on Available for Sale
Securities
        Unrealized Losses
on Available for Sale
Securities
 

Balance as of March 31, 2014

  $ (237,865  

Balance as of September 30, 2013

  $ (361,394

Other comprehensive income before reclassification

    92,584    

Other comprehensive income before reclassification

    216,113  

Amount reclassified from accumulated other comprehensive loss

    —       

Amount reclassified from accumulated other comprehensive loss

    —     

Total other comprehensive income

    92,584    

Total other comprehensive income

    216,113  
 

 

 

     

 

 

 

Balance as of June 30, 2014

  $ (145,281  

Balance as of June 30, 2014

  $ (145,281
 

 

 

     

 

 

 

 

10


Table of Contents

Note 3 — Investment Securities

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

 

     June 30, 2015  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

Obligations of states and political subdivisions

   $ 590,604      $ 296      $ (4,425    $ 586,475  

U.S. government agency securities

     5,998,022        —           (155,797      5,842,225  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 6,588,626      $    296      $ (160,222    $ 6,428,700  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     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 $5,248,022 and $5,070,700 at June 30, 2015 and September 30, 2014, respectively, were pledged to secure public deposits held by the Company at those dates.

There were no sales of available for sale investment securities during the nine months ended June 30, 2015 or 2014.

The amortized cost and fair value of securities available for sale at June 30, 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.

 

     June 30, 2015  
     Amortized
Cost
     Fair
Value
 

Due in one year or less

   $ 145,160      $ 145,145  

Due after one year through five years

     145,444        145,740  

Due after ten years

     6,298,022        6,137,815  
  

 

 

    

 

 

 
   $ 6,588,626      $ 6,428,700  
  

 

 

    

 

 

 

 

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Table of Contents

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

 

     June 30, 2015  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

Obligations of states and political subdivisions

   $ 2,018,553      $ 61,857      $ (28,174    $ 2,052,236  

U.S. government agency securities

     750,000        —           (52,500      697,500  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,768,553      $ 61,857      $ (80,674    $ 2,749,736  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     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    $ 2,056,564  

U.S. government agency securities

     750,000        —           (65,624      684,376  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,772,470      $ 58,846      $ (90,376    $ 2,740,940  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

The amortized cost and fair value of securities held to maturity at June 30, 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.

 

     June 30, 2015  
     Amortized
Cost
     Fair
Value
 

Due after five years through ten years

   $ 483,448      $ 530,736  

Due after ten years

     2,285,105        2,219,000  
  

 

 

    

 

 

 

Total

   $ 2,768,553      $ 2,749,736  
  

 

 

    

 

 

 

 

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Table of Contents

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

 

     June 30, 2015  
     Less than 12 Months     More than 12 Months     Total  
            Gross            Gross            Gross  
     Fair      Unrealized     Fair      Unrealized     Fair      Unrealized  
     Value      Losses     Value      Losses     Value      Losses  

Obligations of states and political subdivisions

   $ 440,735      $ (4,425   $ 272,700      $ (28,174   $ 713,435      $ (32,599

U.S. government agency securities

     4,513,850        (135,491     1,925,372        (72,806     6,439,222        (208,297
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 4,954,585      $ (139,916   $ 2,198,072      $ (100,980   $ 7,152,657      $ (240,896
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     September 30, 2014  
     Less than 12 Months     More than 12 Months     Total  
            Gross            Gross            Gross  
     Fair      Unrealized     Fair      Unrealized     Fair      Unrealized  
     Value      Losses     Value      Losses     Value      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 unrealized loss amount quarterly. At June 30, 2015, the declines outlined in the above table represent temporary declines. The Company does not intend to sell, and does not believe it 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 13 securities in an unrealized loss position at June 30, 2015. The Company has concluded that the unrealized losses disclosed above are temporary and that interest rate changes or sector credit ratings changes 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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Table of Contents

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:

 

     June 30, 2015  
            Gross      Gross         
     Amortized      Unrealized      Unrealized      Fair  
     Cost      Gains      Losses      Value  

Freddie Mac Certificates

   $ 624       $ 44       $ —         $ 668   

Fannie Mae Certificates

     2,482         224         —           2,706   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 3,106       $ 268       $ —         $ 3,374   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     September 30, 2014  
            Gross      Gross         
     Amortized      Unrealized      Unrealized      Fair  
     Cost      Gains      Losses      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 nine months ended June 30, 2015 and 2014 and there were no temporarily impaired mortgage-backed securities at June 30, 2015 or September 30, 2014. In addition, the Company had no securities in an unrealized loss position at June 30, 2015 or September 30, 2014.

The amortized cost and fair values of mortgage-backed securities at June 30, 2015 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers have the right to repay obligations without penalty.

