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 March 31, 1999
-----------------------------------
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
- -------------------------------------------------------------------------------
(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
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(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
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Indicate the number of shares outstanding of the registrant's classes of common
stock, as of the latest practicable date.
Class Outstanding at May 1, 1999
- -------------------------------------- --------------------------
Common Stock, par value $.01 per share 3,965,503 shares
PULASKI FINANCIAL CORP. AND SUBSIDIARIES
FORM 10-Q
MARCH 31, 1999
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 1999 and
September 30, 1998 (Unaudited) 1
Consolidated Statements of Income and Comprehensive Income for the
Three and Six Months Ended March 31, 1999 and 1998 (Unaudited) 2
Consolidated Statement of Stockholders' Equity for the Six Months Ended
March 31, 1999 (Unaudited) 3
Consolidated Statements of Cash Flows for the Six Months Ended
March 31, 1999 and 1998 (Unaudited) 4-5
Notes to Unaudited Consolidated Financial Statements (Unaudited) 6-7
Item 2. Management's Discussion and Analysis of Operations 8-15
PART II OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security-Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
PART I - FINANCIAL INFORMATION
PULASKI FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND SEPTEMBER 30, 1998 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------
March 31, September 30,
ASSETS 1999 1998
Cash and amounts due from depository institutions $ 801,314 $ 3,047,328
Federal funds sold and overnight deposits 16,700,000
------------ ------------
Total cash and cash equivalents 17,501,314 3,047,328
Investment securities available for sale, at market value 1,748,125 2,235,133
Investments securities held to maturity, at cost (market value, $14,961,862
and $19,026,432, at March 31, 1999 and September 30, 1998, respectively) 14,935,091 18,923,006
Mortgage-backed and related securities held to maturity, at cost (market value,
$4,777,128 and $5,683,829 at March 31, 1999 and September 30, 1998, respectively) 4,546,654 5,412,117
Mortgage-backed and related securities available for sale, at market value 1,373,102 1,488,267
Loans receivable held for sale, at lower of cost or market 14,304,274 13,442,421
Loans receivable, net of allowance for loan losses at March 31, 1999 and
September 30, 1998, respectively of $811,760 and $762,688 155,367,530 141,769,058
Federal Home Loan Bank stock - at cost 1,501,200 1,423,000
Real estate acquired in settlement of loans, net of allowance for losses of
$16,983 and $18,640 at March 31, 1999 and September 30, 1998, respectively 194,951 105,628
Premises and equipment - net 2,150,058 2,105,293
Accrued interest receivable:
Investment securities 214,522 224,513
Mortgage-backed securities 40,568 48,584
Loans 996,461 907,695
Other 2,319
Other assets 1,696,010 2,076,332
------------ ------------
TOTAL $216,572,179 $193,208,375
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $159,843,665 $156,235,348
Stock subscriptions 5,129,497
Advances from Federal Home Loan Bank of Des Moines 1,600,000 1,900,000
Advance payments by borrowers for taxes and insurance 1,685,242 3,185,605
Accrued interest payable 235,339 262,600
Other liabilities 1,347,586 1,282,666
------------ ------------
Total liabilities 164,711,832 167,995,716
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock - $.01 par value per share, 1,000,000 shares, authorized; none issued or
outstanding - -
Common stock - $.01 par value per share, 25,000,000 shares authorized; 3,965,503 shares
issued and outstanding at March 31, 1999 39,655 -
Common stock - $1.00 par value per share, 20,000,000 shares authorized; 2,105,840 shares
issued and outstanding at September 30, 1998 2,105,840
Additional paid-in capital 35,641,426 5,258,418
Unearned MRDP shares (46,000) (73,600)
Unearned ESOP shares (2,250,013)
Accumulated other comprehensive income 4,789 14,520
Retained earnings 18,470,490 17,907,481
------------ ------------
Total stockholders' equity 51,860,347 25,212,659
------------ ------------
TOTAL $216,572,179 $193,208,375
============ ============
See accompanying notes to the unaudited consolidated financial statements.
