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 June 30, 1999
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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.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
0-24571
-------------------------------
Commission File Number
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 August 6, 1999
- ----------------------------------------- ----------------------------------
Common Stock, par value $.01 per share 3,774,885 shares
PULASKI FINANCIAL CORP. AND SUBSIDIARIES
FORM 10-Q
JUNE 30, 1999
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 1999 and
September 30, 1998 (Unaudited) 1
Consolidated Statements of Income and Comprehensive Income for the
Three and Nine Months Ended June 30, 1999 and 1998 (Unaudited) 2
Consolidated Statement of Stockholders' Equity for the Nine Months Ended
June 30, 1999 (Unaudited) 3
Consolidated Statements of Cash Flows for the Nine Months Ended
June 30, 1999 and 1998 (Unaudited) 4-5
Notes to Unaudited Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Operations 8-14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
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
JUNE 30, 1999 AND SEPTEMBER 30, 1998 (UNAUDITED)
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June 30, September 30,
ASSETS 1999 1998
Cash and amounts due from depository institutions $ 2,583,288 $ 3,047,328
Federal funds sold and overnight deposits 6,200,000
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Total cash and cash equivalents 8,783,288 3,047,328
Investment securities available for sale, at market value 3,489,108 2,235,133
Investments securities held to maturity, at cost (market value, $13,209,188
and $19,026,432, at June 30, 1999 and September 30, 1998, respectively) 13,221,545 18,923,006
Mortgage-backed and related securities held to maturity, at cost (market value,
$4,544,670 and $5,683,829 at June 30, 1999 and September 30, 1998, respectively) 4,314,982 5,412,117
Mortgage-backed and related securities available for sale, at market value 21,747,004 1,488,267
Loans receivable held for sale, at lower of cost or market 13,490,050 13,442,421
Loans receivable, net of allowance for loan losses at June 30, 1999 and
September 30, 1998, respectively of $851,803 and $762,688 171,995,434 141,769,058
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
$10,716 and $18,640 at June 30, 1999 and September 30, 1998, respectively 136,863 105,628
Premises and equipment - net 2,101,894 2,105,293
Accrued interest receivable 1,468,292 1,180,792
Other assets 1,700,807 2,076,332
------------ ------------
TOTAL $243,950,467 $193,208,375
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $160,812,193 $156,235,348
Stock subscriptions 5,129,497
Advances from Federal Home Loan Bank of Des Moines 27,100,000 1,900,000
Advance payments by borrowers for taxes and insurance 2,348,184 3,185,605
Accrued interest payable 41,360 262,600
Other liabilities 1,629,158 1,282,666
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Total liabilities 191,930,895 167,995,716
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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; 3,972,885 shares
issued and outstanding at June 30, 1999 39,729 -
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 35,687,800 5,258,418
Unearned MRDP shares (32,200) (73,600)
Unearned ESOP shares (2,211,220)
Accumulated other comprehensive income (172,855) 14,520
Retained earnings 18,708,318 17,907,481
------------ ------------
Total stockholders' equity 52,019,572 25,212,659
------------ ------------
TOTAL $243,950,467 $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 NINE MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
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Three Months Ended Nine Months Ended
June 30, June 30,
----------------------------------------------------------------------------
1999 1998 1999 1998
INTEREST INCOME:
Loans $3,235,699 $2,821,667 $ 9,429,515 $ 8,648,447
Investment securities 231,066 186,405 774,477 606,583
Mortgage-backed and related securities 242,949 123,461 491,943 381,237
Other 146,052 242,809 480,358 531,119
---------- ---------- ----------- -----------
Total interest income 3,855,765 3,374,342 11,176,292 10,167,386
INTEREST EXPENSE:
Deposits 1,644,737 1,755,448 5,044,406 5,232,194
Advances from Federal Home Loan Bank of Des Moines 114,847 30,369 226,930 99,600
Stock subscriptions 46,010
---------- ---------- ----------- -----------