 

     June 30, 2015  
     Amortized      Fair  
     Cost      Value  

Due after one year through five years

   $ 1,753      $ 1,885  

Due after five years through ten years

     418        453  

Due after ten years

     935        1,036  
  

 

 

    

 

 

 
   $ 3,106      $ 3,374  
  

 

 

    

 

 

 

 

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Table of Contents

Note 5 — Loans

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

 

     June 30,      September 30,  
     2015      2014  

One-to four-family real estate - owner occupied

   $ 21,899,590       $ 21,556,222   

One-to four-family real estate - non-owner occupied

     41,002,714         39,185,939   

Construction

     4,730,363         2,562,823   

Multi-family real estate

     17,807,636         18,699,192   

Commercial real estate

     24,710,039         21,635,758   

Home equity and second mortgages

     2,029,022         1,880,546   

Secured loans

     150,250         158,512   

Commercial leases and loans

     18,351,128         19,231,496   

Commercial lines of credit

     4,256,743         4,790,107   
  

 

 

    

 

 

 
     134,937,485         129,700,595   

Plus:

     

Unamortized loan premiums

     11,004         12,176   

Less:

     

Unamortized loan fees and costs, net

     (387,640      (321,250

Allowance for loan losses

     (1,431,038      (1,361,038
  

 

 

    

 

 

 
   $ 133,129,811       $ 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 owner occupied and non-owner occupied loans; (2) construction loans; (3) multi-family real estate loans; (4) commercial real estate loans; (5) home equity and second mortgage loans; (6) secured loans; (7) commercial leases and loans; 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

 

15


Table of Contents

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 are 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.

 

16


Table of Contents

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 June 30, 2015 were as follows:

 

     Pass      Special
Mention
     Substandard      Doubtful      Loss      Total  

One-to four-family real estate non-owner occupied

   $ 41,002,714       $ —         $ —         $ —         $ —         $ 41,002,714   

Construction

     4,730,363         —           —           —           —           4,730,363   

Multi-family real estate

     17,807,636         —           —           —           —           17,807,636   

Commercial real estate

     24,710,039         —           —           —           —           24,710,039   

Commercial leases and loans

     18,049,400         —           301,728         —           —           18,351,128   

Commercial lines of credit

     4,094,281         —           162,462         —           —           4,256,743   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 110,394,433       $         —         $ 464,190       $ —         $ —         $ 110,858,623   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

17


Table of Contents

The following table presents performing and non-performing residential real estate and consumer loans based on payment activity as of June 30, 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.

 

     June 30, 2015  
     Nonperforming
Loans
     Performing
Loans
     Total  

One-to four-family real estate - owner occupied

   $ —         $ 21,899,590       $ 21,899,590   

Home equity and second mortgages

     —           2,029,022         2,029,022   

Secured loans

     —           150,250         150,250   
  

 

 

    

 

 

    

 

 

 
   $      —         $ 24,078,862       $ 24,078,862   
  

 

 

    

 

 

    

 

 

 

 

     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 June 30, 2015, with no related allowance. The Company did not recognize any interest income from this loan for the three and nine month period ended June 30, 2015. There were two impaired loans at September 30, 2014.

 

18


Table of Contents
     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
 

June 30, 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  
                                 Unpaid      Average      Interest  
     Recorded      Related      Recorded      Recorded      Principal      Recorded      Income  
     Investment      Allowance      Investment      Investment      Balance      Investment      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 three or nine month periods ended June 30, 2015 and 2014. Nor did it have any TDRs within the year ended September 30, 2014.

 

19


Table of Contents

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 June 30, 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

   $ 87,612       $ —         $ —         $ 87,612       $ 21,811,978       $ 21,899,590       $ —     

One-to four family real estate non-owner occupied

     141,200         —           —           141,200         40,861,514         41,002,714         —     

Construction

     —           —           —           —           4,730,363         4,730,363         —     

Multi-family real estate

     —           —           —           —           17,807,636         17,807,636         —     

Commercial real estate

     —           —           —           —           24,710,039         24,710,039         —     

Home equity and second mortgages

     —           —           —           —           2,029,022         2,029,022         —     

Secured loans

     —           —           —           —           150,250         150,250         —     

Commercial leases and loans

     —           —           301,728         301,728         18,049,400         18,351,128         301,728   

Commercial lines of credit

     —           —           —           —           4,256,743         4,256,743         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 228,812       $ —         $ 301,728       $    530,540       $ 134,406,945       $ 134,937,485       $ 301,728   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 June 30, 2015 and September 30, 2014 were approximately $302,000 and $848,000, respectively. The foregone interest on non-accrual loans was $649 and $12,593 for the three months ended June 30, 2015 and 2014 and $24,262 and $26,654 for the nine months ended June 30, 2015 and 2014, respectively. As of June 30, 2015 and September 30, 2014, there were no loans that were 90 days or more delinquent and still accruing interest.