-1-
PULASKI FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE AND SIX MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
March 31, March 31,
----------------------- -----------------------
1999 1998 1999 1998
INTEREST INCOME:
Loans $3,108,274 $2,875,126 $6,193,816 $5,826,780
Investment securities 254,757 194,304 543,411 420,177
Mortgage-backed and related securities 118,482 127,543 248,994 257,776
Other 214,270 165,195 334,306 288,310
---------- ---------- ---------- ----------
Total interest income 3,695,783 3,362,168 7,320,527 6,793,043
INTEREST EXPENSE:
Deposits 1,658,577 1,730,568 3,399,669 3,476,746
Advances from Federal Home Loan Bank of Des 42,642 34,235 112,082 69,231
Moines
Stock subscriptions 46,010
---------- ---------- ---------- ----------
Total interest expense 1,701,219 1,764,803 3,557,761 3,545,977
---------- ---------- ---------- ----------
NET INTEREST INCOME 1,994,564 1,597,365 3,762,766 3,247,066
PROVISION (CREDIT) FOR LOAN LOSSES 43,832 (10,374) 83,414 69,523
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 1,950,732 1,607,739 3,679,352 3,177,543
---------- ---------- ---------- ----------
OTHER INCOME:
Service charges on deposit accounts 116,243 31,650 204,231 52,539
Gains on sales of loans 220,794 233,876 452,162 372,554
Insurance commissions 87,929 40,634 158,837 82,281
Other 92,224 135,982 204,594 226,777
---------- ---------- ---------- ----------
Total other income 517,190 442,142 1,019,824 734,151
---------- ---------- ---------- ----------
OTHER EXPENSES:
Salaries and employee benefits 852,954 649,941 1,649,379 1,288,406
Occupancy and equipment expense 264,382 207,353 519,302 400,951
Federal insurance premiums 25,508 24,150 49,098 48,667
Outside data processing 92,994 62,723 165,576 119,658
Advertising 96,937 76,640 201,527 154,918
Professional services 76,203 118,629 119,682 149,379
Other 213,616 128,830 371,564 239,228
---------- ---------- ---------- ----------
Total other expenses 1,622,594 1,268,266 3,076,128 2,401,207
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 845,328 781,615 1,623,048 1,510,487
INCOME TAXES 315,254 278,425 604,091 533,934
---------- ---------- ---------- ----------
NET INCOME 530,074 503,190 1,018,957 976,553
OTHER COMPREHENSIVE INCOME - Unrealized (loss)
on securities (net of income taxes of $2,812 and
$3,993, respectively) (5,937) - (9,731) -
---------- ---------- ---------- ----------
COMPREHENSIVE INCOME $ 524,137 $ 503,190 $1,009,226 $ 976,553
========== ========== ========== ==========
NET INCOME PER COMMON SHARE - BASIC $ 0.14 $ N/M $ N/M $ N/M
========== ========== ========== ==========
NET INCOME PER COMMON SHARE - DILUTED $ 0.14 $ N/M $ N/M $ N/M
========== ========== ========== ==========
See accompanying notes to the unaudited consolidated financial statements.
-2-
PULASKI FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------
Unearned
Management
Recognition
Number of Additional and Unearned
Shares Common Paid-In Development ESOP
Outstanding Stock Capital Plan Shares Shares
BALANCE, SEPTEMBER 30, 1998 2,105,840 $ 2,105,840 $ 5,258,418 $(73,600) $ -
---------- ----------- ----------- -------- -----------
Comprehensive income:
Net income - - - - -
Change in net unrealized
gains on securities (c)
Total comprehensive income
Dividends declared
Issuance and exchange of
common stock as a result of
the conversion
reorganization (a) (b) 1,859,663 (2,066,185) 30,386,302 (2,327,600)
Assets consolidated from
Pulaski Bancshares, M.H.C.
