S-1 1 tv515792_s1.htm FORM S-1

 

As filed with the Securities and Exchange Commission on March 11, 2019

 

Registration No. 333-_____

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM S-1

REGISTRATION STATEMENT UNDER

THE SECURITIES ACT OF 1933

 

Eureka Homestead Bancorp, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Maryland 6035 Applied for
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)

 

1922 Veterans Memorial Boulevard

Metairie, Louisiana 70005

(504) 834-0242

 

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

Mr. Alan T. Heintzen

Chief Executive Officer

1922 Veterans Memorial Boulevard

Metairie, Louisiana 70005

(504) 834-0242

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

Copies to:

Kip Weissman, Esq.

Steven Lanter, Esq.

Luse Gorman, PC

5335 Wisconsin Avenue, N.W., Suite 780

Washington, D.C. 20015

(202) 274-2000

John T. Reichert, Esq.

Benjamin G. Lombard, Esq.

Reinhart Boerner Van Deuren s.c.

1000 North Water Street, Suite 1700

Milwaukee, Wisconsin 53202

(414) 298-1000

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: x

 

If this Form is filed to register additional shares for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: ¨

 

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

 

  Large accelerated filer ¨ Accelerated filer   ¨
  Non-accelerated filer   x Smaller reporting company   x
  Emerging growth company x

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ¨

 

CALCULATION OF REGISTRATION FEE

 

Title of each class of

securities to be registered

  Amount to be
registered
   Proposed maximum
offering price per share
   Proposed maximum
aggregate offering price
   Amount of
registration fee
 
Common Stock, $0.01 par value per share   2,116,000 shares    $10.00   $21,160,000(1)  $2,565 
Participation Interests   511,674 (2)             (2)

 

(1)Estimated solely for the purpose of calculating the registration fee.
(2)The securities to be purchased by the Eureka Homestead 401(k) Plan are included in the amount shown for the common stock. Accordingly, no separate fee is required for the participation interests.

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

 

 

 

PROSPECTUS

EUREKA HOMESTEAD BANCORP, INC.

(Proposed Holding Company for Eureka Homestead)

Up to 1,840,000 shares of Common Stock

(Subject to Increase to up to 2,116,000 shares)

 

Eureka Homestead Bancorp, Inc., a Maryland corporation and the proposed holding company for Eureka Homestead, is offering shares of common stock for sale at $10.00 per share in connection with the conversion of Eureka Homestead from the mutual to the stock form of organization. There is currently no established market for our common stock. We expect that our common stock will be quoted on the OTC Pink Marketplace (OTCPK) operated by OTC Markets Group upon conclusion of the stock offering. In addition, if we meet the Nasdaq listing requirements, we will use our best efforts to seek approval to list the common stock on the Nasdaq Capital Market. We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012.

 

We are offering up to 1,840,000 shares of common stock for sale at a price of $10.00 per share on a best efforts basis. We may sell up to 2,116,000 shares of common stock because of demand for the shares of common stock or changes in market conditions, without resoliciting subscribers. We must sell a minimum of 1,360,000 shares in order to complete the offering.

 

We are offering the shares of common stock in a “subscription offering” to eligible depositors of Eureka Homestead. Shares of common stock not purchased in the subscription offering may be offered for sale to the public in a “community offering,” with a preference given to natural persons and trusts of natural persons residing in the following Louisiana Parishes: Orleans, Jefferson, Plaquemines, St. Bernard and St. Tammany. We also may offer for sale shares of common stock not purchased in the subscription offering or community offering to the general public through a “syndicated community offering” managed by FIG Partners, LLC.

 

The minimum number of shares of common stock you may order is 25 shares. Generally, the maximum number of shares of common stock that can be ordered by any person in the offering is 10,000 shares ($100,000), and no person, together with an associate or group of persons acting in concert, may purchase more than 15,000 shares ($150,000) in the offering.

 

The offering is expected to expire at 2:00 p.m., Central Time, on [expiration date]. We may extend this expiration date without notice to you until [extension date]. The Office of the Comptroller of the Currency may approve a later date, which may not be beyond [final date]. Once submitted, orders are irrevocable unless the offering is terminated or is extended beyond [extension date], or the number of shares of common stock to be sold is increased to more than 2,116,000 shares or decreased to fewer than 1,360,000 shares. If the offering is extended past [extension date], we will resolicit subscribers. You will have the opportunity to confirm, change or cancel your order within a specified period of time. If you do not respond during that period, your stock order will be cancelled and your deposit account withdrawal authorizations will be cancelled or your funds submitted will be returned promptly with interest at 0.20% per annum. If the number of shares to be sold is increased to more than 2,116,000 shares or decreased to fewer than 1,360,000 shares, all funds submitted for the purchase of shares of common stock in the offering will be returned promptly with interest at 0.20% per annum, and all subscribers will be resolicited and given an opportunity to place a new order within a specified period of time. Funds received in the subscription and the community offerings and, if applicable, the syndicated community offering will be held in a segregated account at Eureka Homestead and will earn interest at 0.20% per annum until completion or termination of the offering.

 

FIG Partners, LLC will assist us in selling our shares of common stock on a best efforts basis in the offering. FIG Partners, LLC is not required to purchase any of the shares of common stock that are being offered for sale.

 

OFFERING SUMMARY

Price: $10.00 per Share

 

   Minimum   Midpoint   Maximum   Adjusted
Maximum
 
Number of shares   1,360,000    1,600,000    1,840,000    2,116,000 
Gross offering proceeds  $13,600,000   $16,000,000   $18,400,000   $21,160,000 
Estimated offering expenses, excluding selling agent fees and commissions  $935,000   $935,000   $935,000   $935,000 
Selling agent fees and commissions (1) (2)  $335,000   $335,000   $335,000   $335,000 
Estimated net proceeds  $12,330,000   $14,730,000   $17,130,000   $19,890,000 
Estimated net proceeds per share  $9.07   $9.21   $9.31   $9.40 

 

 

(1)See “The Conversion and Offering – Marketing and Distribution; Compensation” for information regarding compensation to be received by FIG Partners, LLC in this offering.
(2)Assumes that all shares are sold in the subscription and community offerings, and excludes reimbursable expenses, which are included in estimated offering expenses. If all shares of common stock were sold in a syndicated community offering, the maximum selling agent fees and commissions would be 6.0% of the aggregate offering dollar amount of all shares sold in the syndicated community offering (net of shares purchased by our directors and executive officers and shares purchased by our employee stock ownership plan), or approximately $719,000, $852,000, $984,000 and $1.1 million at the minimum, midpoint, maximum, and adjusted maximum levels of the offering, respectively.

 

 

 

 

This investment involves a degree of risk, including the possible loss of principal.

Please read “Risk Factors” beginning on page 15.

 

These securities are not deposits or accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. None of the Securities and Exchange Commission, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System or any state securities regulator has approved or disapproved of these securities or determined if this prospectus is accurate or complete. Any representation to the contrary is a criminal offense.

 

 

 

FIG Partners, LLC

 

 

  

For assistance, please contact the Stock Information Center, toll-free, at [phone number].

The date of this prospectus is [________].

 

 

 

 

 

 

 

 

 

 

TABLE OF CONTENTS

 

  Page
SUMMARY 1
RISK FACTORS 15
SELECTED FINANCIAL AND OTHER DATA OF EUREKA HOMESTEAD 31
FORWARD-LOOKING STATEMENTS 33
HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING 35
OUR DIVIDEND POLICY 36
MARKET FOR THE COMMON STOCK 37
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE 38
CAPITALIZATION 39
PRO FORMA DATA 40
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 44
BUSINESS OF EUREKA HOMESTEAD BANCORP 55
BUSINESS OF EUREKA HOMESTEAD 55
REGULATION AND SUPERVISION 78
TAXATION 88
MANAGEMENT 89
SUBSCRIPTIONS BY DIRECTORS AND EXECUTIVE OFFICERS 99
THE CONVERSION AND OFFERING 100
RESTRICTIONS ON ACQUISITION OF EUREKA HOMESTEAD BANCORP 122
DESCRIPTION OF CAPITAL STOCK OF EUREKA HOMESTEAD BANCORP 128
TRANSFER AGENT 130
EXPERTS 130
LEGAL MATTERS 130
WHERE YOU CAN FIND ADDITIONAL INFORMATION 130
INDEX TO FINANCIAL STATEMENTS OF EUREKA HOMESTEAD 132

 

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SUMMARY

 

The following summary explains the significant and important material aspects of Eureka Homestead’s mutual-to-stock conversion and the related offering of Eureka Homestead Bancorp, Inc. common stock. It may not contain all of the information that is important to you. For additional information before making an investment decision, you should read this entire document carefully, including the financial statements and the notes to the financial statements, and the section entitled “Risk Factors.”

 

In this prospectus, the terms “we,” “our,” and “us” refer to Eureka Homestead Bancorp, Inc. and Eureka Homestead, unless the context indicates another meaning. In addition, we sometimes refer to Eureka Homestead Bancorp, Inc. as “Eureka Homestead Bancorp,” and to Eureka Homestead as the “Bank.”

 

Eureka Homestead

 

Eureka Homestead is a federal mutual savings association that was founded in 1884. We have operated continuously in the New Orleans metropolitan area since our founding. We conduct our business from our main office in Metairie, Louisiana, and our loan production office located in New Orleans. Metairie is located in Jefferson Parish, which is located in the New Orleans metropolitan area. Our loan portfolio consists primarily of loans collateralized by real property located in Jefferson Parish and Orleans Parish, Louisiana. We also originate loans in other parts of the greater New Orleans metropolitan area and, to a lesser extent, elsewhere in Louisiana and Mississippi.

 

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, 2018, $75.2 million, or 93.2% of our total loan portfolio, was comprised of one- to four-family residential real estate loans, $11.2 million of which were non-owner-occupied loans, $1.0 million of which were construction loans and $1.6 million of which were home equity loans.

 

A 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.

 

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 Federal Home Loan Bank of Dallas (the “FHLB”), to fund our operations. Pursuant to our business strategy, we are seeking to increase our core deposits, which we consider our savings and money market accounts and retail certificates of deposit, by more aggressively marketing and pricing our deposit products.

 

For the year ended December 31, 2018, we had net income of $295,000 compared to a net loss of ($25,000) for the year ended December 31, 2017. The increase in net income resulted primarily from an increase in interest income and decreases in provision for loan losses and income tax expense when comparing 2018 and 2017.

 

 

 

 

Eureka Homestead is subject to comprehensive regulation and examination by its primary federal regulator, the Office of the Comptroller of the Currency (“OCC”).

 

Our main office is located at 1922 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 prospectus and should not be considered part of this prospectus.

 

Eureka Homestead Bancorp, Inc.

 

The shares being offered will be issued by Eureka Homestead Bancorp, Inc., a newly formed Maryland corporation that will own all of the outstanding shares of common stock of Eureka Homestead upon completion of the Bank’s mutual-to-stock conversion. Eureka Homestead Bancorp was incorporated on February 25, 2019 and has not engaged in any business to date. Upon completion of the conversion, Eureka Homestead Bancorp will register as a savings and loan holding company and will be subject to comprehensive regulation and examination by the Board of Governors of the Federal Reserve System, which we refer to as the Federal Reserve Board.

 

Eureka Homestead Bancorp’s main office is located at 1922 Veterans Memorial Boulevard, Metairie, Louisiana 70005, and its telephone number at this address is (504) 834-0242.

 

The Conversion and Our Organizational Structure

 

Pursuant to the terms of the plan of conversion, Eureka Homestead will convert from a mutual (meaning no stockholders) savings association to a stock savings association. As part of the conversion, Eureka Homestead Bancorp, the newly formed proposed holding company for Eureka Homestead, will offer for sale shares of its common stock in a subscription offering, and, if necessary, a community offering and a syndicated community offering. Upon the completion of the conversion and stock offering, Eureka Homestead Bancorp will be 100% owned by stockholders and Eureka Homestead will be a wholly owned subsidiary of Eureka Homestead Bancorp. See “The Conversion and Offering.”

 

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. We are a very small financial institution, and we believe that managing prudent yet consistent asset growth in order to increase revenue is critical to our long-term success. We intend to operate as a well-capitalized and profitable community bank dedicated to providing exceptional personal service to our individual and business customers. We believe that we have a competitive advantage in the markets we serve because of our knowledge of the local marketplace and our long-standing history of providing superior, relationship-based 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 one- to four-family residential real estate loans.

 

·Maintaining our strong asset quality through conservative loan underwriting.

 

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·Attracting and retaining customers in our market area and building our “core” deposits consisting of savings and money market accounts and retail certificates of deposit.

 

·Remaining a community-oriented institution and relying on high quality service to maintain and build a loyal local customer base.

 

These strategies are intended to guide our investment of the net proceeds of the offering. We intend to continue to pursue our business strategy after the conversion and the offering, subject to changes necessitated by future market conditions and other factors. See “Business of Eureka Homestead” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Business Strategy” for a further discussion of our business strategy.

 

Reasons for the Conversion and Offering

 

Consistent with our business strategy, our primary reasons for converting and raising additional capital through the offering are:

 

·to increase capital to support future growth and profitability and manage our interest rate risk;

 

·to retain and attract qualified personnel by establishing stock-based benefit plans for management and employees; and

 

·to offer our customers and employees an opportunity to purchase our stock.

 

As of December 31, 2018, Eureka Homestead was considered “well capitalized” for regulatory purposes. The proceeds from the stock offering will further improve our capital position during a period of significant economic, regulatory and political uncertainty.

 

See “The Conversion and Offering” for a more complete discussion of our reasons for conducting the conversion and offering.

 

Terms of the Offering

 

We are offering between 1,360,000 shares and 1,840,000 shares of common stock to eligible depositors of Eureka Homestead and to our tax-qualified employee benefit plans in a subscription offering. To the extent shares remain available, we may offer shares for sale in a community offering, with a preference given to natural persons and trusts of natural persons residing in the following Louisiana Parishes: Orleans, Jefferson, Plaquemines, St. Bernard and St. Tammany. We may also offer for sale shares of common stock not purchased in the subscription offering or the community offering to the general public in a syndicated community offering. The number of shares of common stock to be sold may be increased to up to 2,116,000 shares as a result of demand for the shares of common stock in the offering or changes in market conditions. Unless the number of shares of common stock offered is increased to more than 2,116,000 shares or decreased to fewer than 1,360,000 shares, or the offering is extended beyond [extension date], subscribers will not have the opportunity to change or cancel their stock orders once submitted. If the offering is extended past [extension date], we will resolicit subscribers and you will have the opportunity to confirm, change or cancel your order within a specified period of time. If you do not respond during that period of time, your stock order will be cancelled and your deposit account withdrawal authorizations will be cancelled or your funds submitted will be returned promptly with interest at 0.20% per annum. If the number of shares to be sold is increased to more than 2,116,000 shares or decreased to fewer than 1,360,000 shares, all subscribers’ stock orders will be cancelled, their deposit account withdrawal authorizations will be cancelled and funds delivered for the purchase of shares of common stock in the offering will be returned promptly with interest at 0.20% per annum. We will give these subscribers an opportunity to place new orders for a specified period of time.

 

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The purchase price of each share of common stock to be offered for sale in the offering is $10.00. All investors will pay the same purchase price per share. Investors will not be charged a commission to purchase shares of common stock in the offering. FIG Partners, LLC, our marketing agent in the offering, will use its best efforts to assist us in selling shares of our common stock but is not obligated to purchase any shares of common stock in the offering.

 

Important Risks in Owning Eureka Homestead Bancorp’s Common Stock

 

Before you purchase shares of our common stock, you should read the “Risk Factors” section beginning on page 15 of this prospectus.

 

How We Determined the Offering Range and the $10.00 per Share Stock Price

 

The amount of common stock we are offering for sale is based on an independent appraisal of the estimated market value of Eureka Homestead Bancorp, assuming the conversion and offering are completed. Keller & Company, Inc. (“Keller”), our independent appraiser, has estimated that, as of February 12, 2019, this market value was $16.0 million. Based on regulations of the OCC, this market value forms the midpoint of a valuation range with a minimum of $13.6 million and a maximum of $18.4 million. Based on this valuation and a $10.00 per share price, the number of shares of common stock being offered for sale by us will range from 1,360,000 shares to 1,840,000 shares. We may sell up to 2,116,000 shares of common stock because of demand for the shares or changes in market conditions without resoliciting subscribers. The $10.00 per share price was selected primarily because it is the price most commonly used in mutual-to-stock conversions of financial institutions.

 

The appraisal is based in part on Eureka Homestead’s financial condition and results of operations, the pro forma effect of the additional capital raised by the sale of shares of common stock in the offering and an analysis of a peer group of ten publicly traded thrift holding companies with assets of between $137 million and $1.1 billion as of December 31, 2018 that Keller considers comparable to Eureka Homestead Bancorp. See “The Conversion and Offering – Determination of Share Price and Number of Shares to be Issued.”

 

The following table presents a summary of selected pricing ratios for the peer group companies and for Eureka Homestead Bancorp (on a pro forma basis) utilized by Keller in its appraisal. These ratios are based on Eureka Homestead Bancorp’s book value, tangible book value and core earnings as of and for the 12 months ended December 31, 2018. The peer group ratios are based on the latest date for which complete financial data are publicly available and stock prices as of February 12, 2019. Compared to the average pricing of the peer group, our pro forma pricing ratios at the midpoint of the offering range indicated a discount of 41.81% on a price-to-book value basis and a discount of 44.95% on a price-to-tangible book value basis and a premium of 114.89% on a price-to-earnings basis.

 

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Price-to-core earnings

multiple (1)

   Price-to-book
 value ratio
   Price-to-tangible
book value ratio
 
Eureka Homestead Bancorp (on a pro forma basis, assuming completion of the conversion):               
Adjusted Maximum   63.55x   71.53%   71.53%
Maximum   56.68x   67.75%   67.75%
Midpoint   50.40x   63.86%   63.86%
Minimum   43.84x   59.28%   59.28%
                
Valuation of peer group companies, all of which are fully converted (on an historical basis):               
Average   25.05x   109.76%   116.02%
Median   16.97x   112.37%   116.90%

 

 

(1)Price-to-earnings multiples calculated by Keller in the independent appraisal are based on an estimate of “core” or recurring earnings. These ratios are different from those presented in “Pro Forma Data.”

 

The independent appraisal does not indicate trading market value. Do not assume or expect that our valuation as indicated in the appraisal means that after the conversion and offering the shares of our common stock will trade at or above the $10.00 per share purchase price. Furthermore, the pricing ratios presented in the appraisal were utilized by Keller to estimate our pro forma appraised value for regulatory purposes and not to compare the relative value of shares of our common stock with the value of the capital stock of the peer group. The value of the capital stock of a particular company may be affected by a number of factors such as financial performance, asset size and market location.

 

For a more complete discussion of the amount of common stock we are offering for sale and the independent appraisal, see “The Conversion and Offering – Determination of Share Price and Number of Shares to be Issued.”

 

Stock price performance is affected by many factors, including, but not limited to: general market and economic conditions; the interest rate environment; the amount of proceeds a company raises in its offering; and numerous factors relating to the specific company, including the experience and ability of management, historical and anticipated operating results, the nature and quality of the company’s assets, and the company’s market area.

 

Our stock price may trade below $10.00 per share, as the stock prices of certain mutual-to-stock conversions have decreased below the initial offering price. If you purchase shares of common stock, you may not be able to sell them at or above $10.00 per share. Before you make an investment decision, we urge you to carefully read this prospectus, including, but not limited to, the section entitled “Risk Factors” beginning on page 15.