 

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Table of Contents

The following tables detail the allowance for loan losses and loan receivable balances at June 30, 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 4/1/2015

  $ 129,442      $ 263,838      $ 68,778      $ 103,337      $ 234,399      $ 18,906      $ —        $ 313,091      $ 43,274      $ 245,973      $ 1,421,038   

Charge-offs

    —          —          —          —          —          —          —          —          —          —          —     

Recoveries

    —          —          —          —          —          —          —          —          —          —          —     

Provisions (credits)

    (6,207     1,728        (25,324     (3,533     8,761        13,560        —          13,100        (1,388     9,303        10,000   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance 6/30/15

  $ 123,235      $ 265,566      $ 43,454      $ 99,804      $ 243,160      $ 32,466      $ —        $ 326,191      $ 41,886      $ 255,276      $ 1,431,038   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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)

    (32,722     (41,834     7,201        (41,375     20,274        24,164        —          54,824        (8,447     87,915        70,000   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance 6/30/15

  $ 123,235      $ 265,566      $ 43,454      $ 99,804      $ 243,160      $ 32,466      $ —        $ 326,191      $ 41,886      $ 255,276      $ 1,431,038   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Beginning balance 4/1/2014

  $ 148,305      $ 284,327      $ 41,187      $ 143,351      $ 313,838      $ 8,869      $ —        $ 264,564      $ 49,274      $ 70,323      $ 1,324,038   

Charge-offs

    —          —          —          —          —          —          —          —          —          —          —     

Recoveries

    —          —          —          —          —          —          —          —          —          —          —     

Provisions (credits)

    2,593        12,850        (3,957     349        (52,092     779        —          3,444        4,343        56,691        25,000   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance 6/30/14

  $ 150,898      $ 297,177      $ 37,230      $ 143,700      $ 261,746      $ 9,648      $ —        $ 268,008      $ 53,617      $ 127,014      $ 1,349,038   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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)

    (6,077     29,282        17,795        2,017        (8,194     2,177        —          21,030        7,236        (15,266     50,000   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance 6/30/14

  $ 150,898      $ 297,177      $ 37,230      $ 143,700      $ 261,746      $ 9,648      $ —        $ 268,008      $ 53,617      $ 127,014      $ 1,349,038   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for credit losses:

                     

Ending balance 6/30/2015

  $ 123,235      $ 265,566      $ 43,454      $ 99,804      $ 243,160      $ 32,466      $ —        $ 326,191      $ 41,886      $ 255,276      $ 1,431,038   

Ending balance: individually evaluated for impairment

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

  $ 123,235      $ 265,566      $ 43,454      $ 99,804      $ 243,160      $ 32,466      $ —        $ 326,191      $ 41,886      $ 255,276      $ 1,431,038   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans receivables:

                     

Ending balance 6/30/2015

  $ 21,899,590      $ 41,002,714      $ 4,730,363      $ 17,807,636      $ 24,710,039      $ 2,029,022      $ 150,250      $ 18,351,128      $ 4,256,743      $ —        $ 134,937,485   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

  $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ 301,728      $ —        $ —        $ 301,728   

Ending balance: collectively evaluated for impairment

  $ 21,899,590      $ 41,002,714      $ 4,730,363      $ 17,807,636      $ 24,710,039      $ 2,029,022      $ 150,250      $ 18,049,400      $ 4,256,743      $ —        $ 134,635,757   

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   

 

21


Table of Contents

Note 6 — Commitments

The Company’s maximum exposure to credit loss for loan and lease commitments (unfunded loans and leases) at June 30, 2015 and September 30, 2014 was approximately $11,643,000 and $12,283,000, respectively, with interest rates from 1.75% to 6.75%. Fixed rate loan commitments at June 30, 2015 and September 30, 2014 were approximately $4,226,000 and $5,660,000, respectively, with fixed rates of interest ranging from 1.75% to 6.75% 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.

 

22


Table of Contents

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 I measurements) and the lowest priority to unobservable inputs (Level III measurements). The three levels of the fair value hierarchy as follows:

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

Level II: 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 III: 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 June 30, 2015 and September 30, 2014 are as follows:

 

     June 30, 2015  
     Level I      Level II      Level III      Total  

Description

           

Available for Sale Investments:

           

Mortgage-backed securities

   $ —         $ 3,374       $ —         $ 3,374   

Obligations of states and political subdivisions

     —           586,475         —           586,475   

U.S. government agency securities

     —           5,842,225         —           5,842,225   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 6,432,074       $ —         $ 6,432,074   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     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   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

23


Table of Contents

The following tables present the financial assets measured at fair value on a nonrecurring basis as of June 30, 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.