Release of ESOP shares (3,294) 77,587
Amortization of management
recognition and development
plan shares 27,600
---------- ----------- ----------- -------- -----------
BALANCE, MARCH 31, 1999 3,965,503 $ 39,655 $35,641,426 $(46,000) $(2,250,013)
========== =========== =========== ======== ===========
Accumulated
Other
Comprehensive Retained
Income Earnings Total
BALANCE, SEPTEMBER 30, 1998 $14,520 $17,907,481 $25,212,659
------- ----------- -----------
Comprehensive income:
Net income - 1,018,957 1,018,957
Change in net unrealized
gains on securities (c) (9,731) (9,731)
-----------
Total comprehensive income 1,009,226
-----------
Dividends declared (672,928) (672,928)
Issuance and exchange of
common stock as a result of
the conversion
reorganization (a) (b) 25,992,517
Assets consolidated from
Pulaski Bancshares, M.H.C. 216,980 216,980
Release of ESOP shares 74,293
Amortization of management
recognition and development
plan shares 27,600
------- ----------- -----------
BALANCE, MARCH 31, 1999 $ 4,789 $18,470,490 $51,860,347
======= =========== ===========
(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) Includes change in unrealized gains of ($8,629) and reclassification
adjustment for gains included in income of ($1,102).
See accompanying notes to unaudited consolidated financial statements.
-3-
PULASKI FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,018,957 $ 976,553
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation, amortization and accretion:
Premises and equipment 172,929 141,055
Management recognition and development plan stock awards 27,600 27,600
ESOP shares committed to be released 74,293
Loan fees, discounts and premiums - net (29,166) (58,337)
Deferred taxes (40,683)
Provision for loan losses 83,414 69,523
Provision for losses on real estate acquired in settlement of
loans 14,828 15,998
Gains on sales of real estate acquired in settlement of loans (6,401)
Originations of loans for sale to correspondent lenders (70,810,853) (58,639,358)
Proceeds from sales of loans to correspondent lenders 70,401,162 51,609,255
Gains on sales of loans (452,162) (280,738)
Gain on sale of investments (1,750)
Changes in other assets and liabilities 43,827 (204,450)
------------ ------------
Net adjustments (522,962) (7,319,452)
------------ ------------
Net cash provided by (used in) operating activities 495,995 (6,342,899)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities of investment securities 8,550,000 13,545,000
Purchases of investment securities available for sale (4,078,018) (8,412,722)
Principal payments received on mortgage-backed and
related securities 983,205 242,998
Net (increase) decrease in loans (13,956,206) 5,397,604
Proceeds from sales of real estate acquired in settlement of loans 113,501 46,103
Net additions to premises and equipment (217,694) (65,569)
------------ ------------
Net cash (used in) provided by investing activities (8,605,212) 10,753,414
------------ ------------
(Continued)
-4-
PULASKI FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------
1999 1998
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits $ 5,595,832 $ 5,443,321
Proceeds from Federal Home Loan Bank advances 7,500,000
Repayment of Federal Home Loan Bank advances (7,800,000) (300,000)
Decrease in advance payments by borrowers for taxes
and insurance (1,500,363) (1,560,923)
Dividends declared on common stock (672,928) (347,254)
Common stock issued under stock option plan 134,160
Issuance of common stock under conversion/reorganization 19,440,662
----------- -----------
Net cash provided by financing activities 22,563,203 3,369,304
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS 14,453,986 7,779,819
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,047,328 6,248,294
----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $17,501,314 $14,028,113
=========== ===========
ADDITIONAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest on deposits $ 3,426,930 $ 3,480,848
Interest on advances from the Federal Home Loan Bank
of Des Moines 112,082 69,230
Income taxes 501,000 690,814
NONCASH INVESTING ACTIVITIES:
Real estate acquired in settlement of loans 211,251 114,352
Write-down of real estate owned 14,363 -
Decrease in investments for changes in unrealized gains and losses 14,400 -
NONCASH FINANCING ACTIVITIES:
Issuance of common stock:
Decrease in stock subscriptions 5,129,497 -
Purchase of ESOP 2,327,600 -
Proceeds received from deposit transfers 1,987,515 -
LOANS SECURITIZED - Net of profit - 7,006,517
See accompanying notes to the unaudited consolidated financial statements. (Concluded)
-5-
PULASKI FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. The unaudited consolidated financial statements include the accounts of
Pulaski Financial Corp. (the "Company") and its wholly owned subsidiary,
Pulaski 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 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 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 March 31, 1999 and September 30, 1998 and the results of its operations
for the three and six month periods ended March 31, 1999 and 1998. The
results of operations for the three-month or six month periods ended March
31, 1999 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
Basic earnings per share for the three months ended March 31, 1999 was
determined by dividing net income for the year by the weighted average number
of common shares. The weighted average number of shares used in computing
earnings per share was 3,736,665.