 

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How We Intend to Use the Proceeds From the Stock Offering

 

Eureka Homestead will receive a capital contribution equal to at least 50% of the net proceeds of the offering. Based on this formula, we anticipate that Eureka Homestead Bancorp will invest, at the minimum, midpoint, maximum and adjusted maximum of the offering range, approximately $6.2 million, $7.4 million, $8.6 million and $9.9 million, respectively, of the net proceeds from the stock offering in Eureka Homestead. Of the remaining funds, we intend that Eureka Homestead Bancorp will loan funds to our employee stock ownership plan to fund the plan’s purchase of shares of common stock in the stock offering, and retain the remainder of the net proceeds from the offering. Assuming we sell 1,600,000 shares of common stock in the stock offering and have net proceeds of $14.7 million, based on the above formula, we anticipate that Eureka Homestead Bancorp will invest $7.4 million in Eureka Homestead, loan $1.3 million to our employee stock ownership plan to fund its purchase of shares of common stock, and retain the remaining $6.1 million of the net proceeds.

 

Eureka Homestead Bancorp may use the remaining funds that it retains to repurchase shares of common stock (subject to compliance with regulatory requirements), to pay cash dividends, for investments, or for other general corporate purposes. Eureka Homestead intends to invest the net proceeds it receives from us to fund new loans, enhance existing products and services, invest in securities, replace certain non-core funding sources as they mature, or for general corporate purposes.

 

For more information on the proposed use of the proceeds from the offering, see “How We Intend to Use the Proceeds from the Offering.”

 

Persons Who May Order Shares of Common Stock in the Offering

 

We are offering the shares of common stock in a subscription offering in the following descending order of priority:

 

(i)First, to depositors with accounts at Eureka Homestead with aggregate balances of at least $50 at the close of business on December 31, 2017.

 

(ii)Second, to our tax-qualified employee benefit plans (including Eureka Homestead’s employee stock ownership plan), which will receive, without payment therefor, nontransferable subscription rights to purchase in the aggregate up to 10% of the shares of common stock sold in the offering. We expect our employee stock ownership plan to purchase up to 8% of the shares of common stock sold in the offering.

 

(iii)Third, to depositors with accounts at Eureka Homestead with aggregate balances of at least $50 at the close of business on [supplemental eligibility record date].

 

(iv)Fourth, to depositors of Eureka Homestead at the close of business on [voting record date].

 

Shares of common stock not purchased in the subscription offering may be offered for sale in a community offering, with a preference given to natural persons and trusts of natural persons residing in the following Louisiana Parishes: Orleans, Jefferson, Plaquemines, St. Bernard and St. Tammany. The community offering may begin concurrently with, during or after the subscription offering. We also may offer for sale shares of common stock not purchased in the subscription offering or the community offering to the general public through a syndicated community offering, which will be managed by FIG Partners, LLC. We have the right to accept or reject, in our sole discretion, orders received in the community offering or syndicated community offering. Any determination to accept or reject stock orders in the community offering or the syndicated community offering will be based on the facts and circumstances available to management at the time of the determination.

 

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If we receive orders for more shares than we are offering, we may not be able to fully or partially fill your order. Shares will be allocated first to categories in the subscription offering. A detailed description of the subscription offering, the community offering and the syndicated community offering, as well as a discussion regarding allocation procedures, can be found in the section of this prospectus entitled “The Conversion and Offering.”

 

Limits on How Much Common Stock You May Purchase

 

The minimum number of shares of common stock that may be purchased is 25.

 

Generally, no individual, or individuals through a single account held jointly, may purchase more than the greater of: (i) 10,000 shares ($100,000) of common stock; (ii) 0.10% of the total number of shares of common stock issued in the offering, or (iii) 15 times the number of shares offered multiplied by a fraction of which the numerator is the depositor’s total deposit balance (as of the eligibility record date or supplemental eligibility record date, as applicable) and the denominator is the aggregate of all deposits (as of the eligibility record date or supplemental eligibility record date, as applicable), subject to the overall purchase limitations. If any of the following purchase shares of common stock, their purchases, in all categories of the offering combined, when combined with your purchases, cannot exceed 15,000 shares ($150,000) of common stock:

 

·your spouse or relatives of you or your spouse who reside with you;

 

·most companies, trusts or other entities in which you are a trustee, have a substantial beneficial interest or hold a senior position; or

 

·other persons who may be your associates or persons acting in concert with you.

 

Unless we determine otherwise, persons having the same address and persons exercising subscription rights through qualifying accounts registered to the same address will be subject to the overall purchase limitation of 15,000 shares ($150,000). See the detailed descriptions of “acting in concert” and “associate” in the section of this prospectus headed “The Conversion and Offering – Limitations on Common Stock Purchases.”

 

Subject to OCC approval, we may increase or decrease the purchase limitations at any time. See the detailed description of the purchase limitations in the section of this prospectus headed “The Conversion and Offering – Limitations on Common Stock Purchases.”

 

How You May Purchase Shares of Common Stock in the Subscription Offering and the Community Offering

 

In the subscription offering and community offering, you may pay for your shares only by:

 

·personal check, bank check or money order made payable to Eureka Homestead Bancorp, Inc.; or

 

·authorizing us to withdraw available funds (without any early withdrawal penalty) from your account(s) maintained with Eureka Homestead, other than individual retirement accounts (IRAs).

 

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Please do not submit cash or wire transfers. For orders paid for by check or money order, the funds must be available in the account. Eureka Homestead is not permitted to lend funds to anyone for the purpose of purchasing shares of common stock in the offering. Additionally, you may not use any type of third-party check to pay for shares of common stock. Funds received in the subscription and community offerings and, if applicable, the syndicated community offering will be held in a segregated account at Eureka Homestead and will earn interest at 0.20% per annum until completion or termination of the offering. You may not authorize direct withdrawal from a Eureka Homestead individual retirement account. See “– Using Retirement Account Funds to Purchase Shares of Common Stock in the Subscription and Community Offerings.”

 

Withdrawals from certificates of deposit at Eureka Homestead for the purpose of purchasing common stock in the offering may be made without incurring an early withdrawal penalty. All funds authorized for withdrawal from deposit accounts with Eureka Homestead must be in the deposit accounts at the time the stock order form is received. A hold will be placed on those funds when your stock order form is received, making the designated funds unavailable to you. However, funds will not be withdrawn from the accounts until the offering is completed and will continue to earn interest at the applicable deposit account rate until the completion of the offering. If a withdrawal results in a certificate of deposit account with a balance less than the applicable minimum balance requirement, the certificate will be canceled at the time of withdrawal without penalty, and the remaining balance will earn interest at Eureka Homestead’s current statement savings rate thereafter.

 

You may subscribe for shares of common stock in the offering by delivering a signed and completed original stock order form, together with full payment payable to Eureka Homestead Bancorp, Inc. or authorization to withdraw funds from one or more of your Eureka Homestead deposit accounts, provided that the stock order form is received (not postmarked) before 2:00 p.m., Central Time, on [expiration date]. You may submit your stock order form and payment by mail using the stock order reply envelope provided, by overnight delivery to our Stock Information Center at the address noted on the stock order form or by hand-delivery to Eureka Homestead’s main office, located at 1922 Veterans Memorial Boulevard, Metairie, Louisiana. Please do not mail stock order forms to Eureka Homestead. Once submitted, your order will be irrevocable unless the offering is terminated or is extended beyond [extension date], or the number of shares of common stock to be sold is increased to more than 2,116,000 shares or decreased to fewer than 1,360,000 shares. We are not required to accept incomplete stock order forms, unsigned stock order forms, or copies or facsimiles of stock order forms.

 

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For a complete description of how to purchase shares in the stock offering, see “The Conversion and Offering – Procedure for Purchasing Shares.”

 

Using Retirement Account Funds to Purchase Shares of Common Stock in the Subscription and Community Offerings

 

You may be able to subscribe for shares of common stock using funds in your individual retirement account (“IRA”), or other retirement account. If you wish to use some or all of the funds in your IRA or other retirement account held at Eureka Homestead, the applicable funds must be transferred to a self-directed account maintained by an independent custodian or trustee, such as a brokerage firm, before you place your stock order. If you do not have such an account, you will need to establish one. An annual administrative fee may be payable to the independent custodian or trustee. Because individual circumstances differ and the processing of retirement fund orders takes additional time, we recommend that you contact our Stock Information Center promptly, preferably at least two weeks before the [expiration date] offering deadline, for assistance with purchases using funds in your IRA or other retirement account held at Eureka Homestead or elsewhere. Whether you may use such funds for the purchase of shares in the stock offering may depend on timing constraints and, possibly, limitations imposed by the institution where the funds are held.

 

For a complete description of how to use IRA funds to purchase shares in the stock offering, see “The Conversion and Offering – Procedure for Purchasing Shares – Using Retirement Account Funds.”

 

You May Not Sell or Transfer Your Subscription Rights

 

Federal regulations prohibit you from transferring your subscription rights. If you order shares of common stock in the subscription offering, you will be required to state that you are purchasing the common stock for yourself and that you have no agreement or understanding to sell or transfer your subscription rights. We intend to take legal action against anyone who we believe has sold or transferred his or her subscription rights. In addition, we intend to advise the appropriate federal agencies of any person who we believe has sold or transferred his or her subscription rights. We will not accept your order if we have reason to believe that you have sold or transferred your subscription rights. On the stock order form, you may not add the names of others for joint stock registration who do not have subscription rights or who qualify only in a lower subscription offering priority than you do. You may add only those who were eligible to purchase shares of common stock in the subscription offering at your date of eligibility. In addition, the stock order form requires that you list all qualifying accounts, giving all names on each account and the account number at the applicable eligibility date. Failure to provide this information, or providing incomplete or incorrect information, may result in a loss of part or all of your share allocation if there is an oversubscription. Eligible depositors who enter into agreements to allow ineligible investors to participate in the subscription offering may be violating federal and state law and may be subject to civil enforcement actions or criminal prosecution.

 

Purchases by Executive Officers and Directors

 

We expect our directors and executive officers, together with their associates, to subscribe for 52,500 shares ($525,000) of common stock in the offering, representing 3.9% of shares to be sold at the minimum of the offering range. However, there can be no assurance that any individual director or executive officer, or the directors and executive officers as a group, will purchase any specific number of shares of our common stock. The purchase price paid by them will be the same $10.00 per share price paid by all other persons who purchase shares of common stock in the offering. Our directors and executive officers will be subject to the same minimum purchase requirements and purchase limitations as other participants in the offering set forth under “– Limits on How Much Stock You May Purchase.”

 

Purchases by our directors, executive officers and their associates will be included in determining whether the required minimum number of shares has been subscribed for in the offering. Any purchases made by our directors or executive officers, or their associates, for the explicit purpose of meeting the minimum number of shares of common stock required to be sold in order to complete the offering shall be made for investment purposes only and not with a view toward redistribution.

 

For more information on the proposed purchases of shares of common stock by our directors and executive officers, see “Subscriptions by Directors and Executive Officers.”

 

Deadline for Orders of Shares of Common Stock in the Subscription and Community Offerings

 

The deadline for submitting orders for shares of common stock in the subscription and community offerings is 2:00 p.m., Central Time, on [expiration date], unless we extend the subscription offering and/or the community offering. If you wish to purchase shares of common stock, a properly completed and signed original stock order form, together with full payment, must be received (not postmarked) by this time. Orders received after 2:00 p.m., Central Time, on [expiration date] will be rejected unless the offering is extended.

 

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Although we will make reasonable attempts to provide this prospectus and offering materials to holders of subscription rights, the subscription offering and all subscription rights will expire at 2:00 p.m., Central Time, on [expiration date], whether or not we have been able to locate each person entitled to subscription rights.

 

For a complete description of the deadline for purchasing shares in the stock offering, see “The Conversion and Offering – Procedure for Purchasing Shares – Expiration Date.”

 

Steps We May Take if We Do Not Receive Orders for the Minimum Number of Shares

 

If we do not receive orders for at least 1,360,000 shares of common stock, we may take additional steps in order to issue the minimum number of shares of common stock in the offering range. Specifically, we may:

 

·increase the purchase limitations; and/or

 

·seek regulatory approval to extend the offering beyond [extension date].

 

If we extend the offering past [extension date], we will resolicit subscribers and you will have the opportunity to confirm, change or cancel your order within a specified period of time. If you do not respond during that period of time, your stock order will be cancelled and your deposit account withdrawal authorizations will be cancelled or your funds submitted will be returned promptly with interest at 0.20% per annum from the date the stock order was processed.

 

If one or more purchase limitations are increased we will not resolicit all subscribers, however, subscribers in the subscription offering who ordered the maximum amount and who indicated a desire to be resolicited on the stock order form will be and, in our sole discretion, some other large subscribers may be, given the opportunity to increase their subscriptions up to the newly applicable limit. We may increase the individual or aggregate purchase limitations to an amount generally not to exceed 5.0% of the common stock sold in the offering. See “The Conversion and Offering – Limitations on Common Stock Purchases.”

 

Conditions to Completion of the Conversion

 

The board of directors of Eureka Homestead has approved the plan of conversion. In addition, the OCC has conditionally approved the plan of conversion and the Federal Reserve Board has conditionally approved our holding company application. We cannot complete the conversion unless:

 

·The plan of conversion is approved by a majority of votes eligible to be cast by members of Eureka Homestead (depositors of Eureka Homestead). A special meeting of members to consider and vote upon the plan of conversion has been scheduled for [special meeting date];

 

·We sell at least 1,360,000 shares, the minimum of the offering range; and

 

·We receive the final approval required from the OCC to complete the conversion and offering and the final approval from the Federal Reserve Board on the holding company application.

 

Any approval by the OCC or the Federal Reserve Board does not constitute a recommendation or endorsement of the plan of conversion.

 

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Our Dividend Policy

 

Following completion of the stock offering, our board of directors will have the authority to declare dividends on our common stock, subject to statutory and regulatory requirements. However, no decision has been made with respect to the amount, if any, and timing of any dividend payments. The payment and amount of any dividend payments will depend upon a number of factors, including the following: regulatory capital requirements; our financial condition and results of operations; our other uses of funds for the long-term value of stockholders; tax considerations; statutory and regulatory limitations; and general economic conditions. See “Our Dividend Policy” in this prospectus for additional information regarding our dividend policy.

 

Market for Common Stock

 

We anticipate that the common stock sold in the offering will be quoted on the OTC Pink Marketplace (OTCPK) operated by OTC Markets Group. FIG Partners, LLC currently intends to make a market in the shares of our common stock but is under no obligation to do so. See “Market for the Common Stock.” At the time of consummation of the conversion, if we meet the Nasdaq listing requirements, we will use our best efforts to seek approval to list our common stock on the Nasdaq Capital Market, provided however, it is not known whether we will meet all of the Nasdaq listing requirements with respect to public “float” and number of round lot holders.

 

Delivery of Shares of Stock

 

All shares of common stock of Eureka Homestead Bancorp sold in the subscription offering and community offering will be issued in book entry form and held electronically on the books of our transfer agent. Stock certificates will not be issued. A statement reflecting ownership of shares of common stock sold in the offering will be mailed by our transfer agent to the persons entitled thereto at the address noted by them on their stock order form as soon as practicable following consummation of the conversion. Shares of common stock sold in the syndicated community offering may be delivered electronically through the services of The Depository Trust Company. We expect trading in the stock to begin on the business day of or on the business day immediately following the completion of the conversion and stock offering. It is possible that until a statement reflecting ownership of shares of common stock is available and delivered to purchasers, purchasers might not be able to sell the shares of common stock that they ordered, even though the common stock will have begun trading. Your ability to sell the shares of common stock before receiving your statement will depend on arrangements you may make with a brokerage firm.

 

Possible Change in the Offering Range

Keller will update its appraisal before we complete the offering. If, as a result of demand for the shares or changes in market conditions, Keller determines that our pro forma market value has increased, we may sell up to 2,116,000 shares in the offering without further notice to you. If our pro forma market value at that time is either below $13.6 million or above $21.2 million, then, after consulting with the OCC, we may:

 

·terminate the stock offering, cancel deposit account withdrawal authorizations and promptly return all funds received in the offering with interest at 0.20% per annum;

 

·set a new offering range; or

 

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·take such other actions as may be permitted by the OCC, the Federal Reserve Board, the Financial Industry Regulatory Authority (“FINRA”) and the Securities and Exchange Commission.

 

If we set a new offering range, we will promptly return funds, with interest at 0.20% per annum for funds received in the offering, cancel deposit account withdrawal authorizations and commence a resolicitation. In connection with the resolicitation, we will notify subscribers of their right to place a new stock order for a specified period of time.

 

Possible Termination of the Offering

We may terminate the offering at any time prior to the special meeting of members of Eureka Homestead that is being called to vote on the conversion, and at any time after member approval with the concurrence of the OCC. If we terminate the offering, we will promptly return funds and cancel deposit withdrawal authorizations, as described above.

 

Benefits to Management and Potential Dilution to Stockholders Resulting from the Conversion

 

We expect our employee stock ownership plan, which is a tax-qualified retirement plan for the benefit of all of our employees being established in connection with the conversion and stock offering, to purchase up to 8% of the shares of common stock that we sell in the offering. If we receive orders for more shares of common stock than the maximum of the offering range, the employee stock ownership plan will have first priority to purchase shares over this maximum, up to a total of 8% of the shares of common stock that we sell in the offering. This would reduce the number of shares available for allocation to eligible depositors. For further information, see “Management – Benefit Plans and Agreements – Employee Stock Ownership Plan.”

 

Purchases by the employee stock ownership plan in the offering will be included in determining whether the required minimum number of shares have been sold in the offering. Subject to market conditions and receipt of regulatory approval, the employee stock ownership plan may instead elect to purchase shares of common stock in the open market following the completion of the offering in order to fill all or a portion of the employee stock ownership plan’s intended subscription.

 

We also intend to implement a stock-based benefit plan no earlier than six months after completion of the conversion. Stockholder approval of this plan will be required, and the stock-based benefit plan cannot be implemented until at least six months after the completion of the conversion pursuant to applicable OCC regulations. If adopted within 12 months following the completion of the conversion, and provided that upon completion of the offering Eureka Homestead has at least a 10% tangible capital to assets ratio, the OCC conversion regulations would allow for the stock-based benefit plan to reserve a number of shares of common stock equal to not more than 4% of the shares sold in the offering, or up to 73,600 shares of common stock at the maximum of the offering range, for restricted stock awards to key employees and directors, at no cost to the recipients. If adopted within 12 months following the completion of the conversion, the stock-based benefit plan will also reserve a number of shares equal to not more than 10% of the shares of common stock sold in the offering, or up to 184,000 shares of common stock at the maximum of the offering range, for the exercise of stock options granted to key employees and directors. If the stock-based benefit plan is adopted after one year from the date of the completion of the conversion, the 4% and 10% limitations described above will no longer apply, and we may adopt a stock-based benefit plan encompassing more than 257,600 shares of our common stock assuming the maximum of the offering range. We have not yet determined whether we will present this plan for stockholder approval within 12 months following the completion of the conversion or whether we will present this plan for stockholder approval more than 12 months after the completion of the conversion.

 

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The following table summarizes the number of shares of common stock and aggregate dollar value of grants (valuing each share granted at the offering price of $10.00) that would be available under a stock-based benefit plan if such plan is adopted within one year following the completion of the conversion and the offering and Eureka Homestead has at least a 10% tangible capital to assets ratio at that time. The table shows the dilution to stockholders if all these shares are issued from authorized but unissued shares, instead of shares purchased in the open market. The table also sets forth the number of shares of common stock to be acquired by the employee stock ownership plan for allocation to all employees. A portion of the stock grants shown in the table below may be made to non-management employees.