 

     June 30, 2015  
     Level I      Level II      Level III      Total  

Description

           

Assets measured at fair value on a nonrecurring basis:

           

Impaired loans

   $ —         $ —         $ 301,728      $ 301,728  

Other real estate owned

     —           —           539,735        539,735  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ —         $ 841,463      $ 841,463  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     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 June 30, 2015 and September 30, 2014 and for which the Bank uses Level III inputs to determine fair value:

 

     June 30, 2015  
     Fair Value      Valuation
Technique
  Unobservable
Inputs
  Range
(Weighted
Average)
 

Impaired Loans

   $ 301,728      Discounted
cash flow
  Probability
of default
    —     

Other real estate owned

     539,735      Fair Value
of collateral (1)
  Appraisal
adjustments (2)
   

 

20

(20


  

 

 

        
   $ 841,463         
  

 

 

        

 

     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         
  

 

 

        

 

(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.

 

24


Table of Contents

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the 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 June 30, 2015 and September 30, 2014:

 

     June 30, 2015  
     Carrying                           Total  
     Value      Level I      Level II      Level III      Fair Value  

Financial assets:

              

Cash and cash equivalents

   $ 8,282,767      $ 8,282,767      $ —         $ —         $ 8,282,767  

Investment securities available for sale

     6,428,700        —           6,428,700        —           6,428,700  

Investment securities held to maturity

     2,768,553        —           2,749,736        —           2,749,736  

Mortgage-backed securities available for sale

     3,374        —           3,374        —           3,374  

FHLB stock

     131,900        131,900        —           —           131,900  

Cash surrender value of life insurance

     307,776        307,776        —           —           307,776  

Loans receivable, net

     133,129,811        —           —           139,617,811         139,617,811   

Accrued interest receivable

     554,445        554,445        —           —           554,445  

Financial liabilities:

              

Deposits

   $ 129,111,987      $ 60,070,746       $ —         $ 69,070,240       $ 129,140,986   

Advances from borrowers for taxes and insurance

     710,365        710,365        —           —           710,365  

Accrued interest payable

     95,306        95,306        —           —           95,306  

 

     September 30, 2014  
     Carrying                           Total  
     Value      Level I      Level II      Level III      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  

 

25


Table of Contents

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 Bank is subject to regulatory capital adequacy requirements promulgated by federal bank regulatory agencies. Failure by 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.

In early July 2013, the Federal Reserve Board and the Office of the Comptroller of the Currency approved revisions to their capital adequacy guidelines and prompt corrective action rules that implement the revised standards of the Basel Committee on Banking Supervision, commonly called Basel III, and address relevant provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. “Basel III” refers to two consultative documents released by the Basel Committee on Banking Supervision in December 2009, the rules text released in December 2010, and loss absorbency rules issued in January 2011, which include significant changes to bank capital, leverage and liquidity requirements.

The rules include new risk-based capital and leverage ratios, which became effective January 1, 2015, and revised the definition of what constitutes “capital” for purposes of calculating those ratios. The new minimum capital level requirements applicable to the Bank are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. In addition, the rules assign a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The rules also eliminate the inclusion of certain instruments, such as trust preferred securities, from Tier 1 capital. However, instruments issued prior to May 19, 2010 will be grandfathered for institutions with consolidated assets of $15 billion or less. In addition, Tier 2 capital is no longer limited to the amount of Tier 1 capital included in total capital. Mortgage servicing rights, certain deferred tax assets and investments in unconsolidated subsidiaries over designated percentages of common stock will be required to be deducted from capital, subject to a two-year transition period. Finally, Tier 1 capital will include accumulated other comprehensive income (which includes all unrealized gains and losses on available for sale debt and equity securities), subject to a two-year transition period.

The rules also establish a “capital conservation buffer” of 2.5% above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital and would result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement will be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase by that amount each year until fully implemented in January 2019. An institution would be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations would establish a maximum percentage of eligible retained income that could be utilized for such actions.

Information presented below as of June 30, 2015 reflects the Basel III capital requirements that became effective January 1, 2015 for the Bank. Under these capital requirements and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings and other factors.

The Bank may not declare or pay a cash dividend if the effect thereof would cause its net worth to be reduced below either the amounts required for the liquidation account 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.

