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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual Report Pursuant to Section 13 of the
Securities Exchange Act of 1934
For the Fiscal Year Ended September 30, 1999
Commission File No.: 0-24571
PULASKI FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Delaware 43-1816913
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
12300 Olive Boulevard, St. Louis, Missouri 63141
(Address of principal executive offices)
Registrant's telephone number, including area code: (314) 878-2210
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _____.
-
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
-
The aggregate market value of the shares of Registrant's common stock held
by non-affiliates of the Registrant was $36,457,528 as of December 3, 1999 based
on the average of the closing bid and ask price on that date. Solely for the
purpose of this computation, it has been assumed that executive officers and
directors of the Registrant are "affiliates."
There were issued and outstanding 3,576,591 shares of the Registrant's
Common Stock as of December 3, 1999.
Documents Incorporated by Reference
Portions of 1999 Annual Report to Stockholders (Part II).
Portions of Definitive Proxy Statement for the 2000 Annual Meeting of
Stockholders (Part III).
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INDEX
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PART I
Page No.
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Item 1. Business............................................... 1
Item 2. Properties............................................. 29
Item 3. Legal Proceedings...................................... 30
Item 4. Submission of Matters to a Vote of Security Holders.... 30
PART II
Item 5. Market for the Registrant's Common Stock
and Related Stockholder Matters........................ 30
Item 6. Selected Financial Data................................ 30
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 30
Item 7A. Quantitative and Qualitative Disclosure About
Market Risk............................................ 30
Item 8. Financial Statements and Supplementary Data............ 30
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure.................... 30
PART III
Item 10. Directors and Executive Officers of the Registrant..... 31
Item 11. Executive Compensation................................. 32
Item 12. Security Ownership of Certain Beneficial Owners
and Management......................................... 32
Item 13. Certain Relationships and Related Transactions......... 32
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K............................................ 33
SIGNATURES.............................................................. 35
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This report contains certain "forward-looking statements" within the
meaning of the federal securities laws. These statements are not historical
facts, rather statements based on Pulaski Financial Corp.'s current expectations
regarding its business strategies, intended results and future performance.
Forward-looking statements are preceded by terms such as "expects," "believes,"
"anticipates," "intends" and similar expressions.
Management's ability to predict results or the effect of future plans or
strategies is inherently uncertain. Factors which could affect actual results
include interest rate trends, the general economic climate in the market area in
which Pulaski Financial Corp. operates, as well as nationwide, Pulaski Financial
Corp.'s ability to control costs and expenses, competitive products and pricing,
loan delinquency rates, changes in federal and state legislation and regulation,
and the impact of Year 2000 issues. These factors should be considered in
evaluating the forward-looking statements and undue reliance should not be
placed on such statements. Pulaski Financial Corp. assumes no obligation to
update any forward-looking statements.
PART I
Item 1. Business.
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General
Pulaski Financial Corp. (the "Company" or the "Registrant") was
incorporated under Delaware law in May 1998 to become the holding company for
Pulaski Bank, A Federal Savings Bank (the "Bank") upon the Bank's reorganization
resulting from the conversion of Pulaski Bancshares, M.H.C. (the "MHC"), from a
federal mutual holding company to a stock holding company ("Conversion and
Reorganization"). In connection with the Conversion and Reorganization, which
was completed on December 2, 1998, the Company sold 2,909,500 shares of its
common stock to the public at $10 per share in a public offering (the
"Offering") and issued 1,056,003 shares in exchange for the outstanding shares
of the Bank held by the Bank's stockholders other than the MHC. The Company has
no significant assets, other than all of the outstanding shares of the Bank and
the portion of the net proceeds it retained from the Offering, and no
significant liabilities. Management of the Company and the Bank are
substantially similar and the Company neither owns nor leases any property, but
instead uses the premises, equipment and furniture of the Bank. Accordingly, the
information set forth in this report, including the consolidated financial
statements and related financial data, relates primarily to the Bank.
The Bank is regulated by the Office of Thrift Supervision (the "OTS"), its
primary regulator, and by the Federal Deposit Insurance Corporation (the
"FDIC"), the insurer of its deposits. The Bank's deposits are insured by the
FDIC up to applicable legal limits under the Savings Association Insurance Fund
(the "SAIF"). The Bank has been a member of the Federal Home Loan Bank (the
"FHLB") System since 1946.
The Bank is a community oriented financial institution offering traditional
financial services out of its four offices in the greater St. Louis metropolitan
area. The Bank expects to open a fifth office in St. Charles County, Missouri
in the first quarter of 2000. The Bank's business consists principally of
attracting retail deposits from the general public and using them to originate
mortgage loans secured by one- to four-family residences. The Bank has from
time to time originated consumer loans, although it is not actively originating
such loans at this time.
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Market Area
The Bank conducts operations out of its main office and three branch
offices. The main office and two of the branch offices are located in St. Louis
County. The other branch office is located in the City of St. Louis. Most of
the Bank's depositors live in the areas surrounding its branches and most of the
Bank's loans are made to persons in St. Charles, Franklin, Jefferson and St.
Louis Counties, Missouri and Jersey, St. Clair, Monroe and Madison Counties,
Illinois. Several major corporations are headquartered in the Bank's area.
Competition
The Bank faces intense competition in the attraction of savings deposits
(its primary source of lendable funds) and in the origination of loans. Its
most direct competition for savings deposits has historically come from other
thrift institutions, credit unions and from commercial banks located in its
market area. The Bank has faced additional significant competition for
investors' funds from short-term money market securities and other corporate and
government securities. The Bank's competition for loans comes principally from
other thrift institutions, commercial banks, mortgage banking companies and
mortgage brokers.
Lending Activities
General. The following table sets forth the composition of the Bank's loan
portfolio at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
---------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------- ----------------- ----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
----------------- ----------------- ----------------- ----------------- -----------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
Conventional - residential and
multi-family (1).................. $135,416 74.62% $118,501 83.45% $114,300 87.34% $117,584 87.42% $128,854 86.19%
FHA and VA - residential and
multi-family (1).................. 7,351 4.05 8,767 6.17 10,745 8.21 11,845 8.81 14,912 10.12
Commercial.......................... 567 0.31 553 0.39 1,779 1.36 3,452 2.57 3,561 2.67
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans............ 143,334 78.98 127,821 90.01 126,824 96.91 132,881 98.79 147,327 98.98
Consumer and Other Loans:
Automobile loans.................... 31,600 17.41 12,946 9.12 3,352 2.56 1,115 0.83 1,205 0.73
Home equity loans................... 5,022 2.77 -- -- -- -- -- -- -- --
Other............................... 1,513 0.84 1,233 0.87 699 0.53 513 0.38 541 0.29
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total consumer and other
loans............................ 38,135 21.02 14,179 9.99 4,051 3.09 1,628 1.21 1,746 1.02
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans......................... 181,469 100.00% 142,000 100.00% 130,875 100.00% 134,509 100.00% 149,073 100.00%
====== ====== ====== ====== ======
Less:
Loans in process..................... 364 115 47 27 48
Unamortized loan origination fees
(charges), net of direct costs...... (1,413) (647) (143) (41) 21
Unearned discounts................... -- -- -- -- 34
Allowance for loan losses............ 986 763 613 479 419
-------- -------- -------- -------- --------
Total loans receivable, net........ $181,532 $141,769 $130,358 $134,044 $148,551
======== ======== ======== ======== ========
</TABLE>
__________________
(1) Aggregate conventional and FHA and VA multi-family loan balances were $1.3
million, $1.5 million, $1.1 million, $1.4 million and $2.6 million at
September 30, 1999, 1998, 1997, 1996 and 1995, respectively.
2
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Residential Real Estate Lending. The primary lending activity of the Bank
is the origination of mortgage loans to enable borrowers to purchase existing
homes or to refinance existing mortgage loans. To a much lesser extent, the
Bank also originates loans secured by multi-family residential property (five
units or more). At September 30, 1999, $141.4 million, or 77.9% of the Bank's
total loan portfolio consisted of loans secured by one- to four-family
residential property and $1.3 million, or 0.7%, of the Bank's total loan
portfolio consisted of loans secured by multi-family real estate.
The Bank is a direct endorsement lender with Federal Housing Administration
("FHA"). Consequently, the Bank's FHA approved direct endorsement underwriters
are authorized to approve or reject FHA insured loans up to maximum amounts
established by FHA. The Bank is also an automatic lender with the Veteran's
Administration ("VA"), which enables designated qualified Bank personnel to
approve or reject loans on behalf of VA. At September 30, 1999, the Bank had
$7.3 million of FHA- or VA-insured loans. The Bank also participates in
programs to provide financing for low income housing through the Missouri
Housing Development Commission (the "MHDC").
The Bank offers a variety of adjustable-rate mortgage ("ARM") loans. The
loan fees charged, interest rates and other provisions of the Bank's ARM loans
are determined by the Bank on the basis of its own pricing criteria and market
conditions. Interest rates and payments on the Bank's ARM loans generally are
adjusted periodically to a rate typically equal to 2.00% to 2.875% above the
one-year constant maturity U.S. Treasury index. However, the Bank currently
offers ARM loans with lower initial rates based on market factors and
competitive rates for loans having similar features offered by other lenders for
such initial periods. The periodic interest rate cap (the maximum amount by
which the interest rate may be increased or decreased in a given period) on the
Bank's 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. The Bank
qualifies 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. The Bank does not originate negative
amortization loans. The terms and conditions of the ARM loans offered by the
Bank, including the index for interest rates, may vary from time to time. The
Bank believes that the periodic adjustment feature of its ARM loans also
provides flexibility to meet competitive conditions as to initial rate
concessions while preserving the Bank's return on equity objectives by limiting
the duration of the initial rate concession. At September 30, 1999, the Bank
had approximately $108.1 million of ARM loans, or 60% of the Bank's total loan
portfolio.
The Bank also originates conventional fixed-rate mortgage loans on one- to
four-family residential properties. At September 30, 1999, the Bank had
approximately $73.4 million, or 40% of the Bank's total loan portfolio. All
fixed-rate products are generally underwritten according to Freddie Mac and
Fannie Mae standards so as to qualify for sale in the secondary mortgage market.
In recent years, as part of its asset/liability management, the Bank has
originated fixed-rate mortgage loans and sold these loans through its
correspondent relationships. If the Bank's future portfolio needs change, the
Bank may choose to retain more loans for its portfolio and/or retaining
servicing rights. Retaining fixed-rate loans in its portfolio would subject the
Bank to a higher degree of interest rate risk.
Occasionally, the Bank originates residential mortgage loans that do not
meet the standards for sale in the secondary market for retention in its
portfolio. The Bank generally charges a higher interest rate to compensate for
their non-conforming features. At September 30, 1999, the Bank had
approximately $11.4 million of such loans.
3
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Borrower demand for ARM loans versus fixed-rate mortgage loans is a
function of the level 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 in a
competitive environment.