 

   Number of Shares to be Granted or Purchased (1)       Value of Grants (2) 
   At  
Minimum
 of Offering
 Range
  

At
Maximum

of Offering
Range

   As a
Percentage
  of Common  
Stock to be
  Issued
   Dilution
Resulting
From
Issuance of
Shares for
Stock Benefit
Plans
  

At

Minimum
of

Offering
Range

  

At
Maximum
of

Offering
Range

 
                         
Employee stock ownership plan   108,800    147,200    8.00%   n/a(3)  $1,088,000   $1,472,000 
Stock awards   54,400    73,600    4.00    3.85%   544,000    736,000 
Stock options   136,000    184,000    10.00    9.09%   378,080    511,520 
Total   299,200    404,800    22.00%   12.28%  $2,010,080   $2,719,520 

 

 
(1)The stock-based benefit plan may award a greater number of options and shares, respectively, if the plan is adopted more than 12 months after the completion of the conversion.
(2)The actual value of restricted stock grants will be determined based on their fair value as of the date grants are made. For purposes of this table, fair value is assumed to be the same as the offering price of $10.00 per share. The fair value of stock options has been estimated at $2.78 per option using the Black-Scholes option pricing model with the following assumptions: a grant-date share price and option exercise price of $10.00; dividend yield of 0%; an expected option life of 10 years; a risk-free interest rate of 2.31%; and a volatility rate of 13.73%. The actual expense of stock options granted under a stock-based benefit plan will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used in the option pricing model ultimately adopted, which may or may not be the Black-Scholes model.
(3)Represents the dilution of stock ownership interest. No dilution is reflected for the employee stock ownership plan because these shares are assumed to be purchased in the offering.

 

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Tax Consequences

 

Eureka Homestead and Eureka Homestead Bancorp have received an opinion of counsel, Luse Gorman, PC, regarding the material federal income tax consequences of the conversion, including an opinion that it is more likely than not that the fair market value of the nontransferable subscription rights to purchase the common stock will be zero and, accordingly, no gain or loss will be recognized by depositors upon the distribution to them of the nontransferable subscription rights to purchase the common stock and no taxable income will be realized by depositors as a result of the exercise of the nontransferable subscription rights. Eureka Homestead and Eureka Homestead Bancorp have also received an opinion of Hannis T. Bourgeois, LLP, tax advisors to Eureka Homestead, regarding the material Louisiana state tax consequences of the conversion. As a general matter, the conversion will not be a taxable transaction for purposes of federal or state income taxes to Eureka Homestead, Eureka Homestead Bancorp or persons eligible to subscribe in the subscription offering. See the section of this prospectus entitled “Taxation” for additional information regarding taxes.

 

How You Can Obtain Additional Information – Stock Information Center

 

Our banking personnel may not, by law, assist with investment-related questions about the offering. If you have questions regarding the conversion or offering, please call our Stock Information Center. The toll-free telephone number is [phone number]. The Stock Information Center is open for telephone calls Monday through Friday between 10:00 a.m. and 4:00 p.m., Central Time. The Stock Information Center will be closed on bank holidays.

 

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RISK FACTORS

 

You should consider carefully the following risk factors, in addition to all other information in this prospectus, in evaluating an investment in the shares of common stock.

 

Risks Related to Our Business

 

We rely in part on out-of-market jumbo deposits and borrowings to fund our operations. These funding sources carry a measure of liquidity risk which could impair our ability to fund operations and jeopardize our financial condition, growth and prospects.

 

Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity. We rely in part on out-of-market jumbo deposits and advances from the FHLB to fund our operations. At December 31, 2018, we had $26.0 million of FHLB advances outstanding with an additional $8.7 million of available borrowing capacity from the FHLB. We also use an online service for jumbo certificates of deposit, and accept municipal deposits through a non-retail platform, as non-core sources for certificates of deposit, particularly during periods of increased loan originations. At December 31, 2018, we had total deposits of $56.2 million, of which $53.0 million were certificates of deposit. Of this amount, $33.8 million, or 63.8% of our certificates of deposit, were municipal deposits or jumbo certificates of deposit which were acquired through an on-line service or through brokers. These non-core funding sources are not relationship-based accounts and are generally more price-sensitive than our core deposits of savings and money market accounts and our retail certificates of deposit. Therefore, these deposits carry a greater risk of non-renewal than our core deposits. Although we have historically been able to replace maturing deposits and advances as desired, we may not be able to replace such funds in the future if, among other things, our financial condition, the financial condition of the FHLB, or market conditions change. Our access to funding sources in amounts adequate to finance our activities on terms that are acceptable could be impaired by factors that affect us specifically or the financial services industry or economy in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity as a result of a downturn in the markets where our loans are concentrated, or adverse regulatory action against us.  Our ability to acquire funding could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry in light of the recent turmoil faced by banking organizations and the continued deterioration in credit markets.

 

Our financial flexibility would be severely constrained if we are unable to maintain our access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. Although we consider our sources of funds adequate for our liquidity needs, we may seek additional funding in the future to achieve our long-term business objectives. Additional funding, if sought, may not be available to us or, if available, may not be available on reasonable terms. If additional financing sources are unavailable, or are not available on reasonable terms, our financial condition, results of operations, growth and future prospects could be materially adversely affected.  Finally, if we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs.  In this case, our operating margins and profitability would be adversely affected.

 

A portion of our one- to four-family residential real estate loans is comprised of non-owner-occupied properties which increases the credit risk on this portion of our loan portfolio.

 

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The housing stock in our primary lending market area is comprised in part of single-family rental properties as well as two- to four-unit properties.  At December 31, 2018, of the $75.2 million of one- to four-family residential real estate loans in our portfolio, $11.2 million, or 14.8% of this amount, was comprised of non-owner-occupied properties.  We believe that there is a greater credit risk inherent in non-owner-occupied properties than in owner-occupied properties since, similar to commercial real estate and multifamily loans, the repayment of these loans may depend, in part, on the successful management of the property and/or the borrower’s ability to lease the units of the property.  In addition, the physical condition of non-owner-occupied properties may be below that of owner-occupied properties due to lesser property maintenance standards, which has a negative impact on the value of the collateral properties.  Furthermore, some of our non-owner-occupied borrowers have more than one loan outstanding with us, which may expose us to a greater risk of loss compared to residential borrowers with only one loan.  A downturn in the real estate market or the local economy could adversely affect the value of properties securing these loans or the revenues derived from these properties which could affect the borrower’s ability to repay the loan.

 

We utilize non-retail certificates of deposit which are interest-rate sensitive, and this increases our interest rate risk sensitivity.

 

In recent years, we have accepted jumbo certificates of deposits through an on-line service and through brokers and have also acquired municipal deposits. At December 31, 2018, $33.8 million, or 63.8% of our certificates of deposit, consisted of these non-retail certificates of deposit. Our reliance on certificates of deposit to fund our operations may result in a higher cost of funds than would otherwise be the case if we had a higher percentage of savings account and money market account deposits. Additionally, non-retail certificates of deposit are generally considered rate-sensitive instruments which contribute to our interest rate risk sensitivity. Because we do not have checking accounts, we have faced significant challenges in increasing our core deposits, which we consider to be our savings and money market accounts and our retail certificates of deposit. Therefore, it is likely we will continue to have to rely in part on jumbo, non-retail certificates of deposit as a significant funding source.

 

Future changes in interest rates could reduce our profits and asset values.

 

Future changes in interest rates could impact our financial condition and results of operations.

 

Net income is the amount by which net interest income and noninterest income exceeds noninterest expense and the provision for loan losses. Net interest income makes up a majority of our net income and is based on the difference between:

 

·interest income earned on interest-earning assets, such as loans and securities; and

 

·interest expense paid on interest-bearing liabilities, such as deposits and borrowings.

 

We are vulnerable to changes in interest rates including the shape of the yield curve because of a mismatch between the terms to repricing of our assets and liabilities. We maintain in our portfolio a substantial amount of long-term, fixed-rate one- to four-family residential real estate loans. The retention of these loans makes us extremely sensitive to a decrease in the value of our equity in a rising interest rate environment.

 

We utilize a computer simulation model to provide an analysis of estimated changes in our net interest income (“NII”) and in the fair value of our assets and liabilities (our economic value of equity, or (“EVE”)) in various interest rate scenarios. At December 31, 2018, our “rate shock” analysis indicated that our NII would decrease $73,000, or 3.2%, to $2.2 million, and our EVE would decrease $4.6 million, or 34.8%, in the event of an immediate 200 basis point increase in interest rates. Also, our interest rate risk modeling techniques and assumptions likely may not fully predict or capture the impact of actual interest rate changes on our balance sheet.

 

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Additionally, increases in interest rates may decrease loan demand and/or make it more difficult for borrowers to repay adjustable-rate loans. Conversely, a reduction in interest rates can result in increased prepayments of loans and mortgage-backed and related securities, as borrowers refinance their debt in order to reduce their borrowing costs. This creates reinvestment risk, which is the risk that we may not be able to reinvest prepayments at rates that are comparable to the rates we earned on the prepaid loans or securities.

 

Finally, a significant increase in interest rates could make it more difficult to attract the funding needed to support our operations.

 

Our small size makes it more difficult for us to compete and to achieve significant profitability.

 

Our small asset size makes it more difficult to compete with other financial institutions which are generally larger and can more easily afford to invest in the marketing and technologies needed to attract and retain customers. Because our principal source of income is the net interest income we earn on our loans after deducting interest paid on deposits and other sources of funds, our ability to generate the revenues needed to cover our expenses and finance such investments is limited by the size of our loan portfolio. Accordingly, we are not always able to offer new products and services as quickly as our competitors. Our lower earnings also make it more difficult to offer competitive salaries and benefits. In addition, our smaller customer base makes it difficult to generate meaningful noninterest income from such activities as securities and insurance brokerage. Finally, as a smaller institution, we are disproportionately affected by the continually increasing costs of compliance with new banking and other regulations, as well as increasing cybersecurity and information technology expense.

 

We depend on our management team to implement our business strategy and execute successful operations and we could be harmed by the loss of their services.

 

Our future success will be largely due to the efforts of our senior management team, especially Alan T. Heintzen, our Chief Executive Officer, and Cecil A. Haskins, Jr., our President and Chief Financial Officer, who have been employed by Eureka Homestead 22 and 19 years, respectively, and Rhea L. Gonczi, our Vice-President Lending, who has been employed by Eureka Homestead for 14 years. In accordance with our succession plan, in July 2018, Mr. Heintzen relinquished the role of President and the corresponding oversight of the day-to-day operations of Eureka Homestead, and was elected Chairman of the Board and began working off-site from the Bank’s office. Because we are a small community savings association with a small management team, each member of our senior management team has more responsibility than his or her counterpart typically would have at a larger institution with more employees, and we have fewer management-level personnel who are in a position to assume the responsibilities of our senior management team. The loss of services of any of these individuals may have a material adverse effect on our ability to implement our business plan.

 

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Strong competition within our market areas and our limited product offerings and limited technology services may limit our growth and profitability.

 

Competition in the banking and financial services industry is intense. We compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Many of our competitors have greater name recognition and market presence that benefit them in attracting business, and offer certain services that we do not or cannot provide. We currently do not offer checking accounts and do not offer mobile banking applications or an interactive website. Many potential customers seek these products and services and if we do not choose to implement these products and services in the future, we could experience increased challenges in attracting new customers or retaining our existing customers. In addition, larger competitors may be able to price loans and deposits more aggressively than we do, which could affect our ability to grow and remain profitable on a long-term basis. Our ability to achieve significant profitability depends upon our ability to successfully compete in our market area. If we must raise interest rates paid on deposits or lower interest rates charged on our loans, our net interest margin and profitability could be adversely affected. For additional information see “Business of Eureka Homestead – Market Area” and “Business of Eureka Homestead – Competition.”

 

The financial services industry could become even more competitive as a result of new legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of our competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than we can.

 

A worsening of economic conditions in our market area could reduce demand for our products and services and/or result in increases in our level of non-performing loans, which could adversely affect our operations, financial condition and earnings.

 

Local economic conditions have a significant impact on the ability of our borrowers to repay loans and the value of the collateral securing loans. A deterioration in economic conditions could have the following consequences, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations:

 

·demand for our products and services may decline;

 

·loan delinquencies, problem assets and foreclosures may increase;

 

·collateral for loans, especially real estate, may decline in value, thereby reducing customers’ future borrowing power, and reducing the value of assets and collateral associated with existing loans; and

 

·the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us.

 

Moreover, a significant decline in general economic conditions caused by inflation, recession, acts of terrorism, an outbreak of hostilities or other international or domestic calamities, unemployment or other factors beyond our control could further impact these local economic conditions and could further negatively affect the financial results of our banking operations. In addition, deflationary pressures, while possibly lowering our operating costs, could have a significant negative effect on our borrowers, especially our business borrowers, and the values of underlying collateral securing loans, which could negatively affect our financial performance.

 

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If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings could decrease.

 

We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loans and our loss and delinquency experience, and we evaluate economic conditions. If our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover probable incurred losses in our loan portfolio, resulting in additions to our allowance for loan losses. Additions to the allowance for loan losses are established through the provision for losses on loans which is charged against income.

 

Material additions to our allowance could materially decrease our net income. In addition, bank regulators periodically review our allowance for loan losses and, based on judgments different than management’s, we may determine to increase our provision for loan losses or recognize further loan charge-offs as a result of these regulatory reviews. Any material increase in our allowance for loan losses or loan charge-offs may adversely affect our financial condition and results of operations.

 

The Financial Accounting Standards Board has adopted a new accounting standard that we expect will be effective for Eureka Homestead Bancorp and Eureka Homestead for our first fiscal year beginning after December 15, 2020. This standard, referred to as Current Expected Credit Loss, or CECL, will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for loan losses. This will change the current method of establishing allowances for loan losses that are probable, which may require us to increase our allowance for loan losses, and increase the data we would need to collect and review to determine the appropriate level of our allowance for loan losses.

 

We are a community bank and our ability to maintain our reputation is critical to the success of our business and the failure to do so may materially adversely affect our performance.

 

We are a community bank, and our reputation is one of the most valuable components of our business. A key component of our business strategy is to rely on our reputation for customer service and knowledge of local markets to expand our presence by capturing new business opportunities from existing and prospective customers in our market area and contiguous areas. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates. If our reputation is negatively affected by the actions of our employees, or by our inability to conduct our operations in a manner that is appealing to current or prospective customers, our business and, therefore, our operating results may be materially adversely affected.

 

If real estate owned is not properly valued, our earnings could be reduced.

 

We obtain updated valuations in the form of appraisals when a loan has been foreclosed and the property taken in as real estate owned and at certain other times during the holding period of the asset. Our net book value (“NBV”) in the loan at the time of foreclosure and thereafter is compared to the updated fair value of the foreclosed property less estimated selling costs (fair value). A charge-off is recorded for any excess in the asset’s NBV over its fair value less estimated selling costs. If our valuation process is incorrect, or if property values decline, the fair value of our real estate owned may not be sufficient to recover our carrying value in such assets, resulting in the need for additional charge-offs. Significant charge-offs to our real estate owned could have a material adverse effect on our financial condition and results of operations. In addition, bank regulators periodically review our real estate owned and may require us to recognize further charge-offs. Any increase in our charge-offs may have a material adverse effect on our financial condition and results of operations.

 

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We have become subject to more stringent capital requirements, which may adversely impact our return on equity, require us to raise additional capital, or limit our ability to pay dividends.

 

Federal regulations establish minimum capital requirements for insured depository institutions, including minimum risk-based capital and leverage ratios, which were effective for us on January 1, 2015, and define what constitutes “capital” for calculating these ratios. The new minimum capital requirements are: (1) a new common equity Tier 1 capital ratio of 4.5%; (2) a Tier 1 to risk-based assets capital ratio of 6%; (3) a total capital ratio of 8%; and (4) a Tier 1 leverage ratio of 4%. The regulations also require unrealized gains and losses on certain “available-for-sale” securities holdings to be included for calculating regulatory capital requirements unless a one-time opt-out is exercised. We elected to exercise our one-time option to opt-out of the requirement under the final rule to include certain “available-for-sale” securities holdings for calculating our regulatory capital requirements. The regulations also establish a “capital conservation buffer” of 2.5%, and, when fully phased in, will result in the following minimum ratios: (1) a common equity Tier 1 capital ratio of 7.0%, (2) a Tier 1 to risk-based assets capital ratio of 8.5%, and (3) a total capital ratio of 10.5%. The capital conservation buffer requirement began being phased in January 2016 at 0.625% of risk-weighted assets and is increasing each year until fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that can be utilized for such actions.

 

The recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Regulatory Relief Act”) simplifies capital calculations by requiring the federal regulators to establish for institutions under $10 billion in assets a community bank leverage ratio (tangible equity to average consolidated assets) at a percentage not less than 8% and not greater than 10% that eligible institutions may choose to elect to replace the general applicable risk-based capital requirements under the Basel III capital rules for such institutions. Such institutions that meet the community bank leverage ratio will automatically be deemed to be well-capitalized under the federal regulator’s prompt corrective action framework, although the regulators retain the flexibility to determine that the institution may not qualify for the community bank leverage ratio test based on the institution’s risk profile. The federal regulators jointly issued a proposed rule on November 21, 2018, whereby a qualifying community bank organization may elect, but is not required to, use the community bank leverage ratio capital framework, in which case it will be considered well-capitalized so long as its community bank leverage ratio is greater than 9%.

 

Until the federal regulators issue their final rule, the Basel III risk-based and leverage ratios apply. The effective date and the specific community bank leverage ratio remain undetermined.

 

The application of more stringent Basel III capital requirements could, among other things, result in lower returns on equity, require the raising of additional capital, and result in regulatory actions if we were to be unable to comply with such requirements. Implementation of changes to asset risk weightings for risk-based capital calculations, items included or deducted in calculating Basel III regulatory capital and/or additional Basel III capital conservation buffers could result in management modifying its business strategy, and could limit our ability to make distributions, including paying out dividends or buying back shares.

 

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Risks associated with system failures, interruptions, or breaches of security could negatively affect our earnings.

 

Information technology systems are critical to our business. We use various technology systems to manage our customer relationships, general ledger, securities, deposits, and loans. However, while our policies and procedures are designed to prevent or limit the impact of system failures, interruptions, and security breaches, they may not be adequate. In addition any compromise of our systems could deter customers from using our products and services. Although we rely on security systems to provide security and authentication necessary to effect the secure transmission of data, these precautions may not protect our systems from compromises or breaches of security.

 

In addition, we outsource a majority of our data processing to certain third-party providers. If these third-party providers encounter difficulties, or if we have difficulty communicating with them, our ability to adequately process and account for transactions could be affected, and our business operations could be adversely affected. Threats to information security also exist in the processing of customer information through various other vendors and their personnel.

 

The occurrence of any system failures, interruption, or breach of security could damage our reputation and result in a loss of customers and business, subject us to additional regulatory scrutiny or expose us to litigation and possible financial liability. Any of these events could have a material adverse effect on our financial condition and results of operations.

 

Changes to federal programs that subsidize flood insurance could result in increased premiums for owners of flood insurance which could result in increased loan defaults.

