EUREKA HOMESTEAD BANCORP, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)
This discussion and analysis reflects our financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the audited financial statements, which appear beginning on page F-1 of this annual report. You should read the information in this section in conjunction with the business and financial information regarding the Company and the Bank provided in this annual report. 36 Table of Contents General COVID-19 Impacts
The effects of the COVID-19 pandemic and the governmental and societal response to the virus have had a negative impact on overall economic conditions.
The Federal and state governments have worked to contain the spread of COVID-19. The result of these containment strategies has had an enormous impact on the economy and has had a negative impact on some borrowers' ability to make timely loan payments. In recent months, a number of restrictive government initiatives designed to combat the effects of the COVID-19 pandemic have been eased on a national level and in
Louisiana, as well as the rollout of three COVID-19 vaccines, allowing businesses to reopen at varying capacity levels, which has bolstered commercial activity and employment to some degree. However, another resurgence in infections and reimplementation of new and/or additional restrictions at the national and local level to combat the COVID-19 pandemic may present additional negative impacts to the economy and our customers. The duration and severity of the COVID-19 pandemic remain impossible to predict. The Federal Reserve Boardand other various regulatory agencies have issued joint guidance to financial institutions to work with borrowers affected by the coronavirus. The Company instituted a loan deferment program whereby short-term deferrals of payments were allowed. Deferred payments are due at the time the loan is paid off. As of December 31, 2021all of the loans modified by us have resumed normal monthly payments. We did not report these loans as delinquent and continued to recognize interest income during the deferral period. No increase in the allowance for loan losses was deemed necessary on these loans. These loans will continue to be monitored to determine collectability and accrual and delinquency status will be updated as deemed appropriate. Under Section 4013 of the Coronavirus Aid, Relief and Economic Security ("CARES") Act, loans less than 30 days past due as of December 31, 2019were considered current for COVID-19 modifications. A financial institution could then suspend the requirements under GAAP for loan modifications related to COVID-19 that would otherwise be categorized as a troubled debt restructuring ("TDR"), and suspend any determination of a loan modified as a result of COVID-19 as being a TDR, including the requirement to determine impairment for accounting purposes. Financial institutions wishing to utilize this authority were required to make a policy election, which applies to any COVID-19 modification made between March 1, 2020and the earlier of either December 31, 2020or the 60th day after the end of the COVID-19 national emergency. Similarly, the Financial Accounting Standards Boardhas confirmed that short-term modifications made on a good-faith basis in response to COVID-19 to loan customers who were current prior to any relief are not TDRs. Lastly, prior to the enactment of the CARES Act, the banking regulatory agencies provided guidance as to how certain short-term modifications would not be considered TDRs, and have subsequently confirmed that such guidance could be applicable for loans that do not qualify for favorable accounting treatment under Section 4013 of the CARES Act. Based on this guidance, the Company does not believe that TDRs will significantly change as a result of the modifications granted. The full impact on our lending and other business activities as a result of new government and regulatory policies, programs and guidelines, as well as regulators' reaction to such activities, remains uncertain. 37 Table of Contents Hurricane Ida Impacts On August 29, 2021, Hurricane Ida made landfall in southeast Louisianabetween New Orleansand Baton Rouge. The Company did not sustain any significant damage to its locations, and our employees had no significant issues. Banking locations in the impacted markets closed as necessary prior to the hurricane's landfall and in our immediate market area in and around Metairie, Eureka Homesteadand many banks, temporarily closed these office locations. We immediately staffed our disaster recovery location in Baton Rougefor five days after the hurricane made landfall and re-opened our main office in Metairieand our loan production office in New Orleansafter five days. Our borrowers were not significantly affected by the event.
