Item 1. Business
General
Pulaski Financial Corp. (the “Company”) is the holding company for Pulaski Bank (the “Bank”). The Company’s primary assets are its investment in the Bank and cash. The Company also maintains two special-purpose subsidiaries that issue preferred securities. Management of the Company and the Bank are substantially similar and the Company neither owns nor leases any property, but instead uses the office properties and equipment of the Bank. Accordingly, the information set forth in this annual report on Form 10-K, including the consolidated financial statements and related financial data, relates primarily to the Bank.
Pulaski Bank provides an array of financial products and services for businesses and retail customers primarily through its twelve full-service offices in the St. Louis metropolitan area and five loan production offices in the St. Louis and Kansas City metropolitan areas. Pulaski Bank is primarily engaged in attracting deposits from individuals and businesses and using these deposits, together with borrowed funds, to originate one-to four-family residential mortgage loans, residential construction loans, home equity lines of credit, multi-family and commercial real estate and commercial and industrial loans principally within its lending market.
Available Information
We maintain an Internet website at http://www.pulaskibankstl.com. We make available our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended, and other information related to us, free of charge, on this site as soon as reasonably practicable after we electronically file those documents with, or otherwise furnish them to, the Securities and Exchange Commission. Our Internet website and the information contained therein or connected thereto are not intended to be incorporated into this annual report on Form 10-K.
Market Area
We currently conduct our business in the St. Louis metropolitan area and, to a lesser extent, in the Kansas City metropolitan area. In the St. Louis metropolitan area, we conduct operations out of our twelve full-service branch offices and two loan production offices. In the Kansas City metropolitan area, we operate out of three mortgage lending offices in Lee’s Summit and Belton, Missouri and Overland Park, Kansas.
Competition
We face intense competition when attracting savings deposits (our primary source of lendable funds) and originating loans. Direct competition for savings deposits has historically come from commercial banks, other thrift institutions and credit unions located in our market area. We have faced additional significant competition for investors’ funds from short-term money market securities and other corporate and government securities.
At June 30, 2009, which is the most recent date for which data is available from the Federal Deposit Insurance Corporation (the “FDIC”), we held approximately 1.7% of the deposits in the St. Louis, Missouri-Illinois Metropolitan Statistical Area, which was the tenth largest market share out of 144 financial institutions with offices in this metropolitan statistical area. Banks owned by large bank holding companies, such as US Bancorp, Bank of America Corporation and Regions Financial Corp., operate in our market area. These institutions are significantly larger than us and, therefore, have significantly greater resources that could allow them to offer a wider variety of products and services.
Our competition for loans comes principally from other financial institutions, mortgage banking companies and mortgage brokers. We expect competition for our products to increase in the future as a result of legislative, regulatory and technological changes. Technological advances, for example, have lowered barriers to market entry, allowed banks to expand their geographic reach by providing services over the Internet and made it possible for non-depository institutions to offer products and services that traditionally have been provided by banks. The Gramm-Leach-Bliley Act, which permits affiliation among banks, securities firms and insurance companies, also has changed the competitive environment as several non-traditional banking companies have begun collecting deposits in the St. Louis metropolitan area.
Lending Activities
Residential Mortgage Lending. Substantially all of our residential first mortgage loan production is sold on a servicing-released, best-efforts, flow basis to a number of regional and national secondary market investors. This strategy enables us to have a much larger lending capacity, provide a much more comprehensive product offering and reduce the interest-rate, prepayment and credit risks associated with residential lending. This strategy also allows us to offer more competitive interest rates. Loans originated for sale are closed in our name and held in “warehouse” until they are sold to the investors, typically within 30 days. The loans held in warehouse provide an attractive asset yield during the short time we hold them pending their sale, because we are able to fund these longer-term assets (typically 30 year mortgages) with low-cost, short-term funds. Loan sale activity is our largest source of non-interest income.
We are a direct endorsement lender with the Federal Housing Administration (“FHA”). Consequently, our FHA-approved, direct endorsement underwriters are authorized to approve or reject FHA-insured loans up to maximum amounts established by FHA. We are also an automatic lender with the Veterans’ Administration (“VA”), which enables our designated qualified personnel to approve or reject loans on behalf of the VA.
We offer a variety of adjustable-rate mortgage (“ARM”) loans. These ARM loans may be sold in the secondary market or originated for portfolio investment. The loan fees charged, interest rates and other provisions of our ARM loans are determined by us on the basis of our own pricing criteria, the composition and interest rate risk of our current loan portfolio and market conditions. Interest rates and payments on our ARM loans generally are adjusted periodically to a rate typically equal to 2.00% to 3.75% above the one-year constant maturity U.S. Treasury index. The periodic interest rate cap (the maximum amount by which the interest rate may be increased or decreased in a given period) on our ARM loans is generally 2% per adjustment period and the lifetime interest rate cap is generally 6% over the initial interest rate of the loan. We qualify the borrower based on the borrower’s ability to repay the ARM loan based on the maximum interest rate at the first adjustment in the case of one-year ARM loans, and based on the initial interest rate in the case of ARM loans that adjust after two or more years. We do not originate negative amortization loans for portfolio investment. We believe that the periodic adjustment feature of our ARM loans provides us the flexibility to offer initial interest rates that are competitive while limiting our long-term exposure to interest-rate risk.
Borrower demand for ARM loans versus fixed-rate mortgage loans is a function of current and expected market interest rates and the difference between the initial interest rates and fees charged for each type of loan. The relative amount of fixed-rate mortgage loans and ARM loans that can be originated at any time is largely determined by the demand for each. As the result of the low interest rate environment during the year ended September 30, 2009, we experienced an increased demand for our fixed-rate mortgage loan products and almost no demand for ARM loans. If the current low level of interest rates continues, we expect this lack of demand for ARM loans to continue.
We require title insurance insuring the status of our lien on all of our residential mortgage loans and also require that fire and extended coverage casualty insurance (and, if appropriate, flood insurance) be maintained in an amount equal to the greater of the outstanding loan balance or the full replacement cost of the dwelling.
Our lending policies generally limit the maximum loan-to-value ratio on first mortgage loans secured by owner-occupied properties to 80% of the lesser of the appraised value or the purchase price. We will make loans in excess of that limit provided the borrower obtains mortgage insurance. Prior to 2008, the Company offered second mortgage loans that exceeded 80% combined loan-to-value ratios, which were priced with enhanced yields. The Company still offers second mortgage loans up to 80% of the collateral values on an exception basis to extremely credit-worthy borrowers. However, the current underwriting guidelines are more stringent due to the current adverse economic environment. At September 30, 2009, the Company had $71.5 million of second mortgage loans.
We obtain appraisals on our real estate loans from our in-house staff of licensed appraisers and independent appraisers. During the year ended September 30, 2009, the Company performed approximately 36% of its appraisals through the in-house staff. By using in-house staff to perform the appraisal services, management has improved the quality of the appraisal process as loan officers no longer have the ability to control the assignment of the appraisal services.
Construction and Development Loans. We originate real estate construction and development loans that consist of 1-4 family residential construction loans made to retail mortgage customers and builders, loans for the development of land to be used for residential or commercial real estate construction, and loans for the construction of multi-family and commercial properties. Loan disbursements are closely monitored by management to ensure that funds are being used strictly for the purposes agreed upon in the loan covenants. We employ both internal staff and external title company experts to ensure that loan disbursements are substantiated by regular inspections and review. Construction and development loans are underwritten according to the adequacy of the borrower’s repayment sources at the time of approval. Unlike conventional residential lending, signs of deterioration in the customer’s ability to repay the loan is measured throughout the life of the loan and not just at origination or when the loan becomes past due. In most instances, loan amounts are limited to 80% of the “as completed” appraised value of the construction project and the borrowers are generally required to infuse equity into the project. Personal guarantees are generally obtained from commercial borrowers. Due to the downturn in local and national economic conditions, we significantly de-emphasized this type of lending during the year ended September 30, 2009.
Commercial Real Estate Loans. We engage in commercial real estate lending, typically through direct originations. We have expanded our commercial real estate portfolio to provide diversification and to generate assets that are sensitive to fluctuations in interest rates. Commercial real estate loans are generally prime-based, floating-rate loans, or short-term (one to five year), fixed-rate loans. Personal guarantees are generally obtained. Our legal lending limit to any one borrower is 15% of the Bank’s unimpaired capital plus reserves, or approximately $21 million at September 30, 2009. However, our maximum exposure to any one borrower did not exceed $17 million.
Commercial and Industrial Loans. We originate commercial and industrial loans that are secured by property such as inventory, equipment and finished goods. All commercial borrowers are evaluated for the adequacy of repayment sources at the time of approval and are regularly reviewed for any possible deterioration in their ability to repay the loan. In most instances, collateral is required to provide an additional source of repayment in the event of default by the borrower. The structure of the collateral varies from loan to loan depending on the financial strength of the borrower, the amount and terms of the loan, and the collateral available to be pledged. Personal guarantees are generally obtained.
Home Equity Lines of Credit. Home equity lines of credit are secured with a deed of trust and are issued in an amount up to 80% of the appraised value of the property securing the line of credit, less the outstanding balance on the first mortgage. The Bank’s credit underwriting standards for home equity loans have generally followed conforming loan guidelines. This type of loan is generally originated in conjunction with the origination of first mortgage loans eligible for sale in the secondary market. In prior periods, the Company originated certain home equity loans with available lines up to 100% of the appraised value of the home when combined with the balance of the first mortgage loans. At September 30, 2009, the balance of home equity loans with combined loan-to-value ratios equal to 100% or greater, based on the original appraisals, totaled approximately $5.6 million. Interest rates on home equity lines of credit are adjustable and are tied to the prime interest rate. This rate is obtained from the Wall Street Journal and adjusts on a monthly basis. The rate at the date of origination is also the floor rate for the life of the loan. Interest rates are based upon the loan-to-value ratio of the property, with better rates given to borrowers with more equity. Home equity lines of credit, because they adjust monthly with fluctuations in the prime interest rate, present less interest rate risk to us. However, lending up to 100% of the value of the property and the potential for increased payments due to increased interest rates present greater credit risk to us. Due to the downturn in local and national economic conditions and the significant level of our existing loan balances, we de-emphasized home equity lending during the year ended September 30, 2009.
Consumer and Other Loans. We originate consumer loans to residents of the metropolitan areas of St. Louis and Kansas City, including automobile loans and other secured consumer goods loans. These loans are generally offered to our customers as a convenience and are not considered to be among our primary products. Automobile loans currently in the portfolio consist of fixed-rate loans secured by both new and used cars and light trucks. New cars are financed for a period of up to 72 months while used cars are financed for 60 months or less depending on the year and model. Collision and comprehensive insurance coverage is required on all automobile loans.
Loan Marketing and Processing. Loan applicants come through direct marketing efforts by our loan officers, as well as through referrals by realtors, financial planners, previous and present customers and, to a far lesser extent, through television, radio, internet and print advertising promotions. Residential loans may be originated in any of our offices, while commercial loans are originated only from our St. Louis offices. Loans we retain in our portfolio are serviced from our main office. Loans sold into the secondary mortgage market are generally sold on a “servicing released” basis and are serviced by the purchaser. Mortgage loan officers are compensated for their loan production based upon the dollar volume closed, as well as the gain on the sale produced.
Upon receipt of a loan application from a prospective borrower, a credit report and other data are obtained to verify specific information relating to the loan applicant’s employment, income and credit standing. An appraisal of the real estate offered as collateral is performed by an appraiser generally approved by the board of directors and licensed or certified by the State of Missouri.
The board of directors has granted loan approval authority to certain officers up to prescribed limits, depending on their experience and tenure. The CEO or the President may approve secured loans up to $1.0 million and unsecured loans up to $250,000. An internal loan committee, consisting of five senior officers and three non-management directors approves secured loans up to $10.0 million and unsecured loans up to $2.0 million. All loans above these levels are approved by the full board of directors.
Loan applicants are promptly notified of our decision. Interest rates are subject to change if the approved loan is not closed within the time of the commitment, which usually is 45 to 60 days for residential loans and 30 days for commercial loans.
Loan Underwriting Risks.
