General Overview We conduct community banking activities by accepting deposits and making loans in our primary market area. Our lending products include residential mortgage loans, multi-family and commercial real estate loans and, to a lesser extent, commercial lines of credit, construction and consumer loans. We also purchase, through an unrelated third party, commercial leases. In addition, we maintain an investment portfolio consisting primarily of government agency debentures to help manage our liquidity and interest rate risk. Our loan and investment portfolios are funded with deposits. Income. Our primary source of pre-tax income is net interest income. Net interest income is the difference between interest income, which is the income that we earn on our loans and investments, and interest expense, which is the interest that we pay on our deposits. Our net interest income is affected by a variety of factors, including the mix of interest-earning assets and interest-bearing liabilities in our portfolio and changes in levels of interest rates. Growth in net interest income is dependent upon our ability to prudently manage the balance sheet for growth, combined with how successfully we maintain or increase net interest margin, which is net interest income as a percentage of average interest-earning assets. A secondary source of income is non-interest income, or other income, which is revenue that we receive from providing products and services. The majority of our non-interest income generally comes from service charges (mostly from service charges on deposit accounts). Provision for Loan Losses. The allowance for loan losses is maintained at a level representing management's best estimate of known and inherent losses in the loan portfolio, based upon management's evaluation of the portfolio's collectability. The allowance is established through the provision for loan losses, which is charged against income. Charge-offs, if any, are charged to the allowance. Subsequent recoveries, if any, are credited to the allowance. Allocation of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged off. Expenses. The non-interest expense we incur in operating our business consists of salaries and benefits expenses, occupancy expenses, computer costs, professional fees, Federal Deposit Insurance Corporation premiums and various other miscellaneous expenses. Our largest non-interest expense is for salaries and benefits, which consists primarily of salaries and wages paid to our employees, payroll taxes, expenses for health insurance, retirement plans, director and committee fees and other employee benefits, including employer 401(k) plan contributions. Occupancy expenses include the fixed and variable costs of buildings such as depreciation charges, maintenance, real estate taxes and costs of utilities. Depreciation of premises is computed using the straight-line method based on the useful lives of the related assets, which range from five to 50 years for buildings and premises. Leasehold improvements are amortized over the shorter of the useful life of the asset or the term of the lease. Computer costs include fees paid to our third-party data processing service and ATM expense. Professional fees include fees paid to our independent auditors and attorneys. Federal Deposit Insurance Corporation assessments are a specified percentage of assessable deposits, depending on the risk characteristics of the institution. Other non-interest expense includes expenses for stationery, printing, marketing, supplies, telephone, postage, insurance premiums and other fees and expenses. 22 -------------------------------------------------------------------------------- Table of Contents Our Business Strategy The following are the key elements of our business strategy: • Improve earnings through continued loan diversification. Historically, we have emphasized the origination of residential mortgage loans secured by homes in our market area. A majority of our residential mortgage loans are secured by owner-occupied residences located in our primary market area. However, a significant percentage of our residential mortgage loans are secured by non-owner-occupied residences housing college and graduate students in the immediate area surrounding our Oakland branch office, which is located adjacent to the University of Pittsburgh and Carnegie Mellon University campuses. In addition, we have also emphasized the purchase and, to a lesser extent, origination of commercial leases and lines of credit. Going forward, we intend to continue to emphasize loan diversification as a means of improving our earnings, as commercial leases and lines of credit generally have higher interest rates than residential mortgage loans. Another benefit of commercial lending is that it improves the interest rate sensitivity of our interest-earning assets because commercial loans typically have shorter terms than residential mortgage loans and frequently have variable interest rates. • Use conservative underwriting practices to maintain asset quality. We have sought to maintain a high level of asset quality and moderate credit risk by using underwriting standards that we believe are conservative. Non-performing loans and accruing loans delinquent 90 days or more were 0.70% and 0.58% of our total loan portfolio at September 30, 2013 and 2012, respectively. Although we intend to continue our efforts to originate commercial real estate and business loans, we intend to adhere to our philosophy of managing lending risks through our conservative approach to lending. • Improve our funding mix by marketing core deposits. Core deposits (demand, money market and savings accounts) comprised 42.3% of our total deposits at September 30, 2013 compared to 37.3% of our total deposits at September 30, 2012 . We value core deposits because they represent longer-term customer relationships and a lower cost of funding compared to certificates of deposit. • Actively manage our balance sheet. The recent severe economic recession has underscored the importance of a strong balance sheet. We strive to achieve this through managing our interest rate risk and maintaining strong capital levels and liquidity. In addition, our diverse loan mix improves our net interest margin and reduces the exposure of our net interest income and earnings to interest rate fluctuations. We will continue to manage our interest rate risk by maintaining the diversification in our loan portfolio and monitoring the maturities in our deposit portfolio. Moreover, it is expected that existing minimum regulatory capital ratios may be increased by regulatory agencies in response to market and economic conditions. However, we anticipate that we will continue to exceed any such increase in minimum regulatory capital ratios. • Continued expense control. Management continues to focus on the level of non-interest expense and methods to identify cost savings opportunities, such as reviewing the number of employees, renegotiating key third-party contracts and reducing certain other operating expenses. Our efficiency ratio was 59.98% and 57.77% for the years ended September 30, 2013 and 2012, respectively. Critical Accounting Policies The discussion and analysis of the Company's financial condition and results of operations are based on our consolidated financial statements, which are prepared in conformity with generally accepted accounting principles in the United States of America . The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of income and expenses. We consider the accounting policies discussed below to be critical accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations. 