SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ______________________
Pulaski Financial Corp. - Commission File No. 0-24571
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(Exact name of registrant as specified in its charter)
Delaware 43-1816913
- --------------------------------------- ---------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
12300 Olive Boulevard
St. Louis, Missouri 63141-6434
- --------------------------------------- ---------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (314) 878-2210
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of the registrant's classes of common
stock, as of the latest practicable date.
Class Outstanding at February 1, 1999
----------------------------- ---------------------------------
Common Stock, par value $.01 per share 3,965,503 shares
PULASKI FINANCIAL CORP. AND SUBSIDIARIES
FORM 10-Q
DECEMBER 31, 1998
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at December 31, 1998 and
September 30, 1998 (Unaudited) 1
Consolidated Statements of Income and Comprehensive Income for
the Three Months Ended December 31, 1998 and 1997 (Unaudited) 2
Consolidated Statement of Stockholders' Equity for the Three Months Ended
December 31, 1998 (Unaudited) 3
Consolidated Statements of Cash Flows for the Three Months Ended
December 31, 1998 and 1997 (Unaudited) 4-5
Notes to Unaudited Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Operations 7-13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14-17
PART II OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security-Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 19
PULASKI FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND SEPTEMBER 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
December 31, September 30,
1998 1998
ASSETS
Cash and amounts due from depository institutions $ 3,588,204 $ 3,047,328
Federal funds sold and overnight deposits 13,000,000
------------ ------------
Total cash and cash equivalents 16,588,204 3,047,328
Investment securities available for sale, at market value 1,743,626 2,235,133
Investments in debt securities held to maturity (market value, $18,536,818
and $19,026,432, at December 31 and September 30, 1998, respectively) 18,463,829 18,923,006
Mortgage-backed and related securities held to maturity (market value,
$5,220,044 and $5,683,829 at December 31 and September 30, 1998, respectively) 4,966,328 5,412,117
Mortgage-backed and related securities available for sale, at market value 1,435,950 1,488,267
Loans held for sale 17,965,244 13,442,421
Loans receivable, net of allowance for loan losses of $796,039 and
$762,688 at December 31 and September 30, 1998, respectively 148,818,341 141,769,058
Federal Home Loan Bank stock - at cost 1,423,000 1,423,000
Real estate acquired in settlement of loans, net of allowance for losses of
$16,486 and $18,640 at December 31 and September 30, 1998, respectively 93,419 105,628
Premises and equipment - net 2,102,518 2,105,293
Accrued interest receivable:
Investment securities 230,542 224,513
Mortgage-backed securities 44,509 48,584
Loans 925,742 907,695
Other 1,643
Other assets 1,751,465 2,076,332
------------ ------------
TOTAL $216,554,360 $193,208,375
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $157,136,612 $156,235,348
Stock subscriptions 5,129,497
Advances from Federal Home Loan Bank of Des Moines 4,900,000 1,900,000
Advance payments by borrowers for taxes and insurance 948,640 3,185,605
Accrued interest payable 6,752 262,600
Other liabilities 1,968,492 1,282,666
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Total liabilities 164,960,496 167,995,716
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock - $.01 par value per share, authorized 1,000,000 shares; none issued or
outstanding - -
Common stock - $.01 par value per share, authorized 25,000,000 shares; 3,965,503 shares
issued and outstanding at December 31, 1998 39,655
Common stock - $1.00 par value per share, authorized 25,000,000 shares;
2,105,840 issued and outstanding at September 30, 1998 2,105,840
Additional paid-in capital 35,615,042 5,258,418
Unearned MRDP shares (59,800) (73,600)
Unearned ESOP shares (2,288,807)
Accumulated other comprehensive income 10,726 14,520
Retained earnings 18,277,048 17,907,481
------------ ------------
Total stockholders' equity 51,593,864 25,212,659
------------ ------------
TOTAL $216,554,360 $193,208,375
============ ============
See accompanying notes to the consolidated financial statements.
- 1 -
PULASKI FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
1998 1997
INTEREST INCOME:
Loans $3,085,542 $2,951,653
Investment securities 288,654 225,873
Mortgage-backed and related securities 130,512 130,233
Other 120,036 123,115
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Total interest income 3,624,744 3,430,874
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INTEREST EXPENSE:
Deposits 1,741,092 1,746,178
Advances from Federal Home Loan Bank of Des Moines 69,440 34,996
Stock subscriptions 46,010
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Total interest expense 1,856,542 1,781,174
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NET INTEREST INCOME 1,768,202 1,649,700
PROVISION FOR LOAN LOSSES 39,582 79,897
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,728,620 1,569,803
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OTHER INCOME:
Service charges on deposit accounts 87,988 20,889
Gains on sales of loans 231,368 138,710
Insurance commissions 70,908 41,647
Other 112,370 90,795
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Total other income 502,634 292,041
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OTHER EXPENSES:
Advertising 104,590 78,278
Salaries and employee benefits 796,425 638,496
Occupancy and equipment expense 254,920 193,598
Federal insurance premiums 23,590 24,517
Outside data processing 72,582 56,935
Professional services 43,479 30,750
Other 157,948 110,397
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Total other expenses 1,453,534 1,132,971
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INCOME BEFORE INCOME TAXES 777,720 728,872
INCOME TAXES 288,837 255,509
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NET INCOME 488,883 473,363
OTHER COMPREHENSIVE INCOME - Unrealized gain on securities (net of
income taxes of $1,181 and reclassification adjustments of $(1,102)) (3,794) -
---------- ----------
COMPREHENSIVE INCOME $ 485,089 $ 473,363
========== ==========
See accompanying notes to the consolidated financial statements.