Our business consists primarily of taking deposits and securing borrowings and investing those funds, together with funds generated from operations, in one- to four-family residential real estate loans, including non-owner-occupied properties, construction loans for owner-occupied, one- to four-family residential real estate and home equity loans. To a lesser extent, we also originate multifamily, commercial real estate and consumer loans. At
December 31, 2021, $70.9 million, or 94.0% of our total loan portfolio, was comprised of one- to four-family residential real estate loans, $8.5 millionof which were non-owner-occupied loans, $4.6 millionof which were construction loans and $410,000of which were home equity loans. The significant majority of loans we originate are conforming one- to four-family residential real estate loans, and in the low interest rate environment in recent years, almost all of these loans have been long-term, fixed rate loans. In order to address our interest rate risk, in recent years we have sold a significant portion of these conforming, fixed-rate, long-term loans on an industry-standard, servicing-released basis, as well as increasing the percentage of adjustable rate residential loans in portfolio. We offer a variety of deposit accounts, including savings accounts (passbook and money market) and certificates of deposit. We utilize advances from the FHLB for funding and asset/liability management purposes. At December 31, 2021, we had $18.2 millionin advances outstanding with the FHLB. We do not offer checking accounts which may impact our ability to attract and grow core deposits. We have always been dependent, in part, on retail certificates of deposit as a funding source for our loans, and we accept jumbo certificates of deposit through an online service, as well as municipal and brokered certificates of deposit. We have used these non-retail funding sources, as well as advances from the FHLB, to fund our loan growth. Pursuant to our business strategy, we are seeking to increase our core deposits, which we consider our savings and money market accounts and our retail certificates of deposit, by more aggressively marketing and pricing our deposit products. For the year ended December 31, 2021we had net income of $146,000compared to a net loss of $103,000for 2020, an increase of $249,000. The increase in the net income resulted primarily from increases in net interest income of $242,000and noninterest income of $68,000, offset, in part, by a decrease in income tax benefit of $62,000.
Our executive and administrative office is located at
1922 Veterans Memorial Boulevard, Metairie, Louisiana70005, and our telephone number at this address is (504) 834-0242. Our website address is www.eurekahomestead.com. Information on our website is not incorporated into this annual report and should not be considered part of this annual report. 38 Table of Contents Business Strategy
Our primary objective is to create long-term value for our shareholders by operating a profitable, community-focused financial institution dedicated to serving the banking needs of our customers with an emphasis on personalized and efficient customer service. . Highlights of our current business strategy include:
Continue to focus on one to four family residential real estate loans,
including our original practice for retention in our portfolio,
non-owner real estate loans. We have been, and will continue to be,
primarily a one to four family residential real estate lender for borrowers
? our market area. From
loan portfolio, made up of residential real estate loans from one to four families,
non-owner real estate loans. We expect one to four families
residential real estate lending will remain our core lending business.
Maintain the quality of our assets through prudent loan underwriting. We
? intend to maintain strict, quality-driven loan underwriting and credit
monitoring process. AT
Attract and retain customers in our market area and increase our “core”
deposits consisting of savings accounts and retail certificates of deposit. We
? intend to put more emphasis on our savings and money market accounts and
retail certificates of deposit through more aggressive marketing and pricing
these products, thereby reducing our reliance on non-retail certificates
Remain an institution with a community vocation and rely on quality service
to maintain and retain local customers. We were established in 1884
and operated continuously in the
? this time. Thanks to the goodwill we have developed over the years to provide
fast and efficient banking services, we believe we have been able to
attract a solid clientele of local merchants on which we hope to continue to
develop our banking business.
Critical accounting policies
The discussion and analysis of the financial condition and results of operations are based on our financial statements, which are prepared in conformity with generally accepted accounting principles used 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.
The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company”, we may delay the adoption of new or revised accounting statements applicable to public companies until such statements become effective.
39 Table of Contents
to private companies. We intend to take advantage of this extended transition period. Accordingly, our financial statements may not be comparable to those of companies that comply with these new or revised accounting standards.
The following represent our significant accounting policies:
Allowance for Loan Losses. The allowance for loan losses is the estimated amount considered necessary to cover inherent, but unconfirmed, credit losses in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses which is charged against income. In determining the allowance for loan losses, management makes significant estimates and has identified this policy as one of our most critical accounting policies. Management performs a quarterly evaluation of the allowance for loan losses. Consideration is given to a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal loan reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change. The analysis has two components, specific and general allowances. The specific allowance is for unconfirmed losses related to loans that are determined to be impaired. Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral, adjusted for market conditions and selling expenses. If the fair value of the loan is less than the loan's carrying value, a charge is recorded for the difference. The general allowance, which is for loans reviewed collectively, is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. We also analyze historical loss experience, delinquency trends, general economic conditions and geographic and industry concentrations. This analysis establishes historical loss percentages and qualitative factors that are applied to the loan groups to determine the amount of the allowance for loan losses necessary for loans that are reviewed collectively. The qualitative component is critical in determining the allowance for loan losses as certain trends may indicate the need for changes to the allowance for loan losses based on factors beyond the historical loss history. Not incorporating a qualitative component could misstate the allowance for loan losses. Actual loan losses may be significantly more than the allowances we have established which could result in a material negative effect on our financial results. Effective
January 1, 2023, we will adopt the CECL standard for determining the amount of our allowance for credit losses, which may increase our allowance for loan and lease losses upon adoption and cause our historic allowance for loan and lease losses not to be indicative of how we will maintain our allowance for credit losses beginning January 1, 2023. Please see Note 1 - Nature of Operations, Principles of Consolidation, Use of Estimates and Summary of Significant Accounting Policies on page F-7 of the Consolidated Financial Statements for further details. Fair Value Measurements. The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. We estimate the fair value of a financial instrument and any related asset impairment using a variety of valuation methods. Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value. When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, may be used, if available, to determine fair value. When observable market prices do not exist, we estimate fair value. These estimates are subjective in nature and imprecision in estimating these factors can impact the amount of gain or loss recorded. A more detailed description of the fair values measured at each level of the fair value 40 Table of Contents
The hierarchy and methodology used by the Bank can be found in Note 18 to the consolidated financial statements, “Fair values of financial instruments”.