23 -------------------------------------------------------------------------------- Table of Contents Allowance for Loan Losses. The allowance for loan losses is maintained at a level representing management's best estimate of known and inherent losses in the loan portfolio, based on management's evaluation of the portfolio's collectability. The allowance is established through the provision for loan losses, which is charged against income. Management estimates the allowance balance required using loss experience in particular segments of the portfolio, the size and composition of the loan portfolio, trends and absolute levels of non-performing loans, classified and criticized loans, delinquent loans, trends in risk ratings, trends in industry charge-offs by particular segments and changes in existing general economic and business conditions affecting our lending area and the national economy. Additionally, for loans identified by management as impaired, management will provide a specific provision for loan loss based on the expected discounted cash flows of the loan, or for loans determined to be collateral dependent, a specific provision for loan loss is established based on appraised value less costs to sell. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are: loss exposure at default; the amount and timing of future cash flows on impaired loans; value of collateral; and determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if actual conditions differ substantially from the assumptions used in making the evaluation. Further, current economic conditions have increased the uncertainty inherent in these estimates and assumptions. In addition, the Office of the Comptroller of the Currency , as an integral part of its examination process, periodically reviews our allowance for loan losses. Such agency may require us to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would negatively affect earnings. For additional discussion, see "-Risk Management - Analysis and Determination of the Allowance for Loan Losses" below and the notes to the consolidated financial statements included in this annual report. Deferred Income Taxes. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion of the deferred tax asset will not be realized. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to make projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on a continual basis as regulatory and business factors change. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. Valuation and Other-Than-Temporary Impairment of Investment Securities . We evaluate our investment securities portfolio on a quarterly basis for indicators of other-than-temporary impairment, which requires significant judgment. We assess whether other-than-temporary impairment has occurred when the fair value of a debt security is less than the amortized cost basis at the balance sheet date. Under these circumstances, other-than-temporary impairment is considered to have occurred: (1) if we intend to sell the security; (2) if it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of the expected cash flows is not sufficient to recover the entire amortized cost basis. For securities that we do not expect to sell or that we are not more likely than not to be required to sell, the other-than-temporary impairment is separated into credit and non-credit components. The credit-related other-than-temporary impairment, represented by the expected loss in principal, is recognized in non-interest income, while noncredit-related other-than-temporary impairment is recognized in other comprehensive income (loss). Noncredit-related other-than-temporary impairment results from other factors, including increased liquidity spreads and extension of the security. For securities which we do expect to sell, all other-than-temporary impairment is recognized in earnings. Other-than-temporary impairment is presented in the income statement on a gross basis with a reduction for the amount of other-than-temporary impairment recognized in other comprehensive income (loss). Once an other-than-temporary impairment is recorded, when future cash flows can be reasonably estimated, future cash flows are re-allocated between interest and principal cash flows to provide for a level-yield on the security. 24 -------------------------------------------------------------------------------- Table of Contents Financial Condition General. At September 30, 2013 , assets were $141.0 million , an increase of $2.5 million , or 1.8%, from $138.5 million at September 30, 2012 due to an increase in loans, offset by a decrease in securities. Securities decreased $4.8 million , or 34.6%, during the year ended September 30, 2013 primarily as a result of maturities, calls, and principal repayments of $12.5 million , offset by purchases of $8.2 million in longer-term government agency debentures, reflecting investment of excess deposits. The securities purchased were classified as available for sale in order to provide additional liquidity sources. Loans receivable, net, increased by $9.0 million to $121.4 million at September 30, 2013 from $112.4 million at September 30, 2012 , primarily due to increases in multi-family real estate and construction loans. These increases were primarily the result of our continued offering of competitive rates, strong customer service and continued borrowings by long-standing relationships, as well as improvements in market conditions and loan demand. Cash and cash equivalents decreased by $929,000 , or 11.4%, as excess cash was used to fund loan growth. Liabilities were $119.0 million at September 30, 2013 , an increase of $2.9 million , or 2.5%, from $116.1 million at September 30, 2012 . Deposits increased $3.0 million to $117.5 million during the year ended September 30, 2013 primarily as a result of increase in savings accounts and money market accounts offset by a decline in certificates of deposit. Stockholders' equity decreased $400,000 to $22.0 million at September 30, 2013 from $22.4 million at September 30, 2012 . The decrease was primarily the result of net income of $1.4 million , offset by dividends of $0.32 per share at a cost of $411,000 and the repurchase of 69,578 shares at a cost of $1.2 million . Loans. The following table sets forth the composition