The retention of ARM loans in the Bank's loan portfolio helps reduce the
Bank's exposure to changes in interest rates. There are, however,
unquantifiable credit risks resulting from the potential of increased costs to
be paid by the customer due to changed rates. It is possible that, during
periods of rising interest rates, the risk of default on ARM loans may increase
as a result of repricing and the increased costs to the borrower. Furthermore,
because the ARM loans originated by the Bank generally provide, as a marketing
incentive, for initial rates of interest below the rates which would apply were
the adjustment index used for pricing initially (discounting), these loans are
theoretically subject to increased risks of default or delinquency. Another
consideration is that although ARM loans allow the Bank to increase the
sensitivity of its asset base to changes in interest rates, the extent of this
interest sensitivity is limited by the periodic and lifetime interest rate
adjustment limits. Because of these considerations, the Bank has no assurance
that yields on ARM loans will be sufficient to offset increases in the Bank's
cost of funds.
While fixed-rate single-family residential real estate loans are normally
originated with 15- or 30-year terms, and the Bank occasionally permits its ARM
loans to be assumed by qualified borrowers, such loans typically remain
outstanding for substantially shorter periods. This is because borrowers often
prepay their loans in full upon sale of the property pledged as security or upon
refinancing the original loan. In addition, substantially all mortgage loans in
the Bank's loan portfolio contain due-on-sale clauses providing that the Bank
may declare the unpaid amount due and payable upon the sale of the property
securing the loan. The Bank enforces these due-on-sale clauses to the extent
permitted by law and as business judgment dictates. Thus, average loan maturity
is a function of, among other factors, the level of purchase and sale activity
in the real estate market, prevailing interest rates and the interest rates
payable on outstanding loans.
The Bank requires title insurance insuring the status of its lien on all of
its real estate secured loans and also requires that fire and extended coverage
casualty insurance (and, if appropriate, flood insurance) be maintained in an
amount at least equal to the outstanding loan balance.
The Bank's 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 appraisal value or the purchase price. Typically, the Bank will
make loans in excess of that limit provided the borrower obtains mortgage
insurance. In the cases of loans guaranteed by FHA or VA, the Bank offers loans
on loan-to-value ratios of up to 97% and 100%, respectively.
The maximum financing on refinance loans is limited to 90% of the appraised
value and such loans require mortgage insurance above 80% loan-to-value.
The Bank generally obtains appraisals on its real estate loans from outside
appraisers, but, in limited instances (i.e., loan amounts less than $100,000 or
loan-to-value ratios less than 55%), may waive its outside appraisal
requirement.
Commercial Real Estate Loans. The Bank engages in a limited amount of
commercial real estate lending. At September 30, 1999, commercial real estate
loans in the Bank's portfolio totaled $567,000 and consisted of 7 loans.
4
<PAGE>
Loans secured by commercial real estate generally are larger and involve
greater risks than one- to four- family residential mortgage loans. Payments on
loans secured by such properties are often dependent on successful operation or
management of the properties. Repayment of such loans may be subject to a
greater extent to adverse conditions in the real estate market or the economy.
The Bank seeks to minimize these risks in a variety of ways, including limiting
the size of such loans and strictly scrutinizing the financial condition of the
borrower, the quality of the collateral and the management of the property
securing the loan. The Bank also obtains loan guarantees from financially
capable parties. Substantially all of the properties securing the Bank's
commercial real estate loans are inspected by the Bank's lending personnel
before the loan is made. The Bank also obtains appraisals on each property in
accordance with applicable regulations.
Consumer and Other Loans. In the second quarter of fiscal 1997, the Bank
formed a consumer loan department in order to increase its consumer lending
activities. The Bank chose to increase its consumer lending in order to better
serve its customers. Additionally, consumer loans generally have shorter-terms
to maturity or repricing and higher interest rates than mortgage loans.
At September 30, 1999, the Bank's consumer and other loans totaled
approximately $38.1 million, or 21.0% of the Bank's total loans. The Bank's
consumer and other loans consist primarily of automobile loans. In early 1997,
the Bank initiated relationships with automobile dealers, piano dealers and
other large purchase retailers located primarily in the Bank's market area as a
means of attracting consumer loans.
Automobile loans are offered on both new and used cars and light trucks
based upon the purchase price or wholesale value as published by National
Automobile Research "Black Book," if pre-owned. New cars are financed for a
period of up to 72 months while pre-owned 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. At September 30, 1999, automobile
loans amounted to $31.6 million, or 17.4% of the Bank's total loans,
substantially all of which were made on an indirect basis (i.e. originated by
the dealer and closed on dealer loan documents but underwritten by the Bank
according to the Bank's underwriting standards.)
The Bank originates home equity lines of credit to borrowers with a
demonstrated favorable credit history. The home equity lines are secured with a
deed of trust and are issued up to 100% of the appraised or assessed value of
the property securing the line of credit. The interest rate on home equity
lines are generally two to three percentage points above the prime rate as
reported in The Wall Street Journal and have an adjustable rate feature after an
introductory fixed rate period of six months. The rates are based upon the loan
to value ratio of the property. Home equity lines of credit generally are
secured by stronger collateral than consumer loans and because of the adjustable
interest rate, contain a more limited interest rate risk than other consumer
loans. Lending up to a 100% loan to value ratio presents greater credit risk.
However, the Bank has attempted to reduce this risk by only offering this
product to customers with a demonstrated favorable credit history. At September
30, 1999, home equity lines of credit amount to $5.0 million, or 2.8% of the
Bank's total loans.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which 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 substantial collection efforts against the borrower beyond
obtaining a deficiency judgment. In addition, consumer loan collections are
dependent on the borrower's continuing financial stability, and thus are more
likely to be adversely affected by job loss,
5
<PAGE>
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 which can be recovered on such loans. Such loans may
also give rise to claims and defenses by a consumer loan borrower against an
assignee of such loans such as the Bank, and a borrower may be able to assert
against such assignee claims and defenses that it has against the seller of the
underlying collateral. At September 30, 1999, the aggregate amount of consumer
loans 90 days or more past due was $71,000, which represents 0.2% of total
consumer loans.
Loan Maturity and Repricing. The following table sets forth certain
information at September 30, 1999 regarding the dollar amount of loans maturing
in the Bank's portfolio based on their contractual terms to maturity, but does
not include scheduled payments or potential prepayments. 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 repricing date. Loan balances are net
of loans in process.
<TABLE>
<CAPTION>
After After After
One Year 3 Years 5 Years
Within Through Through Through Beyond
One Year 3 Years 5 Years 10 Years 10 Years Total
---------- -------- ------- -------- -------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential real estate................... $41,003 $16,963 $35,232 $25,024 $24,181 $142,403
Commercial real estate.................... 286 -- -- -- 281 567
Consumer loans............................ 5,657 4,596 25,568 2,314 -- 38,135
------- ------- ------- ------- ------- --------
Total loans............................ $46,946 $21,559 $60,800 $27,338 $24,462 $181,105
======= ======= ======= ======= ======= ========
</TABLE>
The following table sets forth, as of September 30, 1999, the dollar amount
of all loans due or repricing after September 30, 2000, which have fixed
interest rates and have floating or adjustable interest rates.
<TABLE>
<CAPTION>
Floating or
Fixed Adjustable
------- -----------
(In thousands)
<S> <C> <C>
Residential real estate............... $36,387 $65,012
Commercial real estate................ 28 253
Consumer and other.................... 32,478 --
------- -------
Total............................... $68,893 $65,265
======= =======
</TABLE>
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of loans is substantially less
than their contractual terms because of prepayments. In addition, due-on-sale
clauses on loans generally give the Bank the right to declare loans immediately
due and payable in the event, among other things, that the borrower sells the
real 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.
6
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Loan Solicitation and Processing. Loan applicants come through direct
solicitation by commissioned loan representatives of the Bank, as well as
through referrals by realtors, financial planners, previous and present
customers and, to a far lesser extent, through television, Internet and print
advertising promotions. All types of loans may be originated in any of the
Bank's offices, though most loans are closed at the Bank's main office. Loans
are serviced from the Bank's main office.
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 generally is undertaken by a fee appraiser
approved by the Bank and licensed or certified by the State of Missouri.
Loans in the amount of $400,000 or less may be approved by any one member
of the Bank's Loan Committee, which consists of the Bank's President, Chief
Financial Officer/Treasurer and Chief Lending Officer or staff underwriter.
Loans in excess of $400,000 must be approved by the Bank's Executive Committee,
consisting of the Chief Executive Officer, Chief Financial Officer and Chief
Operating Officer.
Loan applicants are promptly notified of the decision of the Bank.
Interest rates are subject to change if the approved loan is not closed within
the time of the commitment, which usually is 60 to 90 days.
Loan Originations, Sales and Purchases. During the years ended September
30, 1999, 1998 and 1997, the Bank's total gross loan originations were $210.8
million, $180.4 million and $95.7 million, respectively.
In an effort to manage its interest rate risk position, the Bank generally
sells the fixed-rate mortgage loans that it originates. The sale of loans in
the secondary mortgage market reduces the Bank's risk that the interest rates
paid to depositors will increase while the Bank holds long-term, fixed-rate
loans in its portfolio. It also allows the Bank to continue to fund loans when
savings flows decline or funds are not otherwise available. Mortgage loans
generally have been sold with servicing released. Gains, net of 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 in with the investor,
which may be at the time the Bank issues a loan commitment or at the time the
loan closes. This eliminates the risk to the Bank that a rise in market
interest rates will reduce the value of a mortgage before it can be sold.
Additionally, the Bank negotiates a best efforts delivery, which minimizes any
exposure from loans that do not close.
During the year ended September 30, 1999, the Bank sold $125.9 million of
residential mortgage loans to correspondent lenders, servicing released,
compared to $115.5 million in fiscal 1998. The Bank sold $9.7 million of "first
time home buyer loans" to MHDC, with servicing released, during fiscal year
1999. In fiscal year 1998, the Bank sold $9.1 million of such loans to MHDC,
with servicing retained. Servicing loans generally consists of collecting
mortgage payments, maintaining escrow accounts, disbursing payments to investors
and foreclosure processing. Loan servicing income is recorded on the accrual
basis and includes servicing fees from investors. In April 1998, the Bank
discontinued its historical practice of retaining servicing on loans sold to
MHDC due to a change in servicing policy by MHDC. At September 30, 1999, the
Bank was servicing approximately $864,000 of loans for MHDC.
The Bank occasionally purchases real estate loans in the secondary market
subject to the Bank's underwriting standards. During the year ended September
30, 1999, the Bank purchased $195,000 in loans. Loans and participations
purchased and serviced by others were approximately $1.9 million at September
7
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30, 1999. The Bank's purchases in the secondary market are dependent upon the
demand for mortgage credit in the local market area and the inflow of funds from
deposits.
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
<TABLE>
<CAPTION>
Years Ended September 30,
--------------------------------
1999 1998 1997
--------------------------------
(In thousands)
<S> <C> <C> <C>
Total gross loans, including loans held for sale,
at beginning of period............................... $ 155,387 $ 145,189 $142,316
Loans originated:
Residential real estate............................... 173,633 166,438 91,536
Commercial real estate................................ 256 -- 395
Consumer and other.................................... 36,912 13,923 3,748
--------- --------- --------
Total loans originated............................. 210,801 180,361 95,679
--------- --------- --------
Loans purchased:
Residential real estate............................... 195 -- 305
--------- --------- --------
Loans sold:
Total whole loans sold................................ (125,894) (115,479) (53,307)
Loans securitized and sold............................ -- (9,106) (10,189)
--------- --------- --------
Mortgage loan principal repayments...................... (32,175) (30,231) (24,308)
Consumer loan repayments and all other.................. (18,711) (15,347) (5,307)
--------- --------- --------
Net loan activity....................................... 34,216 10,198 2,873
--------- --------- --------
Total gross loans, including loans held
for sale, at end of period........................... $ 189,603 $ 155,387 $145,189
========= ========= ========
</TABLE>
Loan Commitments. The Bank issues commitments for fixed- and adjustable-
rate one- to four-family residential mortgage loans conditioned upon the
occurrence of certain events. Such commitments are made in writing on specified
terms and conditions and are honored for up to 60 to 90 days from the date of
loan approval. The Bank had outstanding loan commitments of approximately $8.9
million at September 30, 1999, $5.8 million and $3.1 million of which were at
fixed and adjustable rates, respectively. See Note 15 of Notes to Consolidated
Financial Statements.
