EUREKA HOMESTEAD BANCORP, INC. 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.
Overview
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. AtDecember 31, 2019 ,$73.6 million , or 93.8% of our total loan portfolio, was comprised 36 Table of Contents of one- to four-family residential real estate loans,$11.4 million of which were non-owner-occupied loans,$1.0 million of which were construction loans and$1.7 million of 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. AtDecember 31, 2019 , we had$21.6 million in 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 in recent years we have accepted jumbo certificates of deposit through an online service, as well as municipal 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 endedDecember 31, 2019 we had a net loss of ($61,000 ) compared to net income of$295,000 for 2018. The decrease in net income resulted primarily from a decrease in net interest income of$232,000 , and increases in noninterest expense of$158,000 and income tax expense of$200,000 , offset, in part, by an increase of$236,000 in noninterest income.
Our executive and administrative office is located at1922 Veterans Memorial Boulevard ,Metairie, Louisiana 70005, 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.
Business Strategy
Our principal objective is to build long-term value for our stockholders by operating a profitable community-oriented financial institution dedicated to meeting the banking needs of our customers by emphasizing personalized and efficient customer service. Highlights of our current business strategy include:
· Continuing to focus on one- to four-family residential real estate lending,
including our practice of originating for retention in our portfolio,
non-owner-occupied real estate loans. We have been, and will continue to be,
primarily a one- to four-family residential real estate lender for borrowers in
our market area. As of
loan portfolio, consisted of one- to four-family residential real estate loans,
including
non-owner-occupied real estate loans. We expect that one- to four-family
residential real estate lending will remain our primary lending activity.
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· Maintaining our strong asset quality through conservative loan underwriting.
We intend to maintain strict, quality-oriented loan underwriting and credit
monitoring processes. At
nonperforming assets, or 0.0% of total assets.
· Attracting and retaining customers in our market area and increasing our "core"
deposits consisting of savings accounts and retail certificates of deposit. We
intend to increase the emphasis of our savings and money market accounts and
retail certificates of deposits by more aggressively marketing and pricing
these products, thereby decreasing our dependence on non-retail certificates
of deposit.
· Remaining a community-oriented institution and relying on high quality service
to maintain and build a loyal local customer base. We were established in 1884
and have been operating continuously in the
that time. Through the goodwill we have developed over years of providing
timely, efficient banking services, we believe that we have been able to
attract a solid base of local retail customers on which we hope to continue to
build 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 inthe 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 adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We intend to take advantage of the benefits of this extended transition period. Accordingly, our financial statements may not be comparable to companies that comply with such new or revised accounting standards.
The following represent our critical 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
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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. 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 hierarchy and the methodology utilized by the Bank can be found in Note 18 of the Financial Statements "- Fair Values of Financial Investments."
Comparison of Financial Condition at
Total Assets. Total assets increased
interest-earning deposits of
Cash and Cash Equivalents. Cash and cash equivalents increased$8.8 million , or 284.3%, to$11.9 million atDecember 31, 2019 from$3.1 million atDecember 31, 2018 . The increase was principally due to the proceeds received from the conversion. Net Loans. Net loans decreased$2.3 million , or 2.8%, to$78.8 million atDecember 31, 2019 from$81.1 million atDecember 31, 2018 . During the year endedDecember 31, 2019 , one- to four-family residential real estate loans decreased$1.6 million , or 2.1%, to$73.6 million from$75.2 million atDecember 31, 2018 , multifamily loans decreased$552,000 , or 13.4%, to$3.6 million from$4.1 million atDecember 31, 2018 , commercial real estate loans decreased$59,000 , or 5.0%, to$1.1 million from$1.2 million atDecember 31, 2018 and consumer loans decreased$2,000 , or 0.9%, to$209,000 from$211,000 atDecember 31, 2018 . Decreases in our loan balances reflected our strategy to manage interest rate risk in 2019 by selling 39 Table of Contents
most of our conforming one- to four-family residential real estate loan originations which bore lower interest rates.
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$461,000 , or 8.0%, to$5.3 million atDecember 31, 2019 from$5.8 million atDecember 31, 2018 as a result of proceeds from sales and principal repayments of$2.5 million exceeding securities purchases of$2.0 million during the year. Bank-Owned Life Insurance. AtDecember 31, 2019 , our investment in bank owned life insurance was$4.0 million , an increase of$100,000 , or 2.4%, from$4.0 million atDecember 31, 2018 . 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
Deposits. Deposits increased$1.9 million , or 3.3%, to$58.0 million atDecember 31, 2019 from$56.2 million atDecember 31, 2018 . Savings accounts and money market accounts decreased$390,000 , or 12.2%, to$2.8 million atDecember 31, 2019 from$3.2 million atDecember 31, 2018 . Certificates of deposit increased$2.3 million , or 4.2%, to$55.2 million atDecember 31, 2019 from$53.0 million atDecember 31, 2018 . The increase in certificates of deposit resulted primarily from increases in local retail certificates of deposits. We also utilize non-retail funding sources, such as deposits derived from an online service and from municipalities, to fund our loan origination and growth.