Adjustable-Rate Residential Mortgage Loans. The retention of ARM loans in our loan portfolio helps reduce our exposure to changes in interest rates. There are, however, credit risks resulting from the potential of increased amounts to be paid by the customer due to changing interest rates. During periods of rising interest rates, the risk of default on ARM loans increases as a result of repricing and the increased payments required from the borrower. Furthermore, because the ARM loans we originate generally provide initial rates of interest below the fully-indexed rates, these loans are subject to increased risks of default, delinquency, or prepayment as the rates adjust upward to the fully-indexed rates.
Residential Second Mortgage Loans and Home Equity Lines of Credit. Second mortgage loans and home equity lines of credit generally involve greater credit risk than first mortgage loans because they are secured by mortgages that are subordinate to the first mortgage on the property. This means that if the borrower is forced into foreclosure, we will receive no proceeds from the sale of the property until the first mortgage has been completely repaid. Second mortgage loans and home equity lines of credit often have high loan-to-value ratios when combined with the first mortgage on the property. Loans with high combined loan-to-value ratios will be more sensitive to declining property values than would those with lower combined loan-to-value ratios and, therefore, may experience a higher incidence of default and severity of losses.
Construction and Development Loans. Construction and development loans involve greater credit risks than residential or commercial real estate lending. Our risk of loss on these types of loans is dependent largely upon the accuracy of the initial estimate of the property’s value at completion of construction or development and the estimated cost (including interest) of the construction. If the estimate of construction costs is inaccurate, we may be required to advance additional funds to complete the development. If, upon completion of the project, the estimate of the marketability of the property is inaccurate, the borrower may be unable to sell the completed project in a timely manner or obtain adequate proceeds to repay the loan. Delays in completing the project may arise from inclement weather, labor problems, material shortages and other unpredictable contingencies. Construction lending also typically involves higher loan principal amounts and is often concentrated with a small number of builders. In some instances where the collateral value supports a further increase in the outstanding loan amount, no payment from the borrower is required during the term of a construction loan since the accumulated interest is added to the principal of the loan. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project and the ability of the borrower to sell or lease the property or obtain permanent take-out financing, rather than the ability of the borrower or guarantor to repay principal and interest. Furthermore, if our estimate of value of a completed project is inaccurate, then we may be confronted with, at or prior to the maturity of the loan, a project with a value that is insufficient to assure full repayment and we may incur a loss. We generally obtain personal guarantees from builders and commercial borrowers.
Commercial Real Estate Loans. Loans secured by commercial real estate generally have larger loan balances and involve greater risks than one- to four-family residential mortgage loans because the properties securing these loans often have unpredictable cash flows and are more difficult to evaluate and monitor. Payments on loans secured by such properties are often dependent on successful management and operation of the properties. Repayment of such loans may be affected, to a greater extent, by adverse conditions in the real estate market or the economy. If the cash flows from the property are reduced (for example, if leases are not obtained or renewed) the borrower’s ability to repay the loan and the value of the property securing the loan may be impaired. We seek to minimize these risks in a variety of ways, including limiting the size of such loans, reviewing the financial condition of the borrower, verifying the quality of the collateral and scrutinizing the management of the property securing the loan. We also generally obtain loan guarantees from financially capable parties. Our lending personnel or one of our agents inspects all of the properties securing our commercial real estate loans before the loan is made.
Commercial and Industrial Loans. Unlike residential mortgage loans, which generally are made on the basis of a borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial and industrial loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flows of the borrower’s business, including, in the case of loans secured by accounts receivable, the ability of the borrower to collect amounts due from its customers. There is little additional credit support provided by the borrower for most of these loans and the secondary source of repayment is based almost solely on the liquidation of the pledged collateral and the ability to collect on personal guarantees, if any. As a result, the availability of funds for the repayment of commercial loans may depend substantially on the success of the business itself, which may be subject to adverse conditions in the economy. Further, any collateral securing such loans may depreciate over time, be difficult to appraise, fluctuate in value and provide an insufficient source of repayment.
Consumer Loans. Consumer loans entail greater risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by rapidly depreciating assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan repayments are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by loss of employment, divorce, illness or personal bankruptcy. Furthermore, the application of various Federal and state laws, including Federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.
TABLE 1: Loans Receivable
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Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less. Mortgage loans that have adjustable rates are shown as maturing at their next re-pricing date.
Scheduled contractual principal repayments of loans generally do not reflect the actual life of such assets. The average life of loans is substantially less than their contractual terms because of principal prepayments. In addition, due-on-sale clauses on loans generally give us the right to declare loans immediately due and payable if, among other things, the borrower sells the property subject to the mortgage and the loan is not repaid. The average life of mortgage loans tends to increase, however, when current mortgage loan market rates are substantially higher than rates on existing mortgage loans and, conversely, decreases when rates on existing mortgage loans are substantially higher than current mortgage loan market rates.
Loan Originations, Sales and Purchases. To manage our interest rate risk position, we generally sell the fixed-rate residential first mortgage loans that we originate. The sale of such loans in the secondary mortgage market reduces our risk that the interest rates paid on short-term deposits (maturities generally less than three years) will increase while we hold long-term, fixed-rate loans in our portfolio. It also allows us to continue to fund loans when deposit flows decline or funds are not otherwise available. Residential mortgage loans are generally sold with servicing released. Gains, net of direct origination expense, from the sale of such loans are recorded at the time of sale. Generally a loan is committed to be sold and a price for the loan is determined at the same time the interest rate on the loan is locked with the customer, which may be at the time the applicant applies for the loan or any time up to the date of closing. This eliminates the risk to us that a rise in market interest rates will reduce the value of a mortgage before it can be sold.
Additionally, we generally negotiate a best-efforts delivery to the investor, which minimizes any exposure from loans that do not close. Our issuance of interest-rate commitments is considered a derivative instrument and changes in its market value are reported in our consolidated balance sheet and statement of income and comprehensive income.
TABLE 4: Loan Activity
Non-performing Assets and Delinquencies
The following is a summary of non-performing assets at the dates indicated.
TABLE 5: Non-performing Assets, Continued
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Includes $201,000, $221,000, $696,000, $667,000, and $663,000 of FHA/VA loans at September 30, 2009, 2008, 2007, 2006 and 2005, respectively, the principal and interest payments on which are fully insured.
Interest income recognized on non-accrual loans was approximately $2.3 million, $369,000 and $347,000 for the years ended September 30, 2009, 2008 and 2007, respectively. The gross interest income that would have been recorded in such periods if the loans had been current in accordance with their terms and had been outstanding throughout the periods was $3.4 million, $814,000 and $634,000 for the years ended September 30, 2009, 2008 and 2007, respectively. Impaired loans continuing to accrue interest are loans that are more than 90 days past due; however, the loans are well secured and remain in process of collection.
Real Estate Acquired in Settlement of Loans. Real estate acquired as a result of foreclosure or by deed-in-lieu of foreclosure is initially recorded at the lower of its cost, which is the unpaid principal balance of the related loan plus foreclosure costs, or fair value less estimated selling costs. Fair value is generally determined through a new appraisal or market analysis. Any write down to fair value at the time the property is acquired is recorded as a charge-off to the allowance for loan losses. Any decline in the fair value of the property subsequent to acquisition is recorded as a charge to non-interest expense. The balance of real estate acquired in settlement of loans increased $4.9 million from $3.5 million at September 30, 2008 to $8.5 million at September 30, 2009. The balance at September 30, 2009 consists of thirty-three residential properties, six residential construction properties and four commercial properties acquired in settlement of debts outstanding.
Credit Monitoring and Asset Classification. The Bank’s Risk Management Committee has the overall responsibility for the proper identification and classification of troubled assets, the continued monitoring of such assets, the establishment of the appropriate level of loss reserves, the charge-off of uncollectible loans and the implementation of action plans for significant classified or watch list loans. The committee consists of the President of the Bank, the President of the commercial lending division, the President of the mortgage lending division, the Chief Financial Officer, the manager of mortgage loan servicing, the manager of commercial loan servicing and various other loan collection personnel. The Director of Internal Audit also attends the meetings as an independent observer.
The committee meets monthly or more frequently if circumstances dictate, and reviews all problem and potential problem assets, consisting primarily of loans receivable. The status of significant classified and watch list loans, including workout plans, and emerging trends are discussed in detail. Following the meetings, the list of classified assets is updated, the appropriate level of loss reserves is recorded, significant loan charge-offs are recorded and classified asset action plans are updated. Troubled assets are subject to continuous monitoring between meetings. In addition to oversight by the committee, the board of directors reviews delinquent loans, classified assets, the level of the allowance for loan losses, portfolio mix and the status of workout efforts for large commercial credits at its regular monthly meetings. Management’s loan reviews and classifications are subject to independent quarterly reviews by a regional accounting firm specializing in asset reviews.
Residential Real Estate Loans. The Bank has a staff of full-time collectors who are responsible for following up on all past due residential loans. Residential borrowers are contacted almost immediately after a loan payment becomes past due. The first notice is mailed to the borrower eight days after the payment due date. Attempts to contact the borrower by telephone generally begin approximately 17 days after the payment due date. On the 30th day after the due date, a 30-day past due letter is sent. If a satisfactory response is not obtained, continuous follow-up contacts are attempted until the loan has been brought current. On the 45th day after the due date, a 45-day past due notice is sent. Before the 60th day of delinquency, attempts to interview the borrower, preferably in person, are made to establish: (1) the cause of the delinquency; (2) whether the cause is temporary; (3) the attitude of the borrower toward the debt; and (4) a mutually satisfactory arrangement for curing the default. Also, in the case of second mortgage loans, after the 60th day of delinquency: (1) the status and unpaid principal balance of each superior lien is determined; (2) whether any mortgage constituting a superior lien has been sold to any investor; and (3) whether the borrower is also delinquent under a superior lien and what the affected lien holder intends to do to resolve the delinquency.
If the borrower cannot be reached and does not respond to collection efforts, a personal collection visit or property inspection is made and a photograph of the exterior of the property is taken. The physical condition and occupancy status of the property is determined before recommending further action. Such inspection normally takes place on or about the 45th day of delinquency. At 45 days into the delinquency procedure, the Bank notifies the borrower that home ownership counseling is available for eligible homeowners. If by the 91st day of delinquency, or sooner if the borrower is chronically delinquent and all reasonable means of obtaining payment on time have been exhausted, foreclosure, according to the terms of the security instrument and applicable law, is initiated.
All residential loans that are past due 60 days or more are reviewed during weekly meetings between management and the collectors. These meetings allow management to understand the collectors’ perspective and opinions about the credits, review collection methods and make suggestions for alternative solutions to problems inherent with certain past-due customers. Individual action plans are often formulated during these meetings, such as foreclosures, charge-offs, troubled debt restructurings, skip tracing, litigation, or forbearance plans. These meetings are critical to the identification of troubled loans and allow management to take proactive steps to either resolve a problem or prepare for further action.
Management has proactively modified loan repayment terms with borrowers who were experiencing financial difficulties in the current economic climate with the belief that these actions would maximize the Company’s recoveries on these loans. These modifications are generally targeted at residential mortgage loan customers. Substantially all of the Company’s residential borrowers live in the St. Louis and Kansas City communities that the Company serves, which has enabled management to work closely with these troubled borrowers. The restructured terms of the loans generally include a reduction of the interest rates and the addition of past due interest to the principal balance of the loans. Many of these borrowers were current at the time of their modifications and showed strong intent and ability to repay their obligations under the modified terms.
Identification of restructuring candidates is a combined effort of the collection staff, management, and loan origination personnel. Restructuring candidates are referred to the restructuring staff and counseled on available options. Each applicant is required to submit a loan application, provide proof of income, and a hardship letter describing their deteriorating financial condition. Once completed, the loan is evaluated on its own merit, including a new appraisal and, if appropriate, a workout plan is drafted and a modification to the note and deed, if necessary, is executed. The restructured terms are entered onto the Bank’s loan system and the loan is flagged for future reporting and tracking. Occasionally, restructuring applicants are denied. These denials stem from borrowers who do not have enough income to sustain payments under the modified terms or have not adequately demonstrated their intent to repay.