- 2 -
PULASKI FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
Unearned
Management Accumulated
Number of Additional Recognition and Unearned Other
Shares Common Paid-In Development ESOP Comprehensive Retained
Outstanding Stock Capital Plan Shares Shares Income Earnings Total
BALANCE,
September 30, 1998 2,105,840 $ 2,105,840 $ 5,258,418 $(73,600) $ - $14,520 $17,907,481 $25,212,659
-----------
Comprehensive income:
Net income 488,883 488,883
Change in net
unrealized gains on
securities (d) (3,794) (3,794)
-----------
Total
comprehensive
income 485,089
-----------
Dividends (c) (336,296) (336,296)
Issuance and exchange
of common stock as
a result of
the conversion
reorganization (a)(b) 1,859,663 (2,066,185) 30,357,377 (2,327,600) 25,963,592
Assets consolidated
from Pulaski
Bancshares, M.H.C. 216,980 216,980
Release of ESOP shares (753) 38,793 38,040
Amortization of
management
recognition and
development plan
shares 13,800 13,800
--------- ----------- ----------- -------- ----------- ------- ----------- -----------
BALANCE,
December 31, 1998 3,965,503 $ 39,655 $35,615,042 $(59,800) $(2,288,807) $10,726 $18,277,048 $51,593,864
========= =========== =========== ======== =========== ======= =========== ===========
(a) Includes 635,840 $1.00 par value shares outstanding at December 2, 1998,
converted into 1,056,003 $.01 par value exchange shares based on 1.6608
exchange ratio; 2,909,500 $.01 par value shares sold in the subscription
and community offering; and the cancellation of $1,470,000 $1.00 par value
shares previously held by Pulaski Bancshares, M.H.C.
(b) 232,760 shares purchased by the ESOP.
(c) Dividends of $.09 per share on 3,965,503 outstanding shares less $20,599
attributable to unallocated ESOP shares.
(d) Includes change in unrealized gains of ($2,692) and reclassification
adjustment for gains included in income of ($1,102).
See accompanying notes to consolidated financial statements.
- 3 -
PULASKI FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 488,883 $ 473,363
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation, amortization and accretion:
Premises and equipment 87,824 72,438
Management recognition and development plan stock awards 13,800 13,800
ESOP shares committed to be released 38,040
Loan fees, discounts and premiums - net (29,690) (35,844)
Deferred taxes 7,480 (25,526)
Provision for loan losses 47,714 79,897
Provision for losses on real estate acquired in settlement of loans (2,154) 9,526
Gains on sales of loans (231,368) (138,710)
Originations of loans for sale to correspondent lenders (39,959,823) (22,596,135)
Proceeds from sales of loans to correspondent lenders 35,668,368 21,626,087
Changes in other assets and liabilities 302,855 (1,913,606)
------------ ------------
Net adjustments (4,056,954) (2,908,073)
------------ ------------
Net cash used in operating activities (3,568,071) (2,434,710)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities of investment securities 3,251,750 4,575,000
Purchases of investment securities (2,249,818) (3,217,049)
Gain on sale of investments (1,750)
Principal payments received on mortgage-backed and related
securities 503,062 126,552
Loan repayments in excess of originations (7,112,372) 1,022,017
Net additions to premises and equipment (85,049) (38,223)
------------ ------------
Net cash (used in) provided by investing activities (5,694,177) 2,468,297
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 2,888,779 3,405,092
Proceeds of Federal Home Loan Bank advances 7,500,000
Repayment of Federal Home Loan Bank advances (4,500,000)
Decrease in advance payments by borrowers for taxes
and insurance (2,236,965) (2,338,684)
Dividends declared on common stock (336,296) (172,398)
Common stock issued under stock option plan 24,938
Issuance of common stock under conversion/reorganization 19,487,606
------------ ------------
Net cash provided by financing activities 22,803,124 918,948
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(Continued)
- 4 -
PULASKI FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
1998 1997
NET INCREASE IN CASH AND CASH EQUIVALENTS $13,540,876 $ 952,535
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,047,328 6,248,294
----------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $16,588,204 $7,200,829
=========== ==========
ADDITIONAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest on deposits $ 1,996,940 $2,002,286
Interest on advances from the Federal Home Loan Bank
of Des Moines 69,440 34,996
Income taxes - 185,814
NONCASH INVESTING ACTIVITIES:
Write-down of real estate owned 14,363 -
Real estate acquired in settlement of loans - 60,311
Decrease in investments for changes in unrealized gains and losses 4,975 -
NONCASH FINANCING ACTIVITIES:
Issuance of common stock:
Decrease in stock subscriptions 5,129,497 -
Purchase by ESOP 2,327,600 -
Proceeds received from deposit transfers 1,987,515 -
LOANS SECURITIZED - 2,650,377
See accompanying notes to the consolidated financial statements. (Concluded)
- 5 -
PULASKI FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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1. The unaudited consolidated financial statements include the accounts of
Pulaski Financial Corp. (the "Company") and its wholly owned subsidiary
Pulaski Bank, A Federal Savings Bank (the "Bank") and its wholly owned
subsidiary, Pulaski Service Corporation. All significant intercompany
accounts and transactions have been eliminated.