Total interest expense 1,759,584 1,785,817 5,317,346 5,331,794
---------- ---------- ----------- -----------
NET INTEREST INCOME 2,096,181 1,588,525 5,858,946 4,835,592
PROVISION (CREDIT) FOR LOAN LOSSES 60,739 63,538 144,153 133,061
---------- ---------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 2,035,442 1,524,987 5,714,793 4,702,531
---------- ---------- ----------- -----------
OTHER INCOME:
Service charges on deposit accounts 142,036 50,161 346,267 102,700
Gains on sales of loans 203,765 261,866 655,926 634,420
Insurance commissions 86,851 79,672 245,688 161,953
Other 100,434 105,987 305,028 332,764
---------- ---------- ----------- -----------
Total other income 533,086 497,686 1,552,910 1,231,837
---------- ---------- ----------- -----------
OTHER EXPENSES:
Salaries and employee benefits 801,771 685,970 2,451,150 1,974,376
Occupancy and equipment expense 268,498 216,355 787,799 617,305
Federal insurance premiums 23,741 24,450 72,839 73,119
Outside data processing 87,357 63,364 252,933 183,022
Advertising 122,273 69,980 323,800 224,898
Professional services 115,531 40,776 235,213 190,155
Other 210,859 127,219 582,423 366,446
---------- ---------- ----------- -----------
Total other expenses 1,630,029 1,228,114 4,706,157 3,629,321
---------- ---------- ----------- -----------
INCOME BEFORE INCOME TAXES 938,499 794,559 2,561,546 2,305,047
INCOME TAXES 363,607 295,817 967,698 829,751
---------- ---------- ----------- -----------
NET INCOME 574,892 498,742 1,593,848 1,475,296
OTHER COMPREHENSIVE INCOME - Unrealized
loss on securities available for sale (net of
income taxes of
$99,270 and $109,001, respectively) (177,644) - (187,375) -
---------- ---------- ----------- -----------
COMPREHENSIVE INCOME $ 397,248 $ 498,742 $ 1,406,473 $ 1,475,296
========== ========== =========== ===========
NET INCOME PER COMMON SHARE - BASIC $ 0.15 $ N/M $ N/M $ N/M
========== ========== =========== ===========
NET INCOME PER COMMON SHARE - DILUTED $ 0.15 $ N/M $ N/M $ N/M
========== ========== =========== ===========
See accompanying notes to the unaudited consolidated financial statements.
-2-
PULASKI FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
NINE MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
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Unearned
Management Accumulated
Number of Additional Recognition and Unearned Other
Shares Common Paid-In Development ESOP Comprehensive
Outstanding Stock Capital Plan Shares Shares Income
BALANCE, SEPTEMBER 30, 1998 2,105,840 $ 2,105,840 $ 5,258,418 $(73,600) $ - $ 14,520
--------- ----------- ----------- -------- ----------- ---------
Comprehensive income:
Net income - - - - - -
Change in net unrealized gains
on securities(c) (187,375)
Total comprehensive income
Dividends declared
Issuance and exchange of common
stock as a result of the
conversion reorganization (a)(b) 1,860,061 (2,066,181) 30,380,966 (2,327,600)
Assets consolidated from Pulaski
Bancshares, M.H.C.
Stock options exercised 6,984 70 49,873
Release of ESOP shares (1,457) 116,380
Amortization of management
recognition and development
plan shares 41,400
--------- ----------- ----------- -------- ----------- ---------
BALANCE, JUNE 30, 1999 3,972,885 $ 39,729 $35,687,800 $(32,200) $(2,211,220) $(172,855)
========= =========== =========== ======== =========== =========
Retained
Earnings Total
BALANCE, SEPTEMBER 30, 1998 $17,907,481 $25,212,659
----------- -----------
Comprehensive income:
Net income 1,593,848 1,593,848
Change in net unrealized gains
on securities(c) (187,375)
-----------
Total comprehensive income 1,406,473
-----------
Dividends declared (1,009,991) (1,009,991)
Issuance and exchange of common
stock as a result of the
conversion reorganization (a)(b) 25,987,185
Assets consolidated from Pulaski
Bancshares, M.H.C. 216,980 216,980
Stock options exercised 49,943
Release of ESOP shares 114,923
Amortization of management
recognition and development
plan shares 41,400
----------- -----------
BALANCE, JUNE 30, 1999 $18,708,318 $52,019,572
=========== ===========
(a) Includes 635,840, $1.00 par value, shares of Pulaski Bank outstanding at
December 2, 1998, converted into 1,056,003, $.01 par value, shares of
Pulaski Financial Corp. based on 1.6608 exchange ratio; 2,909,500, $.01 par
value, shares of Pulaski Financial Corp. sold in the subscription and
community offering; and the cancellation of $1,470,000, $1.00 par value,
shares of Pulaski Bank previously held by Pulaski Bancshares, M.H.C.