Comparison of the financial situation at
Total Assets. Total assets increased
$3.7 million, or 3.7%, to $103.6 millionat December 31, 2021from $99.9 millionat December 31, 2020. The increase resulted primarily from increases in cash and cash equivalents of $3.4 millionand net loans of $6.1 million, offset in part by decreases in interest-bearing deposits in banks of $1.7 million, investment securities available-for-sale of $721,000and loans held-for-sale of $3.2 million. Cash and Cash Equivalents. Cash and cash equivalents increased $3.4 million, or 85.1%, to $7.3 millionat December 31, 2021from $4.0 millionat December 31, 2020. Interest-Bearing Deposits in Banks. Interest-bearing deposits in banks decreased $1.7 million, or 18.4%, to $7.7 millionat December 31, 2021from $9.5 millionat December 31, 2020.
The balance of these two balance sheet items was an increase of
mainly due to the increase in deposits not yet used to make loans.
Net Loans. Net loans increased
$6.1 million, or 8.7%, to $75.9 millionat December 31, 2021from $69.9 millionat December 31, 2020. During the year ended December 31, 2021, one- to four-family residential real estate loans increased $4.8 million, or 7.2%, to $70.9 millionfrom $66.1 millionat December 31, 2020, multifamily loans decreased $97,000, or 3.4%, to $2.8 millionfrom $2.9 millionat December 31, 2020, commercial real estate loans increased $1.1 million, or 306.6%, to $1.5 millionfrom $364,000at December 31, 2020and consumer loans increased $25,000, or 11.7%, to $239,000from $214,000at December 31, 2020. The increase in net loans was due primarily to increases in commercial real estate loan participations with another local bank and in one- to four-family residential real estate loans, principally in non-conforming and construction loans earning higher interest rates than similar conforming loans, which are generally sold. The decreases in multifamily loans were due to normal repayments.
Securities Available-for Sale. Investment securities available-for-sale, consisting of government-sponsored mortgage-backed securities and SBA 7a Pools backed by real estate and equipment loans, decreased
$721,000, or 11.9%, to $5.3 millionat December 31, 2021from $6.1 millionat December 31, 2020as a result of principal repayments of $1.7 millionexceeding securities purchases of $1.0 millionduring the year. Bank-Owned Life Insurance. At December 31, 2021, our investment in bank owned life insurance was $4.2 million, an increase of $88,000, or 2.1%, from $4.1 millionat December 31, 2020. We invest in bank-owned life insurance to provide us with a funding offset for our benefit plan obligations. Bank-owned life insurance also generally provides us noninterest income that is non-taxable. Federal regulations generally limit our investment in bank-owned life insurance to 25% of our Tier 1 capital plus our allowance for loan losses. Our investment in bank-owned life insurance at December 31, 2021was 20.8% of our Tier 1 capital plus our allowance for loan losses. 41
Deposits. Deposits increased
$4.5 million, or 8.0%, to $61.0 millionat December 31, 2021from $56.4 millionat December 31, 2020. Savings accounts and money market accounts increased $1.3 million, or 45.0%, to $4.1 millionat December 31, 2021from $2.9 millionat December 31, 2020. Certificates of deposit increased $3.3 million, or 6.1%, to $56.8 millionat December 31, 2021from $53.6 millionat December 31, 2020. The increase in certificates of deposit resulted primarily from an increase in certificates of deposit derived from an online service of $3.2 million, from brokers of $1.9 millionand from local retail depositors, offset in part by a decrease of $1.2 millionof certificates of deposit from municipalities. Depending on market conditions, at times we have utilized non-retail funding sources to fund our loan origination and growth and to replace Federal Home Loan Bankadvances, as well as in order to get longer-term funding not always available in the local market in to help reduce interest rate risk. Certificates of deposit that are scheduled to mature in less than one year from December 31, 2021total $18.8 millionat December 31, 2021. Management expects that a substantial portion of the maturing certificates of deposit will be renewed. However, if a substantial portion of these deposits is not retained, we may utilize FHLB advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense. Borrowings. Borrowings, consisting entirely of Federal Home Loan Bankadvances, decreased $1.2 millionor 6.3% to $18.2 millionat December 31, 2021from $19.4 millionat December 31 2020due to maturities not renewed. Total Equity. Total equity decreased $94,000, or 0.4%, to $21.8 millionat December 31, 2021from $21.9 millionat December 31, 2020. The decrease resulted primarily from the repurchase of 22,500 shares of the Company's common stock during the year offset, in part, by the net income of $146,000in 2021.