of our loan portfolio at the dates indicated. At September 30, 2013 2012 Amount (1) Percent Amount (1) Percent (Dollars in thousands) Real estate loans: One- to four-family real estate - owner-occupied $ 20,485 16.65 % $ 22,841 20.08 % One- to four-family real estate - owner-occupied 32,748 26.63 29,150 25.62 Construction 3,847 3.13 448 0.39 Multi-family 17,708 14.40 14,181 12.47 Commercial real estate 22,682 18.44 20,913 18.38 Total real estate loans 97,470 79.25 87,533 76.94 Consumer loans: Home equity and second mortgages 1,235 1.00 1,261 1.11 Secured loans 188 0.15 270 0.24 Total consumer loans 1,423 1.15 1,531 1.35 Commercial leases and loans (2) 20,074 16.32 19,411 17.06 Commercial lines of credit 4,030 3.28 5,284 4.65 Total loans 122,997 100.00 % 113,759 100.00 % Less: Deferred loan premiums and origination fees, net (252 ) (177 ) Allowance for loan losses (1,299 ) (1,142 ) Net loans $ 121,446 $ 112,440 (1) Amounts listed are net of undisbursed portions. (2) Includes $17.4 million and $17.9 million in commercial leases at September 30, 2013 and 2012, respectively. 25 -------------------------------------------------------------------------------- Table of Contents Loan Maturity. The following tables set forth certain information at September 30, 2013 regarding scheduled contractual maturities during the periods indicated. The tables do not include any estimate of prepayments which significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less. The amounts shown below exclude deferred loan fees and costs. September 30, 2013 One- to One- to four- four- family real family real estate - Home estate - non- Equity Commercial Commercial owner- owner- Multi-family Commercial and Second Secured Loans and Lines of Total occupied occupied Construction real estate Real Estate Mortgages Loans Leases Credit Loans (in thousands) Amounts due in: One year or less $ - $ 22 $ 1,102 $ 13 $ - $ 687 $ 8 $ 2,481 $ 4,030 $ 8,343 More than one year to two years 12 98 1,671 102 92 5 41 2,309 - 4,330 More than two year to three years 36 100 1,074 98 871 33 21 4,068 - 6,301 More than three years to five years 166 742 - 766 837 92 48 9,033 - 11,684 More than five years to ten years 3,125 4,021 - 7,127 4,540 418 - 2,183 - 21,414 More than ten years to fifteen years 4,273 18,572 - 4,264 11,631 - 70 - - 38,810 More than fifteen years 12,873 9,193 - 5,338 4,711 - - - - 32,115 Total $ 20,485 $ 32,748 $ 3,847 $ 17,708 $ 22,682 $ 1,235 $ 188 $ 20,074 $ 4,030 $ 122,997 The following table sets forth the dollar amount of all scheduled maturities of loans at September 30, 2013 that are due after September 30, 2014 and have either fixed interest rates or adjustable interest rates. The amounts shown below exclude unearned interest on consumer loans and deferred loan fees. Floating or Fixed Adjustable Rates Rates Total (in thousands) Real estate loans: One- to four-family real estate - owner-occupied $ 20,485 $ - $ 20,485 One- to four-family real estate-non-owner-occupied 29,743 2,983 32,726 Construction 1,074 1,671 2,745 Multi-family real estate 11,757 5,938 17,695 Commercial real estate 11,468 11,214 22,682 Home equity and second mortgages 548 - 548 Secured loans 180 - 180 Commercial loans and leases 17,593 - 17,593 Commercial lines of credit - - - Total loans $ 92,848 $ 21,806 $ 114,654 26 -------------------------------------------------------------------------------- Table of Contents Securities. The following table sets forth the amortized cost and fair values of our securities portfolio at the dates indicated. At September 30, 2013 2012 Amortized Fair Amortized Fair Cost Value Cost Value (In thousands) Securities held to maturity: Obligations of state and political subdivisions $ 2,026 $ 1,963 $ 1,426 $ 1,452 U.S government agency securities 750 624 12,448 12,524 Total held-to-maturity securities 2,776 2,587 13,874 13,976 Securities available for sale: Obligations of state and political subdivision 592 548 - - U.S. government agency securities 6,248 5,743 - - Freddie Mac mortgage-backed certificates 1 1 1 2 Fannie Mae mortgage-backed certificates 7 8 13 14 Total available-for-sale securities 6,848 6,300 14 16 Total securities $ 9,624 $ 8,887 $ 13,888 $ 13,992 Federal law requires a member institution of the Federal Home Loan Bank System to hold stock of its district Federal Home Loan Bank according to a predetermined formula. This stock is carried at cost and was $237,400 at September 30, 2013 . The Federal Home Loan Bank of Pittsburgh is permitted to increase the amount of capital stock owned by a member company to 6.00% of a member's advances, plus 1.50% of the unused borrowing capacity. At September 30, 2013 , we had no investments in a single company or entity (other than state or U.S. Government -sponsored entity securities) that had an aggregate book value in excess of 10% of our equity at September 30, 2013 . The following table sets forth the stated maturities and weighted average yields of investment securities at September 30, 2013 . Weighted average yields on tax-exempt securities are presented on a tax equivalent basis. Certain mortgage related securities have adjustable interest rates and will reprice annually within the various maturity ranges. These repricing schedules are not reflected in the tables below. More than 1 Year to 5 More than 5 Years to One Year or Less Years 10 Years More than 10 Years Total Weighted Weighted Weighted Weighted Weighted Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield (Dollars in thousands) Obligations of state and political subdivisions $ - - % $ 292 .98 % $ 493 8.79 % $ 1,833 4.64 % $ 2,618 5.01 % U.S. government agency securities - - - - - - 6,998 2.25 % 6,998 2.25 % Freddie Mac certificates - - 1 9.00 % - - - - % 1 9.00 % Fannie Mae certificates - - 6 6.94 % 1 6.50 % - - % 7 6.86 % Total securities $ - $ 299 1.12 % $ 494 8.78 % $ 8,831 2.75 % $ 9,624 3.01 % 27 -------------------------------------------------------------------------------- Table of Contents Cash and Cash Equivalents. Our primary source of short-term liquidity is comprised of branch working cash and interest-bearing deposits in other banks. Cash and cash equivalents decreased $900,000 to $7.2 million during the year ended September 30, 2013 primarily as a result of decreased cash balances in interest-bearing accounts in other banks, which was used to fund loan growth. Deposits. Our primary source of funds is our deposit accounts, which are comprised of non-interest-bearing demand accounts, interest-bearing NOW accounts, money market accounts, savings accounts and certificates of deposit. These deposits are provided primarily by individuals and businesses within our primary market area. The following table sets forth the balances of our deposit products at the dates indicated. At September 30, 2013 2012 Weighted Weighted Average Average Amount Rate Amount Rate (Dollars in thousands) Non-interest-bearing demand deposits $ 5,011 - % $ 4,108 - % Interest-bearing demand deposits 22,259 0.14 18,188 