(b) 232,760 shares purchased by the ESOP.
(c) Includes change in unrealized gains of ($186,273) 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
NINE MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
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1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,593,848 $ 1,475,295
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation, amortization and accretion:
Premises and equipment 267,581 211,148
Management recognition and development plan stock awards 41,400 41,400
ESOP shares committed to be released 114,923
Loan fees, discounts and premiums - net (18,504) (91,270)
Deferred taxes (75,580)
Provision for loan losses 144,153 133,061
Provision for losses on real estate acquired in settlement of loans 14,828 14,873
Loss on sales of real estate acquired in settlement of loans 1,828 1,626
Originations of loans for sale to correspondent lenders (101,176,629) (91,338,049)
Proceeds from sales of loans to correspondent lenders 101,784,926 91,735,425
Gains on sales of loans (655,926) (634,420)
Gain on sale of investments (1,750)
Changes in other assets and liabilities 44,351 (362,939)
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Net adjustments 485,601 (289,145)
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Net cash provided by operating activities 2,079,449 1,186,150
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities of investment securities 13,201,750 17,010,000
Purchases of investment securities available for sale (8,734,261) (14,845,219)
Principal payments received on mortgage-backed and
related securities 1,281,820 482,712
Purchases of mortgage-backed and related securities (20,713,884) 0
Net (increase) decrease in loans (30,793,912) 1,464,253
Proceeds from sales of real estate acquired in settlement of loans 271,627 83,001
Net additions to premises and equipment (264,182) (335,665)
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Net cash (used in) provided by investing activities (45,751,042) 3,859,082
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-4-
PULASKI FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
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1999 1998
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits $ 6,564,360 $ 7,762,210
Proceeds from Federal Home Loan Bank advances 35,000,000
Repayment of Federal Home Loan Bank advances (9,800,000) (300,000)
Decrease in advance payments by borrowers for taxes
and insurance (837,421) (827,235)
Dividends declared on common stock (1,009,991) (522,109)
Common stock issued under stock option plan 49,943 135,690
Issuance of common stock under conversion/reorganization 19,440,662
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Net cash provided by financing activities 49,407,553 6,248,556
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NET INCREASE IN CASH AND CASH EQUIVALENTS 5,735,960 11,293,788
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,047,328 6,248,294
------------- ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 8,783,288 $ 17,542,082
============= ============
ADDITIONAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest on deposits $ 5,265,646 $ 5,453,839
Interest on advances from the Federal Home Loan Bank
of Des Moines 226,930 99,600
Income taxes 721,000 895,814
NONCASH INVESTING ACTIVITIES:
Real estate acquired in settlement of loans 319,518 112,360
Decrease in investments for changes in unrealized gains and losses (296,376) -
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 -
See accompanying notes to the unaudited 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 (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 June 30, 1999 and September 30, 1998 and the results of
its operations for the three and nine month periods ended June 30, 1999 and
1998. The results of operations for the three-month or nine month periods
ended June 30, 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 June 30, 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 3,743,244.
Diluted earnings per share considers the potential dilutive effects of the
exercise of the outstanding stock options under the Company's stock option
plan. Applying the treasury stock method to the outstanding stock options
results in an additional 16,716 shares to be used in the diluted earnings
per share calculation for the three months ended June 30, 1999.
Earnings per share for the three months ended June 30, 1998 and for the
nine months ended June 30, 1999 and 1998 are not meaningful due to the
stock conversion/reorganization which was completed on December 2, 1998.
* * * * * *
-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 June 30, 1999 were $243.9 million, an increase of $50.7 million
or 26% from $193.2 million at September 30, 1998. The increase in total assets
is primarily attributable to increases in cash and cash equivalents, mortgage-
backed securities, and loans receivable, offset by decreases in investment
securities.