On December 2, 1998, the Company completed the conversion of Pulaski
Bancshares, M.H.C. from a federal mutual holding company to a stock holding
company. In connection with the Conversion and Reorganization, the Company
sold 2,909,500 shares of its common stock to the public at $10 per share in
a public offering ("Offering"), including 232,760 shares purchased by the
Company's Employee Stock Ownership Plan. In addition, 1,056,003 shares of
common stock of the Company were issued in exchange for shares of stock of
the Bank previously held by public stockholders at an exchange ratio of
1.6608 shares for each share of Bank common stock resulting in 3,965,503
shares of common stock of the Company outstanding at the Conversion and
Reorganization. The Company has no significant assets, other than all of the
outstanding shares of the Bank and the portion of the net proceeds from the
Offering retained by the Company, and no significant liabilities. Management
of the Company and the Bank are substantially similar and the Company
neither owns nor leases any property, but instead uses the premises,
equipment and furniture of the Bank. Accordingly, the information set forth
in this report, including the consolidated financial statements and related
financial data, relates primarily to the Bank.
In the opinion of management, the preceding unaudited consolidated financial
statements contain all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the financial condition of
the Company as of December 31 and September 30, 1998 and the results of its
operations for the three month period ended December 31, 1998 and 1997. The
results of operations for the three month period ended December 31, 1998 are
not necessarily indicative of the results which may be expected for the
entire fiscal year. These unaudited consolidated financial statements should
be read in conjunction with the audited consolidated financial statements of
the Bank for the year ended September 30, 1998 contained in the Company's
1998 Annual Report to Stockholders which is filed as an exhibit to the
Company's Annual Report on Form 10-K.
2. EARNINGS PER SHARE
Earnings per share for the three months ended December 31, 1998 and 1997 are
not applicable due the stock conversion/reorganization which was completed
on December 2, 1998.
3. RECLASSIFICATIONS
Certain reclassifications have been made to 1997 amounts to conform to 1998
presentation.
* * * * * *
- 6 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the
federal securities laws. These statements are not historical facts, rather
statements based on the Company's current expectations regarding its business
strategies and their intended results and its future performance. Forward-
looking statements are preceded by terms such as "expects," "believes,"
"anticipates," "intends," and similar expressions.
Forward-looking statements are not guarantees of future performance. Numerous
risks and uncertainties could cause or contribute to the Company's actual
results, performance and achievements to be materially different from those
expressed or implied by the forward-looking statements. Factors that may cause
or contribute to these differences include, without limitation, general economic
conditions, including changes in market interest rates and changes in monetary
and fiscal policies of the federal government; legislative and regulatory
changes; the Company's ability to remedy any computer malfunctions that may
result from the advent of the year 2000; and other factors disclosed
periodically in the Company's filings with the Securities and Exchange
Commission.
Because of the risks and uncertainties inherent in forward-looking statements,
readers are cautioned not to place undue reliance on them, whether included in
this report or made elsewhere from time to time by the Company or on its behalf.
The Company assumes no obligation to update any forward-looking statements.
GENERAL
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of the Company. The information contained in this section
should be read in conjunction with the unaudited consolidated financial
statements and accompanying notes thereto.
FINANCIAL CONDITION
Total assets at December 31, 1998 were $216.6 million, an increase of $23.4
million from $193.2 million at September 30, 1998. The increase in total assets
is primarily attributable to increases in cash and cash equivalents, loans
receivable and loans receivable held for sale. The increases are offset by
decreases in investment and debt securities.
Loans receivable increased $7 million from $141.8 million at September 30, 1998
to $148.8 million at December 31, 1998. The increase was largely due to a
greater volume of consumer loans (primarily auto) made as a result of an effort
to increase the Bank's position in this market. Loans held for sale increased
from $13.4 million at September 30, 1998 to $18.0 million at December 31, 1998.
This increase is due to greater volume of fixed-rate mortgage loan originations
and refinances given the current rate environment and borrower preferences
towards fixed-rate loans. As it is the Bank's strategy to maintain mostly
adjustable rate loans in their portfolio, the majority of mortgage loans
originated were held for sale to correspondent lenders.
Cash and cash equivalents increased $13.5 million primarily as a result of
proceeds received from the stock offering which was completed on December 2,
1998.
- 7 -
The increase in total assets is partially offset by the sale of $500,000 of
investment securities as well as net maturities of investment securities of
$459,000 and net prepayments and amortizations of debt securities of $446,000.
Total liabilities at December 31, 1998 were $165.0 million, a decrease of $3.0
million from $168.0 million at September 30, 1998. The decrease in total
liabilities is primarily attributable to the redemption of $5.1 million in stock
subscriptions related to the stock offering completed in December 1998.
Additionally, net disbursements totaling $2.2 million were made from escrow
funds held on behalf of others.