Comparison of operating results for the years ended
General. We had net income of
$146,000for the year ended December 31, 2021, compared to a net loss of ( $103,000) for the year ended December 31, 2020, an increase of $249,000. The increase in net income resulted from increases in net interest income of $242,000and noninterest income of $68,000and decreases in noninterest expense of $3,000, offset, in part, by a decreases in benefit for loan losses of $2,000and income tax benefit of $62,000. Interest Income. Interest income decreased $174,000, or 5.8%, to $2.8 millionfor the year ended December 31, 2021from $3.0 millionfor the year ended December 31, 2020. This decrease was primarily attributable to decreases in interest on loans receivable of $86,000, or 3.0%, interest on investment securities of $23,000, or 29.5%, and interest on interest-bearing deposits in banks of $65,000, or 79.3%. The average balance of loans increased $3.6 million, or 5.0%, to $76.6 millionfor the year ended December 31, 2021from $73.0 millionfor the year ended December 31, 2020, and the average yield on loans decreased 29 basis points to 3.58% during 2021 from 3.87% during 2020. The average balance of investment securities increased $546,000, or 10.5%, to $5.7 millionfor the year ended December 31, 2021from $5.2 millionfor the year ended December 21, 2020, while the average yield on investment securities decreased 54 basis points to 0.96% for 2021 from 1.50% for 2020. The average balance of other interest-earning assets decreased $4.1 million, or 22.9%, to $13.9 millionfor the year ended December 31, 2021from $18.0 millionfor the year ended December 31, 2020, and the average yield on other interest-earning assets decreased 33 basis points to 0.12% for 2021 from 0.45% for 2020. Interest Expense. Total interest expense decreased $416,000, or 26.1%, to $1.2 millionfor the year ended December 31, 2021from $1.6 millionfor the year ended December 31, 2020. The decrease was primarily due to decreases in interest expense on deposits of $264,000, or 26.1%, and interest expense on 42
FHLB advances of
$152,000, or 26.0%. The average balance of interest-bearing deposits increased $5.0 million, or 8.9%, to $60.9 millionfor the year ended December 31, 2021from $55.9 millionfor the year ended December 31, 2020, and the average cost of interest-bearing deposits decreased 58 basis points to 1.23% for 2021 from 1.81% for 2020. The average balance of FHLB advances decreased $3.3 million, or 14.9%, to $19.0 millionfor the year ended December 31, 2021from $22.3 millionfor the year ended December 31, 2020. The average cost of these advances decreased 34 basis points to 2.28% for 2021 from 2.62% for 2020. Net Interest Income. Net interest income increased $242,000, or 17.4%, to $1.6 millionfor the year ended December 31, 2021from $1.4 millionfor the year ended December 31, 2020. Average net interest-earning assets decreased $1.6 millionyear to year. This decrease was due primarily to an increase in the average balance of interest-bearing deposits year to year. Our interest rate spread increased 38 basis points to 1.44% for the year ended December 31, 2021from 1.06% for the year ended December 31, 2020, and our net interest margin increased 25 basis points to 1.70% for the year ended December 31, 2021from 1.45% for the year ended December 31, 2020. The increases in interest rate spread and net interest margin were primarily the result of our interest-bearing liabilities repricing downward at a faster rate than our interest-earning assets. Provision for Loan Losses. We recorded no provision or credit in the provision for loan losses for the year ended December 31, 2021and a credit of $2,000for the year ended December 31, 2020. The decrease in the credit in the provision for loan losses in 2021 compared to 2020 resulted from our analysis of the factors described in "Critical Accounting Policies - Allowance for Loan Losses." The allowance for loan losses was $858,000, or 1.14% of total loans, at December 31, 2021, compared to $850,000, or 1.22% of total loans, at December 31, 2020. Classified (substandard, doubtful and loss) loans decreased to $0at December 31, 2021from $559,000at December 31, 2020. There were no non-performing loans at December 31, 2021or December 31, 2020. Net recoveries were $8,000in 2021 compared to $2,000in 2020, an increase of $6,000. Noninterest Income. Noninterest income increased $68,000, or 7.0%, to $1.0 millionfor the year ended December 31, 2021from $975,000for the year ended December 31, 2020. The increase was primarily due to an increases in fees on loans sold of $62,000and service charges and other income of $10,000. This increase was partially offset by a decrease in income from life insurance of $4,000. Noninterest Expense. Noninterest expense decreased $3,000, or 0.1%, to $2.5 millionfor 2021 from $2.5 millionfor 2020. The decrease was due primarily to decreases of $10,000, or 4.8%, in occupancy expense, $38,000, or 33.6%, in data processing expense, $43,000, or 21.8%, in accounting and consulting expense, $13,000, or 19.4% in legal fees, and $6,000, or 2.5% in other expenses. These decreases were offset, in part, by increases of $100,000, or 6.4%, in salaries and employee benefits, primarily from increased commissions paid on higher loan volume in 2021, $1,000or 1.5% in FDICdeposit insurance premiums, and $6,000, or 7.3% in insurance expense.
In future periods, if we make additional grants of awards under our equity incentive plan, which has been approved by our shareholders, we expect our non-interest expense to increase due to the increase in compensation costs.
Income Tax Expense. Income tax expense increased
$62,000to an expense of $0compared to a benefit of $62,000for 2020. We had no income tax expense in 2021 due to the utilization of net operating loss (NOL) carryforwards from prior years. The benefit in 2020 resulted from the net loss before income tax expense in 2020 and the refund of prior year income taxes as allowed by the CARES Act. We have remaining net operating loss (NOL) carryforwards of $1.8 millionwhich have no expiration date. At this time we believe that it is more likely than not that the benefit from a portion of the NOL carryforwards will 43
not be realized within a reasonable time to offset the amount of net tax operating losses which are the primary cause of our deferred tax asset.
Average balances and yields. The following table sets forth average balance sheets, average yields and costs, and certain other information at and for the years indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Nonaccrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees/costs, discounts and premiums that are amortized or accreted to interest income or interest expense. For the Year Ended December 31, 2021 2020 Average Average Outstanding Yield/ Rate Outstanding Yield/ Rate Balance Interest (1) Balance Interest (1) (Dollars in Thousands) Interest-earning assets: Loans, net (1)
$ 76,580 $ 2,7413.58 % $ 72,966 $ 2,8273.87 % Investment securities 5,735 55 0.96 5,189 78 1.50 Other interest-earning assets 13,912 17 0.12 18,046 82 0.45 Total interest-earning assets 96,227 2,813 2.92 96,201 2,987 3.10 Noninterest-earning assets 7,738 7,784 Total assets $ 103,965 $ 103,985Interest-bearing liabilities: Savings/Money Market accounts $ 3,6586 0.16 $ 2,8197 0.25 Certificates of deposit 57,273 741 1.29 53,126 1,004 1.89
Total interest-bearing deposits 60,931 747 1.23 55,945 1,011 1.81 Borrowings 18,984 433 2.28 22,297 585 2.62 Total interest-bearing liabilities 79,915 1,180
1.48 78,242 1,596 2.04 Other noninterest-bearing liabilities 2,050 1,677 Total liabilities 81,965 79,919 Equity 22,000 24,066 Total liabilities and equity
$ 103,965 $ 103,985Net interest income $ 1,633 $ 1,391Net interest rate spread (2) 1.44 % 1.06 %
Net interest-earning assets (3)
$ 16,312 $ 17,959Net interest margin (4) 1.70 % 1.45 % Average of interest-earning assets to interest-bearing liabilities 120.41 % 122.95 %
(1) Net lending fees/(costs) of (
respectively, are included in interest income.