Loans receivable increased $30.2 million, or 21% from $141.8 at September 30,
1998 to $172.0 million at June 30, 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 $5.8 million primarily as a result of
proceeds received from the stock offering, which was completed on December 2,
1998.
Mortgage-backed securities increased $19.2 million, or 278% from $6.9 million at
September 30, 1998 to $26.1 million at June 30, 1999. The increase is due to
implementation of a $20 million leverage strategy utilizing borrowings from the
Federal Home Loan Bank to fund investment in Mortgage Backed Securities. The
increase in assets was offset by maturities and redemptions of $4.4 million of
investment securities.
-7-
Total liabilities at June 30, 1999 were $191.9 million, an increase of $23.9
million, or 14% from the $168.0 million at September 30, 1998. The increase in
total liabilities is primarily attributable to the increase in borrowings from
the Federal Home Loan Bank of Des Moines. Borrowings increased from $1.9
million at September 30, 1998 to $27.1 million at June 30, 1999 and were used to
purchase Mortgage Backed Securities. Deposits increased $4.6 million, or 3%
from $156.2 million at September 30, 1998 to $160.8 million at June 30, 1999.
Most of the growth in deposits is attributable to checking and money market
accounts, which grew $3.6 and $3.1 million respectively. The Bank continues its
High Performance Checking Account Program, with the number of checking and money
market accounts increasing 2,345 or 41% over the last 9 months. Savings
accounts grew slightly by $391,000 over the same period, and certificate
balances declined $2.5 million.
These increases in liabilities were partially offset by a refund of $5.1 million
in stock oversubscriptions related to the stock offering completed in December
1998.
Total stockholders' equity at June 30, 1999 was $52.0 million, an increase of
$26.8 million over $25.2 million at September 30, 1998. The large increase is
due to the conversion and stock offering completed December 2, 1998.
Pulaski Financial Corp has received regulatory approval to repurchase in the
open market up to 15% of its outstanding shares of common stock or up to 594,885
shares. A repurchase of 5%, or 198,000 shares, of outstanding shares was
completed on August 3, 1999 at an average price of $11.73 per share. Additional
repurchases under this approval authority will be considered from time to time
subject to market conditions.
Non-Performing Assets and Delinquencies
Loans accounted for on a non-accrual basis amounted to $285,000 at June 30, 1999
as compared to $753,000 at September 30, 1998. The non-accrual loans consist
primarily of single-family residential loans.
Accruing loans that were contractually past due 90 days or more at June 30, 1999
amounted to $632,000 of which $225,000 were FHA/VA government-insured loans.
The allowance for loan losses was $852,000 at June 30, 1999, or .46% of total
loans. Real estate acquired in settlement of loans, net of allowance for
losses, increased from $106,000 at September 30, 1998 to $137,000 at June 30,
1999, and consisted of single family residences.
COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED JUNE 30,
1999 AND 1998
All trends for the three month periods ended June 30, 1999 and 1998 are
reflective of the trends for the nine month periods ended June 30, 1999 and
1998, in all material respects, unless otherwise noted.
General
Net income for the three months ended June 30, 1999 was $575,000, compared to
$499,000 for the three months ended June 30, 1998.
-8-
INTEREST INCOME
Interest income increased $481,000 for the three months ended June 30, 1999
compared to the three months ended June 30, 1998. The increase resulted
primarily from an increase in interest on consumer loans of $386,000, as well as
an increase of $119,000 in interest on mortgage-backed securities, an increase
in income from investment securities of $45,000, and $28,000 increase in
interest on mortgage loans. These increases are offset by a decrease in
interest on overnight funds of $97,000.
The increase in interest income on consumer loans resulted from an increase in
the average balance of consumer loans outstanding from $8.6 million for the
quarter ended June 30, 1998 to $30.5 million for the June 30, 1999 quarter,
offset by a decrease in the average yield on these loans from 8.23% in 1998 to
7.38% for the June 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
lower interest rate trends over the period.
Interest income on mortgage loans increased as a result of the increase in the
average balance on mortgage loans, from $132.9 million for the quarter ended
June 30, 1998 to $144.6 million for the quarter ended June 30, 1999. The
increase in the average balance was offset by a decrease in the average yield on
mortgage loans, from 7.96% for the quarter ended June 30, 1998 to 7.39% for the
quarter ended June 30, 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.