These decreases were partially offset by a $3.0 million increase in advances
from the Federal Home Loan Bank ("FHLB"), increases in deposits of $900,000 and
increases in other liabilities of $686,000. The increase in FHLB advances
occurred due to cash needs to fund new loans and to provide for the payment of
escrowed real estate taxes. The increase in deposits is related to increased
volume of new checking accounts as a result of the continued implementation of
the high performance checking program. The increase in other liabilities is a
result of a first quarter dividend declared in the amount of $357,000, as well
as timing differences of federal income tax payments and miscellaneous other
liabilities.
Total stockholders' equity at December 31, 1998 was $51.6 million, an increase
of $26.4 million over $25.2 million at September 30, 1998. The large increase
is due to the conversion and stock offering completed on December 2, 1998.
NON-PERFORMING ASSETS AND DELINQUENCIES
Loans accounted for on a non-accrual basis amounted to $936,000 at December 31,
1998 as compared to $753,000 at September 30, 1998. The largest non-accrual
loan is a participation in a commercial real estate loan that is in bankruptcy
for a total of $224,000. The borrower is paying in accordance with the terms of
the bankruptcy, and the interest rate has been increased to 11.625% during the
period of delinquency. Interest is being recorded only upon the receipt of
payments. The remainder of non-accrual loans consists primarily of single-
family residential loans. Accruing loans that were contractually past due 90
days or more at December 31, 1998 amounted to $519,000 of which $204,000 were
FHA/VA government-insured loans. Real estate acquired in settlement of loans,
net of allowance for losses decreased to $93,000 at December 31, 1998 from
$106,000 at September 30, 1998, and consisted of single-family residences. The
allowance for loan losses was $796,000 at December 31, 1998, or .48% of total
loans.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED DECEMBER 31, 1998
AND 1997:
GENERAL
Net income for the three months ended December 31, 1998 was $489,000, compared
to $473,000 for the three months ended December 31, 1997.
INTEREST INCOME
Interest income increased $194,000 for the three months ended December 31, 1998
compared to the three months ended December 31, 1997. The increase resulted
primarily from an increase in interest on consumer loans of $235,000, as well as
an increase of $63,000 in interest on investment securities. These increases
are offset by a decrease in interest on mortgage loans of $101,000.
- 8 -
The increase in interest income on consumer loans resulted from an increase in
the average balance of consumer loans outstanding from $5.3 million in 1997 to
$18.9 million in 1998 with a decrease in the average yield on these loans from
8.93% in 1997 to 7.49% in 1998. The lower average yield on loans is the result
of aggressive pricing by the Bank to obtain volume and the general trend of
lower interest rates over the last twelve months.
The increase in interest income in investment securities resulted primarily from
an increase in the average balance from $16.9 million in 1997 to $20.6 million
in 1998 offset by a decrease in the yield on these investments from 5.90% in
1997 to 5.61% in 1998. The decrease in the average yield is a reflection of the
rates currently available.
The decrease in interest on mortgage loans resulted from an increase in the
average balance from $140.6 million in 1997 to $141.8 million in 1998 which was
offset by a decrease in the yield on these loans of 8.06% in 1997 to 7.71% in
1998. The lower average yield on loans is the result of mortgage loan
refinancing, payoffs and prepayments on higher rate loans, lower rate repricings
on adjustable rate loans and the current market rates.
INTEREST EXPENSE
Interest expense increased $75,000 for the three months ended December 31, 1998
compared to the same period one year ago. The additional expense resulted
primarily from increased interest expense of $34,000 on borrowings from the FHLB
of Des Moines. The average balance of borrowings increased from $2.2 million
for the three months ended December 31, 1997 to $4.9 million for the quarter
ended December 31, 1998. Offsetting the average balance increase was a decline
in the average rate from 6.36% for the quarter ended December 31, 1997 to 5.64%
for the quarter ended December 31, 1998. The Bank obtained short-term advances
to meet loan fundings and the payment of approximately $3 million of borrowers
funds escrowed for annual real estate taxes.
Additional interest expense of $46,000 was incurred during the quarter ended
December 31, 1998 as a result of interest payments made on funds received for
stock subscriptions. Interest on deposits declined $5,000 for the quarter ended
December 31, 1998 compared to the same quarter of the prior year. The average
balances increased from $149 million to $160 million but were offset by reduced
average rates which declined from 4.67% for the three months ended December 31,
1997 to 4.46% for the three months ended December 31, 1998.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $40,000 for the three months ended
December 31, 1998 compared to $80,000 for the three months ended December 31,
1997. Management of the Bank deemed it necessary to increase the provision for
loan losses after considering an increase in total nonperforming loans to
$1.5 million at December 31, 1998 from $1.2 million at September 30, 1998. As
the Bank's investment in consumer credit loans continues to increase, management
believes the additional provision is appropriate and adequate.
The provision for loan losses is determined by management as the amount to be
added to the allowance for loan losses after net charge-offs have been deducted
to bring the allowance to a level which is considered adequate to absorb losses
inherent in the loan portfolio. Because management adheres to strict loan
underwriting guidelines focusing on mortgage loans secured by one-to-four-family
residences, the Bank's historical loan loss experience has been low. No
assurances, however, can be given as to future loan loss levels.
- 9 -
OTHER INCOME
Other income increased $211,000 for the three months ended December 31, 1998
from $292,000 for the three months ended December 31, 1997. The increase in
other income is primarily the result of an increase in gains on the sale of
loans totaling $93,000. Sales of loans for the three months ended December 31,
1998 were approximately 67% higher than the three months ended December 31,
1997.