 

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The following table illustrates the Company’s actual regulatory capital levels compared with its regulatory capital requirements at June 30, 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 June 30, 2015

                     

Common equity Tier I capital to total risk-weighted assets

   $ 22,354        21.37     >       $ 4,708      > 4.50     >       $ 6,801      > 6.50

Tier I capital to total risk-weighted assets

     22,354        21.37     >         6,278      > 6.00     >         8,370      > 8.00

Total capital to total risk-weighted assets

     23,661        22.62     >         8,370      > 8.00     >         10,463      > 10.00

Tier I leverage capital to average assets

     22,354        14.28     >         6,263      > 4.00     >         7,829      > 5.00

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

 

     June 30,
2015
     September 30,
2014
 
     (in thousands)      (in thousands)  

Total equity

   $ 22,249      $ 21,972  

Unrealized loss on securities available-for-sale

     105        121  
  

 

 

    

 

 

 

Tier 1 capital

   $ 22,354        22,093  

Allowable allowances for loan and lease losses

     1,307        1,234  
  

 

 

    

 

 

 

Total risk-based capital

   $ 23,661      $ 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.

 

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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 2014-11, 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 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 statement.

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 Update 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.

 

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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 U.S. 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 may also 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.

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; and (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.

 

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In April 2015, the FASB issued ASU 2015-05, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 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 FASB 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.

In April 2015, the FASB issued ASU 2015-06, Earnings Per Share (Topic 260): Effects on Historical Earnings per Unit of Master Limited Partnership Dropdown Transactions. Topic 260, Earnings Per Share, contains guidance that addresses master limited partnerships that originated from Emerging Issues Task Force (“EITF”) Issue No. 07-4, Application of the Two-Class Method Under FASB Statement No. 128 to Master Limited Partnerships. Under Topic 260, master limited partnerships apply the two-class method of calculating earnings per unit because the general partner, limited partners, and incentive distribution rights holders each participate differently in the distribution of available cash in accordance with the contractual rights contained in the partnership agreement. The amendments in this Update specify that for purposes of calculating historical earnings per unit under the two-class method, the earnings (losses) of a transferred business before the date of a dropdown transaction should be allocated entirely to the general partner. In that circumstance, the previously reported earnings per unit of the limited partners (which is typically the earnings per unit measure presented in the financial statements) would not change as a result of the dropdown transaction. Qualitative disclosures about how the rights to the earnings (losses) differ before and after the dropdown transaction occurs for purposes of computing earnings per unit under the two-class method are also required. The amendments in this Update are effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Earlier application is permitted. This Update is not expected to have a significant impact on the Company’s financial statements.

In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent). The Update applies to reporting entities that elect to measure the fair value of an investment using the net asset value per share (or its equivalent) practical expedient. Under the amendments in this Update, investments for which fair value is measured at net asset value per share (or its equivalent) using the practical expedient should not be categorized in the fair value hierarchy. Removing those investments from the fair value hierarchy not only eliminates the diversity in practice resulting from the way in which investments measured at net asset value per share (or its equivalent) with future redemption dates are classified, but also ensures that all investments categorized in the fair value hierarchy are classified using a consistent approach. Investments that calculate net asset value per share (or its equivalent), but for which the practical expedient is not applied will continue to be included in the fair value hierarchy. A reporting entity should continue to disclose information on investments for which fair value is measured at net asset value (or its equivalent) as a practical expedient to help users understand the nature and risks of the investments and whether the investments, if sold, are probable of being sold at amounts different from net asset value. The amendments in this Update are effective for public business entities 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 fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. A reporting entity should apply the amendments retrospectively to all periods presented. The retrospective approach requires that an investment for which fair value is measured using the net asset value per share practical expedient be removed from the fair value hierarchy in all periods presented in an entity’s financial statements. Earlier application is permitted. This Update is not expected to have a significant impact on the Company’s financial statements.

In May 2015, the FASB issued ASU 2015-08, Business Combinations – Pushdown Accounting – Amendment to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115. This Update was issued to amend various SEC paragraphs pursuant to the issuance of Staff Accounting Bulletin No. 115. This Update is not expected to have a significant impact on the Company’s financial statements.

In May 2015, the FASB issued ASU 2015-09, Financial Services – Insurance (Topic 944): Disclosure About Short-Duration Contracts. The amendments apply to all insurance entities that issue short-duration contracts as defined in Topic 944, Financial Services – Insurance. The amendments require insurance entities to disclose for annual reporting periods certain information about the liability for unpaid claims and claim adjustment expenses. The amendments also require insurance entities to disclose information about significant changes in methodologies and assumptions used to calculate the liability for unpaid claims and claim adjustment expenses, including reasons for the change and the effects on the financial statements. Additionally, the

 

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amendments require insurance entities to disclose for annual and interim reporting periods a rollforward of the liability for unpaid claims and claim adjustment expenses, described in Topic 944. For health insurance claims, the amendments require the disclosure of the total of incurred-but-not-reported liabilities plus expected development on reported claims included in the liability for unpaid claims and claim adjustment expenses. For public business entities, the amendments in this Update are effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. For all other entities, the amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within annual periods beginning after December 15, 2017. This Update is not expected to have a significant impact on the Company’s financial statements.