Interest income on mortgage-backed securities increased as a result of the $20
million investment made in these types of securities during the June 1999
quarter. The increase in interest income in investment securities resulted
primarily from an increase in the average balance from $14.9 million in 1998 to
$17.1 million in 1999, but was offset by a decrease in the yield from 5.67% for
the quarter ended June 30, 1998 to 5.39% for the quarter ended June 30, 1999.
The reduced yield reflects the lower rate environment currently available.
Interest income from investment in overnight funds decreased as a result of
lower average balances. The average balance for the June 30, 1998 quarter was
$17.9 million, and the average balance for the quarter ended June 30, 1999 was
$12.5 million. The average yield declined from 5.43% to 4.66% over the same
period. The decline in average balance is the result of re-investment of
overnight funds into higher earning assets, primarily loans. The reduced
average yield is the result of lower short-term rates in effect over the last 9
months.
Interest Expense
Interest expense decreased $26,000 for the three months ended June 30, 1999
compared to the same period one year ago. The decrease is due primarily to
reduced interest expense on deposits, partially offset by increased interest on
FHLB advances.
The average balance of deposits increased from $155.0 million for the June 1998
quarter, to $158.4 million for the quarter ended June 30, 1999, but was offset
by a decrease on the average cost from 4.53% to 4.15%. Management has adopted a
pricing strategy to reduce the overall cost of funds, and began implementing the
strategy in the March 1999 quarter.
The average balance of FHLB advances increased from $1.9 million for the June
1998 quarter, to $7.9 million for the quarter ended June 30, 1999. This
increase in average balance was partially offset by a decrease in the average
cost from 6.32% to 5.82%.
-9-
Provision for Loan Losses
The provision for loan losses was $61,000 for the three months ended June 30,
1999 compared to a provision of $64,000 for the quarter ended June 30, 1998.
Management deemed it necessary to increase the provision for loan losses this
quarter after considering the increase in the higher risk consumer loan
portfolio. As the 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
specific 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.
Consumer loans are generally considered to carry a greater inherent risk of loss
than residential mortgage loans. Accordingly, the Bank may experience higher
delinquency or loss levels in future periods as a result of the significant
growth in the consumer loan portfolio.
Other Income
Other income increased $35,000, or 7% for the three months ended June 30, 1999
from $498,000 for the quarter ended June 30, 1998 to $533,000 for the quarter
ended June 30, 1999. The increase in other income is primarily the result of
increased service charges on deposits. Quarterly service charge income for June
30, 1999 was $142,000 compared to $50,000 for the June 1998 quarter, a gain of
$92,000. 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 June 30, 1999 decreased
$58,000 compared to the June 1998 quarter, as a result of an 18% decrease in
volume. Gains on loan sales for the nine- month period ended June 30, 1999
increased $21,000 over the same nine- month period ended June 30, 1998.
Insurance commissions, earned by the Bank's subsidiary, increased slightly, from
$80,000 for the June 1998 quarter, to $87,000 for the June 1999 quarter. This
higher amount of commission is due primarily to increased sales of annuities.
Income for the nine- month period ended June 30, 1999 has increased 52%, from
$162,000 through June 30, 1998, to $246,000 through June 30, 1999.
Miscellaneous other income decreased $6,000, from $106,000 for the three months
ended June 30, 1998 to $100,000 for the three months ended June 30, 1999. The
decline is attributable primarily to reduced rental income from office building
operations. The Bank for various operational needs is now utilizing space
previously occupied by tenants.
Other Expenses
Noninterest expenses increased from $1.2 million for the quarter ended June 30,
1998 to $1.6 million for the June 30, 1999 quarter. The increase was primarily
due to a $116,000 increase in compensation expenses, increases for office
occupancy and equipment expenses of $52,000, an increase in professional
services of $75,000, and increases in advertising expense of $52,000 and in
other expenses of $84,000.
Compensation expense increased from $686,000 to $802,000 and was the result of
increased staffing for mortgage and consumer lending, salary increases,
incentive payments as a result of implementation of a "pay
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for performance" based compensation system, higher health insurance premiums,
higher corporate liability insurance premiums, and the additional expenses
associated with an employee stock ownership plan.