A loan is classified as a troubled debt restructuring if the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. A loan classified as a troubled debt restructuring will retain such classification until the borrower demonstrates the ability to pay under the terms of the restructured note through a sustained period of repayment performance, which is generally one year. Interest income on restructured loans is accrued at the reduced rate once the borrower demonstrates the ability to pay under the terms of the restructured note through a sustained period of repayment performance, which is generally three months for loans that were less than 30 days past due at the time of restructuring and six months for loans that were 30 days or more past due at the time of restructuring. A report is prepared each month to track the portfolio of restructured loans.
Commercial Loans. Unlike residential loan monitoring, which is largely based on the past due status of the loan, effective monitoring of a commercial portfolio must be much more proactive. Early identification of problem assets is essential to managing and controlling risk. Troubled assets are closely tracked by senior management and are formally reviewed monthly by the Risk Management Committee. Senior management has recognized that the originating loan officers usually have the closest relationship with the Bank’s borrowers and are generally in the best position to identify potential problems in a timely manner. Therefore, in addition to their traditional business development responsibilities, senior management has refocused the Bank’s commercial loan officers to remain in close contact with existing borrowers so they can better monitor their financial health on an on-going basis. When a borrower’s problems are identified early, the Bank often has the opportunity to be “first in line” to secure additional collateral before the borrower’s financial condition deteriorates into a severe condition.
Each commercial loan officer meets monthly (or more frequently if required by specific circumstances) with the President of the Bank, the President of the commercial lending division and the senior loan underwriter to review their entire portfolio. The meetings address the status of all identified problem or classified credits and any other credits that might potentially become a problem if conditions do not improve. This procedure has been an effective tool in keeping senior management abreast of changes within the Bank’s commercial loan portfolio and has identified loans that warrant additional monitoring by placement on the Bank’s watch list.
The Bank also utilizes various sources of real estate market data, including quarterly analyses of subdivision and residential building lot inventories in the St. Louis region, to monitor potential problems within the loan portfolio.
Consumer Loans. When a consumer loan borrower fails to make a required payment, the Bank institutes collection procedures. The first notice is mailed to the borrower eight days following the payment due date. The Bank receives a computer-generated collection report daily. The customer is contacted by telephone to ascertain the nature of the delinquency. If by the 45th day following the payment due date, no progress has been made, a written notice is mailed informing the borrowers of their right to cure the delinquency within 20 days and of the Bank’s intent to begin legal action if the delinquency is not corrected. Depending on the type of property held as collateral, the Bank either obtains a judgment in small claims court or takes action to repossess the collateral or may collect under the existing note, whatever is most economically efficient.
Non-Accrued Interest. Loans are placed on non-accrual status when, in the opinion of management, there is reasonable doubt as to the collectability of interest or principal. Management considers many factors before placing a loan on non-accrual, including the overall financial condition of the borrower, the progress of management’s collection efforts and the value of the underlying collateral. Non-accrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collectability of interest or principal.
Classification of Troubled Assets. The Bank has adopted the Uniform Credit Classification Policy issued by the Federal Financial Institutions Examination Council, which was subsequently adopted by the Office of Thrift Supervision (“OTS”). The regulations require that each insured institution regularly review and classify its assets based on asset quality. In addition, OTS examiners have authority to identify problem assets in connection with examinations of insured institutions and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful and loss. Substandard assets must have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, questionable resulting in a high possibility of loss. An asset classified as loss is considered uncollectible and of such little value that continuance as an asset of the institution without establishment of a specific reserve is not warranted. If an asset or portion thereof is classified as loss, the insured institution establishes specific allowances for loan losses for the full amount of the portion of the asset classified as loss. A portion of general loan loss allowances established to cover probable losses related to classified assets may be included in determining an institution’s regulatory capital, while specific valuation allowances for loan losses generally do not qualify as regulatory capital. OTS regulations also require that assets that do not currently expose an institution to a sufficient degree of risk to warrant classification as substandard, doubtful or loss but do possess credit deficiencies or potential weakness deserving management’s close attention shall be designated “special mention” by either the institution or its examiners.
TABLE 6: Classified Loans
Allowance for Loan Losses. In originating loans, the Company recognizes that losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the security for the loan. All charged-off loans are charged to the allowance for loan losses and all recoveries are credited to it. The allowance for loan losses is established through a provision for loan losses charged to the Company’s income. The allowance for loan losses is based on management’s periodic evaluation of the Company’s past loan loss experience, known and inherent risks in the portfolio, the size and composition of the loan portfolio, adverse situations which may affect the borrower’s ability to repay, the estimated value of any underlying collateral and current economic conditions. The Company periodically recognizes losses on loans, which have active collection efforts through the use of specific valuation allowances in order to reduce loan balances to the estimated value of the collateral.
The following assessments are performed quarterly in accordance with the Company’s allowance for loan losses methodology:
Homogeneous residential mortgage loans are given one of five standard risk ratings at the time of origination. The risk ratings are assigned through the use of a credit-scoring model, which assesses credit risk determinants from the borrower’s credit history, the loan-to-value ratio, affordability ratios and other personal history. Recent historical loss rates and industry data for each credit rating are used as a starting point to determine the appropriate allocation percentage for each loan grade. Management then adjusts these rates to reflect actual changes and anticipated changes in national and local economic conditions and developments, assessment of collateral values based on independent appraisals, changes in lending policies and procedures, including underwriting standards and collections, charge-off and recovery practices, and changes in the experience, ability, and depth of lending management staff.
Commercial real estate loans are individually reviewed and assigned a credit risk rating periodically by the internal loan committee. Consumer and home equity loans are assigned standard risk weightings that determine the allocation percentage.
When commercial real estate loans are over 30 days delinquent or residential, consumer and home equity loans are over 90 days past due, they are evaluated individually for impairment. Additionally, loans that demonstrate credit weaknesses that may impact the borrower’s ability to repay are also reviewed individually for impairment. We consider a loan to be impaired when management believes it will be unable to collect all principal and interest due according to the contractual terms of the loan. If a loan is impaired, we record a loss valuation equal to the excess of the loan’s carrying value over the present value of estimated future cash flows or the fair value of collateral if the loan is collateral dependent.
Our methodology includes factors that allow us to adjust our estimates of losses based on the most recent information available. Historical charge-off experience generally provides a reasonable starting point for an institution’s analysis of probable losses on groups of homogeneous loans, but should not be the sole determining factor. We have traditionally relied on our five-year average charge-off history as this starting point. However, consistent with the decline in local and national credit market conditions, our charge-off levels increased significantly during fiscal 2008 and 2009 when compared to the trailing five-year period making the five-year trailing average a less reliable indicator of probable losses existing in the portfolio at September 30, 2009. Therefore, we relied most heavily on the actual charge-off experience for the year ended September 30, 2009 as our starting point, coupled with our expectations of the trends in these rates over the next twelve months when arriving at the level of allowance for loan losses at September 30, 2009. Any material increase in non-performing loans will adversely affect our financial condition and results of operations.
Management believes that the amount maintained in the allowance will be adequate to absorb probable losses inherent in the portfolio. Although management believes that it uses the best information available to make such determinations, future adjustments to the allowance for loan losses may be necessary and results of operations could be significantly and adversely affected if circumstances differ substantially from the assumptions used in making the determinations. While we believe we have established our allowance for loan losses in accordance with U.S. generally accepted accounting principles, there can be no assurance that the Bank’s regulators, in reviewing the Bank’s loan portfolio, will not request the Bank to increase significantly its allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that a substantial increase will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses will adversely affect our financial condition and results of operations.
TABLE 7: Allowance for Loan Losses
Investment Activities
The Bank is permitted, under applicable law, to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various federal agencies and state and municipal governments, deposits at the Federal Home Loan Bank (“FHLB”) of Des Moines, certificates of deposit of federally insured institutions, certain bankers’ acceptances and federal funds. Subject to various restrictions, savings institutions may also invest a portion of their assets in commercial paper, corporate debt securities, equity securities and mutual funds. Savings institutions like the Bank are also required to maintain an investment in FHLB stock and a minimum level of liquid assets.
We maintain a portfolio of primarily investment grade mortgage-backed securities in the form of Ginnie Mae, Freddie Mac and Fannie Mae participation certificates and collateralized mortgage obligations. Ginnie Mae certificates are guaranteed as to principal and interest by the full faith and credit of the United States, while Freddie Mac and Fannie Mae certificates are guaranteed by the respective agencies. Mortgage-backed securities generally entitle us to receive a pro rata portion of the cash flows from an identified pool of mortgages. Collateralized mortgage obligations are types of debt securities issued by a special purpose entity that aggregates pools of mortgages and mortgage-backed securities and creates different classes of securities with varying maturities and amortization schedules, as well as a residual interest, with each class possessing different risk characteristics. The cash flows from the underlying collateral are generally divided into “tranches” or classes that have descending priorities with respect to the distribution of principal and interest cash flows.
The Asset Liability Management Committee, which includes our Chief Executive Officer and our Chief Financial Officer, determines appropriate investments in accordance with the board of directors’ approved investment policies and procedures. Investments are made following certain considerations, which include our liquidity position and anticipated cash needs and sources, which in turn include outstanding commitments, upcoming maturities, estimated deposits and anticipated loan amortization and repayments. Further, the effect that the proposed investment would have on our credit and interest rate risk, and risk-based capital is considered. The interest rate, yield, settlement date and maturity are also reviewed.
All of our debt securities and mortgage-backed securities carry market risk insofar as increases in market interest rates would generally cause a decline in their market value. They also carry prepayment risk insofar as they may be called or repaid before their stated maturity during times of low market interest rates, so that we may have to reinvest the funds at a lower interest rate.
Our investment securities portfolio at September 30, 2009 did not contain securities of any issuer with an aggregate book value and aggregate market value in excess of 10% of stockholders’ equity, excluding those issued by the United States government or its agencies.
The above table is presented based upon contractual maturities. Expected maturities of mortgage-backed securities and CMOs will differ from contractual maturities due to scheduled repayments and because borrowers may have the right to call or prepay obligations with or without prepayment penalties. At September 30, 2009, the Company’s portfolio did not include any callable securities. This table does not take into consideration the effects of scheduled repayments or the effects of possible prepayments.
Sources of Funds
General. Deposits (including brokered deposits), loan repayments, loan sales, FHLB borrowings and borrowings from the Federal Reserve Bank are the major sources of our funds for lending and other investment purposes. Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are influenced significantly by the level of market interest rates. Borrowings from the FHLB of Des Moines and borrowings from the Federal Reserve Bank may be used to compensate for reductions in the availability of funds from these other sources. Management chooses among these wholesale funding sources depending on their relative costs, our overall interest rate risk exposure and our overall borrowing capacity at the FHLB and the Federal Reserve.
Deposit Accounts. Our depositors reside predominately in the St. Louis metropolitan area. Deposits are attracted from within our market area through the offering of a broad selection of commercial and retail deposit instruments, including checking accounts, negotiable order of withdrawal (“NOW”) accounts, money market deposit accounts, regular savings accounts, certificates of deposit, retirement savings plans and treasury management services. Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit, and the interest rate, among other factors. In determining the terms of our deposit accounts, we consider current market interest rates, the pricing of competitors, our profitability, the Company’s overall interest rate risk profile, the Company’s liquidity needs and our customer preferences and concerns. Our Asset Liability Management Committee regularly reviews our deposit mix and pricing. We supplement our retail deposits through brokered certificates of deposit and municipal deposits.
Included in certificates of deposit at September 30, 2009, were brokered time deposits totaling $75.0 million and $8.5 million that were scheduled to mature during the years ended September 30, 2010 and 2012, respectively.
At September 30, 2009, 2008 and 2007, certificates of deposit with a minimum principal amount of $100,000 totaled $317.7 million, $221.2 million, and $278.6 million, respectively. At September 30, 2009, such deposits were scheduled to mature as follows:
TABLE 16: Average Balances and Rates Paid on Deposits
Borrowings. We use advances from the FHLB of Des Moines and borrowings from the Federal Reserve Bank to supplement our supply of lendable funds and to meet deposit withdrawal requirements. The FHLB of Des Moines functions as a central reserve bank providing credit for savings associations and certain other member financial institutions. As a member, we are required to own capital stock in the FHLB of Des Moines and we are authorized to apply for advances on the security of such stock and certain of our mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the U.S. Government) provided certain creditworthiness standards have been met. Advances are made pursuant to several different credit programs. Each credit program has its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based on the financial condition of the member institution and the adequacy of collateral pledged to secure the credit. The line of credit is subject to available collateral of one- to four-family residential loans, home equity loans and loans held for sale. Periodically, the FHLB performs collateral audits in order to review the quality of the collateral, which could result in reduced borrowing capacity.