In June 2015, the FASB issued ASU 2015-10, Technical Corrections and Improvements. The amendments in this Update represent changes to clarify the FASB Accounting Standards Codification (“Codification”), correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. Transition guidance varies based on the amendments in this Update. The amendments in this Update that require transition guidance are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. All other amendments will be effective upon the issuance of this Update. 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 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

 

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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 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 June 30, 2015 and September 30, 2014

Assets increased $2.4 million, or 1.6%, to $154.6 million at June 30, 2015 from $152.2 million at September 30, 2014, primarily due to a $5.1 million increase in net loans offset by a $2.0 million decrease in investment securities available for sale, a $1.5 million decrease in interest-bearing deposits in other banks and a $300,000 increase in accrued interest receivable and other assets. During the nine month period ended June 30, 2015, two loans totaling $540,000 were transferred from loans to other real estate owned. The decrease in interest-bearing deposits was due to the $5.1 million increase in loan originations during the nine months ended June 30, 2015. The decrease in investment securities available for sale was the result of bond calls totaling $3.5 million during the nine months ended June 30, 2015.

The increase in loans was primarily due to a $3.1 million increase in commercial real estate loans, a $2.2 million increase in construction loans, a $1.8 million increase in non-owner occupied one-to four-family real estate loans and a $300,000 increase in owner-occupied one-to four-family real estate loans, partially offset by a $900,000 decrease in multifamily real estate loans, a $900,000 decrease in commercial leases and loans and a $500,000 decrease in commercial lines of credit. The increases in commercial real estate, construction and one-to four-family real estate loans were primarily the result of our continued offering of competitive rates, strong customer service and borrowings by long-standing and new lending relationships.

 

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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 was one non-accrual loan at June 30, 2015 totaling $302,000, or 0.22% 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 loan at June 30, 2015 consisted of a commercial line of credit.

Total liabilities increased by $1.7 million, or 1.3%, to $131.2 million at June 30, 2015 from $129.5 million at September 30, 2014. This increase was primarily attributable to an increase in deposits of $1.3 million. The increase in deposits was primarily due to a $3.5 million increase in CDARS deposits, a $1.6 million increase in NOW and money market accounts and a $1.0 million increase in savings deposits, offset by a $4.8 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 CDARS program allows the Bank to attract term deposits at lower cost compared to the Bank’s internal offering rates and FHLB borrowing rates. The decrease in certificates of deposit is primarily due to special rate programs being offered by other local financial institutions.

Stockholders’ equity increased $725,000 to $23.4 million at June 30, 2015 from $22.7 million at September 30, 2014. The increase was primarily the result of net income totaling $1.1 million, a $16,000 decrease in accumulated other comprehensive loss, $94,000 related to the allocation of ESOP shares and, $80,000 related to stock benefit plans, offset by dividends totaling $484,000, and the retirement of 6,578 shares at a cost of $125,000 during the period.

Results of Operations for the Three and Nine Months Ended June 30, 2015 and 2014

Overview.

 

     For the Three Months Ended
June 30,
 
     2015     2014  
     (Dollars in thousands, except
per share amounts)
 

Net income

   $    391      $    402   

Basic and earnings per share

     0.34       0.34   

Diluted earnings per share

     0.34       0.34   

Average equity to average assets

     15.01     15.29

 

     For the Nine Months Ended
June 30,
 
     2015     2014  
     (Dollars in thousands, except  
     per share amounts)  

Net income

   $ 1,143      $ 1,114   

Basic earnings per share

     0.98        0.93   

Diluted earnings per share

     0.98        0.93   

Average equity to average assets

     14.83     15.31

The decrease in net income for the three months ended June 30, 2015 was primarily attributable to a $4,000 increase in net interest income and a $15,000 decrease in the provision for loan losses offset by an $26,000 decrease in non-interest income, and a $25,000 increase in non-interest expense.

The increase in net income for the nine months ended June 30, 2015 was primarily attributable to a $157,000 increase in net interest income offset by an $8,000 decrease in non-interest income and a $108,000 increase in non-interest expense.

 

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Net Interest Income. Net interest income increased $4,000 to $1.5 million for the three months ended June 30, 2015 compared to the same period of the prior year. For the three months ended June 30, 2015, higher net interest income was the result of a $6,000 increase in total interest income, a $6,000 increase in deposit interest expense and a $4,000 decrease in FHLB borrowing expense. For the three months ended June 30, 2015, the average balance of loans receivable increased $6.7 million, offset by a six basis point decrease in the average yield compared to the three months ended June 30, 2014. For the three months ended June 30, 2015, the average balance of investment securities and interest bearing deposits decreased $600,000 compared to the three months ended June 30, 2014.