 

Our market area is highly vulnerable to flooding and was highly impacted by Hurricane Katrina. The National Flood Insurance Program (NFIP) enables property owners in participating communities to purchase insurance, administered by the government, against losses from flooding, and requires flood insurance for all loans or lines of credit that are secured by existing buildings, manufactured homes, or buildings under construction, that are located in a designated Special Flood Hazard Area, including a large portion of our primary market area. This insurance is designed to provide an insurance alternative to disaster assistance to meet the escalating costs of repairing damage to buildings and their contents caused by floods.

 

In 2012, in response to the insolvency of the NFIP, The Biggert-Waters Flood Insurance Reform Act of 2012 was introduced to allow flood insurance premiums to rise to reflect the true risk of living in high-flood areas, by reducing the government subsidies provided by the NFIP. In recent years, there has been ongoing legislative discussions about reducing governmental subsidies for flood insurance, which could result in much larger flood insurance premiums to be paid by owners of the insurance. Increases in flood insurance premiums could result in certain borrowers no longer being able to meet their monthly loan payments and could therefore result in increased loan defaults.

 

Although flood insurance if available may protect some of our customers’ loan collateral, it generally will not protect them from job loss or interruption and other potentially devastating impacts of a flood.

 

We could be adversely affected by a failure in our internal controls.

 

A failure in our internal controls could have a significant negative impact not only on our earnings, but also on the perception that customers, regulators and investors may have of us. We continue to devote a significant amount of effort, time and resources to strengthen our controls and our ability to comply with complex accounting standards and banking regulations.

 

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The cost of additional finance and accounting systems, procedures and controls in order to satisfy our new public company reporting requirements will increase our expenses.

 

As a result of the completion of this offering, we will become a public reporting company. We expect that the obligations of being a public company, including the substantial public reporting obligations, will require significant expenditures and place additional demands on our management team, and accordingly, we expect to hire additional accounting personnel. We have made, and will continue to make, changes to our internal controls and procedures for financial reporting and accounting systems to meet our reporting obligations as a stand-alone public company. However, the measures we take may not be sufficient to satisfy our obligations as a public company. Section 404 of the Sarbanes-Oxley Act of 2002 requires annual management assessments of the effectiveness of our internal control over financial reporting, starting with the second annual report that we would expect to file with the Securities and Exchange Commission. Any failure to achieve and maintain an effective internal control environment could have a material adverse effect on our business and stock price. In addition, we may need to hire additional compliance, accounting and financial staff with appropriate public company experience and technical knowledge, and we may not be able to do so in a timely fashion. As a result, we may need to rely on outside consultants to provide these services for us until qualified personnel are hired. These obligations will increase our operating expenses and could divert our management’s attention from our operations.

 

We operate in a highly regulated environment and may be adversely affected by changes in laws and regulations.

 

We are subject to extensive regulation, supervision, and examination by the Federal Reserve Board, the OCC and, to a lesser extent, the Federal Deposit Insurance Corporation (the “FDIC”). Such regulators govern the activities in which we may engage, primarily for the protection of depositors. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of a financial institution, the classification of assets by a financial institution, and the adequacy of a financial institution’s allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, or legislation, could have a material impact on us and our operations. Because our business is highly regulated, the laws, rules and applicable regulations are subject to regular modification and change. Laws, rules and regulations may be adopted in the future that could make compliance more difficult or expensive or otherwise adversely affect our business, financial condition or prospects. See “Regulation and Supervision” for a discussion of the regulations to which we are subject.

 

Changes in accounting standards could affect reported earnings.

 

The bodies responsible for establishing accounting standards, including the Financial Accounting Standards Board, the Securities and Exchange Commission and other regulatory bodies, periodically change the financial accounting and reporting guidance that governs the preparation of our consolidated financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply new or revised guidance retroactively. See, “– If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings could decrease.”

 

Future legislative or regulatory actions responding to perceived financial and market problems could impair our rights against borrowers.

 

There have been proposals made by members of Congress and others that would reduce the amount distressed borrowers are otherwise contractually obligated to pay under their mortgage loans and limit an institution’s ability to foreclose on mortgage collateral. If proposals such as these, or other proposals limiting our rights as a creditor, are implemented, we could experience increased credit losses or increased expense in pursuing our remedies as a creditor.

 

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Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions.

 

The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions, including restrictions on pursuing acquisitions or establishing new branches. The policies and procedures we have adopted that are designed to assist in compliance with these laws and regulations may not be effective in preventing violations of these laws and regulations.

 

The Federal Reserve Board may require us to commit capital resources to support Eureka Homestead, and we may not have sufficient access to such capital resources.

 

Federal law requires that a holding company act as a source of financial and managerial strength to its subsidiary bank and to commit resources to support such subsidiary bank. Under the “source of strength” doctrine, the Federal Reserve Board may require a holding company to make capital injections into a troubled subsidiary bank and may charge the holding company with engaging in unsafe and unsound practices for failure to commit resources to a subsidiary bank. A capital injection may be required at times when the holding company may not have the resources to provide it and therefore may be required to attempt to borrow the funds or raise capital. Any loans by a holding company to its subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the institution’s general unsecured creditors, including the holders of its note obligations. Thus, any borrowing that must be done by the Eureka Homestead Bancorp to make a required capital injection becomes more difficult and expensive and could have an adverse effect on our business, financial condition and results of operations. Moreover, it is possible that we will be unable to borrow funds when we need to do so.

 

Risks Related to the Offering

 

The future price of our common stock may be less than the purchase price in the stock offering.

 

If you purchase shares of common stock in the stock offering, you may not be able to sell them at or above the purchase price in the stock offering. The purchase price in the offering is based upon an independent third-party appraisal of the pro forma market value of Eureka Homestead, pursuant to federal banking regulations and subject to review and approval by the OCC. The appraisal is not intended, and should not be construed, as a recommendation of any kind as to the advisability of purchasing shares of our common stock. Our aggregate pro forma market value as reflected in the final independent appraisal may exceed the market price of our shares of common stock after the completion of the offering, which may result in our stock trading below the initial offering price of $10.00 per share.

 

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After the shares of our common stock begin trading, the trading price of the common stock will be determined by the marketplace, and will be influenced by many factors outside of our control, including prevailing interest rates, investor perceptions, securities analyst research reports and general industry, geopolitical and economic conditions. Publicly traded stocks, including stocks of financial institutions, often experience substantial market price volatility. These market fluctuations might not be related to the operating performance of particular companies whose shares are traded.

 

There will be a limited trading market in our common stock, which could hinder your ability to sell our common stock and may lower the market price of the stock.

 

We have never issued stock and, therefore, there is no current trading market for the shares of common stock. Moreover, our public “float,” which is the total number of our outstanding shares less the shares held by our employee stock ownership plan and our directors and executive officers and is used as a measurement of shares available for trading, will be limited. The limited trading market could also result in a wider spread between the “bid” and “ask” prices for the stock, which could make it more difficult to sell a large number of shares at one time and could mean a sale of a large number of shares at one time could depress the market price.

 

Upon completion of the conversion, we expect the common stock will also be quoted on the OTC Pink Marketplace (OTCPK). At the time of consummation of the conversion, if we meet the Nasdaq listing requirements, we will use our best efforts to seek approval to list our common stock on the Nasdaq Capital Market, provided however, it is not known whether we will meet all of the Nasdaq listing requirements with respect to public “float” and number of round lot holders.

 

You may not be able to sell your shares of common stock until you have received ownership statements, which may affect your ability to sell your common stock immediately following the offering.

 

Statements of ownership for the shares of common stock purchased in the offering may not be delivered for several days after the completion of the offering and the commencement of trading in the common stock. Your ability to sell the shares of common stock before receiving your ownership statement will depend on arrangements you may make with a brokerage firm, and you may not be able to sell your shares of common stock until you have received these statements.

 

Our stock-based benefit plans will increase our costs, which will reduce our income.

 

We anticipate that our employee stock ownership plan will purchase up to 8.0% of the total shares of common stock sold in the stock offering, with funds borrowed from Eureka Homestead Bancorp. The cost of acquiring the shares of common stock for the employee stock ownership plan will be between $1.1 million at the minimum of the offering range and $1.7 million at the adjusted maximum of the offering range. We will record annual employee stock ownership plan expense in an amount equal to the fair value of shares of common stock committed to be released to employees. If shares of common stock appreciate in value over time, compensation expense relating to the employee stock ownership plan will increase.

 

We also intend to adopt a stock-based benefit plan after the stock offering that would award participants (at no cost to them) shares of our common stock and/or options to purchase shares of our common stock. The number of shares reserved for awards of restricted stock or grants of stock options under any initial stock-based benefit plan may not exceed 4% and 10%, respectively, of the total shares sold in the offering, if these plans are adopted within 12 months after the completion of the conversion. We may reserve shares of common stock for stock awards and stock options in excess of these amounts, provided the stock-based benefit plan is adopted more than one year following the stock offering.

 

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Assuming the market price of the common stock is $10.00 per share; the options are granted with an exercise price of $10.00 per share; the dividend yield on the stock is 0%; the expected option life is ten years; the risk free interest rate is 2.31% (based on the ten-year Treasury rate) and the volatility rate on the shares of common stock is 13.73% (based on an index of publicly traded thrift institutions), the estimated grant-date fair value of the options using a Black-Scholes option pricing analysis is $2.78 per option granted. Assuming this value is amortized over a five-year vesting period, the corresponding annual pre-tax expense associated with the stock options in the first year after the offering would be $118,000 at the adjusted maximum of the offering range. In addition, assuming that all shares of restricted stock are awarded at a price of $10.00 per share, and that the awards vest over a five-year period, the corresponding annual pre-tax expense associated with restricted stock awarded under the stock-based benefit plan would be $169,000 at the adjusted maximum of the offering range in the first year after the offering. Moreover, if we grant shares of common stock or options in excess of these amounts, such grants would increase our costs further.

 

The fair value of the shares of restricted stock on the date granted under the stock-based benefit plan will be expensed by us over the vesting period of the shares. If the shares of restricted stock to be granted under the plan are repurchased in the open market (rather than issued directly from authorized but unissued shares by Eureka Homestead Bancorp) and cost the same as the purchase price in the stock offering, the reduction to stockholders’ equity due to the stock-based benefit plan would be between $544,000 at the minimum of the offering range and $846,000 at the adjusted maximum of the offering range. To the extent we repurchase shares of common stock in the open market to fund the grants of shares under the plan, and the price of such shares exceeds the offering price of $10.00 per share, the reduction to stockholders’ equity would exceed the range described above. Conversely, to the extent the price of such shares is below the offering price of $10.00 per share, the reduction to stockholders’ equity would be less than the range described above.

 

The implementation of a stock-based benefit plan will dilute your ownership interest.

 

We intend to adopt a stock-based benefit plan, which will allow participants to be awarded shares of common stock (at no cost to them) and/or options to purchase shares of our common stock, following the stock offering. If this stock-based benefit plan is funded from the issuance of authorized but unissued shares of common stock, stockholders would experience a reduction in ownership interest totaling 12.28%. Although the implementation of the stock-based benefit plan will be subject to stockholder approval, historically, the overwhelming majority of stock-based benefit plans adopted by savings institutions and their holding companies following mutual-to-stock conversions have been approved by stockholders.

 

We have not determined whether we will adopt a stock-based benefit plan more than one year following the stock offering. Stock-based benefit plans adopted more than one year following the stock offering may exceed regulatory restrictions on the size of stock-based benefit plans adopted within one year, which would increase our costs and the dilution to other shareholders.

 

If we adopt a stock-based benefit plan within one year following the completion of the stock offering, then we may grant shares of common stock or stock options under our stock-based benefit plan for up to 4% and 10%, respectively, of our total outstanding shares. The amount of stock awards and stock options available for grant under the stock-based benefit plan may exceed these amounts, provided the stock-based benefit plans are adopted more than one year following the stock offering. Although the implementation of the stock-based benefit plan will be subject to stockholder approval, the determination as to the timing of the implementation of such a plan will be at the discretion of our board of directors. Stock-based benefit plans that provide for awards in excess of these amounts would increase our costs beyond the amounts estimated in “ – Our stock-based benefit plans will increase our costs, which will reduce our income.” Stock-based benefit plans that provide for awards in excess of these amounts could also result in dilution to stockholders in excess of that described in “ – The implementation of stock-based benefit plans will dilute your ownership interest.”

 

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We have entered into employment agreements with our executive officers, which may increase our compensation costs upon the occurrence of certain events or increase the cost of acquiring us.

 

We have entered into employment agreements with our Chief Executive Officer and our President and Chief Financial Officer. In the event of termination of employment other than for cause, or in the event of certain types of termination following a change in control, as set forth in the employment agreements, assuming each of the agreements has three years remaining, the agreements will provide for cash severance benefits that would cost us up to $1.05 million based on the executives’ current total compensation. The cost of these severance payments, as well as potential expense associated with our other compensation arrangements, would increase the cost of acquiring us. For additional information see “Management – Executive Compensation.”

 

We have broad discretion in using the proceeds of the stock offering. Our failure to effectively deploy the net proceeds of the offering may have an adverse effect on our financial performance and the value of our common stock.

 

We intend to invest between $6.2 million and $8.6 million of the net proceeds of the offering (or $9.9 million at the adjusted maximum of the offering range) in Eureka Homestead. We also expect to use a portion of the net proceeds we retain to fund a loan for the purchase of shares of common stock in the offering by the employee stock ownership plan. We may use the remaining net proceeds to invest in short-term and other investments, repurchase shares of common stock, pay dividends, or for other general corporate purposes. Eureka Homestead may use the remaining net proceeds it receives to fund new loans, enhance existing products and services, invest in securities, expand its banking franchise by establishing or acquiring a new branch or acquiring another financial institution as opportunities arise, or for other general corporate purposes. However, with the exception of the loan to the employee stock ownership plan, we have not allocated specific amounts of the net proceeds for any of these purposes, and we will have significant flexibility in determining the amount of the net proceeds we apply to different uses and the timing of such applications. Also, certain of these uses, such as opening new branches or acquiring other financial institutions, paying dividends and repurchasing common stock, may require the approval of the OCC or the Federal Reserve Board. We have not established a timetable for investing the net proceeds, and, accordingly, we may not invest the net proceeds at the time that is most beneficial to Eureka Homestead Bancorp, Eureka Homestead or the shareholders. For additional information see “How We Intend To Use The Proceeds From The Offering.”

 

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Certain provisions of our articles of incorporation and bylaws, and state and federal law could prevent or impede the ability of stockholders to obtain representation on our board of directors, and may discourage hostile acquisitions of control of Eureka Homestead Bancorp, which could negatively affect our stock value.

 

Certain provisions in our articles of incorporation and bylaws may discourage attempts to acquire Eureka Homestead Bancorp, pursue a proxy contest for control of Eureka Homestead Bancorp, assume control of Eureka Homestead Bancorp by a holder of a large block of common stock, and remove Eureka Homestead Bancorp’s management, all of which shareholders might think are in their best interests. These provisions include:

 

·restrictive requirements regarding eligibility for service on the board of directors, including a requirement that non-employee directors, other than our initial directors, maintain their primary residence for a period of at least one year immediately before his or her nomination or appointment to the Board of Directors within ten (10) miles of the main office of Eureka Homestead Bancorp or Eureka Homestead, a prohibition on service by persons who are or have been the subject of certain legal or regulatory proceedings, a prohibition on service by persons who are party to agreements that may affect their voting discretion, a prohibition on service by persons who have lost more than one campaign for election, and a prohibition on service by nominees or representatives (as defined in applicable Federal Reserve Board regulations) of another person who would not be eligible for service or of an entity the partners or controlling persons of which would not be eligible for service;

 

·the election of directors to staggered terms of three years;

 

·provisions requiring advance notice of shareholder proposals and director nominations;

 

·a limitation on the right to vote more than 10% of the outstanding shares of common stock;

 

·a prohibition on cumulative voting;

 

·a requirement that the calling of a special meeting by shareholders requires the request of a majority of all votes entitled to be cast at the special meeting;

 

·a requirement that directors may only be removed for cause and by the affirmative vote of two-thirds of the votes entitled to be cast;

 

·the board of directors’ ability to cause Eureka Homestead Bancorp to issue preferred stock; and

 

·the requirement of the vote of 80% of the votes entitled to be cast in order to amend certain provisions of the articles of incorporation, including those set forth above.

 

For further information, see “Restrictions on Acquisition of Eureka Homestead Bancorp – Eureka Homestead Bancorp’s Articles of Incorporation and Bylaws.”

 

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Federal regulations prohibit, for three years following the completion of a mutual-to-stock conversion, the offer to acquire or the acquisition of more than 10% of any class of equity security of Eureka Homestead or Eureka Homestead Bancorp without the prior approval of the Federal Reserve Board. In addition, the business corporation law of Maryland, the State where Eureka Homestead Bancorp is incorporated, provides for certain restrictions on acquisition of Eureka Homestead Bancorp. See “Restrictions on Acquisitions of Eureka Homestead Bancorp – Maryland Corporate Law;” “ – Eureka Homestead Charter” and “ – Change in Control Regulations.”

 

Our stock value may be negatively affected by federal regulations that restrict takeovers.

 

For three years following the stock offering, OCC regulations prohibit any person from acquiring or offering to acquire more than 10% of our common stock without the prior written approval of the OCC, or successor regulator. See “Restrictions on Acquisition of Eureka Homestead Bancorp” for a discussion of applicable OCC regulations regarding acquisitions. Certain prospective investors may choose to purchase shares of a company if they believe that the company will be acquired, thereby potentially increasing its stock value. Because federal regulations will restrict any such acquisition of us or Eureka Homestead for at least three years after the completion of the conversion, these regulations may negatively affect our stock value.

 

We are an emerging growth company within the meaning of the Securities Act, and if we decide to take advantage of certain exemptions from various reporting requirements applicable to emerging growth companies, our common stock could be less attractive to investors.

 

We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933 (the “Securities Act”), as modified by the Jumpstart Our Business Startups Act of 2012 ( the “JOBS Act”). We are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, reduced disclosure about our executive compensation and omission of compensation discussion and analysis, and an exemption from the requirement of holding a non-binding advisory vote on executive compensation. In addition, we will not be subject to certain requirements of Section 404 of the Sarbanes-Oxley Act of 2002, including the additional level of review of our internal control over financial reporting as may occur when outside auditors attest as to our internal control over financial reporting. As a result, our stockholders may not have access to certain information they may deem important. Taking advantage of any of these exemptions may adversely affect the value and trading price of our common stock.

 

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We could remain an “emerging growth company” for up to five years, or until the earliest of (a) the last day of the first fiscal year in which our annual gross revenues exceed $1.07 billion, (b) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (c) the date on which we have issued more than $1.0 billion in non-convertible debt during the preceding three-year period.

 

We have elected to delay the adoption of new and revised accounting pronouncements, which means that our financial statements may not be comparable to those of other public companies.

 

As an “emerging growth company,” we have elected to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards.

 

We may take other actions to meet the minimum required sales of shares if we cannot find enough purchasers in the community.

 

If we are not able to reach the minimum of the offering range, we may do any of the following: increase the maximum purchase limitations and allow all maximum purchase subscribers to increase their orders to the new maximum purchase limitations; terminate the offering and promptly return all funds; set a new offering range and notify all subscribers of the opportunity to confirm, cancel or change their orders; or take such other actions as may be permitted, to the extent such permission is required, by the Federal Reserve Board.

 

Our management team has limited experience managing a public company, and regulatory compliance may divert its attention from the day-to-day management of our business.

