General
Management's discussion and analysis of the financial condition at March 31,
2022 and results of operations for the three months ended March 31, 2022 and
2021 is intended to assist in understanding the financial condition and results
of operations of the Company. The information contained in this section should
be read in conjunction with the unaudited financial statements and the notes
thereto, appearing on Part I, Item 1 of this quarterly report on Form 10-Q.
COVID-19 Impacts
The effects of the COVID-19 pandemic and the governmental and societal response
to the virus have negatively impacted 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 Board and 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 March 31, 2022 all 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, 2019 were
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, 2020 and the earlier of either December 31,
2020 or the 60th day after the end of the COVID-19 national emergency.
Similarly, the Financial Accounting Standards Board has 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.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report contains forward-looking statements, which can be
identified by the use of words such as "estimate," "project," "believe,"
"intend," "anticipate," "assume," "plan," "seek," "expect," "will," "may,"
"should," "indicate," "would," "believe," "contemplate," "continue," "target"
and words of similar meaning. These forward-looking statements include, but are
not limited to:
? statements of our goals, intentions and expectations;
? statements regarding our business plans, prospects, growth and operating
strategies;
? statements regarding the asset quality of our loan and investment portfolios;
and
? estimates of our risks and future costs and benefits.
These forward-looking statements are based on current beliefs and expectations
of our management and are inherently subject to significant business, economic
and competitive uncertainties and contingencies, many of which are beyond our
control. In addition, these forward-looking statements are subject to
assumptions with respect to future business strategies and decisions that are
subject to change. We are under no duty to and do not take any obligation to
update any forward-looking statements after the date of this quarterly report.
The following factors, among others, could cause actual results to differ
materially from the anticipated results or other expectations expressed in the
forward-looking statements:
? our ability to manage our operations under the economic conditions in our
market area;
? adverse changes in the financial industry, securities, credit and national and
local real estate markets (including real estate values);
? economic and/or policy changes related the COVID-19 pandemic;
significant increases in our loan losses, including as a result of our
? inability to resolve classified and non-performing assets or reduce risks
associated with our loans, and management's assumptions in determining the
adequacy of the allowance for loan losses;
credit risks of lending activities, including changes in the level and trend of
? loan delinquencies and write-offs and in our allowance for loan losses and
provision for loan losses;
? the use of estimates in determining fair value of certain of our assets, which
may prove to be incorrect and result in significant declines in valuations;
? competition among depository and other financial institutions;
? our success in increasing our one- to four-family residential real estate
lending, multifamily real estate lending and commercial real estate lending;
? our ability to attract and maintain deposits and to grow our core deposits, and
our success in introducing new financial products;
? our ability to maintain our asset quality even as we continue to grow our loan
portfolios;
? our reliance in part on funding sources, including out-of-market jumbo deposits
and borrowings, other than core deposits to support our operations;
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changes in interest rates generally, including changes in the relative
? differences between short term and long term interest rates and in deposit
interest rates, that may affect our net interest margin and funding sources;
? fluctuations in the demand for loans;
? changes in consumer spending, borrowing and savings habits;
? declines in the yield on our assets resulting from the current low interest
rate environment;
? risks related to a high concentration of loans secured by real estate located
in our market area;
the results of examinations by our regulators, including the possibility that
our regulators may, among other things, have judgments different than
management's, and we may determine to increase our allowance or write down
? assets as a result of these regulatory examinations; change our regulatory
capital position; limit our ability to borrow funds or maintain or increase
deposits; or prohibit us from paying dividends, which could adversely affect
our dividends and earnings;
? changes in the level of government support of housing finance;
? our ability to enter new markets successfully and capitalize on growth
opportunities;
changes in laws or government regulations or policies affecting financial
institutions, including the Dodd-Frank Act and the JOBS Act, which could result
? in, among other things, increased deposit insurance premiums and assessments,
capital requirements, regulatory fees and compliance costs, particularly the
new capital regulations, and the resources we have available to address such
changes;
changes in accounting policies and practices, as may be adopted by the bank
? regulatory agencies, the Financial Accounting Standards Board, the Securities
and Exchange Commission and the Public Company Accounting Oversight Board;
changes in our compensation and benefit plans, and our ability to retain key
? members of our senior management team and to address staffing needs in response
to product demand or to implement our strategic plans;
? loan delinquencies and changes in the underlying cash flows of our borrowers;
? our ability to control costs and expenses, particularly those associated with
operating as a publicly traded company;
? the failure or security breaches of computer systems on which we depend;
? the ability of key third-party service providers to perform their obligations
to us;
? changes in the financial condition or future prospects of issuers of securities
that we own; and
? other economic, competitive, governmental, regulatory and operational factors
affecting our operations, pricing, products and services.