Occupancy and equipment expense increased from $216,000 for the quarter ended
June 30, 1998 to $268,000 for the quarter ended June 30, 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.
Professional services increased $75,000, from $41,000 for the quarter ended June
30, 1998 to $116,000 for the quarter ended June 30, 1999. The increase is the
result of higher legal fees, tax advisory services, and use of consultants for
improved business practices. Advertising expenses increased from $70,000 for the
three months ended June 30, 1998 to $122,000 for the June 1999 quarter. The
increase is due to increased use of cable television advertising in addition to
direct mail promotion costs incurred as a result of the Bank's efforts to
increase checking account deposits.
Other miscellaneous expenses increased from $127,000 for the three months ended
June 30, 1998 to $211,000 for the three months ended June 30, 1999. The
increase was primarily due to costs of $39,000 associated with the initiation of
home equity loans, public company expenses of $12,000, franchise taxes of
$9,000, and losses on foreclosed properties, and writeoffs of uncollectible
checks totaling $13,000.
Income Taxes
The provision for income taxes increased $68,000 from $296,000 for the three
months ended June 30, 1998 to $364,000 for the three months ended June 30, 1999.
The increase is primarily attributable to increased levels of taxable income.
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 preceeding 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 June 30, 1999, the Bank's average liquidity
ratio (liquid assets as a percentage of net withdrawable savings deposits and
short-term borrowings) was 18.61%.
The Bank must also maintain adequate levels of liquidity to ensure the
availability of funds to satisfy loan commitments and deposit withdrawals. At
June 30, 1999, the Bank had outstanding commitments to originate loans of $11.7
million, and commitments to sell loans of $21.1 million. At the same date,
certificates of deposit that are scheduled to mature in one year or less totaled
$78.5 million. Based upon past experience, 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
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qualifying first mortgage loans equal to 150% of the outstanding advances as
collateral to secure the amounts borrowed. At June 30, 1999, the Bank had
approximately $58.2 million available to it under the above-mentioned borrowing
arrangement. At June 30, 1999, the Bank had $27.1 million in outstanding
advances from the FHLB-Des Moines.
The Company is not subject to separate regulatory capital requirements.
However, 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 June 30, 1999, the Bank's tangible capital totaled $39.3 million, or 16.9%
of total assets, which exceeded the minimum 1.5% requirement by $35.8 million,
or 15.4%. The Bank's core capital at June 30, 1999 totaled $39.3 million, or
16.9% of total assets, which was approximately $32.4 million, or 13.9% above the
minimum requirement of 3%. The Bank's risk-based capital at that date totaled
$40.2 million, or 28.9% of risk weighted assets, which is $29.1 million, or
20.9% above the 8% fully phased-in requirement.
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 June 30, 1999:
Tangible capital (to
total assets) $39,340 16.90 % $ 3,493 1.50 % N/A N/A
Core capital (to total
assets) 39,340 16.90 % 6,989 3.00 % N/A N/A
Total risk-based capital
(to risk-weighted assets) 40,192 28.92 % 11,116 8.00 % 13,895 10.00 %
Tier I risk-based capital
(to risk-weighted assets) 39,340 28.31 % N/A N/A 8,337 6.00 %
Tier I leverage capital (to
average assets) 39,340 17.47 % N/A N/A 11,261 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.
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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 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 conducted 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. The Company's 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
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2000 compliant to be approximately $100,000. For the year ended September 30,
1998, approximately, $58,000 of this amount has been incurred. Approximately
$37,600 has been incurred during the nine months ended June 30, 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 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 June 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 conducted a preliminary test in
May 1999 and plans another test in October 1999.
Quantitative and qualitative disclosures about Market Risk
There has been no significant change in the Company's quantitative or
qualitative aspects of market risk during the quarter ended June 30, 1999 from
that disclosed for the year ended September 30, 1998.
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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: Not applicable.
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
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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: August 11, 1999 /S/ William A. Donius
----------------------------------------
William A. Donius
President
Date: August 11, 1999 /S/ Thomas F. Hack
----------------------------------------
Thomas F. Hack
Chief Financial Officer/Treasurer
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