Loan Origination and Other Fees. The Bank, in some instances, receives
loan origination fees and discount "points." Loan fees and points are a
percentage of the principal amount of the loan which are charged to the borrower
for funding the loan. The amount of points charged by the Bank varies, though
the range generally is between 0% and 2%. Current accounting standards require
fees received (net of certain loan origination costs) for originating loans to
be deferred and amortized into interest income over the contractual life of the
loan. Net deferred fees or charges associated with loans that are prepaid are
recognized as income adjustments at the time of prepayment. The Bank had $1.4
million of net deferred loan charges at September 30, 1999.
8
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Nonperforming Assets and Delinquencies. When a mortgage loan borrower fails
to make a required payment, the Bank institutes collection procedures. The first
notice is mailed to the borrower 18 days after the payment due date. Attempts to
contact the borrower by telephone generally begin approximately 20 days after
the payment due date. If a satisfactory response is not obtained, continuous
follow-up contacts are attempted until the loan has been brought current. At the
45th day after the due date, a default letter 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, before the 60th day of delinquency, all superior lienholders are
contacted to determine: (1) the status and unpaid principal balance of each
superior lien; (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 lienholder 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 is taken. The physical condition and occupancy status
of the property is determined before recommending further servicing action. Such
inspection normally takes place on or about the 45th day of delinquency.
Generally, after 60 days into the delinquency procedure, the Bank notifies the
borrower that home ownership counseling is available for eligible homeowners. In
most cases, delinquencies are cured promptly; however, 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.
When a consumer loan borrower fails to make a required payment, the Bank
institutes collection procedures. The first notice is mailed to the borrower 15
days following the payment due date. A computer-generated collection report is
received by the Bank daily. The customer is contacted by telephone to ascertain
the nature of the delinquency. In most cases, delinquencies are cured promptly;
however, if, by the 30th day following the grace period of delinquency 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.
Loans are placed on nonaccrual status when, in the opinion of management,
there is reasonable doubt as to the timely collectibility of interest or
principal. Nonaccrual loans are returned to accrual states when, in the opinion
of management, the financial position of the borrower indicates there is no
longer any reasonable doubt as to the timely collectibility of interest or
principal.
The Bank's Board of Directors is informed on a monthly basis as to the
status of all mortgage and consumer loans that are delinquent 30 days or more,
the status on all loans currently in foreclosure, and the status of all
foreclosed and repossessed property owned by the Bank.
9
<PAGE>
The following table sets forth information with respect to the Bank's
nonperforming assets at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------
1999 1998 1997 1996 1995
-------- ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on
a nonaccrual basis:
Residential real estate................. $ 223 $ 519 $ 214 $ 51 $ 214
Commercial real estate.................. -- 224 -- -- --
Consumer and other...................... 35 10 3 -- --
------ ------ ------ ----- ------
Total.................................. 258 753 217 51 214
------ ------ ------ ----- ------
Accruing loans which are contractually
past due 90 days or more:
Residential real estate................. 1,082 369 708 547 520
Commercial real estate.................. -- -- 236 -- --
Consumer and other...................... 71 54 20 22 14
------ ------ ------ ------ ------
Total.................................. 1,153 423 964 569 534
------ ------ ------ ------ ------
Troubled debt restructurings............ -- -- 69 85 100
------ ------ ------ ------ ------
Nonperforming loans (1)................. 1,411 1,176 1,250 705 848
Real estate owned (net)................. 228 106 -- 133 337
Other nonperforming assets.............. -- 7 -- -- --
------- ------ ------ ------ ------
Total nonperforming loans............. $1,639 $1,289 $1,250 $ 838 $1,185
======= ====== ====== ====== =======
Total loans delinquent 90 days or more
to net loans......................... 0.61% 0.27% 0.67% 0.40% 0.36%
Total loans delinquent 90 days or more
to total assets..................... 0.47% 0.22% 0.54% 0.32% 0.29%
Total nonperforming assets
to total assets..................... 0.67% 0.67% 0.70% 0.47% 0.65%
</TABLE>
- -----------------------------
(1) Includes $363,000, $207,000 and $219,000 of FHA/VA loans at September 30,
1999, 1998 and 1997, respectively, the principal and interest payments on
which are fully insured.
Interest income that would have been recorded for the years ended
September 30, 1999 and 1998 had nonaccruing and restructured loans been current
in accordance with their original terms and the amount of interest included in
interest income on such loans during such periods was not significant.
Real Estate Owned. Real estate acquired by the Bank as a result of
foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned
until it is sold. When property is acquired it is recorded at the lower of its
cost, which is the unpaid principal balance of the related loan plus foreclosure
costs, or fair market value. Subsequent to foreclosure, the property is carried
at the lower of the foreclosed amount or fair
10
<PAGE>
value. Upon receipt of a new appraisal and market analysis, the carrying value
is written down through a charge to income, if appropriate. At September 30,
1999, the Bank had $228,000 of real estate owned (net), which consisted of six
one- to four-family properties.
Asset Classification. The OTS has adopted various regulations regarding
problem assets of savings institutions. The regulations require that each
insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, OTS examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets:
substandard, doubtful and loss. Substandard assets must have one or more
defined weaknesses and are characterized by the distinct possibility that 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, and there is a high possibility of loss. An asset classified loss
is considered uncollectible and of such little value that continuance as an
asset of the institution without establishment of a specific reserve is not
warranted. If an asset or portion thereof is classified loss, the insured
institution establishes specific allowances for loan losses for the full amount
of the portion of the asset classified loss. A portion of general loan loss
allowances established to cover possible losses related to assets classified
substandard or doubtful 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 loss, doubtful or substandard 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.
The Bank's Chief Executive Officer, Chief Financial Officer/Treasurer,
Executive Vice President/Chief Operating Officer and collection department
personnel meet quarterly to review all classified assets, to approve action
plans developed to resolve the problems associated with the assets and to review
recommendations for new classifications, any changes in classifications and
recommendations for reserves.
The following table sets forth the number and amount of classified loans at
September 30, 1999:
<TABLE>
<CAPTION>
Loss Doubtful Substandard
---------------- ---------------- ----------------
Number Amount Number Amount Number Amount
------ ------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate:
Residential....................... -- $ -- -- $ -- 12 $ 573
Commercial........................ -- -- -- -- -- --
Consumer............................. 6 19 -- -- 12 97
</TABLE>
Allowance for Loan Losses. In originating loans, the Bank 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 loan losses are charged to
the allowance and all recoveries are credited to it. The allowance for loan
losses is established through a provision for loan losses charged to the Bank's
income. The provision for loan losses is based on management's periodic
evaluation of the Bank's past loan loss experience, known and inherent risks in
the portfolio, adverse situations which
11
<PAGE>
may affect the borrower's ability to repay, the estimated value of any
underlying collateral and current economic conditions.
At September 30, 1999, the Bank had an allowance for loan losses of
$986,000, which represented 0.5% of total loans. Management believes that the
amount maintained in the allowance will be adequate to absorb 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 the Bank believes it has
established its existing allowance for loan losses in accordance with GAAP,
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
substantial increases 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 may adversely affect the Bank's financial
condition and results of operations.
The following table sets forth an analysis of the Bank's allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
At September 30,
------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of period......... $ 763 $ 613 $ 479 $ 419 $ 477
Provision for loan losses................ 265 209 169 65 152
Charge-offs:
Residential real estate................. 36 63 38 17 92
Commercial real estate.................. -- -- -- -- 166
Consumer and other...................... 16 3 5 -- --
------ ------ ------ ------ ------
Total charge-offs...................... 52 66 43 17 258
Recoveries............................... 10 7 8 12 48
------ ------ ------ ------ ------
Net charge-offs.......................... 42 59 35 5 210
------ ------ ------ ------ ------
Allowance at end of period.............. $ 986 $ 763 $ 613 $ 479 $ 419
====== ====== ====== ====== ======
Ratio of allowance to total loans
outstanding at the end of the period... 0.52% 0.49% 0.42% 0.34% 0.28%
Ratio of net charge-offs to average loans
outstanding during the period.......... 0.02% 0.04% 0.02% --% 0.13%
Allowance for loan losses to
nonperforming loans.................... 69.88% 64.88% 49.04% 67.93% 49.44%
</TABLE>
12
<PAGE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------ ------------------ ------------------ ------------------ -------------------
Percent Percent Percent Percent Percent
of Total of Total of Total of Total of Total
In Each In Each In Each In Each In Each
Category Category Category Category Category
To Total To Total To Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
-------- --------- -------- --------- -------- --------- --------- -------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real estate loans....... $ 86 78.67% $124 89.62% $ 98 95.54% $ 62 96.22% $ 78 96.42%
Commercial real estate loans........ -- 0.31 34 0.39 37 1.36 -- 2.58 -- 2.40
Consumer and other loans............ 34 21.02 11 9.99 1 3.10 6 1.20 8 1.18
Unallocated......................... 866 -- 594 -- 477 -- 411 -- 333 --
---- ------ ---- ------ ---- ------ ---- ------ ---- ------
Total allowance for loan losses.... $986 100.00% $763 100.00% $613 100.00% $479 100.00% $419 100.00%
==== ====== ==== ====== ==== ====== ==== ====== ==== ======
</TABLE>
13
<PAGE>
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 FHLB-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 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.
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," requires that investments be categorized as "held to maturity,"
"trading securities" or "available for sale," based on management's intent as to
the ultimate disposition of each security. SFAS No. 115 allows debt securities
to be classified as "held to maturity" and reported in financial statements at
amortized cost only if the reporting entity has the positive intent and ability
to hold those securities to maturity. Securities that might be sold in response
to changes in market interest rates, changes in the security's prepayment risk,
increases in loan demand, or other similar factors cannot be classified as "held
to maturity." Debt and equity securities held for current resale are classified
as "trading securities." Such securities are reported at fair value, and
unrealized gains and losses on such securities would be included in earnings.
The Company does not currently use or maintain a trading account. Debt and
equity securities not classified as either "held to maturity" or "trading
securities" are classified as "available for sale." Such securities are
reported at fair value, and unrealized gains and losses on such securities are
excluded from earnings and reported as a net amount in a separate component of
equity.
The Company maintains a portfolio of mortgage-backed and related securities
in the form of Ginnie Mae, Freddie Mac and Fannie Mae participation
certificates. 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 the Company to receive a pro rata
portion of the cash flows from an identified pool of mortgages. The Company has
also invested in collateralized mortgage obligations ("CMOs"), which are
securities issued by special purpose entities generally collateralized by pools
of mortgage-backed securities. The cash flows from such pools are segmented and
paid in accordance with a predetermined priority to various classes of
securities issued by the entity. The Company's CMOs are short-maturity
tranches.