Because of these and a wide variety of other uncertainties, our actual future
results may be materially different from the results indicated by these
forward-looking statements.
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Critical Accounting Policies
There are no material changes to the critical accounting policies disclosed in
Eureka Homestead Bancorp, Inc.'s Annual Report in Form 10-K as filed with the
Securities and Exchange Commission on March 23, 2022.
Comparison of Financial Condition at March 31, 2022 and December 31, 2021
Total Assets. Total assets decreased $2.9 million, or 2.8%, to $100.7 million at
March 31, 2022 from $103.6 million at December 31, 2021. The decrease was due to
decreases in cash and cash equivalents of $3.6 million, in interest-bearing
deposits in banks of $256,000 and in investment securities available-for-sale of
$738,000, offset, in part, by increases in net loans of $839,000, in loans
held-for-sale of $802,000 and in other assets of $20,000.
Net Loans. Net loans increased $839,000, or 1.1%, to $76.8 million at March 31,
2022 from $75.9 million at December 31, 2021. One- to four-family residential
real estate loans decreased $670,000, or 1.0%, to $65.7 million at March 31,
2022 from $66.4 million at December 31, 2021, multifamily loans decreased
$390,000, or 14.0%, to $2.4 million at March 31, 2022 from $2.8 million at
December 31, 2021, construction and land loans increased $1.9 million, or 42.0%
to $6.5 million at March 31, 2022 from $4.6 million at December 31, 2021,
commercial real estate loans decreased $12,000, or 0.8%, to $1.5 million at
March 31, 2022 from $1.5 million at December 31, 2021 and consumer loans
decreased $9,000, or 3.8%, to $230,000 at March 31, 2022 from $239,000 at
December 31, 2021.
The increase in net loans was due primarily to an increase in construction loans
earning higher interest rates than similar conforming loans, which are generally
sold. The decreases in all other loans were due to normal repayments.
Cash and Cash Equivalents. Cash and cash equivalents decreased $3.6 million, or
48.7%, to $3.8 million at March 31, 2022 from $7.3 million at December 31, 2021.
Interest-Bearing Deposits in Banks. Interest-bearing deposits in banks decreased
$256,000, or 3.3%, to $7.5 million at March 31, 2022 from $7.7 million at
December 31, 2021.
The net of these two balance sheet line items was a decrease of $3.8 million
principally due to the increase in loans, decrease in deposits and the
repurchase of $1.8 million of shares of common stock.
Securities Available-for-Sale. Investment securities available-for-sale,
consisting of government-sponsored mortgage-backed securities and SBA 7a pools
backed by equipment and mortgage loans, decreased $738,000, or 13.8%, to $4.6
million at March 31, 2022 from $5.3 million at December 31, 2021 as a result of
normal repayments.
Deposits. Deposits decreased $1.1 million, or 1.7%, to $59.9 million at March
31, 2022 from $61.0 million at December 31, 2021, principally due to a decrease
of $1.2 million in certificates of deposit, or 2.1%, to $55.6 million at March
31, 2022 from $56.8 million at December 31, 2021, offset, in part, by an
increase of $125,000 in savings accounts, or 3.6% to $3.6 million at March 31,
2022 from $3.4 million at December 31, 2021. The decrease in certificates of
deposit resulted primarily from decreases in local retail certificates of
deposit and 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 Bank advances, as
well as in order to get longer-term funding not always available in the local
market in to help reduce interest rate risk.
Total Equity. Total equity decreased $1.9 million, or 8.6%, to $20.0 million at
March 31, 2022 from $21.8 million at December 31, 2021. The decrease resulted
primarily from the repurchase of $1.8 million of shares of common stock and an
increase in accumulated other comprehensive loss of $110,000.