For the nine months ended June 30, 2015, net interest income increased $157,000 to $4.6 million compared to the same period of the prior year. Higher net interest income was the result of a $117,000 increase in total interest income, a $30,000 decrease in deposit interest expense and a $10,000 decrease in FHLB borrowing expense. For the nine months ended June 30, 2015, the increase in interest income resulted from a $6.3 million increase in the average balance of loans, and a $4.1 million increase in the average balance of investment securities offset by a 17 basis point decrease in the average yield of interest-earning assets. The decrease in total interest expense for the nine months ended June 30, 2015 was primarily attributable to an $8.1 million decrease in the average balance of certificates of deposits and a four 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
June 30, 2015

Compared to
Three Months Ended
June 30, 2014
 
     Increase (Decrease) Due to  
     Rate      Volume      Net  
     (In thousands)  

Interest Income:

        

Loans receivable

   $ (70    $ 84       $ 14   

Investment securities

     (4      (3      (7
  

 

 

    

 

 

    

 

 

 

Total interest-earning assets

     (74      81         7   
  

 

 

    

 

 

    

 

 

 

Interest Expense:

        

NOW and money market accounts

     —           2         2  

Passbook and club accounts

     —           1        1  

IRA accounts

     (2      (1      (3

Certificates of deposit

     127         (146      (19

CDARS

     1         24         25  

FHLB advances

     (2      (2      (4
  

 

 

    

 

 

    

 

 

 
     124         (122      2  
  

 

 

    

 

 

    

 

 

 

Net change in net interest income

   $ (198    $ 203      $ 5  
  

 

 

    

 

 

    

 

 

 

 

     Nine Months Ended
June 30, 2015
Compared to
Nine Months Ended
June 30, 2014
 
     Increase (Decrease) Due to  
     Rate      Volume      Net  
     (In thousands)  

Interest Income:

        

Loans receivable

   $ (229    $ 294       $ 65  

Investment securities

     25         27         52  
  

 

 

    

 

 

    

 

 

 

Total interest-earning assets

     (204      321         117   
  

 

 

    

 

 

    

 

 

 

Interest Expense:

        

NOW and money market accounts

     2         10         12  

Passbook and club accounts

     1         1         2  

IRA accounts

     (10      (2      (12

Certificates of deposit

     387         (480      (93

CDARS

     (3      65         62  

FHLB advances

     (5      (5      (10
  

 

 

    

 

 

    

 

 

 
     372         (411      (39
  

 

 

    

 

 

    

 

 

 

Net change in net interest income

   $ (576    $ 732      $ 156  
  

 

 

    

 

 

    

 

 

 

 

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Provision for Loan Losses. The provision for loan losses for the three and nine months ended June 30, 2015 was $10,000 and $70,000, respectively compared to $25,000 and $50,000, respectively for the comparable 2014 periods. The three month decrease in the provision was based on methodology used to determine an adequate level of allowance for loan losses, including the level of non-performing loans.

The Company’s calculated allowance requirement for credit losses on one-to four-family real estate loans and multi-family real estate loans decreased during the nine month period ended June 30, 2015. The reduction in the allowance requirement for these type loans is due to a decrease in the historical loss percentage factor that is used in the calculation to generate the required allowance amount. There is no reserve established for the commercial leases and loans individually evaluated for impairment as the collateral is deemed sufficient to protect against loss.

There was $302,000 in non-accruing loans at June 30, 2015 compared to $848,000 at September 30, 2014. There were no net charge-offs for the nine months ended June 30, 2015 and 2014.

Non-Interest Income. The following tables show the components of non-interest income and the percentage changes for the three and nine month periods ended June 30, 2015 and 2014.

 

     Three Months Ended                
     June 30,                
     2015      2014      $ Change      % Change  

Fees on deposit accounts

   $ 10,172      $ 8,452      $ 1,720        20.4

Other income

     9,978        37,814        (27,836      (73.6 )% 
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest income

   $ 20,150      $ 46,266      $ (26,116      (56.4 )% 
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Nine Months Ended                
     June 30,                
     2015      2014      $ Change      % Change  

Fees on deposit accounts

   $ 28,248      $ 24,198      $ 4,050        16.7

Other income

     50,416        62,734        (12,318      (19.6 )% 
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest income

   $ 78,664      $ 86,932      $ (8,268      (9.5 )% 
  

 

 

    

 

 

    

 

 

    

 

 

 

For the three month period ended June 30, 2015, the decrease in other income includes a $311 decrease in the cash surrender value of insurance policies compared to a $29,000 increase for the three month period ended June 30, 2014.