The Investment Committee, comprised of the Company's President and Chief
Financial Officer/Treasurer, determines appropriate investments in accordance
with the Board of Directors' approved investment policies and procedures.
Investments are made following certain considerations, which include the
Company's 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 the Company's credit and interest rate risk,
and risk-based capital is given consideration during the evaluation. The
interest rate, yield, settlement date and maturity are also reviewed. The
Company purchases investment securities to provide necessary liquidity for day-
to-day operations. The Company has not purchased any CMOs for several years.
All of the Company's 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 the Company may have to reinvest the funds at a
lower interest rate.
14
<PAGE>
The following table sets forth the Company's investment and mortgage-backed
securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------------------------
1999 1998 1997
-------------- ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C>
Held to maturity:
Investment securities:
U.S. Treasury and agency obligations..... $ 9,010 $18,923 $16,068
Bankers' acceptances..................... -- -- --
------- ------- -------
Total investment securities............ $ 9,010 $18,923 $16,068
======= ======= =======
Mortgage-backed and related securities:
Mortgage-backed securities............... $ 3,384 $ 4,475 $ 5,306
CMOs..................................... 613 937 1,056
------- ------- -------
Total mortgage-backed and related
securities........................... $ 3,997 $ 5,412 $ 6,362
======= ======= =======
FHLB stock................................. $ 1,501 $ 1,423 $ 1,638
======= ======= =======
Available for sale:
Investment securities:
U.S. Treasury and agency obligations.... $ 4,234 $ 2,235 $ --
Mortgage-backed and related securities:
Fannie Mae.............................. $21,356 $ 1,488 --
</TABLE>
The following table sets forth the maturities and weighted average yields
of the securities in the Company's investment and mortgage-backed securities
portfolios at September 30, 1999. Expected maturities of mortgage-backed
securities 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, 1999, the Company's portfolio
included $3.0 million of callable securities with a weighted average rate of
5.4%. The following table does not take into consideration the effects of
scheduled repayments or the effects of possible prepayments.
15
<PAGE>
<TABLE>
<CAPTION>
At September 30, 1999
------------------------------------------------------------------------
Less Than One to Five to Over ten
One Year Five Years Ten Years Years
--------------- ---------------- -------------- -------------------
Amount Yield Amount Yield Amount Yield Amount Yield
------- ------- ------- ------- ------- ------ ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held to maturity:
Investment securities:
U.S. Treasury and agency
obligations.............. $7,211 5.11% $1,799 5.81% $ -- --% $ -- --%
Mortgage-backed and related
securities:
Mortgage-backed
securities........... -- -- 27 9.26 213 8.55 3,144 8.77
CMOs......................... -- -- -- -- -- -- 613 6.19
------ ------ ------ -------
Total mortgage-backed
and related securities.. $ -- -- $ 27 9.26% $ 213 8.55% $ 3,757 8.35%
====== ====== ====== =======
Available for sale:
Investment securities:
U.S. Treasury and agency
obligations.............. $1,748 5.00% $2,486 5.63% -- --% -- --%
Mortgage-backed and related
securities:
Mortgage-backed
securities........... $ -- --% $ -- --% $1,215 5.99% $20,141 6.91%
</TABLE>
Deposit Activities and Other Sources of Funds
General. Deposits, loan repayments and FHLB borrowings are the major
sources of the Bank's 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
general interest rates and money market conditions. Borrowings from FHLB-Des
Moines may be used to compensate for reductions in the availability of funds
from other sources. The Bank had no other borrowing arrangements at September
30, 1999 other than with the Company.
Deposit Accounts. Substantially all of the Bank's depositors are residents
of the State of Missouri. Deposits are attracted from within the Bank's market
area through the offering of a broad selection of deposit instruments, including
checking accounts, negotiable order of withdrawal ("NOW") accounts, money market
deposit accounts, regular savings accounts, certificates of deposit and
retirement savings plans. 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 its deposit
accounts, the Bank considers current market interest rates, profitability to the
Bank, matching deposit and loan products and its customer preferences and
concerns. The Bank generally reviews its deposit mix and pricing weekly.
In the unlikely event the Bank is liquidated, depositors will be entitled
to full payment of their deposit accounts before any payment is made to the
Holding Company as the sole stockholder of the Bank.
The following table sets forth the balances (inclusive of interest
credited) of deposits in the various types of accounts offered by the Bank at
the dates indicated.
16
<PAGE>
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
-------- ---------- -------- ---------- -------- ----------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing................. $ 2,720 1.68% $ 1,704 1.09% $ 1,016 0.68%
NOW checking........................ 13,679 8.48 11,355 7.27 8,572 5.77
Regular savings..................... 25,619 15.88 25,669 16.43 25,983 17.48
Money market deposit................ 15,587 9.66 12,657 8.10 9,694 6.52
Certificates which mature(1):
Within 1 year...................... 73,699 45.67 71,266 45.61 63,063 42.42
After 1 year, but within 3 years... 22,598 14.00 26,835 17.18 36,373 24.47
Certificate maturing thereafter.... 7,469 4.63 6,749 4.32 3,971 2.67
-------- ------ -------- ------ -------- ------
Total............................ $161,371 100.00% $156,235 100.00% $148,672 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
_______________
(1) At September 30, 1999, 1998 and 1997, jumbo certificates amounted to $5.8
million, $5.3 million and $5.0 million, respectively.
The following table indicates the amount of the Bank's jumbo certificates
of deposit by time remaining until maturity as of September 30, 1999. Jumbo
certificates of deposit represent minimum deposits of $100,000 and are not
issued at premium interest rates.
Maturity Period Amount
-------------------------- ----------------------
(Dollars in thousands)
Three months or less...... $ 675
Over 3 through 6 months... 2,405
Over 6 through 12 months.. 1,139
Over 12 months............ 1,627
------
Total.................. $5,846
======
17
<PAGE>
Time Deposits by Rates. The following table sets forth the certificates
of deposits in the Bank classified by rates at the dates indicated.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
3.00 - 3.99%......................... $ 6,292 $ 471 $ 578
4.00 - 4.99%......................... 51,426 11,345 7,062
5.00 - 5.99%......................... 32,470 77,007 81,184
6.00 - 6.99%......................... 8,573 11,192 9,795
7.00 - 7.99%......................... 5,004 4,835 4,788
-------- -------- --------
Total............................. $103,765 $104,850 $103,407
======== ======== ========
</TABLE>
Time Deposits by Maturities. The following table sets forth the amount and
maturities of time deposits at September 30, 1999.
<TABLE>
<CAPTION>
Amount Due
----------------------------------------------------------------------
After After After
1 Year 2 Years 3 Years
Within But Within But Within But Within
One Year 2 Years 3 Years 4 Years Thereafter Total
---------- ------------ ------------ ------------ ------------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
3.00 - 3.99%....... $ 6,292 -- -- -- -- $ 6,292
4.00 - 4.99%....... 40,031 6,986 2,215 745 1,449 51,426
5.00 - 5.99%....... 14,231 11,117 2,029 4,288 805 32,470
6.00 - 6.99%....... 8,354 157 12 50 -- 8,573
7.00 - 7.99%....... 4,791 82 -- 16 115 5,004
------- ------- ------ ------ ------ --------
Total........... $73,699 $18,342 $4,256 $5,099 $2,369 $103,765
======= ======= ====== ====== ====== ========
</TABLE>
Deposit Activity. The following table sets forth the deposit activities of
the Bank for the periods indicated.
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Beginning balance.................................. $156,235 $148,672 $147,824
-------- -------- --------
Net increase (decrease) before interest credited... 479 2,386 (4,226)
Interest credited.................................. 4,657 5,177 5,074
-------- -------- --------
Net increase (decrease) in deposits................ 5,136 7,563 848
-------- -------- --------
Ending balance..................................... $161,371 $156,235 $148,672
======== ======== ========
</TABLE>
Borrowings. The Bank may use advances from the FHLB-Des Moines to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements. The FHLB-Des Moines functions as a central reserve bank providing
credit for savings and loan associations and certain other member financial
institutions. As a member, the Bank is required to own capital stock in the
FHLB-Des Moines and is
18
<PAGE>
authorized to apply for advances on the security of such stock and certain of
its 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. At September 30, 1999, the
Bank had a borrowing capacity of $62.4 million based on available collateral.
The following table sets forth certain information regarding the Bank's use
of FHLB advances during the periods indicated.
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------
1999 1998 1997
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Maximum balance at any month end.................. $28,600 $2,200 $3,000
Average balance................................... 10,595 2,049 2,597
Period end balance................................ 28,600 1,900 2,200
Weighted average interest rate:
At end of period................................ 5.74% 6.32% 6.22%
During the period............................... 5.86 6.35 6.20
</TABLE>
Personnel
As of September 30, 1999, the Bank had 63 full-time and 16 part-time
employees and 9 commissioned loan representatives. The employees are not
represented by a collective bargaining unit and the Bank believes its
relationship with its employees is good.
Subsidiary Activities
The Bank has one subsidiary, Pulaski Service Corporation, which 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, 1999, the Bank's equity investment in its
subsidiary was $505,000.
REGULATION
General
The 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 SAIF 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 regulatory
requirements. This regulation and supervision establishes a comprehensive
framework of activities in which an institution can engage and
19
<PAGE>
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 policies, whether by the OTS, the FDIC or through
legislation, could have a material adverse impact on the Company, the Bank and
their 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 the Home Owners' Loan Act, as amended (the "HOLA"),
and of the Securities and Exchange Commission ("SEC") under the federal
securities 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 applicable to
savings institutions set forth in this document do not purport to be a complete
description of such statutes and regulations and their effects on the Bank.
Federal Savings Institution Regulation
Business Activities. The activities of federal savings institutions are
governed by HOLA and, in certain respects, the Federal Deposit Insurance Act
("FDI Act") and the regulations issued to implement those statutes. These laws
and regulations delineate the nature and extent of the activities in which
federal associations may engage. In particular, many types of lending
authorities for federal associations, e.g., commercial, nonresidential real
property and consumer loans, are limited to a specified percentage of the
institution's capital assets.
Loans to One Borrower. Under the HOLA, savings institutions are generally
subject to the national bank limits on loans to one borrower. Unless an
exception applies, savings institutions may not make a loan or extend credit to
a single or related group of borrowers in excess of 15.0% of the Bank's
unimpaired capital and surplus. An additional amount may be lent, equal to 10.0%
of unimpaired capital and surplus, if such loan is secured by readily-marketable
collateral, which is defined to include certain financial instruments and
bullion, but does not include real estate. At September 30, 1999, the Bank's
largest aggregate amount of loans to one borrower was $1.1 million, which was
below the Bank's loans to one borrower limit of $7.5 million at such date.
QTL Test. The HOLA requires savings institutions to meet a qualified thrift
lender ("QTL") test. Under the QTL test, a savings bank is required to either be
a "domestic building and loan association" within the meaning of the Internal
Revenue Code of 1986, as amended (the "Code"), maintain at least 65.0% of its
"portfolio assets" (total assets less (i) specified liquid assets up to 20.0% 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 and related 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, 1999, the Bank had all of its portfolio assets in qualified thrift
investments and, therefore, 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."