We have the ability to borrow funds from the Federal Reserve under an agreement which assigns certain qualifying loans as collateral to secure the amounts borrowed. These borrowings represent short-term borrowings from the Federal Reserve Bank of St. Louis’ discount window and are typically extended for periods of 28 days or less. At September 30, 2009, $201.8 million of commercial loans were assigned under this arrangement. The assets underlying these borrowings are under the Bank’s physical control.
We issued subordinated debentures from two separate special purpose trusts that are wholly-owned subsidiaries of the Company. At September 30, 2009, we had outstanding subordinated debentures totaling $19.6 million. Payments of the principal and interest on the subordinated debentures of these special purpose trusts are unconditionally guaranteed by the Company. Further, the accompanying junior subordinated debentures we issued to the special purpose trusts are senior to our shares of common stock.
Non-Banking Operations
We have a title insurance business, which is a division of the Bank’s wholly-owned subsidiary, Pulaski Service Corp. The division provides traditional title insurance services and products, including owner’s policies of insurance, lender’s policies of insurance and miscellaneous title information products (e.g., letter reports). The policies are issued primarily on residential transactions; however, the division also issues policies on certain commercial transactions. Customers of the title division consist primarily of the Bank’s residential mortgage loan customers and also include others that have been referred to the title division.
We operate a residential appraisal division consisting of seven appraisers. The business consists primarily of providing appraisal services to the Bank’s mortgage loan customers. All appraisers are either certified or licensed in the states of Missouri, Kansas or both.
We operate a fixed-income securities sales division consisting of six management and sales personnel. The business consists primarily of buying and selling bonds for community bank and public entity investment portfolio managers in Missouri, Illinois and surrounding states. The business does not include maintaining a trading portfolio for the Company.
The Bank’s subsidiary, Pulaski Service Corp., sells insurance products and annuities. Federal savings associations generally may invest up to 3% of their assets in service corporations, provided that any amount in excess of 2% is used primarily for community, inner city and community development projects. At September 30, 2009, the Bank’s equity investment in its subsidiary was $226,391 or 0.02% of the Bank’s assets.
Personnel
As of September 30, 2009, we had 465 full-time equivalent employees. The employees are not represented by a collective bargaining unit, and we believe our relationship with our employees is good.
Executive Officers of the Registrant
The following table sets forth certain information regarding the executive officers of the Company and the Bank.
Name
Age (1)
Position
Gary W. Douglass
President and Chief Executive Officer of Pulaski Financial Corp. and Chairman and Chief Executive Officer of the Bank
W. Thomas Reeves
President of Pulaski Bank
Paul J. Milano
Chief Financial Officer, Treasurer and Secretary of Pulaski Financial Corp. and Pulaski Bank
Matthew A. Locke
President of Mortgage Lending Division of Pulaski Bank
Brian J. Björkman
President of Commercial Lending Division of Pulaski Bank
Cheri G. Bliefernich
Executive Vice President of Banking Operations of Pulaski Bank
(1)
As of September 30, 2009.
Biographical Information
Set forth below is certain information regarding the executive officers of the Company and the Bank. There are no family relationships among the executive officers.
Gary W. Douglass was named President and Chief Executive Officer of the Company and Chief Executive Officer of the Bank on May 1, 2008 and was named Chairman of the Bank on May 1, 2009. Before joining Pulaski, Mr. Douglass was Executive Vice President, Finance and Chief Financial Officer of CPI Corp. (NYSE: CPI), a leading portrait studio operator in North America, headquartered in St. Louis. Mr. Douglass previously held the position of Executive Vice President and Chief Financial Officer of Roosevelt Financial Group, Inc., parent of Roosevelt Bank, before its merger with Mercantile Bancorporation, Inc. in 1997. Mr. Douglass is a certified public accountant and a former partner with Deloitte and Touche LLP, where he headed that firm’s accounting and auditing practice and its financial institutions practice in St. Louis.
W. Thomas Reeves has served as President of the Bank since March 2006. Prior to joining Pulaski, Mr. Reeves served as Executive Director of Downtown Now!, a not-for-profit organization dedicated to generating investment in, and development of, the downtown St. Louis Area from October 1999 to March 2006. Mr. Reeves also served as Senior Vice President and Chief Lending Officer of Mercantile Bank of St. Louis, where he oversaw all middle market and real estate lending activity in five states. He was Senior Vice President and Chief Lending officer and served in various executive and board positions with Mark Twain Bancshares Inc. and its affiliates. He also served as a bank regulator with the Missouri Division of Finance.
Paul J. Milano, CPA, was appointed Chief Financial Officer on April 1, 2009. He joined Pulaski Bank in January 2006 and had served as Secretary, Treasurer and Controller. He previously served as a director and consultant for Premier Bancshares, Inc., a $148 million bank holding company headquartered in Dallas, Texas. Before joining Premier, he served as Senior Vice President, Secretary, Treasurer and Chief Financial Officer of Jefferson Savings Bancorp, Inc., a $2 billion publicly traded thrift, until it was merged into Union Planters Bank in 2002 following its purchase. He was a director of Jefferson’s subsidiary, First Federal Savings Bank, from 1995 to 1999. Mr. Milano also served nine years with the public accounting firm of KPMG LLP, leaving in 1990 as Senior Manager to join Jefferson Savings. Mr. Milano is a member of the American Institute of Certified Public Accountants, the Missouri Society of Certified Public Accountants and the Financial Managers Society.
Matthew A. Locke joined the Bank in 1997 and currently serves as the President of the Mortgage Division. Prior to assuming his current position, he served the Bank as Senior Vice President and Kansas City Lending Manager. Mr. Locke holds a BBA from Pittsburg State University and a MBA from Webster University in St. Louis.
Brian J. Björkman joined the Bank in 2003 and currently serves as the President of the Commercial Division. Prior to joining the Bank, Mr. Björkman was President of Commercial Lending at Founders Bank in Chesterfield, Missouri prior to its acquisition by Bank Midwest. Mr. Björkman is a graduate of Drake University.
Cheri G. Bliefernich joined the Bank in 2004 and has served as Executive Vice President of Banking Operations since October 2008. Prior to assuming the current position, Mrs. Bliefernich served as Senior Vice President, Banking since January 2007 and Vice President, Retail Banking since November 2004. She has also served as Senior Vice President of Retail Banking at Royal Banks and Vice President of Retail Banking at Founders Bank. Mrs. Bliefernich has been in the banking industry for over 16 years.
REGULATION
General
Pulaski Bank is subject to extensive regulation, examination and supervision by the OTS, as its chartering agency, and the FDIC, as the deposit insurer. The Bank is a member of the FHLB System and its deposit accounts are insured up to applicable limits by the Deposit Insurance Fund managed by the FDIC. The Bank must file reports with the OTS and the FDIC concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other financial institutions. There are periodic examinations by the OTS and the FDIC to test the Bank’s safety and soundness and compliance with various laws and regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulatory requirements and policies, whether by the OTS, the FDIC or through legislation, could have a material adverse impact on our operations. The Company, as a savings and loan holding company, is required to file certain reports with, and otherwise comply with the rules and regulations of the OTS under federal laws. Certain of the regulatory requirements applicable to the Bank and to the Company are referred to below or elsewhere herein.
The description of statutory provisions and regulations set forth in this document does not purport to be a complete description of such statutes and regulations and their effects on the Company and the Bank and is qualified in its entirety by reference to the actual statutes and regulations.
Federal Savings Institution Regulation
Business Activities. The activities of federal savings institutions are governed by federal laws and regulations. These laws and regulations delineate the nature and extent of the activities in which federal associations may engage. In particular, many types of lending authority for federal associations, e.g., commercial, non-residential real property and consumer loans, are limited to a specified percentage of the institution’s capital or assets.
Loans to One Borrower. Federal laws provide that savings institutions are generally subject to the national bank limits on loans to one borrower. A savings institution may generally not make a loan or extend credit to a single or related group of borrowers in excess of 15% of the Bank’s unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if secured by readily-marketable collateral.
Qualified Thrift Lender Test. Federal law requires savings institutions to meet a qualified thrift lender (“QTL”) test. Under the test, a savings bank is required to either be a “domestic building and loan association” within the definition of the Internal Revenue Code of 1986, as amended (the “Code”), or maintain at least 65% of its “portfolio assets” (total assets less (i) specified liquid assets up to 20% of total assets, (ii) intangibles, including goodwill, and (iii) the value of property used to conduct business) in certain “qualified thrift investments” (primarily residential mortgages and related investments, including certain mortgage-backed securities) on a monthly basis in 9 out of every 12 months.
A savings institution that fails the QTL test is subject to certain operating restrictions and may be required to convert to a bank charter. As of September 30, 2009, the Bank met the QTL test. Recent legislation has expanded the extent to which education loans, credit card loans and small business loans may be considered “qualified thrift investments.”
Limitation on Capital Distributions. OTS regulations impose limitations upon all capital distributions by a savings institution, such as cash dividends, payments to repurchase its shares and payments to shareholders of another institution in a cash-out merger. Under the regulations, an application to and the prior approval of the OTS is required prior to any capital distribution if the institution does not meet the criteria for “expedited treatment” of applications under OTS regulations (i.e., generally examination ratings in the top two categories), the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the preceding two years, the institution would be undercapitalized following the distribution or the distribution would otherwise be contrary to a statute, regulation or agreement with the OTS. If an application is not required, the institution must still provide prior notice to the OTS of the capital distribution since it is a subsidiary of the holding company. If the Bank’s capital fell below its regulatory requirements or the OTS notified it that it was in need of more than normal supervision, the Bank’s ability to make capital distributions could be restricted. In addition, the OTS could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the OTS determines that such distribution would constitute an unsafe or unsound practice.
Assessments. Savings institutions are required to pay assessments to the OTS to fund the agency’s operations. The general assessment, paid on a semi-annual basis, is based on the savings institution’s total assets, including consolidated subsidiaries, as reported in the latest quarterly thrift financial report.
On May 22, 2009, the FDIC adopted a final rule imposing a 5 basis point special assessment on each insured depository institution’s assets minus Tier 1 capital as of June 30, 2009. The special assessment was paid on September 30, 2009. The FDIC may impose an additional special assessment if the FDIC estimates that the Deposit Insurance Fund reserve ratio will fall to a level that the FDIC believes would adversely affect public confidence or to a level that will be close to or below zero. Any future special assessments will increase insurance premium expense on deposits if and when they become effective.
On November 12, 2009, the FDIC adopted a final rule requiring insured depository institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012, on December 30, 2009, along with each institution's risk-based deposit insurance assessment for the third quarter of 2009. For most institutions, the amount paid on December 30, 2009 will be substantially higher than typical quarterly deposit insurance assessments. The amount of the assessment related to future periods will initially be recorded as a prepaid asset and will be charged to expense during the periods to which it relates.
Branching. The OTS regulations authorize federally chartered savings associations to branch nationwide to the extent allowed by federal statute. This permits federal savings associations with interstate networks to more easily diversify their loan portfolios and lines of business geographically. OTS regulations preempt any state law purporting to regulate branching by federal savings institutions.
Community Reinvestment Act. Under the Community Reinvestment Act (“CRA”), as implemented by OTS regulations, a savings institution has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OTS, in connection with its examination of a savings institution, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution. The CRA also requires all institutions to make public disclosure of their CRA ratings. The Bank received a “Satisfactory” CRA rating in its most recent examination.
Transactions with Related Parties. The Bank’s authority to engage in certain transactions with “affiliates” (i.e., any company that controls or is under common control with an institution, including the Company and any non-savings institution subsidiaries) is limited by federal law. The aggregate amount of covered transactions with any individual affiliate is limited to 10% of the capital and surplus of the savings institution. The aggregate amount of covered transactions with all affiliates is limited to 20% of the savings institution’s capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type described in federal law. The purchase of low-quality assets from affiliates is generally prohibited. Transactions with affiliates must be on terms and under circumstances that are at least as favorable as those prevailing at the time for comparable transactions with non-affiliated companies. In addition, savings institutions are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings institution may purchase the securities of any affiliate other than a subsidiary.