 

Our management team has limited experience managing a publicly traded company or complying with the increasingly complex laws pertaining to public companies. Our management team may not successfully or efficiently manage our transition to a public company, which will be subject to significant regulatory oversight and reporting obligations under the federal securities laws. In particular, these new obligations will require substantial attention from our management team and may divert their attention away from the day-to-day management of our business, which could materially and adversely impact our business operations.

 

You may not receive dividends on our common stock.

 

Holders of our common stock are only entitled to receive such dividends as our board of directors may declare out of funds legally available for such payments. The declaration and payment of future cash dividends will be subject to, among other things, regulatory restrictions, our then current and projected consolidated operating results, financial condition, tax considerations, future growth plans, general economic conditions, and other factors our board of directors deems relevant. See “Our Policy Regarding Dividends,” “Regulation and Supervision − Federal Banking Regulation − Capital Requirements,” “Regulation and Supervision − Federal Banking Regulation − Capital Distributions” and “Regulation and Supervision − Holding Company Regulation.”

 

Eureka Homestead Bancorp will depend primarily upon the proceeds it retains from the offering as well as earnings of Eureka Homestead to provide funds to pay dividends on our common stock. The payment of dividends by Eureka Homestead also is subject to certain regulatory restrictions. Federal law generally prohibits a depository institution from making any capital distributions (including payment of a dividend) to its parent holding company if the depository institution would thereafter be or continue to be undercapitalized, and dividends by a depository institution are subject to additional limitations.

 

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As a result, any payment of dividends in the future by Eureka Homestead Bancorp will depend, in large part, on Eureka Homestead’s ability to satisfy these regulatory restrictions and its earnings, capital requirements, financial condition and other factors.

 

The distribution of subscription rights could have adverse income tax consequences and the cost basis of the stock to purchasers with subscription rights could be less than the purchase price.

 

If the subscription rights granted to certain current or former depositors of Eureka Homestead are deemed to have an ascertainable value, receipt of such rights may be taxable in an amount equal to such value. Whether subscription rights are considered to have ascertainable value is an inherently factual determination. Additionally, if the subscription rights were deemed to have an ascertainable value, it is possible that the cost basis of the stock to any purchaser who used subscription rights could be reduced by an amount equal to the value ascribed to the subscription rights. We have received an opinion of counsel, Luse Gorman, PC, that it is more likely than not that such rights have no value and that it is more likely than not that the basis of the common stock to its stockholders will be the purchase price thereof; however, such opinion is not binding on the Internal Revenue Service.

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SELECTED FINANCIAL AND OTHER DATA
OF EUREKA HOMESTEAD

 

The following tables set forth selected historical financial and other data of Eureka Homestead for the periods and at the dates indicated. The information at and for the years ended December 31, 2018 and 2017 is derived in part from, and should be read together with, the audited financial statements and notes thereto of Eureka Homestead beginning at page F-1 of this prospectus. The following information is only a summary, and should be read in conjunction with our financial statements and notes beginning on page F-1 of this prospectus.

 

   At December 31, 
   2018   2017 
   (In thousands) 
Selected Financial Condition Data:          
           
Total assets  $98,070   $94,636 
Cash and cash equivalents   3,090    713 
Interest-earning deposits   750    947 
Securities available for sale   5,781    6,146 
Loans, net   81,072    79,328 
FHLB stock   1,376    1,341 
Premises and equipment, net   767    773 
Cash surrender value of life insurance   3,950    3,856 
Deposits   56,183    53,091 
FHLB advances   26,030    26,017 
Accrued expenses and other liabilities   2,171    2,282 
Total equity   12,239    11,937 

 

   For the Years Ended
December 31,
 
   2018   2017 
   (In thousands) 
Selected Operations Data:          
           
Interest income  $3,743   $3,295 
Interest expense   1,654    1,290 
Net interest income   2,089    2,005 
Provision for loan losses   (11)   20 
Net interest income after provision for loan losses   2,100    1,985 
Noninterest income   505    515 
Noninterest expense   2,256    2,261 
Income before income tax expense   349    239 
Income tax expense   54    264 
Net income (loss)  $295   $(25)

  

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At or For the Years Ended

December 31,

 
   2018   2017 
         
Selected Financial Ratios and Other Data:          
           
Performance Ratios:          
Return (loss) on average assets   0.30%   (0.03)%
Return (loss) on average equity   2.42%   (0.20)%
Interest rate spread (1)   2.12%   2.24%
Net interest margin (2)   2.30%   2.40%
Efficiency ratio (3)   86.96%   89.71%
Non-interest expense to average total assets   2.30%   2.48%
Average interest-earning assets to average
interest-bearing liabilities
   109.92%   110.43%
Average equity to average total assets   12.39%   13.37%
           
Asset Quality Ratios:          
Non-performing assets to total assets   ―%    0.31%
Non-performing loans to total loans (4)   ―%    0.29%
Allowance for loan losses to non-performing loans (4)   ―%    366.68%
Allowance for loan losses to total loans   1.05%   1.08%
           
Capital Ratios:          
Total capital to risk-weighted assets (bank only)   25.98%   25.64%
Common equity Tier 1 capital to risk-weighted assets (bank only)   24.72%   24.38%
Tier 1 capital to risk-weighted assets (bank only)   24.72%   24.38%
Tier 1 capital to adjusted total assets (bank only)   12.23%   12.80%
           
Other Data:          
Number of full-service offices (5)   1    1 
Full-time equivalent employees   15    15 

 

 

(1)Represents the difference between the weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities for the year.
(2)The net interest margin represents net interest income as a percent of average interest-earning assets for the year.
(3)The efficiency ratio represents non-interest expense divided by the sum of net interest income and non-interest income.
(4)There were no non-performing loans at December 31, 2018.
(5)In addition to its main office, the Bank also has a loan production office in New Orleans, Louisiana.

 

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FORWARD-LOOKING STATEMENTS

 

This prospectus 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 our current beliefs and expectations 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 prospectus.

 

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);

 

·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;

 

·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, require us to increase our allowance for loan losses, write down assets, 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 described elsewhere in this prospectus.

 

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. Please see “Risk Factors” beginning on page 15.

 

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HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING

 

Although we cannot determine what the actual net proceeds from the sale of the shares of common stock in the offering will be until the offering is completed, we anticipate that the net proceeds will be between $12.3 million and $17.1 million, or $19.9 million if the offering range is increased by 15%.

 

We intend to distribute the net proceeds as follows:

   Based Upon the Sale at $10.00 Per Share of 
   1,360,000 shares   1,600,000 shares   1,840,000 shares   2,116,000 shares (1) 
   Amount   Percent
of Net
Proceeds
   Amount   Percent
of Net
Proceeds
   Amount   Percent
of Net
Proceeds
   Amount   Percent
of Net
Proceeds
 
   (Dollars in thousands) 
                                 
Offering proceeds  $13,600        $16,000        $18,400        $21,160      
Less offering expenses   (1,270)        (1,270)        (1,270)        (1,270)     
Net offering proceeds (2)  $12,330    100.0%  $14,730    100.0%  $17,130    100.0%  $19,890    100.0%
                                         
Distribution of net proceeds:                                        
To Eureka Homestead  $6,165    50.0%  $7,365    50.0%  $8,565    50.0%  $9,945    50.0%
To fund loan to employee stock ownership plan  $1,088    8.8%  $1,280    8.7%  $1,472    8.6%  $1,693    8.5%
Retained by Eureka Homestead Bancorp  $5,077    41.2%  $6,085    41.3%  $7,093    41.4%  $8,252    41.5%

 

 

(1)As adjusted to give effect to an increase in the number of shares, which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.
(2)Assumes that all shares of common stock are sold in the subscription and community offerings.

 

Payments for shares of common stock made through withdrawals from existing deposit accounts will not result in the receipt of new funds for investment but will result in a reduction of Eureka Homestead’s deposits. The net proceeds may vary because total expenses relating to the offering may be more or less than our estimates. For example, our expenses would increase if a syndicated community offering were used to sell shares of common stock not purchased in the subscription and community offerings.

 

Eureka Homestead Bancorp intends to fund a loan to the employee stock ownership plan to purchase shares of common stock in the stock offering. Eureka Homestead Bancorp may also use the proceeds it retains from the offering:

 

·to invest in short-term and other securities consistent with our investment policy;

 

·to pay cash dividends to our stockholders;

 

·to repurchase shares of our common stock subject to compliance with applicable regulatory requirements; and

 

·for other general corporate purposes.

 

With the exception of the funding of the loan to the employee stock ownership plan, Eureka Homestead Bancorp has not quantified its plans for use of the offering proceeds for each of the foregoing purposes. Initially, we intend to invest a substantial portion of the net proceeds in investment grade securities, including securities issued by U.S. Government agencies and mortgage-backed securities issued by U.S. Government agencies and U.S. Government-sponsored enterprises.

 

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See “Our Dividend Policy” for a discussion of our expected dividend policy following the completion of the conversion. Under applicable federal regulations, we may not repurchase shares of our common stock during the first year following the completion of the conversion, except when extraordinary circumstances exist and with prior regulatory approval, or except to fund management recognition plans (which would require notification to the Federal Reserve Board) or tax-qualified employee stock benefit plans.

 

Eureka Homestead will receive a capital contribution equal to at least 50% of the net proceeds of the offering. Based on this formula, we anticipate that Eureka Homestead Bancorp will invest $6.2 million, $7.4 million, $8.6 million and $9.9 million, respectively, of the net proceeds at the minimum, midpoint, maximum and adjusted maximum of the offering in Eureka Homestead.

 

Eureka Homestead may use the net proceeds it receives from the stock offering:

 

·to fund new loans, including one- to four-family residential real estate loans, including non-owner-occupied loans, construction loans and home equity loans;

 

·to enhance existing products and services and to support the development of new products and services;

 

·to invest in securities issued by U.S. Government agencies and mortgage-backed securities issued by U.S. Government agencies and U.S. Government-sponsored enterprises, municipal securities and other securities in accordance with our investment policy;

 

·replace certain non-core funding sources as they mature; and

 

·for other general corporate purposes.

 

Eureka Homestead has not quantified its plans for use of the offering proceeds for each of the foregoing purposes. Initially, a substantial portion of the net proceeds will be invested in securities issued by U.S. Government agencies and mortgage-backed securities issued by U.S. Government agencies and U.S. Government-sponsored enterprises. The use of the proceeds outlined above may change based on many factors, including, but not limited to, changes in interest rates, equity markets, laws and regulations affecting the financial services industry, our relative position in the financial services industry, the attractiveness of opportunities to expand our operations through establishing or acquiring new branches, our ability to receive regulatory approval for any such expansion activities, and overall market conditions.

 

We expect our return on equity to decrease, until we are able to reinvest effectively the additional capital raised in the stock offering. See “Risk Factors – Risks Related to the Offering – We have broad discretion in using the proceeds of the stock offering. Our failure to effectively deploy the net proceeds of the offering may have an adverse effect on our financial performance and the value of our common stock.”

 

OUR DIVIDEND POLICY

 

Following completion of the stock offering, our board of directors will have the authority to declare dividends on our shares of common stock, subject to statutory and regulatory requirements. However, no decision has been made with respect to the payment of dividends. In determining whether to pay a cash dividend and the amount of such cash dividend, the board of directors is expected to take into account a number of factors, including capital requirements, our financial condition and results of operations, other uses of funds for the long-term value of stockholders, tax considerations, statutory and regulatory limitations and general economic conditions. No assurances can be given that any dividends will be paid or that, if paid, will not be reduced or eliminated in the future. Special cash dividends, stock dividends or returns of capital, to the extent permitted by regulations and policies of the Federal Reserve Board and the Office of the Comptroller of the Currency, may be paid in addition to, or in lieu of, regular cash dividends.

 

 36 

 

 

We expect to file a consolidated federal tax return with Eureka Homestead. Accordingly, it is anticipated that any cash distributions that we make to our stockholders would be treated as cash dividends and not as a non-taxable return of capital for federal and state tax purposes. Additionally, pursuant to regulations of the Federal Reserve Board, during the three-year period following the stock offering, we will not take any action to declare an extraordinary dividend to stockholders that would be treated by recipients as a tax-free return of capital for federal income tax purposes.

 

Pursuant to our articles of incorporation, we are authorized to issue preferred stock. If we issue preferred stock, the holders thereof may have a priority over the holders of our shares of common stock with respect to the payment of dividends. For a further discussion concerning the payment of dividends on our shares of common stock, see “Description of Capital Stock of Eureka Homestead Bancorp – Common Stock.” Dividends we can declare and pay will depend, in part, upon receipt of dividends from Eureka Homestead, because initially we will have no source of income other than dividends from Eureka Homestead and earnings from the investment of the net proceeds from the sale of shares of common stock retained by Eureka Homestead Bancorp and interest payments received in connection with the loan to the employee stock ownership plan. Regulations of the OCC impose limitations on “capital distributions” by savings institutions. See “Regulation and Supervision – Federal Banking Regulation – Capital Distributions.”

 

Any payment of dividends by Eureka Homestead to us that would be deemed to be drawn out of Eureka Homestead’s bad debt reserves, if any, would require a payment of taxes at the then-current tax rate by Eureka Homestead on the amount of earnings deemed to be removed from the reserves for such distribution. Eureka Homestead does not intend to make any distribution to us that would create such a federal tax liability. See “Taxation.”

 

MARKET FOR THE COMMON STOCK

 

Eureka Homestead Bancorp is a newly formed company and has never issued capital stock. Eureka Homestead, as a mutual institution, has never issued capital stock. Eureka Homestead Bancorp expects that that its common stock will be quoted on the OTC Pink Marketplace (OTCPK) operated by OTC Markets Group. At the time of consummation of the conversion, if we meet the Nasdaq listing requirements, we will use our best efforts to seek approval to list our common stock on the Nasdaq Capital Market, provided however, it is not known whether we will meet all of the Nasdaq listing requirements with respect to public “float” and number of round lot holders. FIG Partners, LLC has advised us that it intends to make a market in our common stock following the conversion and stock offering, but it is under no obligation to do so.

 

The development of an active trading market depends on the existence of willing buyers and sellers, the presence of which is not within our control, or that of any market maker. The number of active buyers and sellers of the shares of common stock at any particular time may be limited. Furthermore, we cannot assure you that, if you purchase shares of common stock, you will be able to sell them at or above $10.00 per share. Purchasers of common stock in this stock offering should have long-term investment intent and should recognize that there will be a limited trading market in the common stock. This may make it difficult to sell the common stock after the stock offering and may have an adverse impact on the price at which the common stock can be sold.

 

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HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE

 

At December 31, 2018, Eureka Homestead exceeded all of the applicable regulatory capital requirements and was considered “well capitalized.” The table below sets forth the historical equity capital and regulatory capital of Eureka Homestead at December 31, 2018 and the pro forma equity capital and regulatory capital of Eureka Homestead after giving effect to the sale of shares of common stock at $10.00 per share. The table assumes the receipt by Eureka Homestead of $6.2 million, $7.4 million, $8.6 million and $9.9 million, respectively, at the minimum, midpoint, maximum and adjusted maximum of the offering range. See “How We Intend to Use the Proceeds from the Offering.”

 

       Pro Forma at December 31, 2018 Based Upon the Sale in the Offering of (1) 
   Eureka Homestead
Historical at
December 31, 2018
   1,360,000 shares   1,600,000 shares   1,840,000 shares   2,116,000 shares (2) 
   Amount   Percent of
Assets (3)
   Amount   Percent of
Assets (3)
   Amount   Percent of
Assets (3)
   Amount   Percent of
Assets (3)
   Amount   Percent of
Assets (3)
 
   (Dollars in thousands) 
                                         
Equity  $12,239    12.5%  $16,772    16.1%  $17,684    16.8%  $18,596    17.4%  $19,645    18.2%
                                                   
Tier 1 leverage capital  $12,335    12.2%  $16,868    15.8%  $17,780    16.4%  $18,692    17.1%  $19,741    17.8%
Tier 1 leverage capital requirement   5,044    5.0    5,353    5.0    5,413    5.0    5,473    5.0    5,542    5.0 
Excess  $7,291    7.2%  $11,516    10.8%  $12,368    11.4%  $13,220    12.1%  $14,199    12.8%
                                                   
Tier 1 risk-based  capital (4)  $12,335    24.7%  $16,868    33.0%  $17,780    34.6%  $18,692    36.2%  $19,741    38.0%
Risk-based requirement   3,992    8.0    4,090    8.0    4,110    8.0    4,129    8.0    4,151    8.0 
Excess  $8,343    16.7%  $12,778    25.0%  $13,670    26.6%  $14,563    28.2%  $15,590    30.0%
                                                   
Total risk-based  capital (4)  $12,961    26.0%  $17,494    34.2%  $18,406    35.8%  $19,318    37.4%  $20,367    39.3%
Risk-based requirement   4,990    10.0    5,113    10.0    5,137    10.0    5,161    10.0    5,189    10.0 
Excess  $7,971    16.0%  $12,381    24.2%  $13,269    25.8%  $14,157    27.4%  $15,178    29.3%
                                                   
Common equity Tier 1 risk-based capital (4)  $12,335    24.7%  $16,868    33.0%  $17,780    34.6%  $18,692    36.2%  $19,741    38.0%
Risk-based requirement   3,243    6.5    3,323    6.5    3,339    6.5    3,355    6.5    3,373    6.5 
Excess  $9,092    18.2%  $13,545    26.5%  $14,441    28.1%  $15,337    29.7%  $16,368    31.5%
Reconciliation of capital infused into Eureka Homestead:                                                  
Proceeds to Eureka Homestead            $6,165        $7,365        $8,565        $9,945      
Less:  Common stock acquired by employee stock ownership plan             (1,088)        (1,280)        (1,472)        (1,693)     
Less:  Common stock acquired by stock-based incentive plan             (544)        (640)        (736)        (846)     
Pro forma increase            $4,533        $5,445        $6,357        $7,406    

 

 

 

 

 

(1)Pro forma capital levels assume that the employee stock ownership plan purchases 8% of the shares of common stock sold in the stock offering with funds we lend and that our stock-based equity plan purchases 4% of the shares sold in the offering for restricted stock awards. Pro forma capital calculated under generally accepted accounting principles (“GAAP”) and regulatory capital have been reduced by the amount required to fund these plans. See “Management” for a discussion of the employee stock ownership plan.
(2)As adjusted to give effect to an increase in the number of shares which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.
(3)Tier 1 leverage capital levels are shown as a percentage of total adjusted assets. Risk-based capital levels are shown as a percentage of risk-weighted assets.
(4)Pro forma amounts and percentages assume net proceeds are invested in assets that carry a 20% risk weighting.

 

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CAPITALIZATION

 

The following table presents the historical consolidated capitalization of Eureka Homestead at December 31, 2018 and the pro forma consolidated capitalization of Eureka Homestead Bancorp after giving effect to the conversion and offering, based upon the assumptions set forth in the “Pro Forma Data” section.