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Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by a savings institution, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule effective in 1998 established three tiers of
institutions, based primarily on an institution's capital level. An institution
that exceeded all capital requirements before and after a proposed capital
distribution ("Tier 1 Bank") and has not been advised by the OTS that it is in
need of more than normal supervision, could, after prior notice but without
approval of the OTS, make capital distributions during a calendar year equal to
the greater of: (i) 100% of its net earnings to date during the calendar year
plus the amount that would reduce by one-half the excess capital over its
capital requirements at the beginning of the calendar year; or (ii) 75% of its
net income for the previous four quarters. Any additional capital distributions
required prior regulatory approval. Effective April 1, 1999, the OTS's capital
distribution regulation changed. Under the new regulation, an application to and
the prior approval of the OTS will be 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, safety and soundness,
compliance and Community Reinvestment Act examination ratings in the two top
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 OTS. If an application is not required, the institution must
still provide prior notice to OTS of the capital distribution. In the event 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.
Liquidity. The Bank is required to maintain an average daily balance of
liquid assets (cash, certain time deposits, bankers' acceptances, specified
United States Government, state or federal agency obligations, shares of certain
mutual funds and certain corporate debt securities and commercial paper) equal
to a monthly average of not less than a specified percentage of its net
withdrawable deposit accounts plus short-term borrowings. This liquidity
requirement may be changed from time to time by the OTS to any amount within the
range of 4.0% to 10.0% depending upon economic conditions and the savings flows
of member institutions, and is currently 4.0%. Monetary penalties may be
imposed for failure to meet these liquidity requirements. The Bank's liquidity
ratio at September 30, 1999 was 21.5% which exceeded the applicable
requirements. The Bank has never been subject to monetary penalties for failure
to meet its liquidity requirements.
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 computed as a percentage upon the savings institution's total
assets, including consolidated subsidiaries, as reported in the bank's latest
quarterly thrift financial report. The assessments paid by the Bank for the
fiscal year ended September 30, 1999, totalled $50,230.
Branching. The OTS regulations authorize federally chartered savings
associations to branch nationwide to the extent allowed by federal statute.
This permits federal savings and loan associations with interstate networks to
diversify more easily their loan portfolios and lines of business
geographically. The OTS authority preempts any state law purporting to regulate
branching by federal savings institutions.
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Community Reinvestment. 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 related parties or "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 Sections 23A
and 23B of the Federal Reserve Act. Section 23A limits the aggregate amount of
"covered transactions" (including extension of credit to, purchases of assets
from or the issuance of a guarantee, acceptance or letter of credit on behalf of
affiliate) with any individual affiliate to 10.0% of the capital and surplus of
the savings institution and also limits the aggregate amount of transactions
with all affiliates to 20.0% 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 Section 23A and the purchase of low quality
assets from affiliates is generally prohibited. Section 23B generally provides
that certain transactions with affiliates, (including loan, asset sales or
purchases, and any servicing, leases or other agreements) must be on terms and
under circumstances, including credit standards, that are substantially the same
or at least as favorable to the institution as those prevailing at the time for
comparable transactions with nonaffiliated companies. Notwithstanding Sections
23A and 23B, savings institutions are prohibited from lending to any affiliate
that is engaged in activities that are not permissible for bank holding
companies under Section 4(c) of the Bank Holding Company Act ("BHC Act").
Further, 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
principal shareholders (generally considered to be those owners controlling or
having the power to vote ten percent or more of any class of the Company's
stock) as well as entities controlled by such persons, are currently governed by
Sections 22(g) and 22(h) of the Federal Reserve Act, and the Federal Reserve
Board's ("FRB") Regulation O thereunder. Among other things, these regulations
require such loans 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. Recent legislation created an exception 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.
Regulation O also places individual and aggregate limits on the 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.
Enforcement. Under the FDI Act, 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 range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors to 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
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in especially egregious cases. Under the FDI Act, the FDIC has the authority to
recommend to the Director of the OTS enforcement action to 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
("Guidelines") and a final rule to implement safety and soundness standards
required under the FDI Act. 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. The
standards set forth in the Guidelines address internal controls and information
systems, internal audit system, credit underwriting, loan documentation,
interest rate risk exposure, asset growth, asset quality, earnings, and
compensation, fees and benefits. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard, as required by the FDI
Act. Most recently, the agencies adopted guidelines related to Year 2000
computer compliance.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
standard, a 4.0% (3% for institutions receiving the highest rating on the CAMELS
financial institution rating system) leverage ratio (or core capital ratio) and
an 8.0% risk-based capital standard. In addition, the prompt corrective action
standards discussed below also establish, in effect, a minimum 2% tangible
capital standard, a 4% leverage (core) capital ratio (3% for the most highly
rated institutions) and, together with the risk-based capital standard itself, a
4% Tier I risk-based capital standard. Core capital is defined as common
stockholders' equity (including retained earnings), certain noncumulative
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 OTS regulations
also require that, in meeting the tangible, leverage (core) 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 4.0% and 8.0%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, 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. The components of Tier 1 (core)
capital are equivalent to those discussed earlier under the 3.0% leverage ratio
standard. The components of supplementary capital currently include cumulative
preferred stock, long-term perpetual preferred stock, mandatory convertible
securities, subordinated debt and intermediate preferred stock and allowance for
loan and lease losses. Allowance for loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25% of risk-weighted assets.
Overall, the amount of supplementary capital included as part of total capital
cannot exceed 100% of core capital.
The OTS (and other federal banking agencies) has revised the risk-based
capital standards to ensure that such standards take account of interest rate
risk. The OTS regulations set forth the methodology for calculating an interest
rate risk component that would be incorporated into the OTS risk-based capital
regulations. A savings institutions with "above normal" interest rate risk
exposure must deduct from total capital a portion of its capital to cover such
interest rate risk for purposes of calculating their risk-based
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capital requirements. A savings institution's interest rate risk is measured by
the decline in the net portfolio value of its assets (i.e., the difference
between incoming and outgoing discounted cash flows from assets, liabilities and
off-balance sheet contracts) that would result from a hypothetical 200-basis
point increase or decrease in market interest rates (except when the 3-month
Treasury bond equivalent yield falls below 4.0%, then the decrease will be equal
to one-half of that Treasury rate) divided by the estimated economic value of
the institution's assets, as calculated in accordance with guidelines set forth
by the OTS. A savings institution whose measured interest rate risk exposure
exceeds 2.0% must deduct an interest rate component in calculating its total
capital under the risk-based capital rule. The interest rate risk component is
an amount equal to one-half of the difference between the institution's measured
interest rate risk and 2.0%, multiplied by the estimated economic value of the
bank's assets. That dollar amount is deducted from an institution's total
capital in calculating compliance with its risk-based capital requirement. For
the present time, the OTS has deferred implementation of a capital deduction
based on the interest-rate risk component. If the Bank had been subject to an
interest-rate risk component as of September 30, 1999, the Bank would not have
been subject to any deduction from capital as a result of its interest rate risk
position.
At September 30, 1999, the Bank met each of its capital requirements. See
Note 12 to the Notes to Consolidated Financial Statements for further
information.
Prompt Corrective Regulatory Action. Under the OTS prompt corrective
action regulations, the OTS is required to take certain supervisory actions
against undercapitalized institutions, the severity of which depends upon the
institution's degree of undercapitalization. Generally, a savings institution
is considered "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of Tier I (core) capital to risk-weighted
assets is at least 6%, its ratio of core capital to total assets is at least 5%,
and it is not subject to any order or directive by the OTS to meet a specific
capital level. A savings institution generally is considered "adequately
capitalized" if its ratio of total capital to risk-weighted assets is at least
8%, its ratio of Tier I (core) capital to risk-weighted assets is at least 4%,
and its ratio of core capital to total assets is at least 4% (3% if the
institution receives the highest CAMEL rating). 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 "undercapitalized." 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 banking
regulator 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 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.
Insurance on Deposit Accounts. The FDIC has established a risk-based
assessment system for insured depository institutions that takes into account
the risks attributable to different categories and concentrations of assets and
liabilities. Under the risk-based assessment system, the average assessment rate
paid by institutions insured under the SAIF was increased. Under the risk-based
assessment system, the
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FDIC assigns an institution to one of three capital categories based on the
institution's financial information as of the reporting period ending seven
months before the assessment period, consisting of (1) well capitalized, (2)
adequately capitalized or (3) undercapitalized. The FDIC also assigns an
institution to one of three supervisory subcategories within each capital group.
The supervisory subgroup to which an institution is assigned is based on a
supervisory evaluation provided to the FDIC by the institution's primary federal
regulator and information that the FDIC determines to be relevant to the
institution's financial conditions and the risk posed to the deposit insurance
funds. An institution's assessment rate depends on the capital category and
supervisory category to which it is assigned. The assessment rate for the
Company's SAIF-assessable deposits for fiscal 1999 was 0 basis points. In
addition, SAIF-assessable deposits are also subject to assessments for payments
on the bonds issued in the late 1980s by the Financing Corporation (the "FICO"
bonds) to recapitalize the now defunct Federal Savings and Loan Insurance
Corporation. The Company's total expense in fiscal 1999 for the assessment for
deposit insurance and the FICO payments was $97,531.
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 in an amount at least equal to 1.0% of
the aggregate principal amount of its unpaid residential mortgage loans and
similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB, whichever is greater. The Bank was in compliance
with this requirement with an investment in FHLB stock at September 30, 1999, of
$1.5 million. FHLB advances must be secured by specified types of collateral
and all long-term advances may only be obtained for the purpose of providing
funds for residential housing finance.
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. For the years ended September 30, 1999, 1998 and
1997, dividends from the FHLB to the Bank amounted to $93,000, $104,000 and
$115,000, respectively. If dividends were reduced, or interest on future FHLB
advances increased, the Bank's net interest income would likely also be reduced.
Further, there can be no assurance that the impact of FDICIA and the FIRREA on
the FHLBs will not also cause a decrease in the value of the FHLB stock held by
the Bank.
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). During fiscal 1999, the FRB regulations generally required
that reserves be maintained against aggregate transaction accounts as follows:
For accounts aggregating $46.5 million or less (subject to adjustment by the
FRB), the reserve requirement is 3.0%; and for accounts greater than $ 46.5
million, the reserve requirement is $1.395 million plus 10.0% (subject to
adjustment by the FRB between 8.0% and 14.0%) against that portion of total
transaction accounts in excess of $46.5 million. The first $4.9 million of
otherwise reservable balances (subject to adjustments by the FRB) were exempted
from the reserve requirements. The Bank complied with the foregoing
requirements. The balances maintained to meet the reserve requirements imposed
by the FRB may be used to satisfy liquidity requirements imposed by the OTS.
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Holding Company Regulation
The Company is a non-diversified unitary savings and loan holding company
within the meaning of the HOLA, as amended. As such, the Company has registered
with the OTS and is subject to OTS regulations, examinations, supervision and
reporting requirements. In addition, the OTS has enforcement authority over the
Company and its non-savings institution subsidiaries. Among other things, this
authority permits the OTS to restrict or prohibit activities that are determined
to be a serious risk to the holding company's subsidiary savings institution.
The Bank must notify the OTS 30 days before declaring any dividend to the
Company.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5.0%
of the voting stock of another savings institution or holding company thereof,
without prior written approval of the OTS; or 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 must
consider the financial and managerial resources and future prospects of the
company and institution involved, the effect of the acquisition on the risk to
the insurance funds, the convenience and needs of the community and competitive
factors.