The Bank’s authority to extend credit to executive officers, directors and 10% shareholders (“insiders”), as well as entities controlled by such persons, is also governed by federal law. Such loans are required to be made on terms substantially the same as those offered to unaffiliated individuals and may not involve more than the normal risk of repayment. An exception exists for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees. The law limits both the individual and aggregate amount of loans the Bank may make to insiders based, in part, on the Bank’s capital position and requires certain board approval procedures to be followed. There are additional restrictions on extensions of credit to executive officers.
Enforcement. The OTS has primary enforcement responsibility over savings institutions and has the authority to bring actions against the institution and all institution-affiliated parties, including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may include the issuance of a capital directive or cease and desist order, removal of officers and/or directors, institution of receivership, conservatorship, or termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or even $1 million per day in especially egregious cases. The FDIC has the authority to recommend to the Director of the OTS that an enforcement action be taken with respect to a particular savings institution. If action is not taken by the Director, the FDIC has the authority to take such action under certain circumstances. Federal law also establishes criminal penalties for certain violations.
Standards for Safety and Soundness. The federal banking agencies have adopted Interagency Guidelines Prescribing Standards for Safety and Soundness. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the OTS determines that an institution fails to meet any standard prescribed by the guidelines, the OTS may require the institution to submit an acceptable plan to achieve compliance with the standard.
Capital Requirements. The OTS capital regulations require savings institutions to meet three minimum capital standards: a 1.5% tangible capital ratio, a 4% leverage ratio (3% for institutions receiving the highest rating on the CAMELS financial institution rating system), and an 8% risk-based capital ratio. In addition, the prompt corrective action standards discussed below also establish, in effect, a minimum 2% tangible capital standard, a 4% leverage capital ratio (3% for institutions receiving the highest rating in the CAMELS financial institution rating system) and, together with the risk-based capital standard itself, a 4% Tier I risk-based capital standard. The OTS regulations also require that, in meeting the tangible, leverage and risk-based capital standards, institutions must generally deduct investments in and loans to subsidiaries engaged in activities as principal that are not permissible for a national bank.
The risk-based capital standard for savings institutions requires the maintenance of Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk weighted assets of 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, recourse obligations and direct credit substitutes are multiplied by a risk-weight of 0% to 100%, as assigned by the OTS capital regulation based on the risks OTS believes are inherent in the type of asset. Core capital is defined as common stockholders’ equity (including retained earnings), certain non-cumulative perpetual preferred stock and related surplus, and minority interests in equity accounts of consolidated subsidiaries less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital include capital instruments such as cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock. The allowance for loan and lease losses is includable in supplementary capital up to 1.25% of risk-weighted assets. Up to 45% of unrealized gains in available-for-sale securities with readily determinable fair values is also includable as supplementary capital. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital.
The OTS also has authority to establish individual minimum capital requirements in appropriate cases upon a determination that an institution’s capital level is or may become inadequate in light of the particular circumstances.
Prompt Corrective Regulatory Action. The OTS is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution’s degree of under-capitalization. Generally, a savings institution that has a ratio of total capital to risk-weighted assets of less than 8%, a ratio of Tier I (core) capital to risk-weighted assets of less than 4% or a ratio of core capital to total assets of less than 4% (3% or less for institutions with the highest examination rating) is considered to be “under-capitalized.” A savings institution that has a total risk-based capital ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio that is less than 3% is considered to be “significantly undercapitalized” and a savings institution that has a tangible capital to assets ratio equal to or less than 2% is deemed to be “critically undercapitalized.” Subject to a narrow exception, the OTS is required to appoint a receiver or conservator for an institution that is “critically undercapitalized.” The regulation also provides that a capital restoration plan must be filed with the OTS within 45 days of the date a savings institution receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Compliance with the plan must be guaranteed by any parent holding company in an amount of up to the lesser of 5% of the savings association’s total assets when it was deemed to be undercapitalized, or the amount necessary to achieve compliance with applicable capital requirements. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. The OTS could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. Significantly and critically undercapitalized institutions are subject to additional mandatory and discretionary measures.
Insurance of Deposit Accounts. The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation. The Deposit Insurance Fund is the successor to the Bank Insurance Fund and the Savings Association Insurance Fund, which were merged in 2006. Under the Federal Deposit Insurance Corporation’s risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other factors, with less risky institutions paying lower assessments. An institution’s assessment rate depends upon the category to which it is assigned. Due to losses incurred by the Deposit Insurance Fund in 2008 as a result of failed institutions, the Federal Deposit Insurance Corporation implemented an industry-wide seven basis point increase in the assessment range for the first quarter of 2009. The Federal Deposit Insurance Corporation implemented further refinements to its risk-based assessment that were effective April 1, 2009 and made the range eight to 77-1/2 basis points. The Federal Deposit Insurance Corporation may adjust rates uniformly from one quarter to the next, except that no single adjustment can exceed three basis points. No institution may pay a dividend if in default of the FDIC assessment.
In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980s by the financing corporation to recapitalize a predecessor deposit insurance funds. That payment is established quarterly and for the year ended September 30, 2009 averaged 1.02 basis points of assessable deposits.
The Federal Deposit Insurance Corporation has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what insurance assessment rates will be in the future.
Insurance of deposits may be terminated by the Federal Deposit Insurance Corporation upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the Federal Deposit Insurance Corporation or the Office of Thrift Supervision. We do not know of any practice, condition or violation that might lead to termination of deposit insurance.
The Bank elected to participate in the FDIC’s Transaction Account Guarantee Program beginning in the quarter ended March 31, 2009. This program provides full FDIC insurance coverage for non interest-bearing transaction accounts and qualifying NOW accounts, regardless of the dollar amount, and is in addition to the standard FDIC insurance that was temporarily increased to $250,000 per depositor through December 31, 2013. The Transaction Account Guarantee Program was originally scheduled to expire on December 31, 2009. However, the FDIC adopted an optional six-month extension of the program, until June 30, 2010, and the Bank elected to participate in the extension.
On May 22, 2009, the FDIC adopted a final rule imposing a 5 basis point special assessment on each insured depository institution’s assets minus Tier 1 capital as of June 30, 2009. The special assessment was paid on September 30, 2009. The FDIC may impose an additional special assessment if the FDIC estimates that the Deposit Insurance Fund reserve ratio will fall to a level that the Board believes would adversely affect public confidence or to a level that will be close to or below zero. Any future special assessments will increase insurance premium expense on deposits if and when they become effective.
On November 12, 2009, the FDIC adopted a final rule requiring insured depository institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012, on December 30, 2009, along with each institution's risk-based deposit insurance assessment for the third quarter of 2009. For most institutions, the amount paid on December 30, 2009 will be substantially higher than typical quarterly deposit insurance assessments. The amount of the assessment related to future periods will initially be recorded as a prepaid asset and will be charged to expense during the periods to which it relates.
Federal Home Loan Bank System. The Bank is a member of the FHLB System, which consists of 12 regional FHLBs. The FHLB provides a central credit facility primarily for member institutions. The Bank, as a member of the FHLB, is required to acquire and hold shares of capital stock in that FHLB.
The FHLBs are required to provide funds for the resolution of insolvent thrifts and to contribute funds for affordable housing programs. These requirements could reduce the amount of dividends that the FHLBs pay to their members and could also result in the FHLBs imposing a higher rate of interest on advances to their members. If dividends were reduced or interest on future FHLB advances increased, the Bank’s net interest income would likely also be reduced.
Federal Reserve System. The FRB regulations require savings institutions to maintain non-interest-earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The regulations generally require that for 2009, reserves be maintained against aggregate transaction accounts as follows: a 3% reserve ratio is assessed on net transaction accounts up to and including $44.4 million; a 10% reserve ratio is applied over $44.4 million. The first $10.3 million of otherwise reservable balances (subject to adjustments by the FRB) were exempted from the reserve requirements. The Bank has complied with the foregoing requirements. For 2010, the FRB has set the 3% reserve limit at $55.2 million and the exemption at $10.7 million.
Regulatory Restructuring Legislation. The Obama Administration has proposed, and the House of Representatives and Senate are currently considering, legislation that would restructure the regulation of depository institutions. Proposals range from just the merger of the Office of Thrift Supervision with the Office of the Comptroller of the Currency, which regulates national banks, to the creation of an independent federal agency that would assume the regulatory responsibilities of the Office of Thrift Supervision, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency and Federal Reserve Board. The federal savings association charter would be eliminated under some proposals, although others would grandfather existing charters such as that of the Bank. Another possibility is the elimination of the separate regulatory scheme for savings and loan holding companies, which would require the Company to become a bank holding company. Also proposed is the creation of a new federal agency to administer and enforce consumer and fair lending laws, a function that is now performed by the depository institution regulators. The federal preemption of state laws currently accorded federally chartered depository institutions would be reduced under certain proposals as well.
Enactment of any of these proposals would revise the regulatory structure imposed on the Bank and Company, which could result in more stringent regulation. At this time, management has no way of predicting the contents of any final legislation, or whether any legislation will be enacted at all.
Holding Company Regulation
The Company is a non-diversified unitary savings and loan holding company within the meaning of federal law. The Gramm-Leach-Bliley Act of 1999 provides that no company may acquire control of a savings association after May 4, 1999 unless it engages only in the financial activities permitted for financial holding companies under the law or for multiple savings and loan holding companies as described below. Further, the Gramm-Leach-Bliley Act specifies that, subject to a grandfather provision, existing savings and loan holding companies may only engage in such activities. The Company qualifies for the grandfathering and is therefore not restricted in terms of its activities. Upon any non-supervisory acquisition by the Company of another savings association as a separate subsidiary, the Company would become a multiple savings and loan holding company and would be limited to activities permitted multiple holding companies by OTS regulation, such as lending and real estate investments. OTS has issued an interpretation concluding that multiple savings holding companies may also engage in activities permitted for financial holding companies, including insurance activities and underwriting, and investment banking.
A savings and loan holding company is prohibited from, directly or indirectly, acquiring more than 5% of the voting stock of another savings institution or savings and loan holding company without prior written approval of the OTS, and from acquiring or retaining control of a depository institution that is not insured by the FDIC. In evaluating applications by holding companies to acquire savings institutions, the OTS considers among other things, the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the Deposit Insurance Fund, the convenience and needs of the community and competitive factors.
The OTS may not approve any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions; (i) the approval of interstate supervisory acquisitions by savings and loan holding companies and (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.
Although savings and loan holding companies are not currently subject to specific capital requirements or specific restrictions on the payment of dividends or other capital distributions, federal regulations do prescribe such restrictions on subsidiary savings institutions, as described previously. The Bank must notify the OTS 30 days before declaring any dividend to the Company. In addition, the financial impact of a holding company on its subsidiary institution is a matter that is evaluated by the OTS and the agency has authority to order cessation of activities or divestiture of subsidiaries deemed to pose a threat to the safety and soundness of the institution.
Acquisition of the Company. Under the Federal Change in Bank Control Act (“CIBCA”), a notice must be submitted to the OTS if any person (including a company), or a group acting in concert, seeks to acquire 10% or more of the Company’s outstanding voting stock, unless the OTS has found that the acquisition will not result in a change in control of the Company. Under the CIBCA, the OTS generally has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the anti-trust effect of the acquisition. Any company that so acquires control would then be subject to regulation as a savings and loan holding company.
Participation in the U.S. Department of Treasury’s Capital Purchase Program. On January 16, 2009, as part of the Capital Purchase Program under the U.S. Department of Treasury’s Troubled Asset Relief Program, the Company issued 32,538 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, $1,000 per share liquidation preference, and a warrant to purchase up to 778,421 shares of the Company’s common stock for a period of ten years at an exercise price of $6.27 per share in exchange for $32.5 million in cash from the U.S. Department of Treasury. The preferred stock pays cumulative dividends of 5% per year for the first five years and 9% per year thereafter. The Company may, at its option, redeem the preferred stock at its liquidation preference plus accrued and unpaid dividends. The securities purchase agreement between the Company and the U.S. Treasury limits, for three years, the rate of dividend payments on the Company’s common stock to the amount of its last quarterly cash dividend prior to participation in the program of $0.095 per share unless an increase is approved by the Treasury, limits the Company’s ability to repurchase its common stock for three years, and subjects the Company to certain executive compensation limitations included in the Emergency Economic Stabilization Act of 2008, as amended by the American Recovery and Reinvestment Act of 2009.