The net interest rate spread represents the difference between the return on (2) average interest-bearing assets and the cost of average interest-bearing assets.
(3) Net interest-earning assets represent total interest-earning assets less
total interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by total
interest-earning assets. Rate/Volume Analysis The following table presents the effects of changing rates and volumes on our net interest income for the years indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of
the prior columns. For 44 Table of Contents
For the purposes of this table, the variations attributable to both price and volume, which cannot be separated, have been allocated proportionally, according to the variations due to the price and the variations due to the volume.
Years Ended December 31, 2021 vs. 2020 Increase (Decrease) Due to Total Increase Volume Rate (Decrease) (In thousands) Interest-earning assets: Loans, net $ 129
$ (215) $ (86)Investment securities 9 (32) (23) Other interest-earning assets (15) (50) (65) Total interest-earning assets 123 (297) (174) Interest-bearing liabilities: Savings accounts 5 (6) (1) Certificates of deposit 85 (348) (263) Total deposits 90 (354) (264) Borrowings (81) (71) (152)
Total interest-bearing liabilities 9 (425)
(416) Change in net interest income $ 114
$ 128$ 242
There were no out-of-period items or adjustments during the years ended
Management of Market Risk General. Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our financial condition and results of operations to changes in market interest rates. All directors participate in discussions during the regular board meetings evaluating the interest rate risk inherent in our assets and liabilities, and the level of risk that is appropriate. These discussions take into consideration our business strategy, operating environment, capital, liquidity and performance objectives consistent with the policy and guidelines approved by them. Our asset/liability management strategy attempts to manage the impact of changes in interest rates on net interest income, our primary source of earnings. Among the techniques we are using to manage interest rate risk are:
the sale of a significant portion of our individual long-term fixed rate contracts in accordance
four-family residential real estate loan originations and retention of
? non-compliant, construction and short term, fixed rate and adjustable rate
residential real estate loans for one to four families that we issue, subject to
market conditions and periodic review of our asset/liability management needs;
trying to reduce our reliance on certificates of deposit and
? borrowings to support lending and investing activities and increase our
use of our savings accounts and money market accounts, which are less
sensitive to interest rates than certificates of deposit;
45 Table of Contents
the lengthening of the weighted average maturity of our liabilities by
? longer-term sources of funding such as fixed rate advances from the FHLB with
duration up to 10 years;
use a rate lock program for loans we issue for sale and sale
? loans under best efforts delivery contracts to eliminate warehouses and
pipeline risk; and
? holding relatively short term, variable rate and highly liquid investments
Our board of directors is responsible for the review and oversight of our executive management team and other essential operational staff which are responsible for our asset/liability analysis. These officers act as an asset/liability committee and are charged with developing and implementing an asset/liability management plan, and generally meet monthly to review pricing and liquidity needs and assess our interest rate risk. We currently utilize a third-party modeling program, prepared on a quarterly basis, to evaluate our sensitivity to changing interest rates, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors.
We do not engage in hedging activities, such as futures, options or swaps, or investments in high-risk mortgage derivatives, such as residual interest on secured mortgage bonds, interest residuals on real estate mortgage investment conduits or stripped mortgage-backed securities.
Economic Value of Equity and Changes in Net Interest Income. We monitor interest rate risk through the use of a simulation model that estimates the amounts by which the fair value of our assets and liabilities (our economic value of equity or "EVE") would change in the event of a range of assumed changes in market interest rates. The quarterly reports developed in the simulation model assist us in identifying, measuring, monitoring and controlling interest rate risk to ensure compliance within our policy guidelines. The table below sets forth, as of
December 31, 2021, the estimated changes in our EVE that would result from the designated instantaneous changes in market interest rates. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results. Change in Estimated Increase NPV as a Percentage of Interest (Decrease) in NPV Present Value of Assets (3) Rates Estimated Increase (Decrease) (basis points) (1) EVE (2) Amount Amount NPV Ratio (4) (basis points) (Dollars in thousands) +400 $ 12,356 $ (8,177)(39.82) % 13.90 % (563) +300 14,337 (6,196) (30.18) 15.46 (407) +200 16,424 (4,109) (20.01) 16.97 (256) +100 18,525 (2,008) (9.78) 18.35 (118) - 20,533 - - 19.53 - (100) 22,502 1,969 9.59 20.56 103 (200) 24,553 4,020 19.58 21.50 197
(1) Assumes an instantaneous and uniform change in interest rates at all maturities.