Borrowings. Borrowings, consisting entirely of
Total Equity. Total equity increased
Comparison of Operating Results for the Years Ended
General. We had a net loss of ($61,000 ) for the year endedDecember 31, 2019 , compared to net income of$295,000 for the year endedDecember 31, 2018 , a decrease of$356,000 . The decrease in net income resulted from a decrease in net interest income of$232,000 , a decrease in benefit for loan losses of$2,000 and increases in noninterest expense of$158,000 and income tax expense of$200,000 , offset, in part, by an increase of$236,000 in noninterest income. Interest Income. Interest income increased$57,000 , or 1.5%, to$3.8 million for the year endedDecember 31, 2019 from$3.7 million for the year endedDecember 31, 2018 . This increase was primarily attributable to a$128,000 increase in interest on other interest-earning assets, offset, in part, by a$71,000 decrease in interest on loans receivable. The average balance of loans decreased$127,000 , or 0.2%, to$80.5 million for the year endedDecember 31, 2019 from$80.6 million for the year endedDecember 31, 2018 , and the average yield on loans decreased eight basis points to 4.31% during 2019 from 4.39% during 2018. The average balance of investment securities increased$340,000 , or 5.5%, to$6.5 million for the year endedDecember 31, 2019 from$6.1 million for the year endedDecember 21, 2018 , while the average yield on 40
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investment securities increased 46 basis points to 2.40% for 2019 from 1.94% for 2018. The average balance of other interest-earning assets increased$4.8 million , or 125.7%, to$8.5 million for the year endedDecember 31, 2019 from$3.8 million for the year endedDecember 31, 2018 , and the average yield on other interest-earning assets increased six basis points to 1.88% for 2019 from 1.82% for 2018. Interest Expense. Total interest expense increased$289,000 , or 17.5%, to$1.9 million for the year endedDecember 31, 2019 from$1.7 million for the year endedDecember 31, 2018 . The increase was primarily due to an increase of$333,000 , or 35.9%, in interest expense on deposits, offset, in part, by a decrease of$44,000 , or 6.1%, in interest expense on FHLB advances. The average balance of interest-bearing deposits increased$3.8 million , or 6.9%, to$59.4 million for the year endedDecember 31, 2019 from$55.6 million for the year endedDecember 31, 2018 , and the average cost of interest-bearing deposits increased 45 basis points to 2.12% for 2019 from 1.67% for 2018, reflecting the higher market interest rate environment. The average balance of FHLB advances decreased$3.3 million , or 12.2%, to$23.8 million for the year endedDecember 31, 2019 from$27.1 million for the year endedDecember 31, 2018 . The average cost of these advances increased 19 basis points to 2.87% for 2019 from 2.68% for 2018. Net Interest Income. Net interest income decreased$232,000 , or 11.1%, to$1.9 million for the year endedDecember 31, 2019 from$2.1 million for the year endedDecember 31, 2018 . Average net interest-earning assets increased$4.5 million year to year. This increase was due primarily to an increase in the average balance of other interest-earning assets year to year. Our interest rate spread decreased 49 basis points to 1.63% for the year endedDecember 31, 2019 from 2.12% for the year endedDecember 31, 2018 , and our net interest margin decreased 36 basis points to 1.94% for the year endedDecember 31, 2019 from 2.30% for the year endedDecember 31, 2018 . The decreases in interest rate spread and net interest margin was primarily the result of an increasing interest rate environment during 2019 resulting in our interest-bearing liabilities repricing at a faster rate than the yields on our interest-earning assets, the majority of which are long-term, fixed-rate loans. Provision for Loan Losses. We recorded credits in the provision for loan losses of$9,000 for the year endedDecember 31, 2019 and$11,000 for the year endedDecember 31, 2018 . The decrease in the credit in the provision for loan losses in 2019 compared to 2018 resulted from our analysis of the factors described in "Critical Accounting Policies - Allowance for Loan Losses." The allowance for loan losses was$850,000 , or 1.08% of total loans, atDecember 31, 2019 , compared to$850,000 , or 1.05% of total loans, atDecember 31, 2018 .