Item 1A.
Item 1A. Risk Factors
An investment in shares of our common stock involves various risks. Before deciding to invest in our common stock, you should carefully consider the risks described below in conjunction with the other information in this annual report on Form 10-K and information incorporated by reference into this annual report on Form 10-K, including our consolidated financial statements and related notes. Our business, financial condition and results of operations could be harmed by any of the following risks or by other risks that have not been identified or that we may believe are immaterial or unlikely. The value or market price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. The risks discussed below also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements.
Our provision for loan losses increased substantially during the past fiscal year and we may be required to make further increases in our provision for loan losses and to charge-off additional loans in the future, especially due to our level of non-performing assets. Further, our allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio.
For the year ended September 30, 2009, we recorded a provision for loan losses of $23.0 million. We also recorded net loan charge-offs of $15.2 million. Our non-performing assets increased significantly in fiscal 2009 from $24.4 million, or 1.87% of total assets at September 30, 2008 to $67.8 million, or 4.82% of total assets at September 30, 2009. The increase was primarily due to the weakened economy and the softening real estate market. If the economy and/or the real estate market continues to weaken these assets may not perform according to their terms and the value of the collateral may be insufficient to pay any remaining loan balance. If this occurs, we may experience losses, which could have a negative effect on our results of operations. Like all financial institutions, we maintain an allowance for loan losses to provide for loans in our portfolio that may not be repaid in their entirety. We believe that our allowance for loan losses is maintained at a level adequate to absorb probable losses inherent in our loan portfolio as of the corresponding balance sheet date. However, our allowance for loan losses may not be sufficient to cover actual loan losses, and future provisions for loan losses could materially adversely affect our operating results.
In evaluating the adequacy of our allowance for loan losses, we consider numerous quantitative factors, including our historical charge-off experience, growth of our loan portfolio, changes in the composition of our loan portfolio and the volume of delinquent and classified loans. In addition, we use information about specific borrower situations, including their financial position and estimated collateral values, to estimate the risk and amount of loss for those borrowers. Finally, we also consider many qualitative factors, including general and economic business conditions, anticipated duration of the current business cycle, current general market collateral valuations, trends apparent in any of the factors we take into account and other matters, which are, by nature, more subjective and fluid. Our estimates of the risk of loss and amount of loss on any loan are complicated by the significant uncertainties surrounding our borrowers’ abilities to successfully execute their business models through changing economic environments, competitive challenges and other factors. Because of the degree of uncertainty and susceptibility of these factors to change, our actual losses may vary from our current estimates.
Federal regulators, as an integral part of their examination process, periodically review our allowance for loan losses and may require us to increase our allowance for loan losses by recognizing additional provisions for loan losses charged to expense, or to decrease our allowance for loan losses by recognizing loan charge-offs. Any such additional provisions for loan losses or charge-offs, as required by these regulatory agencies, could have a material adverse effect on our financial condition and results of operations.
High loan-to-value ratios on a significant portion of our residential mortgage and home equity line of credit portfolios expose us to greater risk of loss.
Many of our residential mortgage loans are secured by liens on mortgage properties in which the borrowers have little or no equity because we originated a first mortgage with an 80% loan-to-value ratio at the time of purchase and a concurrent second mortgage with a combined loan-to-value ratio of up to 100%. At September 30, 2009, approximately $44.7 million of second mortgage loans, or 13.9% of our $320.5 million residential mortgage loan portfolio, had original combined loan-to-value ratios in excess of 90%. In addition, our home equity lines of credit may have, when added to existing senior lien balances, a combined loan-to-value ratio at the date of origination based upon the fully-disbursed amount, of up to 100% of the value of the home securing the loan. At September 30, 2009, we held $12.8 million of uninsured home equity lines of credit with a combined loan-to-value ratio in excess of 90%. Our average loan-to-value ratio in our home equity line of credit portfolio is below 80%. These loan-to-value ratios are based on values at the time of origination. Subsequent declines in real estate values have likely resulted in an increase in such ratios. Residential loans with high combined loan-to-value ratios will be more sensitive to declining property values than would those with lower combined loan-to-value ratios and, therefore, may experience a higher incidence of default and severity of losses. In addition, if the borrowers sell their homes, such borrowers may be unable to repay their loans in full from the proceeds of the sale.
The unseasoned nature of many loans in our commercial loan portfolio may result in errors in judging their collectability, which may lead to additional provisions for loan losses and/or charge-offs, which would reduce our profits.
Our commercial loan portfolio, which includes loans secured by commercial, multi-family and residential real estate as well as business assets, has increased $66.4 million, or 12.5%, to $597.2 million at September 30, 2009 from $530.8 million at September 30, 2008, and increased $575.7 million from $21.4 million at September 30, 2003, the year we began our commercial lending operation. A large portion of our commercial loan portfolio is unseasoned and does not provide us with a significant payment history pattern from which to judge future collectability. As a result, it is difficult to predict the future performance of this part of our loan portfolio. These loans may have delinquency or charge-off levels above our historical experience, which could adversely affect our future performance. Further, commercial loans generally have larger balances and involve a greater risk than one- to four-family residential mortgage loans. Accordingly, if we make any errors in judgment in the collectability of our commercial loans, any resulting charge-offs may be larger on a per-loan basis than those incurred with our residential mortgage loan portfolio.
If the value of real estate in the St. Louis and Kansas City metropolitan areas were to continue to decline, a significant portion of our loan portfolio could become under-collateralized, which could have a material adverse effect on us.
The St. Louis and Kansas City metropolitan areas have experienced declines in home prices over the past two years. A further decline in local economic conditions could have an additional adverse affect on the value of the real estate collateral securing our loans. A continued decline in property values would diminish our ability to recover on defaulted loans by selling the real estate collateral, making it more likely that we would suffer losses on defaulted loans. Additionally, a decrease in asset quality could require additions to our allowance for loan losses through increased provisions for loan losses, which would reduce our profits. Also, a decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loan portfolios are more geographically diverse. Real estate values are affected by various factors in addition to local economic conditions, including, among other things, changes in general or regional economic conditions, governmental rules or policies and natural disasters.
Our business is subject to the success of the local economy in which we operate.
Since the latter half of 2007, depressed economic conditions have existed throughout the United States, including our market area. Our market area has experienced home price declines, increased foreclosures and increased unemployment rates. Continued deterioration of economic conditions in our market area could reduce our growth rate, affect the ability of our customers to repay their loans and generally affect our financial condition and results of operations. Conditions such as inflation, recession, unemployment, high interest rates, short money supply, scarce natural resources, international disorders, terrorism and other factors beyond our control may adversely affect our profitability. We are less able than a larger institution to spread the risks of unfavorable local economic conditions across a large number of diversified economies. Any sustained period of increased loan delinquencies, foreclosures or losses caused by adverse market or economic conditions in the State of Missouri could adversely affect our results of operations and financial condition. Moreover, we cannot give any assurance we will benefit from any market growth or favorable economic conditions in our primary market areas if they do occur.
Recent negative developments in the financial industry and the domestic and international credit markets may adversely affect our operations and our stock price.
As a result of the general economic downturn and uncertainty in the financial markets, commercial as well as consumer loan portfolio performances have deteriorated at many institutions and the competition for deposits and quality loans has increased significantly. In addition, the values of real estate collateral supporting many commercial loans and home mortgages have declined and may continue to decline. Bank and bank holding company stock prices have been negatively affected, as has the ability of banks and bank holding companies to raise capital or borrow in the debt markets compared to recent years. As a result, there is a potential for new federal or state laws and regulations regarding lending and funding practices and liquidity standards, and bank regulatory agencies are expected to be very aggressive in responding to concerns and trends identified in examinations, including the expected issuance of many formal enforcement orders. Negative developments in the financial industry and the domestic and international credit markets, and the impact of new legislation in response to those developments, may negatively impact our operations by restricting our business operations, including our ability to originate or sell loans, and adversely impact our financial performance or our stock price.
An increase in interest rates may reduce our mortgage revenues, which would negatively impact our non-interest income.
Our mortgage banking operations provide a significant portion of our non-interest income. We generate mortgage revenues primarily from gains on the sale of loans to investors on a servicing-released basis. In a rising or higher interest rate environment, our originations of mortgage loans may decrease, resulting in fewer loans that are available to be sold to investors. This would result in a decrease in mortgage revenues and a corresponding decrease in non-interest income. In addition, our results of operations are affected by the amount of non-interest expenses associated with mortgage banking activities, such as salaries and employee benefits, occupancy, equipment and data processing expense and other operating costs. During periods of reduced loan demand, our results of operations may be adversely affected to the extent that we are unable to reduce expenses commensurate with the decline in loan originations.
Secondary mortgage market conditions could have a material impact on our financial condition and results of operations.
In addition to being affected by interest rates, the secondary mortgage markets are also subject to investor demand for residential mortgage loans and increased investor yield requirements for those loans. These conditions may fluctuate or even worsen in the future. In light of current conditions, there is a higher risk to retaining a larger portion of mortgage loans than we would in other environments until they are sold to investors. We believe our ability to retain fixed-rate residential mortgage loans is limited. As a result, a prolonged period of secondary market illiquidity may reduce our loan production volumes and could have a material adverse effect on our financial condition and results of operation.
Fluctuations in interest rates could reduce our profitability and affect the value of our assets.
Like other financial institutions, we are subject to interest rate risk. Our primary source of income is net interest income, which is the difference between interest earned on loans and investments and the interest paid on deposits and borrowings. We expect that we will periodically experience imbalances in the interest rate sensitivities of our assets and liabilities and the relationships of various interest rates to each other. Over any defined period of time, our interest-earning assets may be more sensitive to changes in market interest rates than our interest-bearing liabilities, or vice versa. In addition, the individual market interest rates underlying our loan and deposit products (e.g., the prime rate) may not change to the same degree over a given time period. In any event, if market interest rates should move contrary to our position, our earnings may be negatively affected. In addition, loan volume and quality and deposit volume and mix can be affected by market interest rates. Changes in levels of market interest rates could materially adversely affect our net interest spread, asset quality, origination volume and overall profitability.
We principally manage interest-rate risk by managing our volume and mix of our earning assets and funding liabilities. In a changing interest rate environment, we may not be able to manage this risk effectively. If we are unable to manage interest rate risk effectively, our business, financial condition and results of operations could be materially harmed.
Changes in the level of interest rates also may negatively affect our ability to originate real estate loans, the value of our assets and our ability to realize gains from the sale of our assets, all of which ultimately affect our earnings.
If the goodwill that we recorded in connection with a business acquisition becomes impaired, it could have a negative impact on our profitability.
Goodwill represents the amount of acquisition cost over the fair value of net assets we acquired in the purchase of another financial institution. We review goodwill for impairment at least annually, or more frequently if events or changes in circumstances indicate the carrying value of the asset might be impaired. We determine impairment by comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. Any such adjustments are reflected in our results of operations in the periods in which they become known. At September 30, 2009, our goodwill totaled $3.9 million. While we have recorded no such impairment charges since we initially recorded the goodwill, there can be no assurance that our future evaluations of goodwill will not result in findings of impairment and related write-downs, which may have a material adverse effect on our financial condition and results of operations.
Our business strategy includes the continuation of moderate growth plans, and our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively.
Our assets increased $102.3 million, or 7.8%, from $1.30 billion at September 30, 2008 to $1.41 billion at September 30, 2009, primarily due to increases in commercial loans held in our portfolio and residential real estate loans held for sale. We expect to continue to experience growth in the amount of our assets, the level of our deposits and the scale of our operations. Achieving our growth targets requires us to attract customers that currently bank at other financial institutions in our market, thereby increasing our share of the market. Our ability to successfully grow will depend on a variety of factors, including our ability to attract and retain experienced bankers, the continued availability of desirable business opportunities, the competitive responses from other financial institutions in our market areas and our ability to manage our growth. While we believe we have the management resources and internal systems in place to successfully manage our future growth, there can be no assurance growth opportunities will be available or that we will successfully manage our growth. If we do not manage our growth effectively, we may not be able to achieve our business plan, and our business and prospects could be harmed.