(2) EVE is the discounted present value of the expected cash flows of the assets,
off-balance sheet liabilities and contracts.
(3) The present value of assets represents the present value of inflows
cash flow on interest-earning assets.
(4) The NPV ratio represents the NPV divided by the current value of the assets.
46 Table of Contents
The table above indicates that at
December 31, 2021, in the event of a 200 basis point decrease in interest rates, we would have experienced a 19.58% increase in EVE. In the event of a 200 basis point increase in interest rates at December 31, 2021, we would have experienced a 20.01% decrease in EVE. In addition to modeling changes to our EVE, we also analyze estimated changes to net interest income ("NII") for a prospective twelve-month period under the interest rate scenarios set forth above. The following tables set forth our NII model as of December 31, 2021. Increase (Decrease)
Change in estimated net interest rates Estimated net interest
(Basis Points) Income (1) Interest Income (Dollars in thousands) +400 $ 2,428 27.19 % +300 2,313 21.16 +200 2,191 14.77 +100 2,059 7.86 - 1,909 - (100) 1,795 (5.97) (200) 1,699 (11.00)
(1) The variations calculated assume an immediate shock to the static yield curve.
Certain shortcomings are inherent in the methodology used in the above interest rate risk measurement. Modeling changes in EVE and NII require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the EVE and NII tables presented assume that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the EVE and NII tables provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on EVE and NII and will differ from actual results.
Calculations of EVE and NII may also not reflect the fair values of financial instruments. For example, a decline in market interest rates may increase the fair value of our loans, deposits and borrowings.
Cash and capital resources
Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from the sale of loans, and proceeds from maturities of securities. We also have the ability to borrow from the FHLB. At
December 31, 2021, we had $18.2 millionoutstanding in advances from the FHLB, and had the capacity to borrow approximately an additional $18.3 millionfrom the FHLB and an additional $6.6 millionon a line of credit with First National Bankers Bankat this date. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and short-term investments. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period. 47
Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by (used in) operating activities was
$3.4 millionand ( $2.1 million) for the years ended December 31, 2021and 2020, respectively. Net cash (used in) provided by investing activities, which consisted primarily of net change in loans receivable, net change in interest-bearing deposits and net change in investment securities, was ( $3.6 million) and $502,000for the years ended December 31, 2021and 2020, respectively. Net cash provided by (used in) financing activities, consisting primarily of and the activity in deposit accounts and FHLB advances, was $3.6 millionand ( $6.3 million) for the years ended December 31, 2021and 2020, respectively. We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained. We also anticipate continued use of FHLB advances. At December 31, 2021, we exceeded all of our regulatory capital requirements with a Tier 1 leverage capital level of $19.5 million, or 18.72% of adjusted total assets, which is above the well-capitalized required level of $5.2 million, or 5.00%; and total risk-based capital of $20.1 million, or 39.49% of risk-weighted assets, which is above the well-capitalized required level of $5.1 million, or 10.00%. At December 31, 2020, we exceeded all of our regulatory capital requirements with a Tier 1 leverage capital level of $19.1 million, or 18.94% of adjusted total assets, which is above the well-capitalized required level of $5.0 million, or 5.0%; and total risk-based capital of $19.7 million, or 43.41% of risk-weighted assets, which is above the well-capitalized required level of $4.5 million, or 10.0%. Accordingly, Eureka Homesteadwas categorized as well-capitalized at December 31, 2021and 2020. Management is not aware of any conditions or events since the most recent notification that would change our category.
Off-balance sheet commitments. Information on our off-balance sheet commitments appears in point 8 of this report in notes 15 and 16 to the consolidated financial statements.
Recent accounting pronouncements
For a discussion of the impact of recent accounting pronouncements, see Note 1 of the notes to our financial statements beginning on page F-7 of this annual report. On
January 1, 2023we will adopt the CECL standard for determining the amount of our allowance for credit losses, which we may increase our allowance for loan and lease losses upon adoption and cause our historic allowance for loan and lease losses not to be indicative of how we will maintain our allowance for credit losses beginning January 1, 2023.
Impact of inflation and price changes
The financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles in
the United States of Americawhich require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates, generally, have a more significant impact on a financial institution's performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
SECTION 7A. Quantitative and qualitative information on market risk
Not required for small filing companies.
© Edgar Online, source