Service charges for the three months ended December 31, 1998 increased $67,000
which represents a 321% increase over the corresponding period of the prior year
as a result of the growth in checking accounts.
Insurance commissions have increased 70% from $42,000 for the three months ended
December 31, 1997 to $71,000 for the three months ended December 31, 1998
primarily as a result of increased sales of annuities.
Miscellaneous other income increased $22,000 primarily as a result of increased
late charges and service charges on loans as well as loan modification fees.
OTHER EXPENSES
Other expenses increased $321,000 to $1.5 million for the three months ended
December 31, 1998.
The increase was primarily due to increases in compensation expense of $158,000,
occupancy and equipment expense of $61,000, advertising expense of $26,000, and
other miscellaneous expenses of $48,000.
Compensation expense increased from $638,000 for the three months ended
December 31, 1997 to $796,000 for the three months ended December 31, 1998. The
increase is the result of increased incentive compensation as a result of the
implementation of a performance based compensation system, increased staffing
for mortgage and consumer lending, greater use of temporary and part-time
staffing and the additional expense of the employees stock ownership plan.
Occupancy and equipment expense increased from $194,000 for the three months
ended December 31, 1997 to $255,000 for the three months ended December 31,
1998. The increase is a result of various increased costs, including costs
associated with a newly installed ATM machine, revised maintenance agreements,
and depreciation charges.
Advertising expense increased from $78,000 for the three months ended
December 31, 1997 to $105,000 for the three months ended December 31, 1998. The
increase in advertising expense is a result of costs incurred associated with
the continued promotion of the high performance checking account program
introduced during the first quarter of the prior year.
Other miscellaneous expenses increased from $110,000 for the three months ended
December 31, 1997 to $158,000 for the three months ended December 31, 1998. The
increase was due primarily to $11,000 in increased postage, $13,000 in increased
telephone expenses, $10,000 in increased organization dues, and $9,000 in
increased other loan costs.
INCOME TAXES
The provision for income taxes increased to $289,000 for the three months ended
December 31, 1998 from $256,000 for the three months ended December 31, 1997.
The increase is primarily attributable to increased levels of taxable income.
- 10 -
LIQUIDITY AND CAPITAL RESOURCES
Federal regulations require the Bank to maintain minimum levels of liquid
assets. The required percentage has varied from time to time based upon
economic conditions and savings flows and is currently 4% of net withdrawable
savings deposits (as defined by OTS) and borrowings payable on demand or in one
year or less during the proceeding calendar month. Liquid assets for purposes
of this ratio include cash and cash equivalents and investment securities and
agency-issued collateralized mortgage obligations generally having maturities of
less than five years. The Bank attempts to maintain levels of liquidity in
excess of those required by regulation. Maintaining levels of liquidity acts,
in part, to reduce the Bank's balance sheet exposure to interest rate risk. For
the quarter ended December 31, 1998, the Bank's average liquidity ratio (liquid
assets as a percentage of net withdrawable savings deposits and short-term
borrowings) was 18.91%.
The Bank must also maintain adequate levels of liquidity to ensure the
availability of funds to satisfy loan commitments and deposit withdrawals. At
December 31, 1998, the Bank had outstanding commitments to originate loans of
$8.2 million, and commitments to sell loans of $24.7 million. At the same date,
certificates of deposit which are scheduled to mature in one year or less
totaled $69.0 million. Management believes the majority of maturing
certificates of deposit will remain with the Bank.
Management believes its ability to generate funds internally will satisfy its
liquidity requirements. If the Bank requires funds beyond its ability to
generate them internally, it has the ability to borrow funds from the FHLB-Des
Moines under a blanket agreement which assigns all investments in FHLB stock as
well as qualifying first mortgage loans equal to 150% of the outstanding
advances as collateral to secure the amounts borrowed. At December 31, 1998,
the Bank had approximately $75.6 million available to it under the above-
mentioned borrowing arrangement. At December 31, 1998, the Bank had
$4.9 million in advances from the FHLB-Des Moines.
The Bank is required to maintain specific amounts of capital pursuant to OTS
regulations on minimum capital standards. The OTS' minimum capital standards
generally require the maintenance of regulatory capital sufficient to meet each
of three tests, hereinafter described as the tangible capital requirement, the
core capital requirement and the risk-based requirement. The tangible capital
requirement provides for minimum tangible capital (defined as stockholders'
equity less all intangible assets) equal to 1.5% of adjusted total assets. The
core capital requirement provides for minimum core capital (tangible capital
plus certain forms of supervisory goodwill and other qualifying intangible
assets) equal to 3.0% of adjusted total assets. The risk-based capital
requirements provides for the maintenance of core capital plus a portion of
unallocated loss allowances equal to 8.0% of risk-weighted assets. In computing
risk-weighted assets the Bank multiplies the value of each asset on its balance
sheet by a defined risk-weighting factor (e.g., one- to four-family conventional
residential loans carry a risk-weighted factor of 50%).