 

       Pro Forma at December 31, 2018
Based upon the Sale in the Offering at $10.00 per Share of
 
   Eureka
Homestead at
December 31,
2018
   1,360,000
Shares
   1,600,000
Shares
   1,840,000
Shares
   2,116,000
Shares (1)
 
   (Dollars in thousands, except per share amounts) 
                     
Deposits (2)  $56,183   $56,183   $56,183   $56,183   $56,183 
Borrowings   26,030    26,030    26,030    26,030    26,030 
Total deposits and borrowings  $82,213   $82,213   $82,213   $82,213   $82,213 
                          
Stockholders’ equity:                         
Preferred stock, $0.01 par value, 1,000,000 shares authorized (post-conversion)  $   $   $   $   $ 
Common stock, $0.01 par value, 9,000,000 shares authorized (post-conversion); shares to be issued as reflected (3)       14    16    18    21 
Additional paid-in capital (4)       12,316    14,714    17,112    19,869 
Retained earnings (5)   12,335    12,335    12,335    12,335    12,335 
Accumulated other comprehensive loss   (96)   (96)   (96)   (96)   (96)
                          
Less:                         
Common stock held by employee stock ownership plan (6)       (1,088)   (1,280)   (1,472)   (1,693)
Common stock to be acquired by stock-based benefit plan (7)       (544)   (640)   (736)   (846)
Total stockholders’ equity  $12,239   $22,937   $25,049   $27,161   $29,590 
                          
Pro forma shares outstanding        1,360,000    1,600,000    1,840,000    2,116,000 
                          
Total stockholders’ equity as a percentage of total assets (2)   12.48%   21.09%   22.59%   24.04%   25.64%
Tangible equity as a percentage of tangible assets (2)   12.48%   21.09%   22.59%   24.04%   25.64%
 
 
(1)As adjusted to give effect to an increase in the number of shares of common stock that could occur due to a 15% increase in the offering range to reflect demand for shares or changes in market conditions following the commencement of the subscription and community offerings.
(2)Does not reflect withdrawals from deposit accounts for the purchase of shares of common stock in the conversion and offering. These withdrawals would reduce pro forma deposits and assets by the amount of the withdrawals.
(3)No effect has been given to the issuance of additional shares of Eureka Homestead Bancorp common stock pursuant to the exercise of options under a stock-based benefit plan. If the plan is implemented within the first year after the closing of the offering, an amount up to 10% of the shares of Eureka Homestead Bancorp common stock sold in the offering will be reserved for issuance upon the exercise of options under the plan.
(4)On a pro forma basis, common stock and additional paid-in capital have been revised to reflect the number of shares of Eureka Homestead Bancorp common stock to be outstanding.
(5)The retained earnings of Eureka Homestead will be substantially restricted after the conversion. See “The Conversion and Offering – Liquidation Rights” and “Regulation and Supervision.”
(6)Assumes that 8% of the shares sold in the offering will be acquired by the employee stock ownership plan financed by a loan from Eureka Homestead Bancorp. The loan will be repaid principally from Eureka Homestead’s contributions to the employee stock ownership plan. Since Eureka Homestead Bancorp will finance the employee stock ownership plan debt, this debt will be eliminated through consolidation and no liability will be reflected on Eureka Homestead Bancorp’s consolidated financial statements. Accordingly, the amount of shares of common stock acquired by the employee stock ownership plan is shown in this table as a reduction of total stockholders’ equity.
(7)Assumes a number of shares of common stock equal to 4% of the shares of common stock to be sold in the offering will be purchased for grant by a stock-based benefit plan in open market purchases by Eureka Homestead Bancorp. The dollar amount of common stock to be purchased is based on the $10.00 per share subscription price in the offering and represents unearned compensation. This amount does not reflect possible increases or decreases in the value of common stock relative to the subscription price in the offering. As Eureka Homestead Bancorp accrues compensation expense to reflect the vesting of shares pursuant to the stock-based benefit plan, the credit to equity will be offset by a charge to noninterest expense. Implementation of the stock-based benefit plans will require stockholder approval.

 

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PRO FORMA DATA

 

The following tables summarize historical data of Eureka Homestead and pro forma data of Eureka Homestead Bancorp at and for the year ended December 31, 2018. This information is based on assumptions set forth below and in the table, and should not be used as a basis for projections of market value of the shares of common stock following the conversion and offering.

 

The net proceeds in the tables are based upon the following assumptions:

 

·all shares of common stock will be sold in the subscription offering;

 

·our employee stock ownership plan will purchase 8% of the shares of common stock sold in the stock offering with a loan from Eureka Homestead Bancorp. The loan will be repaid in substantially equal payments of principal and interest (at the prime interest rate, adjusted annually) over a period of 25 years; and

 

·expenses of the stock offering, including fees and expenses to be paid to FIG Partners, LLC, will be $1.27 million.

 

Pro forma earnings on net proceeds have been calculated assuming the stock has been sold at the beginning of the period and the net proceeds have been invested at a yield of 2.43% for the year ended December 31, 2018. This represents the five-year U.S. Treasury Note rate as of December 31, 2018, which, in light of current market interest rates, we consider to more accurately reflect the pro forma reinvestment rate than the arithmetic average of the weighted average yield earned on our interest-earning assets and the weighted average rate paid on our deposits, which is the reinvestment rate generally required by regulations of the OCC. The pro forma after-tax yield on the net proceeds from the offering is assumed to be 1.92% for the year ended December 31, 2018, based on an effective tax rate of 21%.

 

We calculated historical and pro forma per share amounts by dividing historical and pro forma amounts of consolidated net income and stockholders’ equity by the indicated number of shares of common stock. We adjusted the earnings figures to give effect to the shares of common stock purchased by the employee stock ownership plan. We computed per share amounts for each period as if the shares of common stock were outstanding at the beginning of each period, but we did not adjust per share historical or pro forma stockholders’ equity to reflect the earnings on the estimated net proceeds.

 

The pro forma tables give effect to the implementation of a stock-based benefit plan. Subject to the receipt of stockholder approval, we have assumed that the stock-based benefit plan will acquire for restricted stock awards a number of shares of common stock equal to 4% of our outstanding shares of common stock at the same price for which they were sold in the stock offering. We assume that shares of common stock are granted under the plan in awards that vest over a five-year period.

 

We have also assumed that the stock-based benefit plan will grant options to acquire shares of common stock equal to 10% of our outstanding shares of common stock. In preparing the tables below, we assumed that stockholder approval was obtained, that the exercise price of the stock options and the market price of the stock at the date of grant were $10.00 per share and that the stock options had a term of ten years and vested over five years. We applied the Black-Scholes option pricing model to estimate a grant-date fair value of $2.78 for each option. In addition to the terms of the options described above, the Black-Scholes option pricing model assumed an estimated volatility rate of 13.73% for the shares of common stock, a dividend yield of 0%, an expected option life of 10 years and a risk-free interest rate of 2.31%. Finally, we assumed that 25% of the stock options were non-qualified options granted to directors, resulting in a tax benefit (at an assumed tax rate of 21%) for a deduction equal to the grant date fair value of the options.

 

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We may reserve shares for the exercise of stock options and the grant of stock awards under a stock-based benefit plan in excess of 10% and 4%, respectively, of our total outstanding shares if the stock-based benefit plan is adopted more than one year following the stock offering. In addition, we may grant options and award shares that vest more rapidly than over a five-year period if the stock-based benefit plan is adopted more than one year following the stock offering.

 

As discussed under “How We Intend to Use the Proceeds from the Offering,” we intend to contribute at the minimum, midpoint, maximum and adjusted maximum of the offering range approximately $6.2 million, $7.4 million, $8.6 million and $9.9 million, respectively, of the net proceeds from the stock offering to Eureka Homestead, and we will retain the remainder of the net proceeds from the stock offering. We will use portions of the proceeds we retain for the purpose of making a loan to the employee stock ownership plan and retain the rest of the proceeds for future use.

 

The pro forma table does not give effect to: (i) withdrawals from deposit accounts for the purpose of purchasing shares of common stock in the stock offering; (ii) our results of operations after the stock offering; or (iii) changes in the market price of the shares of common stock after the stock offering.

 

The following pro forma information may not represent the financial effects of the stock offering at the date on which the stock offering actually occurs and you should not use the table to indicate future results of operations. Pro forma stockholders’ equity represents the difference between the stated amount of our assets and liabilities, computed in accordance with GAAP. We did not increase or decrease stockholders’ equity to reflect the difference between the carrying value of loans and other assets and their market value. Pro forma stockholders’ equity is not intended to represent the fair market value of the shares of common stock and may be different than the amounts that would be available for distribution to stockholders if we liquidated. Pro forma stockholders’ equity does not give effect to the impact of intangible assets, bad debt reserve or the liquidation account we will establish in the conversion in the unlikely event we are liquidated.

 

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At or for the year ended December 31, 2018

Based upon the Sale at $10.00 Per Share of

 
  

1,360,000

Shares

  

1,600,000

Shares

  

1,840,000

Shares

  

2,116,000

Shares (1)

 
   (Dollars in thousands, except per share amounts) 
                 
Gross proceeds of offering  $13,600   $16,000   $18,400   $21,160 
Less: Expenses   (1,270)   (1,270)   (1,270)   (1,270)
Estimated net proceeds   12,330    14,730    17,130    19,890 
Less: Common stock acquired by ESOP (2)   (1,088)   (1,280)   (1,472)   (1,693)
Less: Common stock acquired by stock-based benefit plans (3)(4)   (544)   (640)   (736)   (846)
Estimated net proceeds  $10,698   $12,810   $14,922   $17,351 
                     
For the year ended December 31, 2018                    
Consolidated net income:                    
Historical  $295   $295   $295   $295 
Pro forma adjustments:                    
Income on adjusted net proceeds   205    246    287    333 
Employee stock ownership plan (2)   (34)   (40)   (47)   (53)
Stock awards (3)   (86)   (101)   (116)   (134)
Stock options (4)   (72)   (84)   (97)   (111)
Pro forma net income (loss)  $308   $316   $322   $330 
                     
Income per share:                    
Historical  $0.23   $0.20   $0.17   $0.15 
Pro forma adjustments:                    
Income on adjusted net proceeds   0.16    0.17    0.17    0.17 
Employee stock ownership plan (2)   (0.03)   (0.03)   (0.03)   (0.03)
Stock awards (3)   (0.07)   (0.07)   (0.07)   (0.07)
Stock options (4)   (0.06)   (0.06)   (0.06)   (0.06)
Pro forma earnings (loss) per share  $0.23   $0.21   $0.18   $(0.16)
                     
Offering price to pro forma net earnings per share   43.48x   47.62x   55.56x   62.50x
Number of shares used in earnings per share calculations   1,255,552    1,477,120    1,698,688    1,953,491 
                     
At December 31, 2018                    
Stockholders’ equity:                    
Historical  $12,239   $12,239   $12,239   $12,239 
Estimated net proceeds   12,330    14,730    17,130    19,890 
Less: Common stock acquired by ESOP (2)   (1,088)   (1,280)   (1,472)   (1,693)
Less: Common stock acquired by stock-based benefit plans (3)(4)   (544)   (640)   (736)   (846)
Pro forma stockholders’ equity (5)  $22,937   $25,049   $27,161   $29,590 
                     
Stockholders’ equity per share:                    
Historical  $9.00   $7.65   $6.65   $5.78 
Estimated net proceeds   9.07    9.21    9.31    9.40 
Less: Common stock acquired by ESOP (2)   (0.80)   (0.80)   (0.80)   (0.80)
Less: Common stock acquired by stock-based benefit plans (3)(4)   (0.40)   (0.40)   (0.40)   (0.40)
Pro forma stockholders’ equity per share (5)  $16.87   $15.66   $14.76   $13.98 
                     
Pro forma price to book value   59.28%   63.86%   67.75%   71.53%
Number of shares outstanding for pro forma book value per share calculations   1,360,000    1,600,000    1,840,000    2,116,000 

 

 

(Footnotes begin on following page)

 

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(1)As adjusted to give effect to an increase in the number of shares which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.
(2)Assumes that 8% of shares of common stock sold in the offering will be purchased by the employee stock ownership plan (“ESOP”). For purposes of this table, the funds used to acquire these shares are assumed to have been borrowed by the ESOP from Eureka Homestead Bancorp. Eureka Homestead intends to make annual contributions to the ESOP in an amount at least equal to the required principal and interest payments on the debt. Eureka Homestead’s total annual payments on the employee stock ownership plan debt are based upon 25 equal annual installments of principal and interest. Financial Accounting Standards Board Accounting Standards Codification 718-40, “Employers’ Accounting for Employee Stock Ownership Plans” (“ASC 718-40”) requires that an employer record compensation expense in an amount equal to the fair value of the shares committed to be released to employees. The pro forma adjustments assume that the ESOP shares are allocated in equal annual installments based on the number of loan repayment installments assumed to be paid by Eureka Homestead, the fair value of the common stock remains equal to the subscription price and the employee stock ownership plan expense reflects an effective tax rate of 21%. The unallocated ESOP shares are reflected as a reduction of stockholders’ equity. No reinvestment is assumed on proceeds contributed to fund the ESOP. The pro forma net income further assumes that 4,352, 5,120, 5,888 and 6,771 shares were committed to be released during the year ended December 31, 2018, respectively, at the minimum, midpoint, maximum, and adjusted maximum of the offering range, respectively, and in accordance with ASC 718-40, only the ESOP shares committed to be released during the period were considered outstanding for purposes of income per share calculations.
(3)If approved by Eureka Homestead Bancorp’s stockholders, a stock-based benefit plan may purchase an aggregate number of shares of common stock equal to 4% of the shares to be sold in the offering (or possibly a greater number of shares if the plan is implemented more than one year after completion of the conversion or a lesser number if Eureka Homestead has a tier 1 leverage ratio of less than 10.00% within one year of the completion of the conversion). Stockholder approval of the stock-based benefit plan, and purchases by the plan may not occur earlier than six months after the completion of the conversion. The shares may be acquired directly from Eureka Homestead Bancorp or through open market purchases. The funds to be used by the stock-based benefit plans to purchase the shares will be provided by Eureka Homestead Bancorp. The table assumes that (i) the stock-based benefit plan acquires the shares through open market purchases at $10.00 per share, (ii) 20% of the amount contributed to the stock-based benefit plan is amortized as an expense during the year, and (iii) the stock-based benefit plan expense reflects an effective tax rate of 21%. Assuming stockholder approval of the stock-based benefit plan and that shares of common stock equal to 4% of the shares sold in the offering are awarded through the use of authorized but unissued shares of common stock, stockholders would have their ownership and voting interests diluted by approximately 3.85%.
(4)If approved by Eureka Homestead Bancorp’s stockholders, a stock-based benefit plan may grant options to acquire an aggregate number of shares of common stock equal to 10% of the shares to be sold in the offering (or possibly a greater number of shares if the plan is implemented more than one year after completion of the conversion). Stockholder approval of the stock-based benefit plan may not occur earlier than six months after the completion of the conversion. In calculating the pro forma effect of the stock options to be granted under a stock-based benefit plan, it is assumed that the exercise price of the stock options and the trading price of the common stock at the date of grant were $10.00 per share, the estimated grant-date fair value determined using the Black-Scholes option pricing model was $2.78 for each option, and the aggregate grant-date fair value of the stock options was amortized to expense on a straight-line basis over a five-year vesting period of the options. The actual expense of the stock options to be granted under the stock-based benefit plan will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used in the option pricing model ultimately adopted. Under the above assumptions, the adoption of the stock-based benefit plan will result in no additional shares under the treasury stock method for purposes of calculating earnings per share. There can be no assurance that the actual exercise price of the stock options will be equal to the $10.00 price per share. If a portion of the shares to satisfy the exercise of options under the stock-based benefit plans is obtained from the issuance of authorized but unissued shares, our net income per share and stockholders’ equity per share would decrease. Assuming stockholder approval of the stock-based benefit plan and that shares of common stock used to fund stock options (equal to 10% of the shares sold in the offering) are awarded through the use of authorized but unissued shares of common stock, stockholders would have their ownership and voting interests diluted by approximately 9.09%.
(5)The retained earnings of Eureka Homestead will be substantially restricted after the conversion. See “Our Dividend Policy,” “The Conversion and Offering – Liquidation Rights” and “Regulation and Supervision.” The number of shares used to calculate pro forma stockholders’ equity per share is equal to the total number of shares to be outstanding upon completion of the offering.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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 prospectus. You should read the information in this section in conjunction with the business and financial information regarding Eureka Homestead Bancorp provided in this prospectus.

 

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. At December 31, 2018, $75.2 million, or 93.2% of our total loan portfolio, was comprised of one- to four-family residential real estate loans, $11.2 million of which were non-owner-occupied loans, $1.0 million of which of which were construction loans and $1.6 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.

 

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, 2018, we had $26.0 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 ended December 31, 2018 we had net income of $295,000 compared to a net loss of ($25,000) for the year ended December 31, 2017. The increase in net income from resulted primarily from an increase in interest income, decreases in provision for loan losses and income tax expense when comparing 2018 and 2017.

 

Eureka Homestead is subject to comprehensive regulation and examination by its primary federal regulator, the Office of the Comptroller of the Currency (“OCC”).

 

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Our executive and administrative office is located at 1922 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 prospectus and should not be considered part of this prospectus.

 

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 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 December 31, 2018, $75.2 million, or 93.2% of our total loan portfolio, consisted of one- to four-family residential real estate loans, including $11.2 million, or 13.9% of our total loan portfolio, of non-owner-occupied loans. We expect that one- to four-family residential real estate lending will remain our primary lending activity.

 

·Maintaining our strong asset quality through conservative loan underwriting. We intend to maintain strict, quality-oriented loan underwriting and credit monitoring processes. At December 31, 2018, we had no nonperforming assets, down from $298,000, or 0.30% of total assets, at December 31, 2017.

 

·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 New Orleans metropolitan area since 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.

 

These strategies are intended to guide our investment of the net proceeds of the offering. We intend to continue to pursue our business strategy after the conversion and the offering, subject to changes necessitated by future market conditions, regulatory restrictions and other factors.

 

Anticipated Increase in Noninterest Expense

 

Following the completion of the conversion, our noninterest expense is expected to increase because of the increased costs associated with operating as a public company, 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, no earlier than six months after the completion of the conversion. For further information, see “Summary – Benefits to Management and Potential Dilution to Stockholders Resulting from the Conversion;” “Risk Factors – Risks Related to the Offering – Our stock-based benefit plan will increase our costs, which will reduce our income;” and “Management – Benefit Plans and Agreements.”

 

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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 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 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.

 

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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 17 of the Financial Statements “–Fair Values of Financial Investments.”

 

Comparison of Financial Condition at December 31, 2018 and December 31, 2017 

 

Total Assets. Total assets increased $3.4 million, or 3.6%, to $98.1 million at December 31, 2018 from $94.6 million at December 31, 2017. The increase resulted primarily from increases in cash and cash equivalents of $2.4 million and net loans of $1.7 million, offset in part by decreases of $197,000 in interest-earning deposits and a decrease of $365,000 in investment securities available-for-sale. 

 

Cash and Cash Equivalents. Cash and cash equivalents increased $2.4 million, or 333.4%, to $3.1 million at December 31, 2018 from $713,000 at December 31, 2017. The increase was due to a strategy to increase on-hand liquidity pursuant to our asset liability analysis.

 

Net Loans.  Net loans increased $1.7 million, or 2.2%, to $81.1 million at December 31, 2018 from $79.3 million at December 31, 2017. During the year ended December 31, 2018, one- to four-family residential real estate loans increased $1.0 million, or 1.4%, to $75.2 million from $74.2 million at December 31, 2017, multifamily loans increased $1.4 million, or 52.4%, to $4.1 million from $2.7 million at December 31, 2017, commercial real estate loans decreased $491,000, or 29.5%, to $1.2 million from $1.7 million at December 31, 2017 and consumer loans decreased $277,000, or 56.8%, to $211,000 from $488,000 at December 31, 2017. Increases in our loan balances reflect our strategy to grow our portfolio by investing in the communities we serve.