Our continued pace of growth may require us to raise additional capital in the future, but that capital may not be available when it is needed.
We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. We anticipate that we have sufficient capital resources to satisfy our capital requirements for the foreseeable future. We may at some point, however, need to raise additional capital to support our continued growth. If we raise capital through the issuance of additional shares of our common stock or other securities, it would dilute the ownership interests of existing shareholders and may dilute the per share book value of our common stock. New investors may also have rights, preferences and privileges senior to our current shareholders which may adversely impact our current shareholders.
On January 16, 2009, as part of the Capital Purchase Program under the U.S. Department of Treasury’s Troubled Asset Relief Program, the Company issued 32,538 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, $1,000 per share liquidation preference, and a warrant to purchase up to 778,421 shares of the Company’s common stock for a period of ten years at an exercise price of $6.27 per share in exchange for $32.5 million in cash from the U.S. Department of Treasury. The preferred stock pays cumulative dividends of 5% per year for the first five years and 9% per year thereafter. The Company may, at its option, redeem the preferred stock at its liquidation preference plus accrued and unpaid dividends. We intend to redeem the preferred stock prior to the increase in the dividend rate to 9%. Such redemption will require us to raise additional capital.
Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside of our control, and on our financial performance. Accordingly, we may not be able to raise additional capital, if needed, on terms acceptable to us. If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth and acquisitions could be materially impaired.
Our wholesale funding sources may prove insufficient to replace deposits at maturity and support our future growth.
We must maintain sufficient funds to respond to the needs of depositors and borrowers. As a part of our liquidity management, we use a number of funding sources in addition to deposit growth and repayments and maturities of loans and investments. As we continue to grow, we may become more dependent on these sources, which include FHLB advances, borrowings from the Federal Reserve Bank, proceeds from the sale of loans, and brokered certificates of deposit. At September 30, 2009, we had $61.0 million of FHLB advances outstanding with an additional $191.3 million available borrowing capacity, no borrowings from the Federal Reserve Bank outstanding with an additional $131.1 million available borrowing capacity and $83.5 million in brokered certificates of deposit. If we were to become less than “well capitalized,” as defined by applicable OTS regulations, it would materially restrict our ability to acquire and retain brokered certificates of deposit and could reduce the maximum borrowing limits we currently have available through the FHLB and the Federal Reserve Bank. Additionally, adverse operating results or changes in industry conditions could lead to difficulty or an inability to access these additional funding sources. Our financial flexibility will be severely constrained if we are unable to maintain our access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. Finally, if we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs. In this case, our operating margins and profitability would be adversely affected.
The building of market share through our branching strategy could cause our expenses to increase faster than revenues.
We may continue to build market share in the St. Louis metropolitan area through our branching strategy. We opened three new branches during calendar year 2007. There are considerable costs involved in opening branches and new branches generally require a period of time to generate sufficient revenues to offset their costs, especially in areas in which we do not have an established presence. Accordingly, any new branch can be expected to negatively impact our earnings for some period of time until the branch reaches certain economies of scale. We have no assurance our new branches will be successful even after they have been established.
We are dependent upon the services of our management team.
Our future success and profitability is substantially dependent upon the management and banking abilities of our senior executives. We believe that our future results will also depend, in part, upon our attracting and retaining highly skilled and qualified management. We are especially dependent on a limited number of key management personnel, none of whom has an employment agreement with us, except for our chief executive officer. The loss of the chief executive officer and other senior executive officers could have a material adverse impact on our operations because other officers may not have the experience and expertise to readily replace these individuals. Competition for such personnel is intense, and we cannot assure you that we will be successful in attracting or retaining such personnel. Changes in key personnel and their responsibilities may be disruptive to our business and could have a material adverse effect on our business, financial condition and results of operations.
Our failure to continue to recruit and retain qualified loan originators could adversely affect our ability to compete successfully and affect our profitability.
Our continued success and future growth depend heavily on our ability to attract and retain highly skilled and motivated loan originators and other banking professionals. We compete against many institutions with greater financial resources both within our industry and in other industries to attract these qualified individuals. Our failure to recruit and retain adequate talent could reduce our ability to compete successfully and adversely affect our business and profitability.
The limitations on dividends and repurchases imposed through our participation in the Capital Purchase Program may make our common stock a less attractive investment.
On January 16, 2009, the United States Department of the Treasury purchased newly issued shares of our preferred stock as part of the Troubled Asset Relief Program’s Capital Purchase Program. As part of this transaction, we agreed to not increase the dividend paid on our common stock and to not repurchase shares of our common stock for a period of three years. These capital management devices contribute to the attractiveness of our common stock and limitations and prohibitions on such activities may make our common stock less attractive to investors.
The limitations on executive compensation imposed through our participation in the Capital Purchase Program may restrict our ability to attract, retain and motivate key employees, which could adversely affect our operations.
As part of our participation in the Capital Purchase Program, we agreed to be bound by certain executive compensation restrictions, including limitations on severance payments and the clawback of any bonus and incentive compensation that were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria. The American Recovery and Reinvestment Act of 2009 provides more stringent limitations on severance pay and the payment of bonuses to certain officers and highly compensated employees. To the extent that any of these compensation restrictions limit our ability to provide a comprehensive compensation package to our key employees that is competitive in our market area, we may have difficulty in attracting, retaining and motivating our key employees, which could have an adverse effect on our results of operations.
The exercise of the warrant by the U. S. Treasury Department will dilute existing stockowners’ ownership interest and may make it more difficult for us to take certain actions that may be in the best interests of shareholders.
In addition to the issuance of preferred shares, we also granted the U.S. Treasury Department a warrant to purchase 778,421 common shares at a price of $6.27 per share. If the U.S. Treasury Department exercises the entire warrant, it would result in a significant dilution to the ownership interest of our existing stockholders and dilute the earnings per share value of our common stock. Further, if the U.S. Treasury Department exercises the entire warrant, it will become the second largest shareholder of the Company. The U.S. Treasury Department has agreed that it will not exercise voting power with regard to the shares that it acquires by exercising the warrant. However, U.S. Treasury Department’s abstention from voting may make it more difficult for us to obtain shareholder approval for those matters that require a majority of total shares outstanding, such as a business combination involving the Company.
The terms governing the issuance of the preferred stock to Treasury may be changed, the effect of which may have an adverse effect on our operations.
The Securities Purchase Agreement that we entered into with the U.S. Treasury Department provides that it may unilaterally amend any provision of the agreement to the extent required to comply with any changes in applicable federal statutes that may occur in the future. The American Recovery and Reinvestment Act of 2009 placed more stringent limits on executive compensation for participants in the TARP Capital Purchase Program and established a requirement that compensation paid to executives be presented to shareholders for a “non-binding” vote. Further changes in the terms of the transaction may occur in the future. Such changes may place further restrictions on our business or results of operation, which may adversely affect the market price of our common stock.
Increased and/or special FDIC assessments will hurt our earnings.
Beginning in late 2008, the economic environment caused higher levels of bank failures, which dramatically increased FDIC resolution costs and led to a significant reduction in the Deposit Insurance Fund. As a result, the FDIC has significantly increased the initial base assessment rates paid by financial institutions for deposit insurance. These increases in the base assessment rate have increased our deposit insurance costs and negatively impacted our earnings. In addition, in May 2009, the FDIC imposed a special assessment on all insured institutions due to recent bank and savings association failures. Our special assessment, which was reflected in earnings for the quarter ended June 30, 2009, was $700,000.
In lieu of imposing an additional special assessment, the FDIC has adopted a rule requiring that all institutions prepay their assessments for the fourth quarter of 2009 and all of 2010, 2011 and 2012. This pre-payment is due on December 30, 2009. Under the rule, the assessment rate for the fourth quarter of 2009 and for 2010 is based on each institution’s total base assessment rate for the third quarter of 2009, modified to assume that the assessment rate in effect on September 30, 2009 had been in effect for the entire third quarter, and the assessment rate for 2011 and 2012 will be equal to the modified third quarter assessment rate plus an additional 3 basis points. In addition, each institution’s base assessment rate for each period will be calculated using its third quarter assessment base, adjusted quarterly for an estimated 5% annual growth rate in the assessment base through the end of 2012. Under this rule, we will be required to make a payment of approximately $7.3 million to the FDIC on December 30, 2009. We will record this payment as a prepaid expense and amortize the expense over the three year assessment period.
We operate in a highly regulated environment and we may be adversely affected by changes in laws and regulations.
Pulaski Bank is subject to extensive regulation, supervision and examination by the OTS, its chartering authority, and by the FDIC, as insurer of its deposits. The Company is subject to regulation and supervision by the OTS. Such regulation and supervision govern the activities in which an institution and its holding company may engage, and are intended primarily for the protection of the FDIC insurance fund and for the depositors and borrowers of Pulaski Bank. The regulation and supervision by the OTS and the FDIC are not intended to protect the interests of investors in our common stock. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the adverse classification of our assets and determination of the level of our allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations. In addition, the Sarbanes-Oxley Act of 2002, and the related rules and regulations promulgated by the Securities and Exchange Commission and Nasdaq that are applicable to us, have, in recent years, increased the scope, complexity and cost of corporate governance, reporting and disclosure practices, including the costs of completing our audit and maintaining our internal controls.
We are subject to security and operational risks relating to our use of technology that could damage our reputation and our business.
Security breaches in our internet banking activities could expose us to possible liability and damage our reputation. Any compromise of our security also could deter customers from using our internet banking services that involve the transmission of confidential information. We rely on standard internet security systems to provide the security and authentication necessary to effect secure transmission of data. These precautions may not protect our systems from compromises or breaches of our security measures that could result in damage to our reputation and our business. Additionally, we outsource our data processing to a third party. If our third party provider encounters difficulties or if we have difficulty in communicating with such third party, it will significantly affect our ability to adequately process and account for customer transactions, which would significantly affect our business operations.
Competition from financial institutions and other financial service providers may adversely affect our growth and profitability.
The banking business is highly competitive and we experience competition from many other financial institutions. We compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds, and other mutual funds, as well as other super-regional, national and international financial institutions that operate offices in our primary market areas.
We compete with these institutions both in attracting deposits and in making loans. This competition has made it more difficult for us to make new loans and has occasionally forced us to offer higher deposit rates. Price competition for loans and deposits might result in us earning less on our loans and paying more on our deposits, which reduces net interest income. Many of our competitors are larger financial institutions. While we believe we can and do successfully compete with these other financial institutions in our primary markets, we may face a competitive disadvantage as a result of our smaller size, smaller resources and smaller lending limits, lack of geographic diversification and inability to spread our marketing costs across a broader market. In recent years, several new financial institutions have formed in the St. Louis area. These de novo banks may price their loans and deposits aggressively in order to attract customers. Although we compete by concentrating our marketing efforts in our primary markets with local advertisements, personal contacts and greater flexibility and responsiveness in working with local customers, we can give no assurance this strategy will be successful.
We may have fewer resources than many of our competitors to invest in technological improvements.
The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success will depend, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers.
Our ability to service our debt, pay dividends and otherwise pay our obligations as they come due is substantially dependent on capital distributions from Pulaski Bank, and these distributions are subject to regulatory limits and other restrictions.
A substantial source of our income from which we service our debt, pay our obligations and from which we can pay dividends is the receipt of dividends from Pulaski Bank. The availability of dividends from Pulaski Bank is limited by various statutes and regulations. It is possible, depending upon the financial condition of Pulaski Bank, and other factors, that the applicable regulatory authorities could assert that payment of dividends or other payments is an unsafe or unsound practice. In the event that Pulaski Bank is unable to pay dividends to us, we may not be able to service our debt, pay our obligations or pay dividends on our common stock. The inability to receive dividends from Pulaski Bank would adversely affect our business, financial condition, results of operations and prospects.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Properties
The Bank conducts its business through twelve full-service banking offices and five loan production offices. The following table sets forth information on those offices as of September 30, 2009.