Diluted earnings per share considers the potential dilutive effects of the
exercise of the outstanding stock options under the Bank's stock option plan.
Applying the treasury stock method to the outstanding stock options results
in an additional 6,831 shares to be used in the diluted earnings per share
calculation for the three months ended March 31, 1999.
Earnings per share for the three months ended March 31, 1998 and for the six
months ended March 31, 1999 and 1998 are not meaningful due to the stock
conversion/reorganization which was completed on December 2, 1998.
-6-
3. RECLASSIFICATIONS
Certain reclassifications have been made to 1998 amounts to conform to 1999
presentation.
* * * * * *
-7-
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 March 31, 1999 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, and loans
receivable, offset by decreases in investment securities.
Loans receivable increased $13.6 million, or 9.6% from $141.8 at September 30,
1998 to $155.4 million at March 31, 1999. The increase is 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, and to utilize proceeds from the
conversion to a stock holding company.
Cash and cash equivalents increased $14.5 million primarily as a result of
proceeds received from the stock offering which was completed on December 2,
1998.
The increase in assets was offset by maturities and redemptions of $4.5 million
of investment securities and net repayments and amortizations of mortgage-backed
securities of approximately $1.0 million.
-8-
Total liabilities at March 31, 1999 were $164.7 million, a decline of $3.3
million, or 2% from the $168 million at September 30, 1998. The decrease in
total liabilities is primarily attributable to the refund of $5.1 million in
stock oversubscriptions related to the stock offering completed in December
1998, and repayment of $300,000 of Federal Home Loan Bank Advances. Net
disbursements totaling $2.2 million were made from escrow funds on behalf of
borrowers. These decreases were partially offset by increased deposits of $3.6
million, with most of the growth attributable to checking and money market
accounts, $2.4 million and $2.5 million, respectively. The Bank continues its
Totally Free Checking campaign, with the number of checking accounts increasing
by 1,496, representing a 26% year-to-date gain. Certificate balances declined
by $1.7 million over the same period, and savings account balances grew slightly
by $0.4 million.
Total stockholders' equity at March 31, 1999 was $51.9 million, an increase of
$26.7 million over $25.2 million at September 30, 1998. The large increase is
due to the conversion and stock offering completed December 2, 1998.
Non-Performing Assets and Delinquencies
Loans accounted for on a non-accrual basis amounted to $816,000 at March 31,
1999 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 $218,000. 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 income is being recorded upon the receipt of
payments. This loan was subsequently repaid in full during April 1999. The
remainder of non-accrual loans consist primarily of single-family residential
loans.
Accruing loans that were contractually past due 90 days or more at March 31,
1999 amounted to $819,000 of which $410,000 were FHA/VA government-insured
loans. The allowance for loan losses was $812,000 at March 31, 1999, or .48% of
total loans. Real estate acquired in settlement of loans, net of allowance for
losses, increased from $106,000 at September 30, 1998 to $195,000 at March 31,
1999, and consisted of one to four family residences.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND
1998:
All trends for the three month periods ended March 31, 1999 and 1998 are
reflective of the trends for the six month periods ended March 31, 1999 and
1998, in all material respects, unless otherwise noted.
General
Net income for the three months ended March 31, 1999 was $530,000, compared to
$503,000 for the three months ended March 31, 1998.
Interest Income
Interest income increased $334,000 for the three months ended March 31, 1999
compared to the three months ended March 31, 1998. The increase resulted
primarily from an increase in interest on consumer loans of $302,000, as well as
an increase of $60,000 in interest on investment securities, and $49,000
increase in interest on investment in overnight funds. These increases are
offset by a decrease in interest on mortgage loans of $68,000.
-9-
The increase in interest income on consumer loans resulted from an increase in
the average balance of consumer loans outstanding from $7 million for the
quarter ended March 31, 1998 to $23.9 million for the March 31, 1999 quarter,
offset by a decrease in the average yield on these loans from 8.35% in 1998 to
7.35% for the March 1999 quarter. The lower average yield on consumer loans is
the result of aggressive pricing by the Bank to obtain volume and in response to
competitive pricing of this product.