For the nine month period ended June 30, 2015, the decrease in other income includes a $11,070 increase in the cash surrender value of insurance policies compared to $36,000 increase for the nine-month period ended June 30, 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 nine month periods ended June 30, 2015 and 2014.

 

     Three Months Ended                
     June 30,                
     2015      2014      $ Change      % Change  

Salaries and benefits

   $ 574,313      $ 547,466      $ 26,847        4.9

Occupancy

     85,408        84,694        714        0.8

Data processing

     64,377        68,708        (4,331      (6.3 )% 

Professional fees

     76,252        90,665        (14,413      (15.9 )% 

FDIC insurance premiums

     18,150        18,150        —           —  

Other

     118,710        102,271        16,439        16.1
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest expense

   $ 937,210      $ 911,954      $ 25,256        2.8
  

 

 

    

 

 

    

 

 

    

 

 

 

Salaries and benefits expense increased $27,000 for the three months ended June 30, 2015 due primarily to a $7,000 increase in salary and benefits expense, a $7,000 increase in retirement fund contributions, a $5,000 increase in ESOP expense and a $7,000 increase in restricted stock and options expense. Professional fees decreased $14,000 primarily due to a decrease in the expense related to the use of consultants in order to maintain compliance with increasing regulatory compliance requirements. The increase in other expenses is related to cost associated with debit card processing, stock related activities and other real estate owned expenses.

 

     Nine Months Ended                
     June 30,                
     2015      2014      $ Change      % Change  

Salaries and benefits

   $ 1,675,361      $ 1,609,654      $ 65,707        4.1

Occupancy

     267,485        264,398        3,087        1.2

Data processing

     191,990        202,397        (10,407      (5.1 )% 

Professional fees

     274,523        250,044        24,479        9.8

FDIC insurance premiums

     54,450        51,700        2,750        5.3

Other

     373,711        351,627        22,084        6.3
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest expense

   $ 2,837,520      $ 2,729,820      $ 107,700        3.9
  

 

 

    

 

 

    

 

 

    

 

 

 

Salaries and benefits expense increased $66,000 for the nine months ended June 30, 2015 due to a $26,000 increase in retirement fund contributions, an $18,000 increase in salary and benefits expense, a $13,000 increase in ESOP expense and a $7,400 increase in restricted stock and options expense. Professional fees increased $24,000 primarily due to the increased use of consultants in order to maintain compliance with increasing regulatory compliance requirements. The increase in other expenses is primarily related to cost associated with debit cards processing and other real estate owned expenses.

Income Taxes. Income tax expense was $185,000 and $592,000 for the three and nine months ended June 30, 2015, respectively, compared to $206,000 and $600,000 for the comparable periods in 2014. The decrease in income tax expense in the 2015 periods was primarily the result of a higher level of tax-free income from municipal loans.

 

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Table of Contents

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 June 30, 2015, cash and cash equivalents totaled $8.3 million. In addition, at June 30, 2015, we had the ability to borrow a total of approximately $70.0 million from the Federal Home Loan Bank of Pittsburgh. At June 30, 2015, we had no FHLB advances outstanding.

At June 30, 2015, we had $11.6 million in loan commitments outstanding, which consisted of commitments to grant $2.2 million in loans and $1.0 million in commercial leases. At June 30, 2015, we had $5.4 million in undisbursed lines of credit, $1.9 million in undisbursed construction loans, $800,000 in undisbursed home equity lines of credit and $322,000 in undisbursed loans in process.

Certificates of deposit due within one year of June 30, 2015 totaled $24.3 million, representing 46.6% of certificates of deposit, and 18.8% of total deposits at June 30, 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 June 30, 2015, we redeemed $1.5 million in CDARS deposits as a result of excess liquidity. 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 June 30, 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 June 30, 2015, the Company had $1.0 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 June 30, 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 22.62%, 21.37% and 14.28%, respectively. At June 30, 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 June 30, 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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Table of Contents
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 June 30, 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 June 30, 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)
 

April 1 through April 30

     —           —           —           116,021  

May 1 through May 31

     —           —           —           116,021  

June 1 through June 30

     52      $ 19.02        52        115,969  
  

 

 

       

 

 

    

Total

     52           52     
  

 

 

       

 

 

    

 

(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

 

    3.1    Articles of Incorporation of Eureka Financial Corp. (1)
    3.2    Bylaws of Eureka Financial Corp. (1)
    4.0    Form of Stock Certificate of Eureka Financial Corp. (1)
  31.1    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
  31.2    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
  32.0    Section 1350 Certification
101.0    The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statement of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to the Consolidated Financial Statements.

 

(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: August 14, 2015     By:  

/s/ Edward F. Seserko

      Edward F. Seserko
      President and Chief Executive Officer
      (principal executive officer)
Dated: August 14, 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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