At December 31, 1998, the Bank's tangible capital totaled $38.8 million, or
19.1% of adjusted total assets, which exceeded the minimum 1.5% requirement by
$35.8 million, or 17.6%. The Bank's core capital at December 31, 1998 totaled
$38.8 million, or 19.1% of adjusted total assets, which was approximately $32.7
million, or 16.1% above the minimum requirement of 3%. The Bank's risk-based
capital at that date totaled $39.6 million, or 31.6% of risk weighted assets,
which is $29.6 million, or 23.6% above the 8% fully phased-in requirement.
- 11 -
To be Categorized as
"Well Capitalized"
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
---------------------- ---------------------- ----------------------
(Dollars in Thousands) Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1998:
Tangible capital (to total assets) $38,849 19.09 % $ 3,052 1.50 % N/A N/A
Core capital (to total assets) 38,849 19.09 % 6,103 3.00 % N/A N/A
Total risk-based capital
(to risk-weighted assets) 39,633 31.62 % 10,029 8.00 % 12,536 10.00 %
Tier I risk-based capital
(to risk-weighted assets) 38,849 30.99 % N/A N/A 7,522 6.00 %
Tier I leverage capital (to
average assets) 38,849 18.95 % N/A N/A 10,250 5.00 %
Year 2000
The Company is a user of computers, computer software and equipment utilizing
embedded microprocessors that will be affected by the year 2000 issue. The year
2000 issue exists because many computer systems and applications use two-digit
date fields to designate a year. As the century date change occurs, date-
sensitive systems may recognize the year 2000 as 1900, or not at all. This
inability to recognize or properly treat the year 2000 may cause erroneous
results, ranging from system malfunctions to incorrect or incomplete processing.
The Company established a year 2000 committee in 1997 headed by the Senior Vice
President. Other members are President, Executive Vice President, and an
outside Board member. The committee provides periodic reports to the Board of
Directors in order to assist the directors in their year 2000 readiness
oversight role. The plan is comprised of the following phases:
1. Awareness -- Educational initiatives on year 2000 issues and concerns. This
phase is ongoing, especially as it relates to informing customers of the
Company's year 2000 preparedness.
2. Assessment -- Inventory of all technology assets and identification of
third-party vendors and service providers. This phase has been completed.
3. Renovation -- Review of vendor and service providers responses to the
Company's year 2000 inquiries and development of a follow-up plan and time
line. This phase has been completed.
4. Validation -- Testing all systems and third-party vendors for year 2000
compliance. The Company is currently in this phase of its plan. A third-
party service bureau processes all customer transactions and has completed
upgrades to its systems to be year 2000 compliant.
The Company's third-party service bureau provided access to their system on
November 8, 1998 for the Company to test its upgraded hardware and Local
Area Network, and to test all applications the service bureau provides to
the Company. The testing of equipment and Local Area Network went extremely
well and the Company was able to roll the date on the file server and sign
on the Host System that was dated January 3, 2000.
- 12 -
The Company processed transactions for all applications, Savings,
Certificates of Deposit, Mortgage Loans, Consumer Loan, Individual
Retirement Accounts, etc. The General Ledger system was also tested and the
Company received a file containing all the transactions that were processed
during the test. This file was entered into the General Ledger system which
posted and merged in the General Ledger balance.
The Company's item processor will be conducting a test with their service
bureau. The Company is also participating in Proxy Testing with their ATM
Processor. This testing is scheduled to be complete by March 31, 1999. Other
third-party vendors have indicated their compliance. Where it is possible,
the Company plans to test third-party vendors for compliance. Where testing
is not possible, the Company will rely on certifications from vendors.
Testing is scheduled to be completed by March 31, 1999. In the event that
testing reveals that the third-party systems are not year 2000 compliant,
the Company's service bureau intends to either transfer the Company to other
systems that are year 2000 compliant or provide additional resources to
resolve the year 2000 issues. Where it is possible to do so, the Company has
scheduled testing with these third parties. Where testing is not possible,
the Company will rely on certifications from vendors and service providers.
5. Implementation -- Replacement or repair of non-compliant technology. As the
Company progresses through the validation phase, the Company expects to
determine necessary remedial actions and provide for their implementation.
The Company has already implemented a new year 2000 compliant computerized
teller system and has verified the year 2000 compliance of its computer
hardware and other equipment containing embedded microprocessors.
The Company, as it continues to proceed with its year 2000 readiness plan, makes
revisions to the estimated cost to become year 2000 compliant. Currently, the
Company estimates its total cost to replace computer equipment, software
programs or other equipment containing embedded microprocessors that were not
year 2000 compliant to be approximately $100,000. For year ended September 30,
1998, approximately $58,000 of this amount has been incurred. Approximately
$8,000 has been incurred during the three months ended December 31, 1998.
System maintenance or modification costs are being expensed as incurred,
including the cost of new hardware, software or other equipment. The Company
does not separately track the internal costs and time that its own employees
spend on year 2000 issues. Such costs are principally payroll costs.