As a unitary savings and loan holding company (i.e., one that controls only
one thrift subsidiary), the Company generally will not be restricted under
existing banking laws as to the types of business activities in which it may
engage, provided that the Bank continues to be a QTL. See "Federal Savings
Institution Regulation - QTL Test" for a discussion of the QTL requirements.
Upon any non-supervisory acquisition by the Company of another savings
association or savings bank that meets the QTL test and is deemed to be a
savings institution by OTS, the Company would become a multiple savings and loan
holding company (if the acquired institution is held as a separate subsidiary)
and would be subject to extensive limitations on the types of business
activities in which it could engage. The HOLA limits the activities of a
multiple savings and loan holding company and its non-insured institution
subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c)(8) of the Bank Holding Company Act, subject to the prior
approval of the OTS, and certain other activities authorized by OTS regulation,
and no multiple savings and loan holding company may acquire more than 5.0% of
the stock of a company engaged in impermissible activities.
The OTS is prohibited from approving 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.
Federal law generally provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control," as that term is defined in OTS regulations, of a federally-insured
savings institution without giving at least 60 days written notice to the OTS
and providing the OTS an opportunity to disapprove of the proposed acquisition.
Such acquisitions of control may be disapproved if it is determined, among other
things, that (i) the acquisition would substantially lessen competition; (ii)
the financial condition of the acquiring person might jeopardize the financial
stability of the savings institution or prejudice the interests of its
depositors; or (iii) the competency, experience or integrity of the acquiring
person or the proposed management personnel indicates that it would not be in
the
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interest of the depositors or the public to permit the acquisition of control by
such person. This requirement would apply to acquisitions of the Company's
stock.
Financial Institution Modernization Legislation. Recently enacted federal
legislation designed to modernize the regulation of the financial services
industry expands the ability of bank holding companies to affiliate with other
types of financial services companies such as insurance companies and investment
banking companies. However, the legislation provides that companies that acquire
control of a single savings association after May 4, 1999 (or that filed an
application for that purpose after that date) are not entitled to the
unrestricted activities formerly allowed for a unitary savings and loan holding
company. Rather, these companies will have authority to engage in the activities
permitted "a financial holding company" under the new legislation, including
insurance and securities-related activities, and the activities currently
permitted for multiple savings and loan holding companies, but generally not in
commercial activities. The authority for unrestricted activities is
grandfathered for unitary savings and loan holding companies, such as the
Company, that existed before May 4, 1999. However, the authority for
unrestricted activities would not apply to any company that acquired the
Company.
TAXATION
Federal Taxation
General. The Company and the Bank report their income on a fiscal year
basis using the accrual method of accounting and are subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Bank or the Company. For additional information regarding income taxes, see Note
9 of Notes to Consolidated Financial Statements.
Bad Debt Reserve. Historically, savings institutions such as the Bank
which met certain definitional tests primarily related to their assets and the
nature of their business ("qualifying thrift") were permitted to establish a
reserve for bad debts and to make annual additions thereto, which may have been
deducted in arriving at their taxable income. The Bank's deductions with respect
to "qualifying real property loans," which are generally loans secured by
certain interest in real property, were computed using an amount based on the
Bank's actual loss experience, or a percentage equal to 8% of the Bank's taxable
income, computed with certain modifications and reduced by the amount of any
permitted additions to the non-qualifying reserve. Due to the Bank's loss
experience, the Bank generally recognized a bad debt deduction equal to 8% of
taxable income.
The thrift bad debt rules were revised by Congress in 1996. The new rules
eliminated the percentage of taxable income method for deducting additions to
the tax bad debt reserves for all thrifts for tax years beginning after December
31, 1995. These rules also required that all institutions recapture all or a
portion of their bad debt reserves added since the base year (last taxable year
beginning before January 1, 1988). For taxable years beginning after December
31, 1995, the Bank's bad debt deduction must be determined under the experience
method using a formula based on actual bad debt experience over a period of
years or, if the Bank is a "large" association (assets in excess of $500
million) on the basis of net charge-offs during the taxable year. The new rules
allowed an institution to suspend bad debt reserve recapture for the 1996 and
1997 tax years if the institution's lending activity for those years is equal to
or greater than the
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institutions average mortgage lending activity for the six taxable years
preceding 1996 adjusted for inflation. For this purpose, only home purchase or
home improvement loans are included and the institution can elect to have the
tax years with the highest and lowest lending activity removed from the average
calculation. If an institution is permitted to postpone the reserve recapture,
it must begin its six year recapture no later than the 1998 tax year. The
unrecaptured base year reserves will not be subject to recapture as long as the
institution continues to carry on the business of banking. In addition, the
balance of the pre-1988 bad debt reserves continues to be subject to provisions
of present law referred to below that require recapture of the pre-1988 bad debt
reserve in the case of certain excess distributions to shareholders.
Distributions. To the extent that the Bank makes "nondividend
distributions" to the Company, such distributions will be considered to result
in distributions from the balance of its bad debt reserve as of December 31,
1987 (or a lesser amount if the Bank's loan portfolio decreased since December
31, 1987) and then from the supplemental reserve for losses on loans ("Excess
Distributions"), and an amount based on the Excess Distributions will be
included in the Bank's taxable income. Nondividend distributions include
distributions in excess of the Bank's current and accumulated earnings and
profits, distributions in redemption of stock and distributions in partial or
complete liquidation. However, dividends paid out of the Bank's current or
accumulated earnings and profits, as calculated for federal income tax purposes,
will not be considered to result in a distribution from the Bank's bad debt
reserve. The amount of additional taxable income created from an Excess
Distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if, after the
conversion, the Bank makes a "nondividend distribution," then approximately one
and one-half times the Excess Distribution would be includable in gross income
for federal income tax purposes, assuming a 34% corporate income tax rate
(exclusive of state and local taxes). See "REGULATION" for limits on the payment
of dividends by the Bank. The Bank does not intend to pay dividends that would
result in a recapture of any portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Internal Revenue Code imposes a tax
on alternative minimum taxable income ("AMTI") at a rate of 20%. The excess of
the tax bad debt reserve deduction using the percentage of taxable income method
over the deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the AMTI. In addition,
only 90% of AMTI can be offset by net operating loss carryovers. AMTI is
increased by an amount equal to 75% of the amount by which the Bank's adjusted
current earnings exceeds its AMTI (determined without regard to this preference
and prior to reduction for net operating losses). For taxable years beginning
after December 31, 1986, and before January 1, 1996, an environmental tax of
0.12% of the excess of AMTI (with certain modification) over $2.0 million is
imposed on corporations, including the Bank, whether or not an Alternative
Minimum Tax is paid.
Dividends-Received Deduction. The Company may exclude from its income 100%
of dividends received from the Bank as a member of the same affiliated group of
corporations. The corporate dividends-received deduction is generally 70% in the
case of dividends received from unaffiliated corporations with which the Company
and the Bank will not file a consolidated tax return, except that if the Company
or the Bank owns more than 20% of the stock of a corporation distributing a
dividend, then 80% of any dividends received may be deducted.
Audits. The Bank's federal income tax returns have been audited through
the tax year ended September 30, 1994 without material adjustment.
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State Taxation
Missouri Taxation. Missouri-based thrift institutions, such as the Bank,
are subject to a special financial institutions tax, based on net income without
regard to net operating loss carryforwards, at the rate of 7% of net income.
This tax is in lieu of certain other state taxes on thrift institutions, on
their property, capital or income, except taxes on tangible personal property
owned by the Bank and held for lease or rental to others and on real estate,
contributions paid pursuant to the Unemployment Compensation Law of Missouri,
social security taxes, sales taxes and use taxes. In addition, the Bank is
entitled to credit against this tax all taxes paid to the State of Missouri or
any political subdivision, except taxes on tangible personal property owned by
the Bank and held for lease or rental to others and on real estate,
contributions paid pursuant to the Unemployment Compensation Law of Missouri,
social security taxes, sales and use taxes, and taxes imposed by the Missouri
Financial Institutions Tax Law. Missouri thrift institutions are not subject to
the regular corporate income tax. The Bank's state income tax returns have not
been audited for the past five years.
Delaware. As a Delaware holding company not earning income in Delaware,
the Company is exempt from Delaware corporate income tax, but is required to
file an annual report with and pay an annual franchise tax to the State of
Delaware.
Item 2. Properties.
- ------------------
The Bank conducts its business through four full-service banking offices.
The following table sets forth information on those offices as of September 30,
1999.
<TABLE>
<CAPTION>
Year Net Book Owned/ Approximate
Location Opened Value(1) Leased Square Footage
- --------------------------- --------- ---------- ---------- --------------
Main Office: (Dollars in thousands)
<S> <C> <C> <C> <C>
12300 Olive Boulevard 1978 $1,546 Owned 29,000(2)
St. Louis, Missouri 63141-6434
Branch Offices:
199 Jamestown Mall 1967(3) 109 Leased(4) 2,500
Florissant, Missouri 63033-5398
3760 South Grand Avenue 1967 411 Owned 3,500
St. Louis, Missouri 63118-3487
4225 Bayless Road 1971 70 Leased(5) 2,000
St. Louis, Missouri 63123-7500
</TABLE>
___________________________
(1) Represents the net book value of land, buildings, furniture, fixtures and
equipment owned by the Bank.
(2) 2,869 square feet of which is leased to outside tenants.
(3) Includes the period the branch office was located at 6955 Parker Road at
Highway 367 in Florissant. The branch was moved to its current site in
October 1998.
(4) Lease expires on July 31, 2004.
(5) Lease expires on May 31, 2002.
29
<PAGE>
The Bank expects to open a fifth full-service banking office in the first
quarter of 2000. The space for that office, which will be located at 1928
Zumbehl Road, St. Charles, Missouri, will be leased.
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. Submission of Matters to a Vote of Security Holders.
- -----------------------------------------------------------
None.
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
- -------------------------------------------------------------------------
Matters.
- -------
The information required by this item is incorporated herein by
reference to the section captioned "Common Stock Information" in the Annual
Report to Stockholders.
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. 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 Annual Report to
Stockholders.
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
Annual Report to Stockholders."
Item 8. Financial Statements and Supplementary Data.
- ----------------------------------------------------
The financial statements listed in the index to Consolidated Financial
Statements at Item 14 of this Form 10-K are incorporated by reference into this
Item 8 of Part II of this Form 10-K .
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure.
- --------------------
None.
30
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
- -----------------------------------------------------------
For information concerning the Board of Directors of the Company, the
information contained under the section captioned "Proposal I -- Election of
Directors" is incorporated herein by reference. 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" for information regarding compliance with Section 16
of the Exchange Act.
Executive Officers
The following table sets forth certain information regarding the
executive officers of the Company and the Bank.
<TABLE>
<CAPTION>
Name Age (1) Position
- ----------------- ------ ----------
<S> <C> <C>
William A. Donius................................................. 41 President, Chief Executive Officer and
Director
Michael J. Donius................................................. 39 Executive Vice President, Chief Operating
Officer and Director of the Company and the
Bank, Secretary of the Company
Thomas F. Hack.................................................... 55 Chief Financial Officer, Treasurer and
Director
</TABLE>
_________________________________
(1) As of September 30, 1999.