(1)
Represents the net book value of land, buildings, furniture, fixtures and equipment owned by the Bank.
(2)
The Bank owns the land where the branch is located. The building on site is being leased, which expires on October 31, 2010.
(3)
The lease expires on April 30, 2014.
(4)
Lease expires on August 31, 2017.
(5)
Lease expires on September 30, 2017.
(6)
Houses loan production office. Lease expires on October 31, 2013.
(7)
Houses loan production office. Lease expires on December 14, 2012.
(8)
Houses loan production office. Lease expires on April 30, 2010.
(9)
Houses loan production office. Lease expires on October 15, 2011.
(10)
Houses the mortgage lending, appraisal and title divisions.
Item 3.
Item 3. Legal Proceedings
The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business which, in the aggregate, involve amounts which are believed by management to be immaterial to the financial condition and results of operations of the Company.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The market for the registrant’s common equity and related stockholders matters required by this item is incorporated herein by reference to the section captioned “Common Stock Information” in the Annual Report to Stockholders.
For a description of restrictions on the Bank’s ability to pay cash dividends to Pulaski Financial Corp., see “Regulation - Federal Savings Institution Regulation - Limitations on Capital Distributions” and “Regulation - Holding Company Regulation - Participation in the U.S. Department of Treasury’s Capital Purchase Program” in this annual report on Form 10-K.
ISSUER PURCHASES OF EQUITY SECURITIES
(1)
In February 2007, the Company announced a repurchase program under which it could repurchase up to 497,000 shares of the Company’s common stock. The repurchase program will continue until it is completed or terminated by the Board of Directors. However, as part of the Company’s participation in the Capital Repurchase Program of the U.S. Department of Treasury’s Troubled Asset Relief Program, prior to the earlier of January 16, 2012 or the date on which the preferred stock issued in that transaction has been redeemed in full or the Treasury has transferred its shares to non-affiliates, the Company cannot increase its quarterly cash dividend above $0.095 per share or repurchase any shares of its common stock, without the prior approval of the Treasury.
(2)
Total number of shares purchased represents shares surrendered by employees to satisfy tax withholding requirements upon vesting of stock awards.
Item 6.
Item 6. Selected Financial Data
The information required by this item is incorporated herein by reference to the section captioned “Selected Consolidated Financial Information” in the Annual Report to Stockholders.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The information required by this item is incorporated herein by reference to the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2009 Annual Report to Stockholders.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is incorporated herein by reference to the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Market Risk Analysis” in the 2009 Annual Report to Stockholders.
Item 8.
Item 8. Financial Statements and Supplementary Data
The financial statements required by this item are incorporated herein by reference to the audited consolidated financial statements and notes thereto included in the 2009 Annual Report to Stockholders.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. In addition, based on that evaluation, no change in the Company’s internal control over financial reporting occurred during the quarter ended September 30, 2009 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s report on internal control over financial reporting is incorporated by reference to page 35 in the 2009 Annual Report to Stockholders.
KPMG LLP’s attestation report on the Company’s internal control over financial reporting is incorporated by reference to page 36 in the 2009 Annual Report to Stockholders.
Item 9B.
Item 9B. Other Information
None
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Directors
For information concerning the Board of Directors of the Company, the information contained under the section captioned “Proposal 1 - Election of Directors” in the Proxy Statement is incorporated herein by reference.
Executive Officers
For information concerning officers of the Company, see Part I, Item I, “Business - Executive Officers of the Registrant.”
Compliance with Section 16(a) of the Exchange Act
Reference is made to the cover page of this Form 10-K and to the section captioned “Compliance with Section 16(a) of the Exchange Act” in the Proxy Statement for information regarding compliance with Section 16(a) of the Exchange Act.
Code of Ethics
We have adopted a written code of ethics, which applies to our senior financial officers. We intend to disclose any changes or waivers from our Code of Ethics applicable to any senior financial officers on our website at http://www.pulaskibankstl.com or in a report on Form 8-K. A copy of the Code of Ethics is available, without charge, upon written request to Paul Milano, Corporate Secretary, Pulaski Financial Corp., 12300 Olive Blvd, St. Louis, MO 63141.
Corporate Governance
For information regarding the audit committee and its composition and the audit committee expert, the section captioned “Corporate Governance - Meetings and Committees of the Board of Directors” in the Proxy Statement is incorporated herein by reference.
Item 11.
Item 11. Executive Compensation
Executive Compensation
The information contained under the sections captioned “Compensation Discussion and Analysis,” “Executive Compensation” and “Corporate Governance - Director Compensation” in the Proxy Statement is incorporated herein by reference.
Corporate Governance
For information regarding the compensation committee report, the section captioned “Compensation Committee Report” in the Proxy Statement is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
(a)
Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference to the section captioned “Stock Ownership” in the Proxy Statement.
(b)
Security Ownership of Management
The information required by this item is incorporated herein by reference to the sections captioned “Stock Ownership” in the Proxy Statement.
(c)
Changes in Control
The Company is not aware of any arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the Company.
(d)
Equity Compensation Plan Information
The following table sets forth information about Company common stock that may be issued upon exercise of options, warrants and rights under all of the Company’s equity compensation plans as of September 30, 2009.
(1)
Consists of non-statutory stock options granted in 2001 outside of the Company’s stock option plans. Each of the options was granted at a price equal to the fair market value of the Company common stock on the date of grant. All of the options vest ratably over a five-year period beginning on the first anniversary date of grant and expire ten years from date of grant. However, in the event of a change in control (as defined in the Company’s 2000 Stock-Based Incentive Plan) all options will become exercisable until the expiration of the term of the option, regardless of termination of employment.
Item 13.
Item 13. Certain Relationships, and Director Independence Related Transactions
The information set forth under the sections captioned “Corporate Governance - Independent Directors,” “- Policy and Procedures Governing Related Party Transactions,” and “Transactions with Management” in the Proxy Statement is incorporated by reference.
Item 14.
Item 14. Principal Accountant Fees and Services
The information set forth under the section captioned “Proposal 3-Ratification of Independent Registered Public Accounting Firm” in the Proxy Statement is incorporated by reference.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
The following documents are filed as part of this report:
1.
Financial Statements
Consolidated Balance Sheets at September 30, 2009 and
Consolidated Statements of Stockholders’ Equity for the Years Ended September 30, 2009, 2008 and 2007
Notes to Consolidated Financial Statements for the Years ended September 30, 2009, 2008 and 2007
Such financial statements are incorporated herein by reference to the Consolidated Financial Statements and Notes thereto included in the 2009 Annual Report to Stockholders.
2.
Financial Statement Schedules
None.
3.
Exhibits
The exhibits listed below are filed as part of this report or are incorporated by reference herein.
Exhibit
No.
Description
Incorporated by
Reference to
3.1
Articles of Incorporation of Pulaski Financial Corp.
Definitive Proxy Statement as filed on December 27, 2002
3.2
Certificate of Amendment to Articles of Incorporation of Pulaski Financial Corp.
Form 10-Q for the quarterly period ended December 31, 2003, as filed on February 17, 2004
3.3
Certificate of Designations establishing Fixed Rate Cumulative Perpetual Preferred Stock, Series A
Form 8-K, as filed on January 16, 2009
3.4
Bylaws of Pulaski Financial Corp.
Form 8-K, as filed on December 21, 2007
4.1
Form of Certificate for Common Stock
Form S-1 (Registration No. 333-56465), as amended, as filed on June 9,
4.2
Form of stock certificate for Fixed Rate Cumulative Perpetual Preferred Stock, Series A
Form 8-K, as filed on January 16, 2009
4.3
Warrant to Purchase 778,421 shares of common stock of Pulaski Financial Corp.
Form 8-K, as filed on January 16, 2009
4.4
No long-term debt instrument issued by the Registrant exceeds 10% of consolidated assets or is registered. In accordance with paragraph 4(iii) of Item 601(b) of Regulation S-K, the Registrant will furnish the Securities and Exchange Commission copies of long-term debt instruments and related agreements upon request.
10.1*
Employment Agreement by and among Pulaski Bank, Pulaski Financial Corp. and Gary W. Douglass
Form 10-Q for the quarterly period ended March 31, 2008, as filed on May 12,
10.2*
Pulaski Financial Corp. 2002 Stock Option Plan.
Definitive Proxy Statement as filed on December 27, 2001
10.3*
Pulaski Financial Corp. 2000 Stock-Based Incentive Plan
Definitive Proxy Statement as filed on December 16, 1999
10.4*
Amendment to Pulaski Financial Corp. 2002 Stock Option Plan
Form 10-Q for the quarterly period ended March 31, 2004, as filed on May 14,
10.5*
Pulaski Financial Corp. Deferred Compensation Plan (“Equity Trust Plan”)
Form 10-K for the year ended September 30, 2003, as filed on December 29,
10.6*
Separation and Release Agreement between Pulaski Financial Corp. and William A. Donius
Form 10-Q for the quarterly period ended March 31, 2008, as filed on May 12,
10.7*
Form of Stock Option Agreement
Form 10-Q for the year period ended March 31, 2005, as filed on May 10,
10.8*
Pulaski Financial Corp. Cash-Based Deferred Compensation Plan, as amended and restated
Form 10-Q for the quarterly period ended March 31, 2009, as filed on May 8,
10.9*
Pulaski Financial Corp. Stock-Based Deferred Compensation Plan, as amended and restated
Form 10-Q for the quarterly period ended March 31, 2009, as filed on May 8,
10.10*
Form of Pulaski Financial Corp. Cash-Based Deferred Compensation Plan Election Form
Definitive Proxy Statement as filed on December 13, 2005
10.11*
Form of Pulaski Financial Corp. Stock-Based Deferred Compensation Plan Election Form
Form 10-K for the year ended September 30, 2005, as filed on December 30,
10.12*
Pulaski Financial Corp. 2006 Long-Term Incentive Plan
Definitive Proxy Statement for the 2006 Annual Meeting of Stockholders
10.13*
Form of Non-Solicitation and Confidentiality Agreement between Pulaski Financial Corp. and each of Paul J. Milano, W. Thomas Reeves, Matthew A. Locke and Brian J. Bjorkman
Form 10-K for the year ended September 30, 2008, as filed on December 12,
10.14*
Compensation arrangement with Matthew A. Locke
Form 10-Q for the quarterly period ended June 30, 2009, as filed on August 7,
10.15*
Compensation arrangement with Brian J. Bjorkman
Form 10-Q for the quarterly period ended June 30, 2009, as filed on August 7,
13.1
Annual Report to Stockholders
21.1
Subsidiaries of Pulaski Financial Corp.
23.1
Consent of KPMG LLP
31.1
Rule 13a-14(a) 15d-14(a) Certification of Chief Executive Officer
31.2
Rule 13a-14(a) 15d-14(a) Certification of Chief Financial Officer
32.1
Chief Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Chief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1
Chief Executive Officer Certification regarding TARP
99.2
Chief Financial Officer Certification regarding TARP
* Management contract or compensatory plan or arrangement filed pursuant to Item 15(a) of this Report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PULASKI FINANCIAL CORP.
(Registrant)
/s/ Gary W. Douglass
Gary W. Douglass
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
NAME
TITLE
DATE
/s/ Gary W. Douglass
President and Chief Executive Officer
December 18, 2009
Gary W. Douglass
(principal executive officer)
/s/ Paul J. Milano
Chief Financial Officer
December 18, 2009
Paul J. Milano
(principal accounting and financial
officer)
/s/ Stanley J. Bradshaw
Chairman of the Board
December 18, 2009
Stanley J. Bradshaw
/s/ Lee S. Wielansky
Vice-Chairman of the Board
December 18, 2009
Lee S. Wielansky
/s/ Kathryn S. Bader
Director
December 18, 2009
Kathryn S. Bader
/s/ William M. Corrigan, Jr.
Director
December 18, 2009
William M. Corrigan, Jr.
/s/ William A. Donius
Director
December 18, 2009
William A. Donius
/s/ Leon A. Felman
Director
December 18, 2009
Leon A. Felman
/s/ Michael R. Hogan
Director
December 18, 2009
Michael R. Hogan
/s/ Timothy K. Reeves
Director
December 18, 2009
Timothy K. Reeves
/s/ Steven C. Roberts
Director
December 18, 2009
Steven C. Roberts