Because the Company is substantially dependent on its computer systems and the
computer systems of third parties, the failure of these systems to be year 2000
compliant could cause substantial disruption of the Company's business and could
have a material adverse financial impact on the Company. Failure to resolve
year 2000 issues presents the following risks to the Company: (1) the Company
could lose customers to other financial institutions, resulting in a loss of
revenue, if the Company's third-party service bureau is unable to properly
process customer transactions; (2) governmental agencies, such as the Federal
Home Loan Bank, and correspondent banks could fail to provide funds to the
Company, which could materially impair the Company's liquidity and affect the
Company's ability to fund loans and deposit withdrawals; (3) concern on the part
of depositors that year 2000 issues could impair access to their deposit account
balances could result in the Company experiencing deposit outflows prior to
December 31, 1999; and (4) the Company could incur increased personnel costs if
additional staff is required to perform functions that inoperative systems would
have otherwise performed. Management believes that it is not possible to
estimate the potential lost revenue due to the year 2000 issue, as the extent
and longevity of any potential problem cannot be predicted. Because
substantially all of the Company's loan portfolio consists of residential
mortgages and consumer loans, management believes that year 2000 issues will not
impair the ability of the Company's borrowers to repay their debt. The Bank
does not have any commercial loans, other than commercial real estate loans,
they represent an insignificant percentage of outstanding loans.
There can be no assurances that the Company's year 2000 plan will effectively
address the year 2000 issue, that the Company's estimates of the timing and
costs of completing the plan will ultimately be accurate or that
- 13 -
the impact of any failure of the Company or its third-party vendors and service
providers to be year 2000 compliant will not have a material adverse affect on
the Company's business, financial condition or results of operations.
The Bank has developed a contingency plan to mitigate the risks associated with
the failure of mission critical systems. The renovation of mission critical
items and testing of them has time lines that permit senior management to
monitor progress of the plan. In addition, the Bank's regulator OTS continues
to monitor our progress. Most recently they completed an exam in January 1999.
We have developed a plan of action to ensure the Bank continues to function
capably in the event that the year 2000 date change does not transition as
planned for the Bank and its related systems and services.
We have selected one office to act as the central site in the event we do not
have full electric power. We have developed an action plan to enable us to be
able to continue our core business of taking deposits and loan payments. This
plan calls for manual processing of transactions, and may require installation
of a generator. The Bank will test this plan by May 31, 1999.
- 14 -
MARKET RISK ANALYSIS
Quantitative Aspects of Market Risk -- The Company does not maintain a trading
account for any class of financial instrument nor does the Company engage in
hedging activities or purchase high-risk derivative instruments. Furthermore,
the Company is not subject to foreign currency exchange rate risk or commodity
price risk.
The following table presents the Company's financial instruments that are
sensitive to changes in interest rates, categorized by contractual maturity, and
the instruments' fair values at December 31, 1998.
December 31, 1998
------------------------------------------------------------------------------------------
One Year After Three After Five Carrying
Average Within One to Years to Five Years to Beyond Value Fair
Interest Sensitive Assets Rate Year Three Years Years Ten Years Ten Years Total Value
------------------------------------------------------------------------------------------
(Dollars in Thousands)
Loans receivable - net 7.82 % $ 51,474 $14,798 $30,908 $30,557 $21,081 $148,818 $152,375
Loans held for sale - net 6.71 % 17,965 17,965 18,191
Mortgage backed securities - HTM 8.12 % 7 38 407 4,514 4,966 5,220
Mortgage backed securities - AFS 6.00 % 1,420 1,420 1,436
Investments - HTM 5.55 % 10,265 6,699 1,500 18,464 18,537
Investments - AFS 5.54 % 992 750 1,742 1,744
Federal funds/overnight deposits 4.49 % 13,000 13,000 13,000
-------- ------- ------- ------- ------- -------- --------
Total interest sensitive assets $ 93,696 $22,254 $32,446 $32,384 $25,595 $206,375 $210,503
======== ======= ======= ======= ======= ======== ========
Interest Sensitive Liabilities
Checking accounts and money market 2.53 % $ 29,361 $ - $ - $ - $ - $ 29,361 $ 29,361
Savings accounts 2.50 % 25,472 25,472 25,472
Certificate accounts 5.35 % 68,738 26,032 7,400 133 102,303 103,135
Borrowings 5.44 % 3,300 600 1,000 4,900 5,066
-------- ------- ------- ------- ------- -------- --------
Total interest sensitive liabilities $126,871 $26,632 $ 8,400 $ 133 $ - $162,036 $163,034
======== ======= ======= ======= ======= ======== ========
Off Balance Sheet Items
Commitments to extend credit 6.83 % 32,925 (1)
(1) Includes commitments to sell loans of $24,700.
- 15 -
Qualitative Aspects of Market Risk -- The Company's principal financial
objective is to achieve long-term profitability while reducing its exposure to
fluctuating market interest rates. The Company has sought to reduce the exposure
of its earnings to changes in market interest rates by attempting to manage the
mismatch between asset and liability maturities and interest rates. In order to
reduce the exposure to interest rate fluctuations, the Company has developed
strategies to manage its liquidity, shorten its effective maturities of certain
interest-earning assets and increase the interest rate sensitivity of its asset
base. Management has sought to decrease the average maturity of its assets by
emphasizing the origination of adjustable-rate residential mortgage loans and
consumer loans, all of which are retained by the Company for its portfolio. In
addition, long-term, fixed-rate single-family residential mortgage loans are
underwritten according to the guidelines of Fannie Mae and Freddie Mac and
usually sold for cash in the secondary market. The retention of ARM loans, which
reprice at regular intervals, helps to ensure that the yield on the Company's
loan portfolio will be sufficient to offset increases in the Company's cost of
funds. However, periodic and lifetime interest rate adjustment limits may
prevent ARM loans from repricing to market interest rates during periods of
rapidly rising interest rates. The Company does not use any hedging techniques
to manage the exposure of its assets to fluctuating market interest rates. The
Company relies on retail deposits as its primary source of funds. Management
believes retail deposits, compared to brokered deposits, reduce the effects of
interest rate fluctuations because they generally represent a more stable source
of funds.