Biographical Information
Set forth below is certain information regarding the executive officers
of the Company and the Bank. Unless otherwise stated, each executive officer has
held his or her current occupation for the last five years. There are no family
relationships among the executive officers except that William and Michael
Donius are brothers.
William A. Donius has served as President of the Bank since December 1,
1997. Mr. Donius is also the Chairman of the Board of the Company and the Bank.
He previously served as Senior Vice President from February 1997 to December
1997, as Vice President from April 1995 to February 1997, and as Director of
Marketing from July 1992 to April 1995.
Michael J. Donius joined the Bank in 1988 and has served as Executive
Vice President since 1993, as Chief Operating Officer since 1997 and as
Secretary since 1994. Prior to assuming his current positions, Mr. Donius served
the Bank in various capacities, including Vice President in charge of compliance
and CRA.
Thomas F. Hack joined the Bank in 1967 and has served as the Treasurer
since 1974 and as the Chief Financial Officer since 1993.
31
<PAGE>
Item 11. Executive Compensation.
- -------------------------------
The information contained under the sections captioned "Executive
Compensation" and "Directors' Compensation" in the Proxy Statement is
incorporated herein by reference.
PART IV
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- -----------------------------------------------------------------------
(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.
Item 13. Certain Relationships and Related Transactions.
- -------------------------------------------------------
The information set forth under the section captioned "Transactions with
Management" in the Proxy Statement is incorporated by reference.
32
<PAGE>
PART V
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
- -------------------------------------------------------------------------
(a) The following documents are filed as part of this report:
1. Financial Statements
Independent Auditors' Report
Consolidated Statements of Financial Condition at September 30,
1999 and 1998
Consolidated Statements of Income and Comprehensive Income for the
Years Ended September 30, 1999, 1998 and 1997
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended September 30, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended September
30, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
Such financial statements are incorporated herein by reference to
the Consolidated Financial Statements and Notes thereto included in
the Annual Report to Stockholders.
2. Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not
applicable or the required information is presented in the Consolidated
Financial Statements or notes thereto.
33
<PAGE>
3. Exhibits
The exhibits listed below are filed as part of this report or are
incorporated by reference herein.
3.1 Certificate of Incorporation of Pulaski Financial Corp.*
3.2 Bylaws of Pulaski Financial Corp.*
4.0 Form of Certificate for Common Stock*
10.1 Employment Agreement with William A. Donius**
10.2 Employment Agreement with Thomas F. Hack**
10.3 Employment Agreement with Michael J. Donius**
10.4 Severance Agreement with Beverly M. Kelley**
10.5 Pulaski Financial Corp. 2000 Stock-Based Incentive Plan***
13.0 Annual Report to Stockholders
21.0 Subsidiaries of Pulaski Financial Corp.
23.0 Consent of Independent Auditor
27.0 Financial Data Schedule
_______________
* Incorporated by reference from the Form S-1 (Registration No.
333-56465), as amended, as filed on June 9, 1998.
** Incorporated herein by reference to Pulaski Financial Corp's Form
10-K for the year ended September 30, 1998 as filed on December
29, 1998.
*** Incorporated herein by reference to Pulaski Financial Corp.'s
Definitive Proxy Statement for the 2000 Annual Meeting of
Stockholders.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September 30,
1999.
34
<PAGE>
Conformed 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/ William A. Donius
-------------------------------------
William A. Donius
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.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ---- ----- ----
<S> <C> <C>
/s/ William A. Donius President and Chief Executive December 27, 1999
- -----------------------------------
William A. Donius Officer
(principal executive officer)
/s/ Thomas F. Hack Chief Financial Officer, December 27, 1999
- -----------------------------------
Thomas F. Hack Treasurer and Director
(principal financial and accounting
officer)
/s/ Michael J. Donius Executive Vice President, Chief December 27, 1999
- -----------------------------------
Michael J. Donius Operating Officer, Secretary and
Director
/s/ Robert A. Ebel Director December 27, 1999
- ---------------------------------
Robert A. Ebel
/s/ E. Douglas Britt Director December 27, 1999
- -----------------------------------
E. Douglas Britt
/s/ Garland A. Dorn Director December 27, 1999
- -----------------------------------
Garland A. Dorn
/s/ Dr. Edward J. Howenstein Director December 27, 1999
- ----------------------------
Dr. Edward J. Howenstein
</TABLE>
35
<PAGE>
Exhibit 13.0
Annual Report to Stockholders
<PAGE>
Table of Contents
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
<S> <C>
Business of the Company 1
Selected Consolidated Financial Information 2-3
Management's Discussion and Analysis of Financial Condition and Results of Operations 4-21
Independent Auditors' Report 22
Consolidated Financial Statements 23-27
Notes to Consolidated Financial Statements 28-48
Common Stock Information 49
Directors and Officers 50
Corporate Information 51
Annual Meeting 51
</TABLE>
<PAGE>
Message to Fellow Shareholders:
We continue to transition from a mutual holding company to a full stock company,
and to an organization seeking above average growth. We are well on our way
toward a vibrant, growth oriented public company. This process is important. Our
challenge is to preserve the best elements of our past seventy seven-year
tradition, while becoming an increasingly progressive, earnings focused
competitor. As a mutual entity, we aimed to maximize our relationships with
customers and employees. As we go forward we will maintain that worthy goal.
However, we are also learning to be vigilant about managing the company so as to
ensure we will be able to operate more efficiently and focus on growing earnings
annually, thereby increasing shareholder value. While this is not an easy task,
it is one that management has fully embraced.
[GRAPH APPEARS HERE]
Before turning to an operational review, a comment on one aspect of our capital
management strategy this past year is necessary. The company received regulatory
approval late this past year from the Office of Thrift Supervision to repurchase
15 percent (594,885 shares) of our outstanding shares. We've completed the first
10 percent of this repurchase. Currently our stock price is below book value and
we have a strong, capital position as a result of our recent conversion. These
factors certainly suggest that completing the currently authorized repurchase
our stock makes economic sense for our shareholders. Longer term, however, we
will focus on other ways that we can prudently improve our return on equity.
In order to accomplish our growth and earnings objectives, we have built an
infrastructure of staff and products that will allow us to continue to grow. We
added 2,800 net new checking account customers this past year, representing an
increase of 50 percent from the total at September 30, 1998. Fee income
increased $363,000 or 215 percent over September 1998 from service charges on
deposit accounts. These customers primarily have opened checking account
relationships with us because of our "High Performance Checking Account"
program. We believe that winning over the checking account relationship is
especially important for several reasons: i.) most customers consider "their"
bank as the one where they have
<PAGE>
their checking account; ii.) many consider it difficult to switch one's
checking account; when you "win over" new customers, they typically are
reluctant to move this account; iii.) this relationship represents a good
starting point for other product sales and iv.) an increase in checking account
balances lowers the bank's average funding costs for loans.
A primary objective of this past fiscal year was to focus internally on our
products, pricing and the manner in which our products are delivered. It proves
to be a tough challenge to give the customer both the best rate and excellent
service. We developed the discipline over the course of the year to balance
difficult decisions that combine growing earnings and customer relationships.
After a thorough analysis, we implemented many pricing changes that should have
a positive impact on both our interest rate spread and net interest margin while
serving our customers' needs.
[GRAPH APPEARS HERE]
Importantly, we received guidance from banking industry consultants who
worked with us to evaluate and refine our pricing in all areas of the bank. In
addition, we are increasing our use of technology to assist in developing models
to guide us in pricing deposit and lending products. We've also developed models
to forecast staffing needs, based on transaction history, in our retail
branches. These models give us the ability to use current information and
forecast the return on equity of a particular pricing decision. Since this
process was completed late in the fiscal year, we believe these initiatives will
have a positive impact beginning the current fiscal year as well as in years to
come.
This past year we achieved record loan growth as our loan portfolio grew by
$40 million or 28 percent. We also originated a record number of mortgage loans,
$180 million. We retained $54 million. The balance was sold into the secondary
market which resulted in immediate and important fee income. We guarded against
compromising quality as we increased our lending volume, by maintaining our
underwriting integrity. We have developed an increasingly strong mortgage
origination engine within the bank. We are currently ranked as one of St. Louis'
top residential lenders by RMS Services, an independent firm that tracks
mortgage loan originations across the country.
We believe we will continue to have expanded opportunities in the mortgage
lending due to major turmoil caused in the mortgage market by recent
consolidation activities in the industry. Customers are turning to smaller,
service oriented financial institutions. Since we have a profitable, successful
operation, we plan to significantly
<PAGE>
grow revenues in this area. Our plan continues to be move decisively to attract
top-notch mortgage loan officers. In fact, three experienced mortgage loan
officers joined us in the past month. Complementing this effort, we have
committed to upgrade our computer systems to capitalize on new technologies that
more efficiently process a greater volume of loans. Our goal is to offer "high
tech and high touch" to our customers applying for loans with us. We also now
offer customers the option of applying through our website,
www.pulaskibankstl.com.
Our loan officers have primarily focused on originating single family
residential mortgages in the segment of the market where people are buying homes
and not in the market where they are refinancing their existing residence.
Therefore, we do not anticipate a dramatic reduction in loan volume or fee
income from recently increased rates, assuming there is not significant increase
in those rates.
[GRAPH APPEARS HERE]
We have also diversified our portfolio in the past year by adding $19
million in consumer loans, primarily auto loans. Our consumer loan portfolio
currently is $33 million or 18 percent of our total loan portfolio. These loans
typically have a shorter maturity and carry a higher interest rate than mortgage
loans. As with our mortgage loan portfolio, we adhere to strict underwriting
guidelines with the origination of these consumer loans, and as a result, our
delinquency rates have been low. We monitor delinquency rates to ensure that we
were not experiencing a growing delinquency trend as the volume grows.
We do not want to take for granted the favorable credit cycle that we
continue to experience. Although our balance sheet consists of mortgage loans
and some consumer loans, we do not experience the greater margins that
commercial banks do because we do not carry the implicit additional portfolio
risks that they bear (primarily because our loans are secured by personal
residences and automobiles as opposed to commercial property and inventory).
In an effort to expand our profitability in the lending area, we added a
home equity line of credit to our product line-up. We closed the fiscal year
with $5 million in outstanding balances, or 3 percent of our loan portfolio.
This product will benefit us in several ways: i.) allow us to add a prime
rate-based adjusting asset to our balance sheet (rates vary from prime rate to
prime plus two percent on this product after the initial six month lower rate
period; ii.) allow us to "piggyback" a second product sale at the same
<PAGE>
time that the first mortgage loan is originated, thereby better spreading our
costs; and iii.) add a relationship product with the customer that remains in
place, even if the first mortgage loan is sold in the secondary market. For
these reasons, we plan to further emphasize this product in the years ahead.
We are attempting to position ourselves for growth, as efficiently as
possible. Of course, this can prove to be challenging and it takes discipline.
After careful analysis, we chose to close our Sunset Hills Office as we deemed
both its deposit base combined with its growth prospects insufficient to meet
our revenue goals. Incidentally, our Bayless Office is located within a
reasonable distance of the Sunset Hills Office.
We will open an office in fast growing St. Charles County in the early
part of 2000. The location is a former free-standing restaurant site in the
Zumbehl Commons Shopping Center, near Zumbehl Road and Highway 94. We carefully
selected this location after stringent site analysis and patient negotiations
with the ownership group during a lengthy bankruptcy process. We believe our
consumer centered product offerings will be well received at this new location.