 

Securities available-for-sale.  Investment securities available-for-sale, consisting of government-sponsored mortgage-backed securities and SBA 7a Pools backed by equipment loans, decreased $365,000, or 5.9%, to $5.8 million at December 31, 2018 from $6.1 million at December 31, 2017 as a result of proceeds from sales and principal repayments of $2.3 million exceeding securities purchases of $2.0 million during the year. 

 

Bank-Owned Life Insurance. At December 31, 2018, our investment in bank owned life insurance was $4.0 million, an increase of $94,000, or 2.4%, from $3.9 million at December 31, 2017. 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, and we have not made any additional purchases of bank-owned life insurance since 2015.

 

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Deposits.  Deposits increased $3.1 million, or 5.8%, to $56.2 million at December 31, 2018 from $53.1 million at December 31, 2017. Savings accounts and money market accounts decreased $516,000, or 13.9%, to $3.2 million at December 31, 2018 from $3.7 million at December 31, 2017. Certificates of deposit increased $3.6 million, or 7.3%, to $53.0 million at December 31, 2018 from $49.4 million at December 31, 2017. The increase in certificates of deposit resulted primarily from increases in certificates of deposits derived from an online service, and from municipal certificates of deposit. We have utilized these non-retail funding sources to fund our loan origination and growth.

 

Borrowings. Borrowings, consisting entirely of Federal Home Loan Bank advances, were unchanged at $26.0 million at both December 31, 2018 and 2017, respectively.

 

Total Equity.  Total equity increased $302,000, or 2.5%, to $12.2 million at December 31, 2018 from $11.9 million at December 31, 2017. The increase resulted primarily from net income of $295,000 during the year ended December 31, 2018.

 

Comparison of Operating Results for the Years Ended December 31, 2018 and December 31, 2017 

 

General.  We had net income of $295,000 for the year ended December 31, 2018, compared to a net loss of ($25,000) for the year ended December 31, 2017, an increase of $320,000. The increase in net income resulted from an increase in net interest income of $84,000, a decrease in provision for loan losses of $31,000 and decreases in noninterest expense of $5,000 and income tax expense of $210,000, offset, in part, by a decrease of $10,000 in noninterest income.

 

Interest Income.  Interest income increased $449,000, or 13.6%, to $3.7 million for the year ended December 31, 2018 from $3.3 million for the year ended December 31, 2017. This increase was primarily attributable to a $416,000 increase in interest on loans receivable and a $33,000 increase in interest on other interest-earning assets. The average balance of loans increased $7.3 million, or 9.9%, to $81.0 million for the year ended December 31, 2018 from $73.7 million for the year ended December 31, 2017, and the average yield on loans increased 13 basis points to 4.39% during 2018 from 4.26% during 2017. The average balance of investment securities decreased $812,000, or 11.7%, to $6.1 million for the year ended December 31, 2018 from $6.9 million for the year ended December 21, 2017, while the average yield on investment securities increased 22 basis points to 1.94% for 2018 from 1.72% for 2017. The average balance of other interest-earning assets increased $656,000, or 21.0%, to $3.8 million for the year ended December 31, 2018 from $3.1 million for the year ended December 31, 2017, and the average yield on other interest-earning assets increased 67 basis points to 1.84% for 2018 from 1.17% for 2017.

 

Interest Expense. Total interest expense increased $364,000, or 28.3%, to $1.7 million for the year ended December 31, 2018 from $1.3 million for the year ended December 31, 2017. The increase was primarily due to an increase of $364,000, or 64.4%, in interest expense on deposits. The average balance of interest-bearing deposits increased $8.0 million, or 16.7% to $55.6 million for the year ended December 31, 2018 from $47.6 million for the year ended December 31, 2017, and the average cost of interest-bearing deposits increased 49 basis points to 1.67% for 2018 from 1.18% for 2017, reflecting the higher market interest rate environment. The average balance of FHLB advances decreased $1.1 million, or 3.9%, to $27.1 million for the year ended December 31, 2018 from $28.2 million for the year ended December 31, 2017. The average cost of these advances increased 11 basis points to 2.68% for 2018 from 2.57% for 2017. 

 

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Net Interest Income.  Net interest income increased $84,000, or 4.2%, to $2.1 million for the year ended December 31, 2018 from $2.0 million for the year ended December 31, 2017. Average net interest-earning assets increased $7.2 million year to year. This increase was due primarily to an increase in the average balance of loans year to year. Our interest rate spread decreased to 2.12% for the year ended December 31, 2018 from 2.24% for the year ended December 31, 2017, and our net interest margin decreased to 2.30% for the year ended December 31, 2018 from 2.40% for the year ended December 31, 2017. The decreases in interest rate spread and net interest margin was primarily the result of an increasing interest rate environment during 2018 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 a credit in the provision for loan losses of $11,000 for the year ended December 31, 2018, compared to a $20,000 provision for the year ended December 31, 2017. The decrease in the provision for loan losses in 2018 compared to 2017 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 1.05% of total loans, at December 31, 2018, compared to $850,000, or 1.08% of total loans, at December 31, 2017. Classified (substandard, doubtful and loss) loans decreased to $580,000 at December 31, 2018 from $828,000 at December 31, 2017. There were no non-performing loans at December 31, 2018 compared to $232,000 at December 31, 2017. Net recoveries for 2018 were $11,000, compared to net charge-offs of $70,000 in 2017, a decrease of $81,000.

 

Noninterest IncomeNoninterest income decreased $10,000, or 2.0%, to $505,000 for the year ended December 31, 2018 from $515,000 for the year ended December 31, 2017. The decrease was primarily due to a loss on sales of securities during 2018 of $55,000 with no comparable losses in 2017, and a decrease in income from life insurance of $16,000. These decreases were partially offset by increases in service charges and other income of $28,000, $10,000 in fees on loans sold and a $23,000 increase in gain on sales of other real estate owned.

 

Noninterest Expense.  Noninterest expense decreased $5,000, or 0.2%, to $2.3 million for 2018 from $2.3 million for 2017. The decrease was due primarily to a decrease of $88,000, or 5.9%, in salaries and employee benefits. The decrease resulted primarily from a lower annual salary for the Chief Executive Officer beginning in July 2018. In accordance with our succession plan, in July 2018, Mr. Heintzen relinquished the role of President and the corresponding oversight of the day-to-day operations of Eureka Homestead, and was elected Chairman of the Board and began working off-site from the Bank’s office. At this time, Mr. Heintzen’s annual salary was temporarily decreased to $42,000, and it is expected to increase to an annual salary of $100,000 beginning July 2019. The decrease in noninterest expense also resulted from a decrease of $13,000, or 6.2%, in occupancy expense. These decreases were offset, in part, by an increase in accounting and consulting expense of $50,000, or 60.6%, and other expenses of $43,000, or 21.2%.

 

Upon consummation of the conversion and stock offering, we expect noninterest expense to increase because of costs associated with operating as a public company, 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 decreased $210,000 to $54,000 for 2018 compared to $264,000 in 2017. The decrease resulted from new Federal income tax rates implemented during 2018, which resulted in a $208,000 write-down of our deferred tax asset and an increase in income tax expense during 2017.

 

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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.

 

   At
December
31,
   For the Year Ended December 31, 
   2018   2018   2017 
   Yield/ Cost   Average
Outstanding
Balance
   Interest  

Yield/ Rate
(1)

   Average
Outstanding
Balance
   Interest  

Yield/ Rate
(1)

 
   (Dollars in thousands) 
     
Interest-earning assets:                                   
Loans, net   4.58%  $80,957   $3,555    4.39%  $73,650   $3,139    4.26%
Investment securities   2.31    6,131    119    1.94    6,943    120    1.72 
Other interest-earning assets   2.64    3,785    69    1.84    3,129    36    1.17 
Total interest-earning assets   4.36    90,873    3,743    4.12    83,722    3,295    3.94 
Noninterest-earning assets        7,387              7,526           
Total assets       $98,260             $91,248           
                                    
Interest-bearing liabilities:                                   
Savings/Money Market accounts   0.20%  $3,384    7    0.20   $3,588    7    0.20 
Certificates of deposit   2.08    52,223    921    1.76    44,052    557    1.26 
Total interest-bearing deposits   1.97    55,607    928    1.67    47,640    564    1.18 
Borrowings   2.78    27,068    726    2.68    28,177    726    2.57 
Total interest-bearing liabilities   2.23    82,675    1,654    2.00    75,817    1,290    1.70 
Other noninterest-bearing liabilities        3,409              3,235           
Total liabilities        86,084              79,052           
Equity        12,176              12,196           
Total liabilities and equity       $98,260             $91,248           
                                    
Net interest income            $2,089             $2,005      
Net interest rate spread (1)                  2.12%             2.24%
Net interest-earning assets (2)       $8,198             $7,905           
Net interest margin (3)                  2.30%             2.40%
Average of interest-earning assets to interest-bearing liabilities        109.92%             110.43%          

 

 

(1)Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(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.

 

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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,
2018 vs. 2017
 
   Increase (Decrease) Due to   Total 
   Volume   Rate  Increase
(Decrease)
 
   (In thousands) 
             
Interest-earning assets:               
Loans, net  $324   $92   $416 
Investment securities   4    (4)   - 
Other interest-earning assets   9    24    33 
                
Total interest-earning assets   337    112    449 
                
Interest-bearing liabilities:               
Savings accounts   -    -    - 
Certificates of deposit   116    248    364 
Total deposits   116    248    364 
                
Borrowings   (11)   12    1 
                
Total interest-bearing liabilities   105    260    365 
                
Change in net interest income  $232   $(148)  $84 

 

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:

 

·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; 

 

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·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 tables below set forth, as of December 31, 2018, 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
Interest
       Estimated Increase
 (Decrease) in NPV
   NPV as a Percentage of
 Present Value of Assets (3)
 

Rates

(basis points) (1)

  

Estimated

EVE (2)

   Amount   Amount   NPV Ratio (4)  

Increase (Decrease)

(basis points)

 
(Dollars in thousands) 
 +300   $6,111   $(7,234)   (54.20)%   7.06%   (650.86)
 +200    8,708    (4,637)   (34.75)   9.61    (395.75)
 +100    11,209    (2,136)   (16.01)   11.84    (172.29)
     13,345            13.57     
 (100)    14,788    1,443    10.81    14.57    100.43 
 (200)    15,423    2,078    15.57    14.84    127.76 

 

 

(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.

 

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The tables above indicate that at December 31, 2018, in the event of a 200 basis point decrease in interest rates, we would have experienced a 15.57% increase in EVE. In the event of a 200 basis point increase in interest rates at December 31, 2018, we would have experienced a 34.75% 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, 2018.

 

Change in Interest Rates

(Basis Points)

  

Estimated Net Interest
Income (1)

  

Increase (Decrease)
in Estimated Net

Interest Income

 
          
 +300   $2,149    (5.31)%
 +200    2,197    (3.23)
 +100    2,238    (1.39)
     2,270    - 
 (100)    2,282    0.52 
 (200)    2,250    0.88 

 

 

(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 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. At December 31, 2018, we had $26.0 million outstanding in advances from the FHLB, and had the capacity to borrow approximately an additional $8.7 million from the FHLB and an additional $3.0 million on a line of credit with First National Bankers Bank at this date. 

 

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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 provided by operating activities was $345,000 and $24,000 for the years ended December 31, 2018 and 2017, respectively. Net cash used in investing activities, which consists primarily of net change in loans receivable and net change in investment securities, was ($1.1 million) and ($3.1 million) for the years ended December 31, 2018 and 2017, respectively. Net cash provided by financing activities, consisting primarily of the activity in deposit accounts and FHLB advances, was $3.2 million and $2.2 million for the years ended December 31, 2018 and 2017, 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. 

 

At December 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%. At December 31, 2017, we exceeded all of our regulatory capital requirements with a Tier 1 leverage capital level of $12.0 million, or 12.80% of adjusted total assets, which is above the well-capitalized required level of $4.7 million, or 5.0%; and total risk-based capital of $12.7 million, or 25.64% of risk-weighted assets, which is above the well-capitalized required level of $4.9 million, or 10.0%. Accordingly, Eureka Homestead was categorized as well-capitalized at December 31, 2018 and 2017. Management is not aware of any conditions or events since the most recent notification that would change our category.

 

Off-Balance Sheet Arrangements. At December 31, 2018, we had no outstanding commitments to originate loans. Certificates of deposit that are scheduled to mature in less than one year from December 31, 2018 total $32.1 million at December 31, 2018. 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-1 of this prospectus.

 

Impact of Inflation and Changing Prices

 

The financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles in the 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.

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BUSINESS OF EUREKA HOMESTEAD BANCORP

 

Eureka Homestead Bancorp was incorporated in the State of Maryland on February 25, 2019, and has not engaged in any business to date. Upon completion of the conversion, Eureka Homestead Bancorp will own all of the issued and outstanding stock of Eureka Homestead. We intend to contribute at least 50% of the net proceeds from the stock offering to Eureka Homestead. Eureka Homestead Bancorp will retain the remainder of the net proceeds from the stock offering and use a portion of the retained net proceeds to make a loan to the employee stock ownership plan. At a later date, we may use the net proceeds to repurchase shares of common stock, subject to our planned growth, capital needs and regulatory limitations. We will invest our initial capital as discussed in “How We Intend to Use the Proceeds from the Offering.”

 

After the conversion and the offering are complete, Eureka Homestead Bancorp, as the holding company of Eureka Homestead, will be authorized to pursue other business activities permitted by applicable laws and regulations. See “Regulation and Supervision – Holding Company Regulation” for a discussion of the activities that are permitted for savings and loan holding companies. We may also borrow funds for reinvestment in Eureka Homestead.

 

Following the offering, our cash flow will depend on earnings from the investment of the net proceeds from the offering that we retain, and any dividends we receive from Eureka Homestead. Eureka Homestead is subject to regulatory limitations on the amount of dividends that it may pay. See “Regulation and Supervision – Federal Banking Regulation – Capital Distributions.” Initially, Eureka Homestead Bancorp will neither own nor lease any property, but will instead pay a fee to Eureka Homestead for the use of its premises, equipment and furniture. At the present time, we intend to employ only persons who are officers of Eureka Homestead to serve as officers of Eureka Homestead Bancorp. We will, however, use the support staff of Eureka Homestead from time to time. We will pay a fee to Eureka Homestead for the time devoted to Eureka Homestead Bancorp by employees of Eureka Homestead; however, these persons will not be separately compensated by Eureka Homestead Bancorp. Eureka Homestead Bancorp may hire additional employees, as appropriate, to the extent it expands its business in the future.

 

BUSINESS OF EUREKA HOMESTEAD

 

General

 

We conduct our business from our main office in Metairie, Louisiana, which is located in Jefferson Parish, within the metropolitan area of New Orleans, and our loan production office located in New Orleans. Our loan portfolio consists primarily of loans collateralized by real property located in Jefferson Parish and Orleans Parish, Louisiana. We also originate loans in other parts of the greater New Orleans metropolitan area and, to a lesser extent, elsewhere in Louisiana and Mississippi.

 

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, 2018, $75.2 million, or 93.2% of our total loan portfolio, was comprised of one- to four-family residential real estate loans, $11.2 million of which were non-owner-occupied loans, $1.0 million of which of which were construction loans and $1.6 million of which were home equity loans.

 

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A 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 manage our interest rate risk, in recent years we have sold a significant portion of these conforming, fixed-rate, long-term production on an industry-standard, servicing-released basis.

 

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, 2018, we had $26.0 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 operations. Pursuant to our business strategy, we are seeking to increase our core deposits, which we consider our savings and money market accounts and retail certificates of deposit, by more aggressively marketing and pricing our deposit products.

 

Eureka Homestead is subject to comprehensive regulation and examination by its primary federal regulator, the Office of the Comptroller of the Currency (“OCC”).

 

Our main office is located at 1922 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 prospectus and should not be considered part of this prospectus.

 

Market Area

 

We conduct our business from our main office in Metairie, Louisiana, which is located in Jefferson Parish, within the greater metropolitan area of New Orleans, and our loan production office located in New Orleans. Our loan portfolio consists primarily of loans collateralized by real property located in Jefferson Parish and Orleans Parish, Louisiana. We also originate loans in other parts of the greater New Orleans metropolitan area and, to a lesser extent, elsewhere in Louisiana and Mississippi. Our business is dependent on the City of New Orleans and our local economy which includes tourism, port activity along the Mississippi River, the petrochemical industry and healthcare. Service jobs, primarily in healthcare, education and construction and development, represent the largest employment sector in Jefferson Parish.

 

According to the United States census, the estimated July 2017 population of Jefferson Parish was 439,000, representing an increase of 1.5% from the 2010 census population of 432,000. During this same time period, the population of the City of New Orleans is estimated to have grown by 14.4%, the Louisiana population grew by an estimated 3.3% and the United States population grew by an estimated 5.5%. From 2013 through 2017, the median household income for Jefferson Parish was $51,000, compared to median household incomes of $47,000 and $58,000 for the State of Louisiana and for the United States, respectively.

 

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Competition

 

We face competition within our market area both in making loans and attracting retail deposits. Our market area has a concentration of financial institutions that include large money center and regional banks, community banks and credit unions. We also face competition from commercial banks, savings institutions, mortgage banking firms, consumer finance companies and credit unions and, with respect to deposits, from money market funds, brokerage firms, mutual funds and insurance companies. As of June 30, 2018, based on the most recent available FDIC data, there were 22 FDIC-insured financial institutions with offices in Jefferson Parish, of which we ranked 15th, with a market share of deposits of 0.51%. We do not have a significant market share of either deposits or residential lending in any other parish in Louisiana.

 

Lending Activities

 

General. Our principal lending activity is originating 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. Our loan portfolio consists primarily of loans collateralized by real property located in Jefferson Parish and Orleans Parish, Louisiana. We also originate loans in other parts of the greater New Orleans metropolitan area and, to a lesser extent, elsewhere in Louisiana and Mississippi.

 

We offer adjustable-rate and fixed-rate residential loans. However, historically a significant majority of the residential real estate loans which we have originated are conforming, long-term, fixed-rate loans. In recent years, in order to address and manage our interest rate risk, we have been selling a significant portion of our conforming, fixed-rate, long term (greater than 15 years) loans to the secondary market, on a servicing-released basis.

 

Commercial real estate and multifamily loans have not historically comprised a significant portion of our total loan portfolio. While we expect that one- to four-family residential real estate lending will continue to be the primary emphasis of our lending operations, we intend to modestly increase our emphasis on multifamily and commercial real estate loans through increased originations of and purchase of participations in these types of loans.

 

Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio, by type of loan, at the dates indicated.

 

   At December 31, 
   2018   2017 
   Amount   Percent   Amount   Percent 
   (Dollars in thousands) 
                 
One- to four-family residential:                    
Owner-occupied (1) (2)  $64,027    79.4%  $63,271    80.1%
Non-owner-occupied   11,158    13.8    10,889    13.8 
Multifamily   4,117    5.1    2,701    3.4 
Commercial real estate   1,175    1.4    1,666    2.1 
Consumer   211    0.3    488    0.6 
                     
Total loans receivable   80,688    100.0%   79,015    100.0%
                     
Deferred loan costs (fees)   1,234         1,163      
Allowance for loan losses   (850)        (850)     
                     
Total loans receivable, net  $81,072        $79,328      

 

 

(1)At December 31, 2018 and 2017, includes $1.0 million and $2.1 million, respectively, of construction loans.
(2)At December 31, 2018 and 2017, includes $1.6 million and $1.4 million, respectively, of home equity loans.