0.20 Savings accounts 22,456 0.10 20,454 0.15 Time deposits 67,731 1.46 71,747 1.69 Total $ 117,457 $ 114,497 The following table indicates the amount of jumbo certificates of deposit by time remaining until maturity at September 30, 2013 . Jumbo certificates of deposit require minimum deposits of $100,000 . Jumbo Certificates of Maturity Period at September 30, 2013 Deposits (In thousands) Three months or less $ 7,464 Over three months through six months 4,131 Over six months through twelve months 4,344 Over twelve months 12,842 Total $ 28,781 The following table sets forth time deposits classified by rates at the dates indicated. At September 30, 2013 2012 (In thousands) 0.00% - 1.00% $ 27,683 $ 26,976 1.01% - 2.00% 14,557 9,757 2.01% - 3.00% 20,725 27,630 3.01% - 4.00% 2,747 3,780 4.01% - 5.00% 362 666 5.01% - 6.00% 1,657 2,938 Total $ 67,731 $ 71,747 28 -------------------------------------------------------------------------------- Table of Contents The following table sets forth the amount and maturities of time deposits classified by rates at September 30, 2013 . Amount Due Percent of More Than More Than Total Time Less than One Year to Two Years to More Than Deposit One Year Two Years Three Years Three Years Total Accounts (Dollars in thousands) 0.00% - 1.00% $ 24,005 $ 2,641 $ 1,036 $ - $ 27,683 40.9 % 1.01% - 2.00% 4,525 1,1871 2,448 5,713 14,557 21.5 2.01% - 3.00% 7,405 2,767 655 9,898 20,725 30.6 3.01% - 4.00% 694 211 197 1,646 2,748 4.1 4.01% - 5.00% 233 120 - 8 361 0.5 5.01% - 6.00% 1,090 538 29 - 1,657 2.4 Total $ 37,952 $ 8,148 $ 4,365 $ 17,265 $ 67,731 100.0 % Results of Operations for the Years Ended September 30, 2013 and 2012 Overview. Years Ended September 30, 2013 2012 (Dollars in thousands, except per share amounts) Net Income $ 1,393 $ 1,462 Basic and diluted earnings per share 1.14 1.17 Average equity to average assets 15.99 % 15.92 % For the year ended September 30, 2013 , net income decreased to $1.4 million from $1.5 million for the 2012 fiscal year primarily as a result of a decrease in total interest income and an increase in non-interest expense offset by a decrease in deposit interest expense. Net Interest Income. For the year ended September 30, 2013 , net interest income increased $9,000 compared to the year ended September 30, 2012 due to a decrease in interest expense, offset by a decrease in interest income. Interest income decreased $100,000 to $6.8 million for the year ended September 30, 2013 from $6.9 million for the year ended September 30, 2012 . This decrease was primarily the result of a $201,000 increase in interest income on loans to $6.4 million from $6.2 million for fiscal 2012, as a result of a 27 basis point decrease in the average yield and a $5.8 million decrease in the average balance of investment securities, offset by a $9.7 million increase in the average balance of loans receivable. Interest income on securities and interest-bearing deposits decreased $354,000 from $667,000 to $313,000 for fiscal 2013 as a result of a $5.8 million decrease in the average balance and a 106 basis point decrease in the average yield. Interest expense decreased $163,000 for the year ended September 30, 2013 compared to the year ended September 30, 2012 due primarily to a decrease in the average cost of deposits. Average interest-bearing liabilities decreased $161,000 in fiscal 2013 to $111.7 million from $111.9 million in fiscal 2012. The decrease in the average cost of deposits was primarily due to an $84,000 decrease in interest paid on certificates of deposit due to a 12 basis point decrease in the average cost and a $53,000 decrease in interest paid on IRA accounts due to a 61 basis point decrease in the average cost. 29 -------------------------------------------------------------------------------- Table of Contents Average Balances and Yields. The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. For purposes of this table, average balances have been calculated using month-end balances. Management does not believe that the use of month-end balances instead of daily average balances has caused any material differences in the information presented. Loan fees are included in interest income on loans and are insignificant. Yields are not presented on a tax-equivalent basis. Any adjustments necessary to present yields on a tax-equivalent basis are insignificant. At September 30, 2013 2013 2012 Actual Average Average Actual Yield/ Average Yield/ Average Yield/ Balance Cost Balance Interest Cost Balance Interest Cost Interest-earning assets: Loans receivable (1) $ 121,446 5.30 % $ 118,094 $ 6,442 5.46 % $ 108,371 $ 6,241 5.76 % Investments securities and interest bearing deposits (2) 15,908 1.97 18,270 313 1.71 24,069 667 2.77 Total interest-earning assets 137,354 4.92 136,364 6,755 4.95 132,440 6,908 5.22 Non-interest earning assets 3,596 4,192 6,993 Total Assets $ 140,950 $ 140,556 $ 139,433 Interest-bearing liabilities: Interest-bearing deposits: NOW accounts $ 22,259 0.15 % $ 20,653 33 0.16 % $ 21,933 48 0.22 % Passbook and savings accounts 22,456 0.11 21,584 25 0.12 19,942 30 0.15 IRA accounts 9,037 1.96 9,068 177 1.95 8,987 230 2.56 Certificates of deposit 56,364 1.60 58,277 902 1.55 59,189 986 1.67 CDARS 2,331 0.47 2,165 11 0.51 1,857 16 .86 Total interest-bearing liabilities 112,447 1.02 111,747 1,148 1.03 111,908 1,310 1.17 Non-interest bearing liabilities 6,517 6,331 5,322 Total Liabilities 118,964 118,078 117,230 Stockholders' equity (3) 21,986 22,478 22,203 Total Liabilities and stockholders' equity $ 140,950 $ 140,556 $ 139,433 Net interest income $ 5,607 $ 5,598 Interest rate spread (4) 3.90 % 3.92 % 4.05 % Net yield on interest-earning assets (5) 4.08 % 4.11 % 4.23 % Ratio of average interest-earning assets to average interest-bearing liabilities 120.54 % 121.52 % 118.35 % (1) Average balances include non-accrual loans with respect to which income is recognized on a cash basis. (2) Includes interest-bearing deposits in other financial institutions, investment securities and mortgage-backed securities (3) Includes unrealized gains on available for sale securities. (4) Interest-rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (5) Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning assets. 