Comparison of Operating Results for the Three Months Ended March 31, 2022 and
2021
General. We had a net loss of $14,000 for the three months ended March 31, 2022,
compared to a net income of $80,000 for the three months ended March 31, 2021, a
decrease of $94,000. The decrease in net loss This decrease
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resulted from a decrease in noninterest income of $63,000 and an increase in
noninterest expense of $57,000, offset, in part, by an increase in net interest
income of $18,000 and a decrease of $8,000 in provision for loan losses.
Interest Income. Interest income decreased $34,000, or 4.7%, to $691,000 for the
three months ended March 31, 2022 from $725,000 for the three months ended March
31, 2021. This decrease was principally attributable to a decrease in interest
on loans receivable of $34,000, or 4.8%. The average balance of loans increased
$1.7 million, or 2.3%, to $77.0 million for the three months ended March 31,
2022 from $75.3 million for the three months ended March 31, 2021, and the
average yield on loans decreased 26 basis points to 3.49% for the three months
ended March 31, 2022 from 3.75% for the three months ended March 31, 2021. The
average balance of investment securities decreased $821,000, or 13.8%, to $5.1
million for the three months ended March 31, 2022 from $5.9 million for the
three months ended March 31, 2021, while the average yield on investment
securities increased 8 basis points to 1.02% for the three months ended March
31, 2022 from 0.94% for the three months ended March 31, 2021. The average
balance of other interest-earning assets increased $34,000, or 0.3%, to $12.8
million for the three months ended March 31, 2022 from $12.8 million for the
three months ended March 31, 2021, and the average yield on other
interest-earning assets increased 3 basis points to 0.19% for the three months
ended March 31, 2022 from 0.16% for the three months ended March 31, 2021.
Interest Expense. Total interest expense decreased $52,000, or 16.5%, to
$264,000 for the three months ended March 31, 2022 from $316,000 for the
three months ended March 31, 2021. The decrease was due to decreases of $39,000,
or 19.5%, in interest expense on deposits and $13,000, or 11.2%, in interest
expense on advances from the FHLB. The average balance of interest-bearing
deposits increased $1.4 million, or 2.4%, to $60.3 million for the three months
ended March 31, 2022 from $58.9 million for the three months ended March 31,
2021, and the average cost of interest-bearing deposits in banks decreased 29
basis points to 1.07% for the three months ended March 31, 2022 from 1.36% for
the three months ended March 31, 2021, resulting from lower market interest
rates period to period. The average balance of FHLB advances decreased $1.2
million, or 6.3%, to $18.2 million for the three months ended March 31, 2022
from $19.4 million for the three months ended March 31, 2021. The average cost
of these advances decreased 13 basis points to 2.26% for the three months ended
March 31, 2022 from 2.39% for the three months ended March 31, 2021.
Net Interest Income. Net interest income increased $18,000, or 4.4%, to $427,000
for the three months ended March 31, 2022 from $409,000 for the three months
ended March 31, 2021. Average net interest-earning assets increased $741,000
period to period. This increase was due primarily to an increase in loans
receivable, offset, in part, by a decrease in investment securities. Our
interest rate spread increased 9 basis points to 1.56% for the three months
ended March 31, 2022 from 1.47% for the three months ended March 31, 2021, and
our net interest margin increased 6 basis points to 1.80% for the three months
ended March 31, 2022 from 1.74% for the three months ended March 31, 2021. The
increases in interest rate spread and interest rate margin were primarily the
result of interest rates on average interest-bearing assets rising more than
interest rates on interest-earning liabilities during the three months ended
March 31, 2022 versus the three months ended March 31, 2021.
Provision for Loan Losses. There was no provision for loan losses for the three
months ended March 31, 2022 compared to a provision for loan losses of $8,000
for the three months ended March 31, 2021. The allowance for loan losses was
$858,000, or 1.12% of total loans, at March 31, 2022, compared to $858,000, or
1.14% of total loans, at December 31, 2021, and $850,000, or 1.13%, of total
loans, at March 31, 2021. Classified (substandard, doubtful and loss) loans
decreased to $0 at March 31, 2022 and at December 31, 2021 from $610,000 at
March 31, 2021. There were no non-performing loans at March 31, 2022, December
31, 2021 or March 31, 2021. There were no charge-offs or recoveries for the
three months ended March 31, 2022 or for the three months ended March 31, 2021.