The Company uses interest rate sensitivity analysis to measure its interest rate
risk by computing changes in NPV (net portfolio value) of its cash flows from
assets, liabilities and off-balance sheet items in the event of a range of
assumed changes in market interest rates. NPV 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 400 basis point increase or decrease in
market interest rates with no effect given to any steps that management might
take to counter the effect of that interest rate movement (see table below).
Using data compiled by the OTS, the Company receives a report which measures
interest rate risk by modeling the change in NPV (net portfolio value) over a
variety of interest rate scenarios. This procedure for measuring interest rate
risk was developed by the OTS to replace the "gap" analysis (the difference
between interest-earning assets and interest-bearing liabilities that mature or
reprice within a specific time period).
Estimated Change
in Net Portfolio Value
Change in Interest Rates (in thousands)
400 basis point rise (4,027)
300 basis point rise (2,167)
200 basis point rise (799)
100 basis point rise (164)
Base scenario -
100 basis point decline (38)
200 basis point decline 387
300 basis point decline 1,367
400 basis point decline 2,429
The preceding table indicates that at September 30, 1998 (the most recent date
made available by the OTS and before completion of stock conversion/
reorganization and change in equity), in the event of a sudden and sustained
increase in prevailing market interest rates, the Company's NPV would be
expected to decrease, and in the event of a sudden and sustained decrease in
prevailing market interest rates, the Company's NPV would be expected to
increase.
- 16 -
Certain assumptions utilized by the OTS in assessing the interest rate risk of
savings associations within its region were utilized in preparing the preceding
table. 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 method of analysis 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 ARM loans, have features which 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.
- 17 -
Item 1. Legal Proceedings:
Periodically, there have been various claims and lawsuits involving the
Bank, such as claims to enforce liens, condemnation proceedings on
properties in which the Bank holds security interests, claims involving
the making and servicing of real property loans and other issues
incident to the Bank's business. The Bank is not a party to any pending
legal proceedings that it believes would have a material adverse effect
on the financial condition or operations of the Bank.
Item 2. Changes in Securities and Use of Proceeds:
a. Changes in Securities: Not applicable.
b. Use of Proceeds: During the quarter ended December 31, 1998, the
Company completed an offering of securities registered pursuant to
the Securities Act of 1933, as amended. In connection therewith:
1. The effective date of the Registration Statement on Form S-1,
as amended (File No. 333-56465) was August 12, 1998 and the
effective date of the post-effective amendment thereto was
November 2, 1998.
2. The offering of securities was not underwritten. Charles Webb &
Company, a Division of Keefe, Bruyette & Woods, Inc. acted as
marketing agent.
3. The class of securities registered was common stock, $0.01 par
value per share. The aggregate amount of such securities
registered was 3,965,503 shares (which includes 1,056,003
shares issued in exchange for securities of the Bank) at an
offering price of $10.00 per share. The offering terminated on
December 2, 1998 with the sale of 2,909,500 shares at a price
of $10.00 per share, as well as the issuance of 1,056,003
shares in exchange for securities of the Bank.
4. The total offering expenses incurred by the Company were
$803,808 none of which were paid directly or indirectly to
directors or officers of the Company or their associates.
5. The net proceeds of the offering were $28,291,192 of which
$2,327,600 was loaned to the Bank's employee stock ownership
plan to purchase stock in the offering. One-half of the
remaining net proceeds were invested in the subsidiary bank and
one-half was invested in short-term securities. These uses of
proceeds do not represent a material change in the use of
proceeds described in the Company's Prospectus dated August 12,
1998 and the related Prospectus Supplement dated November 2,
1998.
Item 3. Defaults Upon Senior Securities: Not applicable
Item 4. Submission of Matters to a Vote of Security-Holders: Not applicable
Item 5. Other Information: Not applicable
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Item 6. Exhibits and Reports on Form 8-K:
a. Exhibits
3.1 Certificate of Incorporation of Pulaski Financial Corp.*
3.2 Bylaws of Pulaski Financial Corp.*
10.1 Employment Agreement with William A. Donius**
10.2 Employment Agreement with Thomas F. Hack**
10.3 Employment Agreement with Michael J. Donius**
10.4 Severance Agreement with M. Brad Condon**
10.5 Severance Agreement with Beverly M. Kelley**
27.0 Financial Data Schedule
---------------
* Incorporated by reference from the Form S-1 (Registration
No. 333-56465), as amended, as filed on June 9, 1998.
** Incorporated by reference from the Form 10-K for the fiscal year
ended September 30, 1998.
b. Form 8-K: No reports on Form 8-K were filed during the quarter
ended December 31, 1998.
-19-
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PULASKI FINANCIAL CORP.
Date: February 11, 1999 /s/William A. Donius
----------------- ---------------------------------------
William A. Donius
President
Date: February 11, 1999 /s/Thomas F. Hack
----------------- ---------------------------------------
Thomas F. Hack
Chief Financial Officer/Treasurer
-20-