30 -------------------------------------------------------------------------------- Table of Contents Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by current volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionally based on the changes due to rate and the changes due to volume. Year Ended September 30, 2013 Compared to Year Ended September 30, 2012 Increase (Decrease) Due to Rate Volume Net (In thousands) Interest Income: Loans receivable $ (340 ) $ 541 $ 201 Investment securities (217 ) (137 ) (354 ) Total interest-earning assets (557 ) 404 (153 ) Interest Expense: NOW accounts (12 ) (3 ) (15 ) Passbook & club accounts (7 ) 2 (5 ) IRA Accounts (55 ) 2 (53 ) Certificates of deposit (69 ) (15 ) (84 ) CDARS (8 ) 3 (5 ) Total interest-bearing liabilities (151 ) (11 ) (162 ) Net change in interest income $ (406 ) $ 415 $ 9 Provision for Loan Losses. For the year ended September 30, 2013 , the provision for loan losses increased $15,000 to $157,000 from $142,000 for the year ended September 30, 2012 . The increase in the provision for loan losses was due to an increase of $9.0 million in net loans receivable for the year ended September 30, 2013 , offset by improvements in asset quality. The risk-based approach to calculating the loan portfolio's general valuation allowance assigns a risk classification and subsequent reserve percentage to every loan, either individually or as a classification, that is in our portfolio. Individual loan risk classifications are adjusted annually, on an as needed basis, when the loans are internally and externally reviewed. Total non-performing residential loans decreased to $0 at September 30, 2013 from $660,000 at September 30, 2012 . A commercial lease with a balance of $442,000 as of September 30, 2013 was restructured during the year and is considered an impaired loan. We had no charge-offs for the years ended September 30, 2013 and 2012. An analysis of the changes in the allowance for loan losses is presented under "- Risk Management - Analysis and Determination of the Allowance for Loan Losses." 31 -------------------------------------------------------------------------------- Table of Contents Non-interest Income. The following table shows the components of non-interest income for the years ended September 30, 2013 and 2012. Years Ended September 30, 2013 2012 $ Change % Change (Dollars in thousands) Fees on NOW accounts $ 36 $ 35 $ 1 2.9 % ATM Surcharge fees 13 12 1 8.3 Increase in cash surrender value of life insurance policies 38 45 (7 ) (15.6 ) Other income 51 33 18 54.5 Total non-interest income $ 138 $ 125 $ 13 10.4 % Non-interest income increased $13,000 for the year ended September 30, 2013 compared to the year ended September 30, 2012 primarily from an increase in deposit related service fees. Non-interest Expense. The following table shows the components of non-interest expense and the percentage changes for the years ended September 30, 2013 and 2012. Years Ended September 30, 2013 2012 $ Change % Change (Dollars in thousands) Salary and benefits $ 1,983 $ 1,875 108 5.8 % Occupancy 375 377 (2 ) (0.5 ) Data processing 254 241 13 5.4 Professional fees 291 292 (1 ) (0.3 ) FDIC insurance premiums 67 63 4 6.3 Charitable contributions 87 87 - - Other 389 371 18 4.9 Total non-interest expense $ 3,446 $ 3,306 140 4.2 % The increase in non-interest expense for the year ended September 30, 2013 was primarily due to a $108,000 increase in salary and benefits expense, and an $18,000 increase in other expenses. The increase in salary and benefits expense was related to a $60,000 increase in expense related to the ESOP and incentive benefit plans, a $60,000 increase in salary expense, offset by a $12,000 decrease in benefits expense. The increase in data processing expense was related to additional technology services. Income Taxes. We recorded income tax expense of $749,000 for the year ended September 30, 2013 compared to an income tax expense of $812,000 for the year ended September 30, 2012 . This change in the provision for income taxes was primarily related to a decrease in income before tax. The effective tax rate for fiscal year 2013 was 34.95% compared to 35.71% for the 2012 fiscal year. 32 -------------------------------------------------------------------------------- Table of Contents Risk Management Overview. Managing risk is an essential part of successfully managing a financial institution. Our most prominent risk exposures are credit risk, interest rate risk and market risk. Credit risk is the risk of not collecting the interest and/or the principal balance of a loan or investment when it is due. Interest rate risk is the potential reduction of net interest income as a result of changes in interest rates. Market risk arises from fluctuations in interest rates that may result in changes in the values of financial instruments, such as available-for-sale securities, that are accounted for on a mark-to-market basis. Other risks that we face are operational risks, liquidity risks and reputation risk. Operational risks include risks related to fraud, regulatory compliance, processing errors, technology and disaster recovery. Liquidity risk is the possible inability to fund obligations to depositors, lenders or borrowers due to unforeseen circumstances. Reputation risk is the risk that negative publicity or press, whether true or not, could cause a decline in our customer base or revenue. Credit Risk Management. Our strategy for credit risk management focuses on having well-defined credit policies and uniform underwriting criteria and providing prompt attention to potential problem loans. When a borrower fails to make a required loan payment, we take a number of steps to attempt to have the borrower cure the delinquency and restore the loan to current status. When the loan becomes 15 days past due, a late notice is generated and sent to the borrower. A second notice is sent and phone calls are made ten days later. If payment is not received by the 30th day of delinquency, a further notification is sent to the borrower. If payment is not received by the 45th day of delinquency, a notice is sent to the borrower advising them that they have a specified period of time to cure their default before legal action begins. If no successful workout can be achieved, after a loan becomes 90 days delinquent, we typically commence foreclosure or other legal proceedings. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real property securing the loan generally is sold at or subsequent to foreclosure. We also may consider loan workout arrangements with certain borrowers under certain circumstances. Management reports to the board of directors or a committee of the board monthly regarding the amount of loans delinquent more than 30 days, all loans in foreclosure and all foreclosed and repossessed property that we own. Analysis of Nonperforming and Classified Assets. We consider repossessed assets, loans that are 90 days or more past due, and troubled debt restructurings to be non-performing assets. Typically, payments received on a non-accrual loan are applied to the outstanding principal and interest as determined at the time of collection of the loan. Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as foreclosed assets until it is sold. When property is acquired, it is initially recorded at the lower of its cost or fair value, less estimate selling expenses. Holding costs and declines in fair value after acquisition of the property result in charges against income. The following table provides information with respect to our non-performing assets at the dates indicated. We had one troubled debt restructuring and no loans past due 90 days and still accruing interest at the dates indicated. At September 30, 2013 2012 (Dollars in thousands) Non-accruing loans: One-to four-family real estate $ 424 $ 660 Commercial leases and loans 442 - Total 866 660 Assets acquired through foreclosure - - Total non-performing assets $ 866 $ 660 Total non-performing loans to total loans 0.70 % 0.58 % Total non-performing loans to total assets 0.61 0.48 Total non-performing assets to total assets 0.61 0.48 For a discussion of the specific allowance related to these assets, see "Analysis and Determination of the Allowance for Loan Losses - Allowance on Impaired Loans." Interest income that would have been recorded for the years ended September 30, 2013 and 2012 had non-accruing loans been current according to their original terms was approximately $32,000 and $36,000 , respectively. Interest income included in net income for these loans for the years ended September 30, 2013 and 2012 was $0 and $24,000 , respectively. 33 -------------------------------------------------------------------------------- Table of Contents Federal regulations require us to review and classify our assets on a regular basis. In addition, the Office of the Comptroller of the Currency has the authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful and loss. "Substandard assets" must have one or more defined weaknesses and are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. "Doubtful assets" have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified "loss" is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. We also utilize a "special mention" category, described as assets which do not currently expose us to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving our close attention. If we classify an asset as loss, we reserve an amount equal to 100% of the portion of the asset classified loss. The following table shows the aggregate amounts of our classified assets at the dates indicated. At September 30, 2013 2012 (In thousands) Special mention assets $ 376 $ 310 Substandard assets 424 424 Doubtful assets - - Loss - - Total criticized and classified assets $ 800 $ 734 At September 30, 2013 and 2012, substandard assets were comprised of a $424,000 commercial line of credit. At September 30, 2013 , Eureka Bank had nine loans classified as special mention, which were comprised of six one- to four-family residential real estate loans, one commercial line of credit, and two commercial leases. At September 30, 2012 , Eureka Bank had eleven loans classified as special mention, which were comprised of nine one- to four-family residential real estate loans and two commercial lines of credit. Other than as disclosed in the above tables, there are no other loans at September 30, 2013 that management has serious doubts about the ability of the borrowers to comply with the present loan repayment terms. Delinquencies. The following table provides information about delinquencies in our loan portfolio at the dates indicated. At September 30, 2013 2012 30-59 60-89 30-59 60-89 Days Days Days Days Past Due Past Due Past Due Past Due (In thousands) One- to four-family real estate $ 116 $ 60 $ 258 $ 91 Home equity and second mortgages - 19 - - Commercial leases and lines of credit 193 - 424 - Total $ 309 $ 79 $ 682 $ 91 34 -------------------------------------------------------------------------------- Table of Contents At September 30, 2013 , delinquent loans were comprised of two one- to four-family residential real estate loans, one home equity line of credit, and one commercial line of credit. At September 30, 2012 , delinquent loans were comprised of eight one- to four-family residential real estate loans and two commercial lines of credit. Analysis and Determination of the Allowance for Loan Losses. The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. We evaluate the need to establish allowances against losses on loans on a quarterly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings. Our methodology for assessing the appropriateness of the allowance for loan losses consists of: (1) a valuation allowance on impaired loans; and (2) a valuation allowance on the remainder of the loan portfolio. Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available for the entire portfolio. Allowance on Impaired Loans. We establish an allowance for loans that are individually evaluated and determined to be impaired. The allowance is determined by utilizing one of the three impairment measurement methods. A loan is impaired when, based upon current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest according to the contractual terms of the loan agreement. Management performs individual assessments of larger impaired loans and, to a lesser extent, certain non-impaired loans, to determine the existence of loss exposure and, where applicable, the extent of loss exposure based upon the present value of expected future cash flows available to pay the loan, or based upon the estimated realizable collateral where a loan is collateral dependent. Generally, loans excluded from the individual impairment analysis are collectively evaluated by management to estimate reserves for loan losses inherent in those loans. Allowance on the Remainder of the Loan Portfolio. We establish another allowance for loans that are not determined to be impaired. Management determines the appropriate loss factor for each group of loans with similar risk characteristics within the portfolio based on loss experience and qualitative and environmental factors for loans in each group. Loan categories will represent groups of loans with similar risk characteristics and may include types of loans categorized by product, large credit exposures, concentrations, loan grade, or any other characteristic that causes a loan's risk profile to be similar to another. We consider qualitative or environmental factors that are likely to cause estimated credit losses associated with our existing portfolio to differ from historical loss experience including changes in lending policies and procedures; changes in the nature and volume of the loan portfolio; changes in experience, ability and depth of loan management; changes in the volume and severity of past due loans, non-accrual loans and adversely graded or classified loans; changes in the quality of the loan review system; changes in the value of underlying collateral for collateral dependent loans; the existence of or changes in concentrations of credit; changes in economic or business conditions; and the effect of competition, legal and regulatory requirements on estimated credit losses. We identify loans that may need to be charged-off as a loss by reviewing all delinquent loans, classified loans and other loans about which management may have concerns about collectability. For individually reviewed loans, the borrower's inability to make payments under the terms of the loan or a shortfall in collateral value would result in our charging off the loan or the portion of the loan that was impaired. The Office of the