Effective January 1, 2023, we will adopt the CECL standard for determining the
amount of our allowance for credit losses, which we expect will 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 2 -
Recent Accounting Pronouncements in the notes to our unaudited financial
statements contained herein
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Noninterest Income. Noninterest income decreased $63,000, or 23.2%, to $209,000
for the three months ended March 31, 2022 from $272,000 for the three months
ended March 31, 2021. The decrease was principally due to decreases of $43,000,
or 19.4%, in fees on loans sold, $19,000, or 67.9%, in service charges and other
income and $1,000, or 4.5%, in income from life insurance.
Noninterest Expense. Noninterest expense increased $57,000, or 9.6%, to $650,000
for the three months ended March 31, 2022 from $593,000 for the three months
ended March 31, 2021. The increase was primarily due to an increase of $9,000,
or 2.3%, in salaries and employee benefits, resulting primarily from an increase
in commissions and related expenses on higher loan volume period to period, as
well as increases of $1,000, or 2.0%, in occupancy expense, $21,000, or 55.3%,
in accounting and consulting expense, $3,000, or 14.3%, in insurance expense,
$3,000, or 25.0%, in legal expense and $22,000, or 53.7%, in other expenses. The
increases were offset, in part, by a decrease of $2,000, or 10.0%, in data
processing expense.
In future periods, if we make additional grants of awards under our equity
incentive plan which was approved by our stockholders, we would expect our
noninterest expense to increase due to increased compensation expenses.
Income Tax Expense. There was no income tax expense for the three months ended
March 31, 2022 or for the three months ended March 31, 2021, principally due to
net operating loss tax carryforwards from prior years. The effective tax rate
was 0.00% for the three months ended March 31, 2022 and 0.00% for the same
quarter in 2021.
To provide financial assistance and liquidity to taxpayers during the COVID-19
pandemic, the CARES Act amended the federal income tax rules with regard to the
usage of net operating losses ("NOLs") for corporate taxpayers. The CARES Act
allows for the carryback of losses arising in a taxable year beginning after
December 31, 2017, and before January 1, 2021, to be carried back to each of the
five taxable years preceding the taxable year of the loss. The CARES Act also
temporarily repeals the 80% limitation for NOLs arising in tax years beginning
after December 31, 2017 and beginning before January 1, 2021 and carried to
another tax year. These NOLs are now permitted to fully offset the loss
corporation's pre-2021 taxable income.
Liquidity 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
and proceeds from the sale of loans. We also have the ability to borrow from the
FHLB. At March 31, 2022, we had $18.2 million outstanding in advances from the
FHLB, and had the capacity to borrow approximately an additional $18.0 million
from the FHLB and an additional $6.6 million on a line of credit with First
National Bankers' Bank, Baton Rouge, Louisiana at 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 including
interest-bearing deposits in banks. The levels of these assets are dependent on
our operating, financing, lending, and investing activities during any given
period.
Our cash flows are comprised of three primary classifications: cash flows from
operating activities, investing activities, and financing activities. Net cash
provided by operating activities was $77,000 and $1.9 million for the three
months ended March 31, 2022 and 2021, respectively. Net cash provided by (used
in) investing activities, which consists primarily of net change in loans
receivable, net change in interest-bearing deposits in banks and net change in
investment securities, was $17,000 and ($60,000) for the three months ended
March 31, 2022 and 2021, respectively. Net cash (used in) provided by financing
activities, consisting primarily of activity in deposit accounts, advances from
Federal Home Loan Bank, advance payments by borrowers for taxes and insurance,
and repurchases of common stock, was ($3.7 million) and $2.1 million for the
three months ended March 31, 2022 and 2021, 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.
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At March 31, 2022, the Bank exceeded all regulatory capital requirements with a
Tier 1 leverage capital level of $19.5 million, or 19.03% of adjusted average
total assets, which is above the well-capitalized required level of $5.1
million, or 5.0%; and total risk-based capital of $20.2 million, or 39.11% of
risk-weighted assets, which is above the well-capitalized required level of $5.2
million, or 10.0%; and common equity Tier 1 capital of $19.5 million or, 37.86%
of risk weighted assets, which is above the well-capitalized required level of
$3.3 million, or 6.5% of risk weighted assets. Accordingly, Eureka Homestead was
categorized as well capitalized at March 31, 2022. Management is not aware of
any conditions or events since the most recent notification that would change
our category.
Off-Balance Sheet Commitments. Information about our off-balance sheet
commitments may be found in Item 1 of this report in Note 7 to the Consolidated
Financial Statements.
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