Interest income on mortgage loans decreased as a result of the decrease in the
average yield on mortgage loans, from 7.98% for the quarter ended March 31, 1998
to 7.58% for the quarter ended March 31, 1999. The lower average yield on
mortgage loans is the result of mortgage loan refinancing payoffs and
prepayments of higher-rate loans, lower rate repricings on adjustable rate
loans, and the currently prevailing market rates for new loan originations.
Offsetting the decline in the average yield, the average balance increased from
$136.9 million in March 1998 to $140.8 million in March of 1999.
The increase in interest income in investment securities resulted primarily from
an increase in the average balance from $14.6 million in 1998 to $18.4 million
in 1999, but was offset by a decrease in the yield from 6.17% for the quarter
ended March 31, 1998 to 5.53% for the quarter ended March 31, 1999. The reduced
yield reflects the lower rate environment currently available.
Interest income from investment in overnight funds increased as a result of the
average balance change. The average balance for the March 1998 quarter was
$12.2 million, and the average balance for the quarter ended March 31, 1999 was
$18.5 million. The average yield declined from 5.38% to 4.64% over the same
period. The higher average balance is due to greater anticipated needs for
funding of consumer loans, and loans originated for sale to others. The
relatively flat yield curve environment during this quarter has provided little
incentive for maturity extension of the portfolio.
Interest Expense
Interest expense decreased $64,000 for the three months ended March 31, 1999
compared to the same period one year ago. The decrease is due primarily to
reduced interest expense on deposits. The average balance of deposits increased
from $151.3 million for the March 1998 quarter, to $155.3 million for the
quarter ended March 31, 1999, but was offset by a decrease on the average cost
from 4.58% to 4.27%. The Bank's management has adopted a pricing strategy to
reduce overall cost of funds, and began implementing the strategy in the March
1999 quarter.
Provision (Credit) for Loan Losses
The provision for loan losses was $44,000 for the three months ended March 31,
1999 compared to a credit of $10,000 for the quarter ended March 31, 1998.
Management of the Bank deemed it necessary to increase the provision for loan
losses after considering an increase in non-performing loans to $1.6 million at
March 31, 1999 from $1.2 million at September 30, 1998. As the Bank's
investment in consumer credit loans continues to increase, management believes
that additional loss provisions are appropriate.
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 believes it 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.
-10-
Other Income
Other income increased $75,000, or 17% for the three months ended March 31, 1999
from $442,000 for the quarter ended March 31, 1998 to $517,000 currently. The
increase in other income is primarily the result of increased service charges on
deposits. Quarterly service charge income for March 31, 1999 was $116,000
compared to $32,000 for the March 1998 quarter, for a gain of $84,000. This
revenue growth is a result of the greater volume of checking accounts generated
by the Bank's High Performance Checking Account Program.
Gains on the sale of loans for the three months ended March 31, 1999 were
relatively flat compared to the same period in the preceding year. Gains on the
sale of loans were $452,000 for the six months ended March 31, 1999 and
represent an increase of $79,000 above the $373,000 recorded for the six months
period ended March 31, 1998. Sales of loans were 57% higher than the comparable
six-month period in 1998.
Insurance commissions increased from $40,000 for the March 1998 quarter, to
$88,000 for the March 1999 quarter. This higher amount of commission is due
primarily to increased sales of annuities.
Miscellaneous other income decreased $44,000, from $136,000 for the three months
ended March 31, 1998 to $92,000 for the three months ended March 31, 1999. The
decline is attributable primarily to reduced loan fees associated with
modifications of $17,000 and reduced dividends on stock invested in the Federal
Home Loan Bank of Des Moines of $10,000.
Other Expenses
Noninterest expenses increased from $1.3 million for the quarter ended March 31,
1998 to $1.6 million for the March 31, 1999 quarter. The increase was primarily
due to a $203,000 increase in compensation expenses, office occupancy and
equipment expenses of $57,000, and $85,000 in other expenses.
Compensation expense increased from $650,000 to $853,000 and was the result of
increased staffing for mortgage and consumer lending, salary increases,
incentive payments as a result of implementation of a "pay for performance"
based compensation system, higher health insurance premiums, and the additional
expenses associated with an employee stock ownership plan.