Comptroller of the Currency , as an integral part of its examination process, periodically reviews our allowance for loan losses. The Office of the Comptroller of the Currency may require us to make additional provisions for loan losses based on judgments different from ours. At September 30, 2013 , our allowance for loan losses was $1.3 million , or 1.06% of loans receivable, net and 149.93% of non-performing loans. At September 30, 2012 , our allowance for loan losses was $1.1 million , or 1.00% of loans receivable, net and 173.0% of non-performing loans. Non-performing loans at September 30, 2013 , were $866,000 or 0.70% of loans receivable, net compared to $660,000 , or 0.58% of loans receivable, net at September 30, 2012 . The allowance for loan losses is maintained at a level that represents management's best estimate of losses in the loan portfolio at the balance sheet date. However, the allowance for loan losses may not be adequate to cover losses which may be realized in the future and additional provisions for loan losses may be required. 35 -------------------------------------------------------------------------------- Table of Contents Our historical loss experience and qualitative and environmental factors are reviewed on a quarterly basis to ensure they are reflective of current conditions in our loan portfolio and economy. The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated. At September 30, 2013 2012 % of % of Loans in Loans in Category Category to Total to Total Amount Loans Amount Loans (Dollars in thousands) Real estate loans: One- to four-family real estate-owner-occupied $ 157 16.65 % $ 114 20.08 % One- to four-family real estate-non-owner-occupied 268 26.63 306 25.63 Construction and land 19 3.13 4 0.39 Multi-family real estate 142 14.40 128 12.47 Commercial real estate 270 18.44 241 18.38 Consumer loans: Home equity and second mortgages 7 1.00 7 1.11 Secured loans - .15 - .24 Commercial leases and loans 247 16.32 243 17.06 Commercial lines of credit 46 3.28 60 4.64 Non-allocated 143 - 39 - Total allowance for loan losses $ 1,299 100.00 % $ 1,142 100.00 % Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and our results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while we believe we have established our allowance for loan losses in conformity with U.S. generally accepted accounting principles, the Office of the Comptroller of the Currency , in reviewing our loan portfolio, may request that we increase our allowance for loan losses based on judgments different from ours. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, increases may be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations. 36 -------------------------------------------------------------------------------- Table of Contents Analysis of Loan Loss Experience. The following table sets forth an analysis of the allowance for loan losses for the years indicated. Year Ended September 30, 2013 2012 Allowance at beginning of year $ 1,142 $ 1,000 Charge-offs - - Recoveries - - Net charge-offs - - Provision for loan losses 157 142 Allowance at end of year $ 1,299 $ 1,142 Allowance for loan losses to non-performing loans 149.93 % 173.02 % Allowance for loan losses to total loans at the end of the year 1.06 1.00 Net charge-offs to average loans outstanding during the year - - Interest Rate Risk Management. Because the majority of our assets and liabilities are sensitive to changes in interest rates, our most significant form of market risk is interest rate risk. We are vulnerable to an increase in interest rates that may cause our interest-bearing liabilities to increase at a rate faster than our interest-earning assets, thereby negatively affecting net income. We manage the interest rate sensitivity of our interest-bearing liabilities and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment. To reduce the volatility of our earnings, we have sought to improve the match between asset and liability maturities and rates, while maintaining an acceptable interest rate spread. Our strategy for managing interest rate risk generally is to: • originate multi-family and commercial real estate loans with adjustable-rate features or fixed-rate loans with shorter maturities than one- to four-family residential mortgages; • purchase commercial leases with adjustable-rate features or fixed-rate loans with shorter maturities than one- to four-family residential mortgages; • attract low-cost checking and transaction accounts, which tend to be less interest rate sensitive; • maintain interest-bearing deposits, federal funds and U.S. Government securities with short to intermediate terms; and • maintain an investment portfolio that provides stable cash flows, thereby providing investable funds in varying interest rate cycles. We have made a significant effort to increase our level of lower-cost deposits as a method of enhancing profitability. At September 30, 2013 , we had 42.3% of our deposits in lower-cost passbook and interest-bearing and non-interest bearing demand accounts compared to 37.3% at September 30, 2012 . Such deposits have traditionally remained relatively stable and would be expected to be only moderately affected by changes in interest rates. Net Portfolio Value Analysis. We use a net portfolio value analysis prepared by the Office of the Comptroller of the Currency to review our level of interest rate risk. Such analysis measures interest rate risk by computing changes in net portfolio value of our cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. Net portfolio value represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market risk-sensitive instruments in the event of a sudden and sustained 100 to 300 basis point increase or 100 basis point decrease in market interest rates with no effect given to any steps that we might take to counter the effect of that interest rate movement. Because of the low level of market interest rates, these analyses are not performed for decreases of more than 100 basis points. 