 

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Loan Portfolio Maturities. The following table sets forth the contractual maturities of our loan portfolio at December 31, 2018. Loans having no stated repayment schedule or maturity are reported as being due in the year ending December 31, 2019. Maturities are based on the final contractual payment date and do not reflect the impact of prepayments and scheduled principal amortization.

 

   One- to
four-family
residential
real estate
   Multifamily   Commercial
real estate
   Consumer   Total 
   (In thousands) 
Due During the Years Ending December 31,                    
2019  $367    $     $    $211   $578 
2020   125                125 
2021   63                63 
2022 to 2023   709                709 
2024 to 2028   3,094                3,094 
2029 to 2033   8,902    1.094    432        10,428 
2033 and beyond   61,925    3,023    743        65,691 
                          
Total  $75,185   $4,117   $1,175   $211   $80,688 

 

The following table sets forth our fixed- and adjustable-rate loans at December 31, 2018 that are contractually due after December 31, 2019.

 

   Due After December 31, 2019 
   Fixed   Adjustable   Total 
   (In thousands) 
             
One- to four-family residential  $74,389   $429   $74,818 
Multifamily   3,881    236    4,117 
Commercial real estate   1,175        1,175 
Consumer           ―  
Total  $79,445   $665   $80,110 

 

Portfolio Loan Approval Procedures and Authority. Our lending is subject to written, non-discriminatory underwriting standards and origination procedures. Decisions on loan applications are made on the basis of detailed applications submitted by the prospective borrower and property valuations. Our policies require that for all real estate loans that we originate, property valuations must be performed by outside independent state-licensed appraisers approved by our board of directors. The loan applications are designed primarily to determine the borrower’s ability to repay the requested loan, and the more significant items on the application are verified through use of credit reports, financial statements and tax returns. All loans that we originate require personal guarantees that are evaluated as part of the loan.

 

Pursuant to applicable law, the aggregate amount of loans that we are permitted to make to any one borrower or a group of related borrowers is generally limited to 15% of Eureka Homestead’s unimpaired capital and surplus (25% if the amount in excess of 15% is secured by “readily marketable collateral” or 30% for certain residential development loans). At December 31, 2018, our largest credit relationship consisted of 10 loans which totaled $1.4 million and was secured by 10 non-owner occupied, one- to four-family residential real estate properties. Our second largest relationship at this date was for $1.3 million and was secured by an owner-occupied, one- to four-family residential real estate property. At December 31, 2018, these loans were performing in accordance with their repayment terms.

 

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We have a Management Loan Committee and a Board Loan Committee. The Management Loan Committee is comprised of the Chief Executive Officer and the President/Chief Financial Officer and it considers loans/relationships up to $250,000. The Board Loan Committee is comprised of all directors and considers loans of $250,000 or more, or loans of any amount that will increase a borrower’s total relationship to $250,000 or more. All loans approved for portfolio are reviewed by the Board of Directors at its meetings.

 

Generally, we require property and extended coverage casualty insurance in amounts at least equal to the principal amount of the loan or the value of improvements on the property, depending on the type of loan. In addition, we require and escrow for flood insurance (where appropriate) and generally require an escrow for required property taxes and insurance. On occasion, we allow borrowers to pay their own taxes and property and casualty insurance as long as proof of payment is provided.

 

One- to Four-Family Residential Real Estate Lending. At December 31, 2018, $75.2 million, or 93.2% of our total loans, was secured by one- to four-family residential real estate. Of this total amount, $11.2 million, or 13.8% of our total loan portfolio, was secured by non-owner-occupied, one- to four-family residential real estate loans, $1.0 million, or 1.2% of our total loan portfolio, was secured by loans for the construction of owner-occupied, one- to four-family residential real estate and $1.6 million, or 2.0% of our total loan portfolio, was secured by home equity loans. At December 31, 2018, we had $17.3 million and $69.3 million of jumbo loans and non-conforming loans, respectively.

 

We originate both fixed- and adjustable-rate one- to four-family residential real estate loans, and at December 31, 2018, these types of loans were comprised of 99.4% of fixed-rate loans and 0.6% of adjustable-rate loans.

 

We generally limit the loan-to-value ratios of our owner-occupied and non-owner-occupied, one- to four-family residential real estate loans to 80% of the purchase price or appraised value, whichever is lower. In addition, we may make owner-occupied one- to four-family residential real estate loans with loan-to-value ratios above 80% of the purchase price or appraised value, whichever is less, where the borrower obtains private mortgage insurance.

 

We originate one- to four-family residential real estate loans for retention in our portfolio as well as for sale in the secondary market. Loans originated for sale are underwritten according to Fannie Mae guidelines, typically with terms of up to 30 years. We generally do not retain the servicing on loans we sell. Additionally, we originate non-conforming, one- to four-family residential real estate loans that we retain in our portfolio. These loans might be nonconforming as a result of the size of the loan, the loan to value of the appraised property securing the loan, or the debt to income ratio or the credit score of the borrower, or other nonconforming aspects of the credit. Loans that we retain in our portfolio have a maximum fixed-rate term of 30 years.

 

At December 31, 2018, most of our one- to four-family residential real estate loans, including $11.2 million of non-owner occupied loans, were secured by properties located in Jefferson or Orleans Parishes. On a limited basis we have purchased one- to four-family residential real estate loans from outside of our market area.

 

Our adjustable-rate, one- to four-family residential real estate loans generally have fixed rates of interest for initial terms of three and five years and adjust annually thereafter. Generally, interest rates cannot increase more than 2% per year and 5% over the life of the loan.  The interest rate is based on The Weekly average Yield on Unites States Treasury securities adjusted to a constant maturity of 1 year, as made available by the Federal Reserve Board plus a margin of 2.25%. Our adjustable-rate loans carry terms to maturity of up to 30 years.

 

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Although adjustable-rate one- to four-family residential real estate loans may reduce our vulnerability to changes in market interest rates because they periodically reprice, as interest rates increase, the required payments due from the borrower also increase (subject to rate caps), increasing the potential for default by the borrower. At the same time, the ability of the borrower to repay the loan and the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustments of the contractual interest rate are also limited by the maximum periodic and lifetime rate adjustments permitted by our loan documents. As a result, the effectiveness of adjustable-rate one- to four-family residential real estate loans in compensating for changes in market interest rates may be limited during periods of rapidly rising interest rates.

 

Our residential construction loans generally have initial terms of 12 months (subject to extension), during which the borrower pays interest only. Upon completion of construction, these loans convert to conventional amortizing mortgage loans. We do not extend credit if construction has already commenced. Our residential construction loans have rates and terms comparable to residential real estate loans that we originate. The maximum loan-to-value ratio of our residential construction loans is generally 85% of the lesser of the appraised value of the completed property or the total cost of the construction project. Residential construction loans are generally underwritten pursuant to the same guidelines used for originating permanent residential mortgage loans. We do not have a program for making speculative construction loans to contractors or developers.

 

Construction lending generally involves greater credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on construction loans depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost of construction and other assumptions. If the estimate of construction cost is inaccurate, we may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property. Moreover, if the estimated value of the completed project is inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment of the construction loan upon the sale of the property. Construction loans also expose us to the risk that improvements will not be completed on time in accordance with specifications and projected costs. In addition, the ultimate sale or rental of the property may not occur as anticipated.

 

Other than during the construction phase of our one-to four-family residential loans, we do not offer “interest only” mortgage loans on permanent one- to four-family residential real estate loans (where the borrower pays interest for an initial period, after which the loan converts to a fully amortizing loan). We also do not offer one- to four-family residential real estate loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on the loan, resulting in an increased principal balance during the life of the loan. We generally do not offer “subprime loans” on one- to four- family residential real estate loans (i.e., loans to borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios), or “Alt-A” (i.e., loans to borrowers with better credit scores who borrow with alternative documentation such as little or no verification of income). However, we consider the circumstances of each borrower’s financial situation before rendering a decision.

 

Non Owner-Occupied One- to Four-Family Residential Real Estate Loans. At December 31, 2018, $11.2 million, or 13.8% of our total loan portfolio, consisted of non-owner-occupied, or “investment,” one- to four-family residential real estate loans, all of which were secured by properties located in our primary lending market area. At December 31, 2018, our non owner-occupied one- to four-family residential real estate loans had an average balance of $112,000. At December 31, 2018, our largest non-owner-occupied, one- to four-family residential relationship had a principal balance of $1.4 million and was collateralized by 10 properties and was performing in accordance with its repayment terms as of such date. At December 31, 2018, our second largest non-owner-occupied, one- to four-family residential relationship had a principal balance of $580,000 and was collateralized by four properties and was performing in accordance with its repayment terms as of such date.

 

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We originate fixed-rate and adjustable-rate loans secured by non owner-occupied one- to four-family properties. These loans may have a term of up to 30 years. In recent years, in the historically low interest rate environment, nearly all of our non owner-occupied one- to four-family residential loan originations have fixed rates of interest. We generally lend up to 80% of the property’s appraised value. Appraised values are determined by an outside independent appraiser. In deciding to originate a loan secured by a non owner-occupied one- to four-family residential property, we review the creditworthiness of the borrower, the expected cash flow from the property securing the loan, the cash flow requirements of the borrower and the value of the property securing the loan. We require an abstract of title, a title policy, property and extended coverage casualty insurance, and, if appropriate, flood insurance, in order to protect our security interest in the underlying property. Current borrower financial information is required on an annual basis under the terms of loans originated after 2009.

 

Non owner-occupied one- to four-family residential loans generally carry higher interest rates and have shorter terms than one- to four-family residential mortgage loans. Non owner-occupied one- to four-family residential loans, however, entail greater credit risks compared to the owner-occupied one- to four-family residential mortgage loans we originate. The payment of loans secured by income-producing properties typically depends on the sufficient income from the property to cover operating expenses and debt service. Changes in economic conditions could affect the value of the collateral for the loan or the future cash flow of the property. Historically, we have experienced higher rates of delinquencies on our non-owner-occupied one- to four-family residential real estate loans as compared to our owner-occupied loans.

 

Home Equity Loans. In addition to one- to four-family residential real estate loans, we offer closed-end, second mortgage home equity loans that are secured by the borrower’s primary residence. We make home equity loans to borrowers on which we also hold the first mortgage as well as loans on which we do not hold the first mortgage. At December 31, 2018, we had $1.6 million, or 2.0%, of our total loan portfolio in home equity loans.

 

Home equity loans are generally underwritten using the same criteria that we use to underwrite one- to four-family residential real estate loans. Home equity loans may be underwritten with a loan-to-value ratio of up to 90% when combined with the principal balance of the existing first mortgage loan. Our home equity loans are primarily originated with fixed rates of interest with terms of up to 15 years.

 

Home equity loans are generally secured by junior mortgages and have greater risk than one- to four-family residential real estate loans secured by first mortgages. We face the risk that the collateral will be insufficient to compensate us for loan losses and costs of foreclosure, after repayment of the senior mortgages, if applicable. When customers default on their loans, we assess the likelihood of recovery from the sale of the collateral. Generally, we will attempt to foreclose on the property and resell the property as soon as possible to minimize foreclosure and carrying costs. However, the value of the collateral may not be sufficient to compensate us for the amount of the unpaid loan and we may be unsuccessful in recovering the remaining balance from those customers. Particularly with respect to our home equity loans, decreases in real estate values could adversely affect our ability to fully recover the loan balance in the event of a default.

 

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Multifamily and Commercial Real Estate Loans. At December 31, 2018, multifamily loans totaled $4.1 million, or 5.1% of our total loan portfolio, and commercial real estate loans totaled an additional $1.2 million, or 1.4% of our total loan portfolio. Upon completion of the conversion and offering, we intend to modestly increase our emphasis on multifamily and commercial real estate loans through increased originations and purchase of participations.

 

We originate a variety of fixed- and adjustable-rate multifamily and commercial real estate loans with balloon and amortization terms up to 25 years. Multifamily and commercial real estate loan amounts generally do not exceed 75% of the property’s appraised value at the time the loan is originated. Aggregate debt service ratios, including the guarantor’s cash flow and the borrower’s other projects, have a guideline minimum income to debt service ratio of 1.25x. We require multifamily and commercial real estate loan borrowers to submit annual financial statements and tax returns and/or rent rolls on the subject property. We may request such information for smaller loans on a case-by-case basis. These properties may also be subject to annual inspections with pictures as evidence appropriate maintenance is being performed. Our commercial real estate loans are typically secured by retail, service or other commercial properties.

 

At December 31, 2018, our largest multifamily real estate relationship totaled $900,000 and was secured by two properties. At December 31, 2018, this loan was performing in accordance with its terms.

 

At December 31, 2018, we had an aggregate of three commercial real estate loans, all of which were secured by properties in Louisiana. At December 31, 2018, our largest commercial real estate loan totaled $432,000 and was a secured by a strip mall. This loan was performing in accordance with its original repayment terms at December 31, 2018.

 

We consider a number of factors in originating commercial real estate loans. We evaluate the qualifications, credit capacity and financial condition of the borrower, including project-level and global cash flows, credit history, and management expertise, as well as the value and condition of the property securing the loan. When evaluating the qualifications of the borrower, we first consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with us and other financial institutions. In evaluating the property securing the loan, the factors we consider include the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service). We generally require a debt service ratio of at least 1.25x.

 

The payment of loans secured by income-producing properties typically depends on the successful operation of the property, as repayment of the loan generally is dependent, in large part, on sufficient income from the property to cover operating expenses and debt service. Changes in economic conditions that are not in the control of the borrower or lender could affect the value of the collateral for the loan or the future cash flow of the property. Additionally, any decline in real estate values may be more pronounced for commercial real estate than residential properties. There may be additional risk on commercial rentals, where the borrower is not the occupant of the collateral property. If we foreclose on a multifamily or commercial real estate loan, our holding period for the collateral is typically longer than for one- to four-family residential real estate loans because there are fewer potential purchasers of the collateral. Further, our multifamily and commercial real estate loans generally have relatively larger balances to single borrowers or related groups of borrowers than our one- to four-family residential real estate loans. Accordingly, if any of our judgments regarding the collectability of our multifamily or commercial real estate loans prove incorrect, the resulting charge-offs may be larger on a per loan basis than those incurred with respect to one- to four-family residential loans.

 

Consumer Lending. At December 31, 2018, we had $211,000, or 0.3% of our loan portfolio, in consumer loans. Our consumer loans are collateralized by up to 90% of the borrower’s existing savings accounts or certificates of deposit at Eureka Homestead and are interest-only loans with no fixed term. Generally, these loans carry an interest rate of 2.00% above the borrower’s deposit rate.

 

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Loan Originations, Participations, Purchases and Sales

 

We originate real estate and other loans through employee marketing and advertising efforts, our existing customer base, walk-in customers and referrals from customers.

 

We originate one-to four-family residential real estate loans that conform to Fannie Mae guidelines for sale into the secondary market. In 2018 and 2017, we originated for sale and sold $12.3 million and $10.7 million, respectively, of one- to four-family residential real estate loans.

 

We employ certain processes and procedures to monitor and mitigate the risks associated with our mortgage banking activities, including:

·independent daily pricing to establish profitability targets;

 

·locking rates to mitigate risk of pair off fees;

 

·selling loans pursuant to best efforts delivery contracts to eliminate warehouse and pipeline risk; and

 

·underwriting review of each file to avoid loan repurchases for non-compliance with underwriting requirements.

 

In 2015 we purchased a $532,000 participation in a commercial real estate loan. However, since 2007 we have not purchased loans. Subject to our conservative underwriting standards, in the future we intend to modestly increase the emphasis of originations of and the purchase of participations in multifamily and commercial real estate loans.

 

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The following table sets forth our loan origination, sale and principal repayment activity during the periods indicated. We did not purchase any loans during the years presented.

 

   Years Ended December 31, 
   2018   2017 
         
Total loans, at beginning of period  $79,608   $70,826 
           
Loans originated:          
Real estate:          
One- to four-family residential   23,668    25,250 
Multifamily   1,087    1,097 
Commercial   323     
Consumer   67    664 
Total loans originated   25,145   $27,011 
           
Loans sold:          
Real estate:          
One- to four-family residential   12,350    10,978 
Total loans sold   12,350    10,978 
           
Other:          
Principal repayments and other   11,183    7,251 
           
Net loan activity   1,612    8,782 
Total loans, including loans held for sale, at end of period  $81,220   $79,608 

 

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Delinquencies, Classified Assets and Nonperforming Assets

 

Delinquency Procedures. When a borrower fails to make a required monthly payment on a residential real estate loan, we attempt to contact the borrower by phone.  All delinquent loans are reported to the board of directors each month. This report effectively is our watch list. After 90 days delinquent the loan is transferred to the appropriate collections personnel.  Our policies provide that a late notice be sent four times a month. Once the loan is considered in default, generally at 90 days past due, a letter is generally sent to the borrower explaining that the entire balance of the loan is due and payable, the loan is placed on non-accrual status, and additional efforts are made to contact the borrower.  If the borrower does not respond, we generally initiate foreclosure proceedings when the loan is 120 days past due.  If the loan is reinstated, foreclosure proceedings will be discontinued and the borrower will be permitted to continue to make payments.  In certain instances, we may modify the loan or grant a limited exemption from loan payments to allow the borrower to reorganize his or her financial affairs. 

 

When we acquire real estate as a result of foreclosure or by deed in lieu of foreclosure, the real estate is classified as other real estate owned until it is sold. The real estate is recorded at estimated fair value at the date of acquisition less estimated costs to sell, and any write-down resulting from the acquisition is charged to the allowance for loan losses. Subsequent decreases in the value of the property are charged to operations. After acquisition, all costs in maintaining the property are expensed as incurred. Costs relating to the development and improvement of the property, however, are capitalized to the extent of estimated fair value less estimated costs to sell.

 

Delinquent multifamily and commercial real estate and construction loans are handled in a similar fashion. Our procedures for repossession and sale of consumer collateral are subject to various requirements under applicable laws, including consumer protection laws. In addition, we may determine that foreclosure and sale of such collateral would not be cost-effective for us.

 

Troubled Debt Restructurings. We occasionally modify loans to extend the term or make other concessions to help a borrower stay current on his or her loan and to avoid foreclosure.  We consider modifications only after analyzing the borrower’s current repayment capacity, evaluating the strength of any guarantors based on documented current financial information, and assessing the current value of any collateral pledged. We generally do not forgive principal or interest on loans, but may do so if it is in our best interest and increases the likelihood that we can collect the remaining principal balance. We may modify the terms of loans to lower interest rates (which may be at below market rates), to provide for fixed interest rates on loans where fixed rates are otherwise not available, to provide for longer amortization schedules, or to provide for interest-only terms. These modifications are made only when a workout plan has been agreed to by the borrower that we believe is reasonable and attainable and in our best interests. At December 31, 2018, we had no loans which were classified as troubled debt restructurings.

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Delinquent Loans. The following table sets forth our loan delinquencies by type and amount at the dates indicated.

 

   Loans Delinquent For         
   30-89 Days   90 Days and Over   Total 
   Number   Amount   Number   Amount   Number   Amount 
   (Dollars in thousands) 
                         
At December 31, 2018                              
Real estate:                              
One- to four-family residential   4   $398        $ ―    4   $398 
Multifamily                        
Commercial real estate                        
Consumer                        
Total   4   $398        $ ―    4   $398 
                               
At December 31, 2017                              
Real estate:                              
One- to four-family residential   8   $613    2   $86    10   $699 
Multifamily                        
Commercial real estate                        
Consumer                        
Total   8   $613    2   $86    10