Occupancy and equipment expense increased from $207,000 for the quarter ended
March 31, 1998 to $264,000 for the quarter ended March 31, 1999, primarily as a
result, of increased depreciation expense associated with the purchase and
installation of 5 ATMs in the past year, as well as higher maintenance costs on
equipment.
Other miscellaneous expenses increased from $129,000 for the three months ended
March 31, 1998 to $214,000 for the three months ended March 31, 1999. The
increase was primarily due to costs associated with the initiation of home
equity loans of $23,000, franchise taxes of $20,000, and loss provisions on
properties acquired as a result of foreclosure of $11,000.
Income Taxes
The provision for income taxes increased to $315,000 for the three months ended
March 31, 1999 from $278,000 for the three months ended March 31, 1998. The
increase is primarily attributable to increased levels of taxable income.
-11-
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 adequate levels of
liquidity acts, in part, to reduce the Bank's balance sheet exposure to interest
rate risk. For the quarter ended March 31, 1999, the Bank's average liquidity
ratio (liquid assets as a percentage of net withdrawable savings deposits and
short-term borrowings) was 18.09%.
The Bank must also maintain adequate levels of liquidity to ensure the
availability of funds to satisfy loan commitments and deposit withdrawals. At
March 31, 1999, the Bank had outstanding commitments to originate loans of $10.4
million, and commitments to sell loans of $23.1 million. At the same date,
certificates of deposit which are scheduled to mature in one year or less
totaled $74.5 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 March 31, 1998, the
Bank had approximately $80.0 million available to it under the above-mentioned
borrowing arrangement. At March 31, 1999, the Bank had $1.6 million in
outstanding 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 March 31, 1999, the Bank's tangible capital totaled $39.1 million, or 19.2%
of adjusted total assets, which exceeded the minimum 1.5% requirement by $36.1
million, or 17.7%. The Bank's core capital at March 31, 1999 totaled $39.1
million, or 19.2% of adjusted total assets, which was approximately $33.0
million, or 16.2% above the minimum requirement of 3%. The Bank's risk-based
capital at that date totaled $39.9 million, or 30.1% of risk weighted assets,
which is $29.3 million, or 22.1% above the 8% fully phased-in requirement.
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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 March 31, 1999:
Tangible capital (to
total assets) $39,108 19.19 % $ 3,058 1.50 % N/A N/A
Core capital (to total
assets) 39,108 19.19 % 6,113 3.00 % N/A N/A
Total risk-based capital
(to risk-weighted
assets) 39,894 30.11 % 10,598 8.00 % 13,247 10.00 %
Tier I risk-based
capital (to risk-
weighted assets) 39,108 29.52 % N/A N/A 7,948 6.00 %
Tier I leverage capital
(to average assets) 39,108 18.14 % N/A N/A 10,780 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 indicated
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no problems 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.
The Company processed transactions for all applications, Savings,
Certificates of Deposit, Mortgage Loans, Consumer Loans, Individual
Retirement Accounts, etc. The General Ledger System was also tested and the
Company received a file containing all 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 test was completed and the results were satisfactory. 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. 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. Our ATM processor has conducted
tests with the various ATM switches. They have had successful test results.
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 the year ended September
30, 1998, approximately, $58,000 of this amount has been incurred. Approximately
$23,500 has been incurred during the six months ended March 31, 1999. 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 mortgage and consumer loans,
management believes that year 2000 issues will not impair the ability of the
Company's
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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 assurance 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 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.
Management has 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.
Management has selected one office to act as the central site in the event we do
not have full electric power. Management has 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.
Market Risk Analysis
There has been no significant change in the Company's quantitative or
qualitative aspects of market risk during the quarter ended March 31, 1999.
-15-
PART II - OTHER INFORMATION
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 six months ended March 31, 1999, 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. 333-56365) 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 was $850,752
none of which was paid directly or indirectly to directors or
officers of the Company or their associates.
5. The net proceeds of the offering were $28,244,248 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
Item 6. Exhibits and Reports on Form 8-K: None
-16-
SIGNATURES
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: May 12, 1999 /S/William A. Donius
---------------------------- --------------------
William A. Donius
President
Date: May 12, 1999 /S/Thomas F. Hack
---------------------------- -----------------
Thomas F. Hack
Chief Financial Officer/Treasurer
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