Classified (substandard, doubtful and loss) loans decreased to
Noninterest Income. Noninterest income increased$236,000 , or 46.7%, to$741,000 for the year endedDecember 31, 2019 from$505,000 for the year endedDecember 31, 2018 . The increase was primarily due to an increase in fees on loans sold of$234,000 and in gains on sales of securities of$61,000 . These increases were partially offset by a decreases in service charges and other income of$24,000 , net income from other real estate owned of$23,000 and income from life insurance of$12,000 . Noninterest Expense. Noninterest expense increased$158,000 , or 7.0%, to$2.4 million for 2019 from$2.3 million for 2018. The increase was due primarily to an increase of$95,000 , or 6.7%, in salaries and employee benefits, primarily from increased commissions paid on higher loan volume in 2019. The increase in noninterest expense also resulted from increases of$60,000 , or 30.6%, in occupancy expense,$26,000 , or 19.7%, in accounting and consulting expense and$3,000 , or 0.7% in other expenses. The increase in occupancy expense resulted from higher maintenance and repairs expenses in 2019 and the increase in accounting and consulting expense resulted from increased accounting and legal fees associated with 41 Table of Contents
operating as a public company. These increases were offset, in part, by a
decrease in
We expect noninterest expense to increase because of costs associated with operating as a public company for a full year in 2020, including the expected hiring of additional accounting personnel, and the increased compensation expenses associated with the purchase of shares of common stock by our employee stock ownership plan and the possible implementation of a stock-based benefit plan, if approved by our stockholders. Income Tax Expense. Income tax expense increased$200,000 to$254,000 for 2019 compared to$54,000 in 2018. The increase resulted from a charge to earnings of$222,000 to establish a valuation allowance on our deferred tax asset. At this time we believe that it is more likely than not that the benefit from a portion of the NOL carryforwards will not be realized within a reasonable time period to offset the amount of tax net operating losses which are the principal cause of our deferred tax asset. Average balances and yields. The following table sets forth average balance sheets, average yields and costs, and certain other information at and for the years indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Nonaccrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or interest expense. For the Year Ended December 31, 2019 2018 Average Average Outstanding Yield/ Rate Outstanding Yield/ Rate Balance Interest (1) Balance Interest (1) Interest-earning assets: Loans, net$ 80,834 $ 3,484 4.31 %$ 80,957 $ 3,555 4.39 % Investment securities 6,471 155 2.40 6,131 119 1.94 Other interest-earning assets 8,542 161 1.88 3,785 69 1.82 Total interest-earning assets 95,847 3,800 3.96 90,873 3,743 4.12 Noninterest-earning assets 7,562 7,387 Total assets$ 103,409 $ 98,260 Interest-bearing liabilities: Savings/Money Market accounts$ 3,958 6 0.15$ 3,384 7 0.21 Certificates of deposit 55,468 1,255 2.26 52,223 921 1.76 Total interest-bearing deposits 59,426 1,261 2.12 55,607 928 1.67 Borrowings 23,764 682 2.87 27,068 726 2.68 Total interest-bearing liabilities 83,190 1,943 2.34 82,675 1,654 2.00 Other noninterest-bearing liabilities 2,665 3,409 Total liabilities 85,855 86,084 Equity 17,554 12,176 Total liabilities and equity$ 103,409 $ 98,260 Net interest income$ 1,857 $ 2,089 Net interest rate spread (1) 1.63 % 2.12 % Net interest-earning assets (2)$ 12,657 $ 8,198 Net interest margin (3) 1.94 % 2.30 % Average of interest-earning assets to interest-bearing liabilities 115.21 % 109.92 %
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(1) Net interest rate spread represents the difference between the yield on
average interest-earning assets and the cost of average interest-bearing
liabilities.
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(2) Net interest-earning assets represents total interest-earning assets less
total interest-bearing liabilities.
(3) 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 purposes of this table, changes attributable to
both rate and volume, which cannot be segregated, have been allocated
proportionately, based on the changes due to rate and the changes due to volume.
Years Ended December 31,
2019 vs. 2018
Increase (Decrease) Due to Total
Increase
Volume Rate (Decrease)
(In thousands)
Interest-earning assets:
Loans, net $ (6) $ (65) $ (71)
Investment securities 7 29 36
Other interest-earning assets 90 2 92
Total interest-earning assets 91 (34) 57
Interest-bearing liabilities:
Savings accounts 1 (2) (1)
Certificates of deposit 60 274 334
Total deposits 61 272 333
Borrowings (105) 61 (44)
Total interest-bearing liabilities (44) 333 289
Change in net interest income $ 135 $ (367) $ (232)
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.