37 -------------------------------------------------------------------------------- Table of Contents The following table, which is based on information that we provide to the Office of the Comptroller of the Currency , presents the change in the net portfolio value of the Bank at September 30, 2013 , which is the most recent date for which information is available, that would occur in the event of an immediate change in interest rates based on Office of the Comptroller of the Currency assumptions, with no effect given to any steps that we might take to counteract that change. Net Portfolio Value Net Portfolio Value as a % of Portfolio Value of Assets Basis Point ("bp") Change in Rates Amount Change % Change NPV Ratio Change (bp) (Dollars in Thousands) +300 bp $ 21,277 $ (6,017 ) (22 )% 15.88 % (281 ) +200 bp 23,712 (3,582 ) (13 ) 17.14 (155 ) +100 bp 25,996 (1,298 ) (5 ) 18.22 (47 ) 0 bp 27,294 - - 18.69 - - 100 bp 26,359 935 3 17.78 91 The changes in our net portfolio value shown in the preceding table that would occur reflects: (1) that a substantial portion of our interest-earning assets are fixed-rate loans and fixed-rate investment securities; and (2) the shorter duration of deposits, which reprice more frequently in response to changes in market interest rates. The Office of the Comptroller of the Currency uses various assumptions in assessing interest rate risk. These assumptions relate to interest rates, loan prepayment rates, deposit decay rates and the market values of certain assets under differing interest rate scenarios, among others. As with any method of measuring interest rate risk, certain shortcomings are inherent in the methods of analyses presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could deviate significantly from those assumed in calculating the table. Prepayment rates can have a significant impact on interest income. Because of the large percentage of loans and mortgage-backed securities we hold, rising or falling interest rates have a significant impact on the prepayment speeds of our earning assets that in turn affect the rate sensitivity position. When interest rates rise, prepayments tend to slow. When interest rates fall, prepayments tend to rise. Our asset sensitivity would be reduced if prepayments slow and vice versa. While we believe these assumptions to be reasonable, assumed prepayment rates may not approximate actual future mortgage-backed security and loan repayment activity. Liquidity Management. Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of cash and cash equivalents, deposit inflows, wholesale borrowings, loan repayments and maturities and liquidation and sales of securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows, loan prepayments and sales of securities are greatly influenced by general interest rates, economic conditions and competition. We regularly adjust our investments in liquid assets based upon our assessment of: (1) expected loan demand; (2) expected deposit flows; (3) yields available on interest-earning deposits and securities; and (4) the objectives of our asset/liability management policy. We use a variety of measures to assess our liquidity needs, which are provided to our board of directors on a regular basis. 38 -------------------------------------------------------------------------------- Table of Contents Our most liquid assets are cash and cash equivalents. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. Cash and cash equivalents totaled $7.2 million at September 30, 2013 . In addition, at September 30, 2013 , we had the ability to borrow a total of approximately $70.3 million from the Federal Home Loan Bank of Pittsburgh , of which we had no advances outstanding. At September 30, 2013 , we had $2.4 million in loan commitments outstanding, which consisted of commitments to grant $2.0 million in loans and $367,000 in commercial leases and lines of credit. At September 30, 2013 , we had $5.7 million in undisbursed lines of credit, $504,000 in undisbursed loans in process and $2.1 million in undisbursed construction loans. Certificates of deposit due within one year of September 30, 2013 totaled $35.6 million , representing 52.6% of certificates of deposit at September 30, 2013 . We believe, based on past experience, that we will retain a significant portion of these deposits at maturity. However, if these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before September 30, 2013 . The following table presents certain of our contractual obligations as of September 30, 2013 . Payments Due by Period Less Than One to Three Three to More Than Total One Year Years Five Years Five Years (In thousands) Contractual Obligations Operating lease obligations (1) $ 235 $ 58 $ 177 $ - $ - Other long-term obligations (2) 8 7 1 - - Total $ 243 $ 65 $ 178 $ - $ - (1) Represents the lease for the Bank's Shaler branch office. (2) Represents obligations relating to branch office signage and the Bank's mailing system. Our primary investing activities are the origination of loans and the purchase and sale of securities. Our primary financing activities consist of activity in deposit accounts. Deposit flows are affected by the overall levels of interest rates, the interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive and to increase core deposit relationships. Occasionally, we offer promotional rates on certain deposit products to attract deposits. The following table presents our primary investing and financing activities during the periods indicated. Years Ended September 30, 2013 2012 (In thousands) Investing activities: Proceeds from maturities and redemptions of investment securities $ 12,450 $ 16,505 Purchase of investment securities (8,109 ) (13,400 ) Net decrease in loans 144 3,302 Commercial leases purchased (9,307 ) (11,529 ) Financing activities: Increase (decrease) in deposits 2,961 (288 ) Purchase and retirement of common stock (1,209 ) (300 ) Payment of dividends (403 ) (369 ) 39 -------------------------------------------------------------------------------- Table of Contents Capital Management. We have managed our capital to maintain strong protection for depositors and creditors. We are subject to various regulatory capital requirements administered by the Office of the Comptroller of the Currency , including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At September 30, 2013 , we exceeded all of our regulatory capital requirements. We are considered "well capitalized" under regulatory guidelines. See "Regulation and Supervision - Federal Banking Regulations - Capital Requirements" and the notes to the consolidated financial statements included in this annual report. Off-Balance Sheet Arrangements. In the normal course of operations, we engage in a variety of financial transactions that, in accordance with U.S. generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers' requests for funding and take the form of loan commitments, letters of credit and lines of credit. For information about our loan commitments and unused lines of credit, see note 14 of the notes to the consolidated financial statements. For the years ended September 30, 2013 and 2012, we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows. Impact of Recent Accounting Pronouncements For a discussion of the impact of recent accounting pronouncements, see note 1 of the notes to the consolidated financial statements. Effect of Inflation and Changing Prices The financial statements and related financial data presented in this annual report have been prepared in accordance with U.S. generally accepted accounting principles, which require the measurement of financial condition and operating results in terms of historical dollars without considering the change 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 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 do general levels of 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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