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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:
· selling a significant portion of our conforming, long-term, fixed-rate one- to
four-family residential real estate loan originations and retaining the
non-conforming and shorter-term, fixed-rate and adjustable-rate one- to
four-family residential real estate loans that we originate, subject to market
conditions and periodic review of our asset/liability management needs;· trying to reduce our dependence on non-retail certificates of deposit and
borrowings to support lending and investment activities and increasing our
reliance on our savings accounts and money market accounts, which are less
interest rate sensitive than certificates of deposit;
· lengthening the weighted average maturity of our liabilities through
longer-term funding sources such as fixed-rate advances from the FHLB with
terms to maturity of up to 10 years;
· utilizing a rate lock program for loans that we originate for sale and selling
loans pursuant to best efforts delivery contracts to eliminate warehouse and
pipeline risk; and
· holding relatively short-duration, adjustable rate, highly liquid investment
securities.
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 engaging in futures, options or swap transactions, or investing in high-risk mortgage derivatives, such as collateralized mortgage obligation residual interests, real estate mortgage investment conduit residual interests 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 ofDecember 31, 2019 , 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 44 Table of Contents
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 $ 12,751 $ (6,642) (34.25) % 13.34 % (437.82)
+300 14,703 (4,690) (24.18) 14.81 (289.89)
+200 16,586 (2,807) (14.47) 16.12 (159.33)
+100 18,251 (1,142) (5.89) 17.15 (56.00)
- 19,393 - - 17.71 -
(100) 19,647 254 1.31 17.58 (13.36)
(200) 19,400 7 0.04 17.16 (55.54)
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(1) Assumes an instantaneous uniform change in interest rates at all maturities.
(2) EVE is the discounted present value of expected cash flows from assets,
liabilities and off-balance sheet contracts.
(3) Present value of assets represents the discounted present value of incoming
cash flows on interest-earning assets.
(4) NPV Ratio represents NPV divided by the present value of assets.
The table above indicates that at December 31, 2019 , in the event of a 200 basis
point decrease in interest rates, we would have experienced a 0.04% increase in
EVE. In the event of a 200 basis point increase in interest rates at December
31, 2019 , we would have experienced a 14.47% 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, 2019 .
Increase (Decrease)
Change in Interest Rates Estimated Net Interest in Estimated Net
(Basis Points) Income (1) Interest Income
+400 $ 2,769 11.12 %
+300 2,709 8.71
+200 2,644 6.10
+100 2,573 3.25
- 2,492 -
(100) 2,376 (4.65)
(200) 2,222 (10.83)
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(1) The calculated changes assume an immediate shock of 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
45Table of Contents
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.
EVE and NII calculations also may not reflect the fair values of financial instruments. For example, decreases in market interest rates can increase the fair values of our loans, deposits and borrowings.
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, proceeds from the sale of loans, and proceeds from maturities of securities. We also have the ability to borrow from the FHLB. AtDecember 31, 2019 , we had$21.6 million outstanding in advances from the FHLB, and had the capacity to borrow approximately an additional$16.3 million from the FHLB and an additional$4.3 million on a line of credit withFirst National Bankers Bank 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. 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 (used in) provided by operating activities was ($2.3 million ) and$345,000 for the years endedDecember 31, 2019 and 2018, respectively. Net cash provided by (used in) investing activities, which consisted primarily of net change in loans receivable, net change in interest-bearing deposits and net change in investment securities, was$1.8 million and ($1.1 million ) for the years endedDecember 31, 2019 and 2018, respectively. Net cash provided by financing activities, consisting primarily of the proceeds from the issuance of common stock due to the conversion and the activity in deposit accounts and FHLB advances, was$9.3 million and$3.2 million for the years endedDecember 31, 2019 and 2018, respectively, resulting from our strategy of generating liquidity through our deposit base at lower interest rates to fund loan originations. 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. AtDecember 31, 2019 , we exceeded all of our regulatory capital requirements with a Tier 1 leverage capital level of$18.9 million , or 17.47% of adjusted total assets, which is above the well-capitalized required level of$5.4 million , or 5.00%; and total risk-based capital of$19.6 million , or 38.94% of risk-weighted assets, which is above the well-capitalized required level of$5.0 million , or 10.00%. AtDecember 31, 2018 , we exceeded all of our regulatory capital requirements with a Tier 1 leverage capital level of$12.3 million , or 12.23% 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$13.0 million , or 25.98% of risk-weighted assets, which is above the well-capitalized required level of$5.0 million , or 10.0%. Accordingly,Eureka Homestead was categorized as well-capitalized atDecember 31, 2019 and 2018. Management is not aware of any conditions or events since the most recent notification that would change our category. 46 Table of Contents Off-Balance Sheet Arrangements. AtDecember 31, 2019 , we had$524,000 of outstanding commitments to originate loans, all of which represented the balance of remaining funds to be disbursed on construction loans in process. Certificates of deposit that are scheduled to mature in less than one year fromDecember 31, 2019 total$26.0 million atDecember 31, 2019 . 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.
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.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles inthe United States of America which 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.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
Not required for smaller reporting companies.
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