We are optimistic that our efforts will pay off with an excellent new branch and
its anticipated growth.
In summary, we end this past year and century better positioned than ever
to continue to profitably expand the company. I'm proud to lead a talented
management team and employee group that is committed to enhancing shareholder
value everyday. Thanks goes to them and to our customers who are so critical in
helping us to move ahead. In closing, I thank our shareholders who have shown
the confidence in us that your investment represents. We plan to continue to
earn your trust and confidence.
/s/ William A Donius
William A. Donius
Chairman of the Board,
President and Chief Executive Officer
<PAGE>
Business of the Company
Pulaski Financial Corp. ("Company") was incorporated under Delaware law in May
1998. The Company was organized for the purpose of becoming the holding company
for Pulaski Bank, A Federal Savings Bank ("Bank") upon the Bank's reorganization
as a wholly owned subsidiary of the Company resulting from the conversion of
Pulaski Bancshares, M.H.C. ("MHC"), from a federal mutual holding company to a
stock holding company ("Conversion and Reorganization"). In connection with the
Conversion and Reorganization, which was completed on December 2, 1998, the
Company sold 2,909,500 shares of its common stock to the public at $10 per share
in a public offering ("Offering") and issued 1,056,016 shares in exchange for
the outstanding shares of the Bank held by the Bank's stockholders other than
the MHC. The Company has no significant assets, other than all of the
outstanding shares of the Bank and the portion of the net proceeds from the
Offering retained by the Company, and no significant liabilities. Management of
the Company and the Bank are substantially similar and the Company neither owns
nor leases any property, but instead uses the premises, equipment and furniture
of the Bank. Accordingly, the information set forth in this report, including
the consolidated financial statements and related financial data, relates
primarily to the Bank.
The Bank is regulated by the Office of Thrift Supervision ("OTS"), its primary
federal regulator, and the Federal Deposit Insurance Corporation ("FDIC"), the
insurer of its deposits. The Bank's deposits are federally insured by the FDIC
under the Savings Association Insurance Fund ("SAIF"). The Bank is a member of
the Federal Home Loan Bank ("FHLB") System. At September 30, 1999, the Company
had total assets of $244.0 million, total deposits of $161.4 million and
stockholders' equity of $49.9 million, or 20.45% of total assets, on a
consolidated basis.
The Bank is a community oriented financial institution that provides traditional
financial services within the City and County of St. Louis, St. Charles County,
Franklin and Jefferson Counties. The Bank is engaged primarily in the business
of attracting deposits from the general public and using these and other funds
to originate one- to four-family residential mortgage loans within the Bank's
lending market area. Additionally, the Bank has, from time to time, originated
consumer loans, although it is not actively originating such loans at this time.
The Bank is an approved lender/servicer for the Federal Housing Administration
("FHA") and the Veterans Administration ("VA"), as well as for the Missouri
Housing Development Commission (a government agency established to provide home
buying opportunities for lower income first time home buyers) ("MHDC"). The
Bank is also an approved seller/servicer for the Government National Mortgage
Association ("GNMA").
-1-
<PAGE>
Selected Consolidated Financial Information
The following tables set forth certain information concerning the consolidated
financial position, consolidated data from operations and performance ratios for
the Company at the dates and for the years indicated.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------
1999 1998 1997 1996 1995
FINANCIAL CONDITION DATA (In thousands)
<S> <C> <C> <C> <C> <C>
Total assets $243,974 $193,208 $179,419 $178,812 $183,095
Loans receivable, net 181,533 141,769 130,359 134,044 148,551
Loans receivable held for sale 8,159 13,442 14,384 7,210 3,263
Bankers Acceptances and investment securities 14,746 21,158 16,068 15,012 5,488
Mortgage-backed and related securities 25,353 6,900 6,362 7,424 9,443
Cash and cash equivalents 8,887 3,047 6,248 9,022 10,882
Deposits 161,371 156,235 148,672 147,824 151,505
Advances from Federal Home Loan Bank of Des Moines 28,600 1,900 2,200 3,000 5,000
Stockholders' equity 49,905 25,213 23,858 22,504 22,096
Years Ended September 30,
-------------------------------------------------------
1999 1998 1997 1996 1995
OPERATING DATA (In thousands)
Interest income $ 15,258 $ 13,602 $ 13,383 $ 13,211 $ 12,709
Interest expense 7,323 7,142 6,985 7,071 6,882
-------- -------- -------- -------- --------
Net interest income 7,935 6,460 6,398 6,140 5,827
Provision for loan losses 265 209 169 65 151
-------- -------- -------- -------- --------
Net interest income after provision for loan losses 7,670 6,251 6,229 6,075 5,676
Other income 2,316 1,695 1,016 847 929
SAIF premium assessment 1,010
Other expense 6,601 5,111 4,298 4,659 4,766
-------- -------- -------- -------- --------
Income before income taxes 3,385 2,835 2,947 1,253 1,839
Income taxes 1,252 990 1,024 370 614
-------- -------- -------- -------- --------
Net income $ 2,133 $ 1,845 $ 1,923 $ 883 $ 1,225
======== ======== ======== ======== ========
Net income per common share - Basic (1) N/M N/M N/M N/M N/M
======== ======== ======== ======== ========
Net income per common share - Diluted (1) N/M N/M N/M N/M N/M
======== ======== ======== ========= ========
(Continued)
</TABLE>
(1) Not meaningful due to the Conversion and Reorganization which took place
on December 2, 1998.
-2-
<PAGE>
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------
OTHER DATA 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Number of:
Real estate loans outstanding 2,927 2,729 2,921 3,031 3,228
Consumer loans 2,680 1,251 434 246 277
Deposit accounts 21,297 18,581 16,047 16,316 17,155
Full service offices 4 5 5 5 4
At or For the Years Ended September 30,
----------------------------------------------------
KEY OPERATING RATIOS 1999 1998 1997 1996 1995
Return on average assets (net income divided by average assets) 0.96% 1.00% 1.08% 0.49% 0.66%
Return on average equity (net income divided by average equity) 4.52% 7.49% 8.28% 3.90% 5.66%
Average equity to average assets 21.23% 13.35% 12.98% 12.60% 11.71%
Interest rate spread (difference between average yield on interest-
earning assets and average cost of interest-bearing liabilities) 2.76% 3.02% 3.08% 2.97% 2.79%
Net interest margin (net interest income as a percentage of
average interest-earning assets) 3.70% 3.63% 3.69% 3.54% 3.30%
Dividend payout ratio (1) N/M N/M N/M N/M N/M
Other expense to average assets 2.97% 2.77% 2.40% 3.16% 2.58%
Average interest-earning assets to average interest-bearing liabilities 127.51% 115.14% 115.17% 113.90% 113.31%
Allowance for loan losses to total loans at end of period 0.52% 0.49% 0.42% 0.34% 0.28%
Allowance for loan losses to nonperforming loans 69.88% 64.88% 49.04% 67.93% 49.44%
Net charge-offs to average outstanding loans during the period 0.02% 0.04% 0.02% 0.003% 0.13%
Nonperforming assets to total assets 0.67% 0.67% 0.70% 0.47% 0.65%
</TABLE>
(1) Ratio is not considered meaningful due to the Conversion and Reorganization
which took place on December 2, 1998.
-3-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of the Company. The information contained in this section
should be read in conjunction with the consolidated financial statements and
accompanying notes thereto.
Certain statements throughout Management's Discussion and Analysis of Financial
Condition and Results of Operations are "forward looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 and involve
known and unknown risk, uncertainties and other factors that may cause the
Company's actual results, performance or achievements to be materially different
from the results, performance or achievements expressed or implied by the
forward looking statement. Factors that impact such forward looking statements
include, among others, changes in general economic conditions, changes in
interest rates and competition.
Operating Strategy
The Company operates as a progressive, community-oriented unitary thrift holding
company. Its business consists primarily in the operation of it wholly owned
subsidiary - Pulaski Bank. The Bank operates in the traditional lines of
business by attracting deposits from the general public to finance one to four
family residential mortgage loans originated by the Bank. In recent years,
since the Bank became a publicly held company in 1994, management has
implemented strategies designed to enhance the earnings of the Bank while still
maintaining safety and soundness. In addition, the Bank strives to provide
superior service to its customers. Management plans to preserve the long-
standing hallmarks of quality customer service.
The current strategy is to lower funding costs, increase fee income, improve
operational efficiencies and add higher yielding assets to the balance sheet
with the goal of growing earnings. The Bank implemented a "High Performance
Checking Account" program in early 1998. The Bank chose the same program that
many other banks had successfully used to accomplish this task. The goals of
the program are to: (i) increase both the number and percentage of transaction
accounts to total deposits, thereby decreasing the Bank's cost of funds, (ii)
increase fee income through insufficient funds charges, service charges and
miscellaneous fees levied on checking accounts and (iii) to add new customer
relationships to the Bank providing a larger customer base for additional
product sales.
The Bank has also taken steps to enhance fee income by structuring its mortgage
lending department to function as both a portfolio lender to meet both its asset
quality and volume needs and as a mortgage broker to benefit from the fee income
produced by selling loans into the secondary market. Management plans to grow
the mortgage origination business by continuing to recruit successful loan
officers into the Bank. In early 1999, the Bank began to offer a home equity
line product that is designed to be offered in conjunction with the first
mortgage loan. The Bank is attempting to leverage off of the relatively large
number of first mortgages it is originating by offering a second, relationship-
oriented product in tandem with the first mortgage origination. The home equity
product is tied to the prime rate allowing for a higher earning portfolio asset
and better interest rate risk management.
The Bank has taken steps to improve its interest earning yield by implementing a
plan to lower costs from renewing certificates of deposits and evaluating the
pricing relationships of all depository products from a
-4-
<PAGE>
return on equity basis. The Bank's strategy includes the use of an MCIF (master
customer information file) and a president's club program to carefully evaluate
customer activities with the objective of both optimizing customer relationships
and minimizing customer withdrawals.
The Bank has upgraded its retail delivery infrastructure to make it is easier
for customers to do business with the Bank as well as attract new customers to
the Bank. These steps include the addition of ATMs in the past year, a voice
response unit (telephone banking), and relocating the North County Branch to a
new location with drive up lanes.
Management conducted an efficiency review process in the third and fourth
quarters. As a result of the process, a computerized staffing model will be
used in the retail branches, many procedures were streamlined, and the number of
full-time equivalent employees was reduced. The Bank elected to close a branch
office with a very small deposit base in South County to improve operational
efficiencies. A fifth branch office will open in St. Charles County, a high
growth potential market, in the first quarter of 2000. The general objective is
to run the Bank as efficiently as possible by using newer technologies, without
making significant customer service concessions.
Employee Stock Ownership Plan
Effective January 1, 1998 the Bank established a tax-deferred stock bonus plan
best known as an Employee Stock Ownership Plan (ESOP) for all eligible
employees. The primary purpose of the Plan is to invest in employer securities
with all contributions being made by the Bank to eligible participants in shares
of company stock as of December 31 of each year. The ESOP plan will enable
eligible participants to share in the growth and prosperity of Pulaski Bank
while at the same time providing the participants an opportunity to accumulate
capital for their future security of retirement, disability and/or death
benefits. The Plan contributions totaling 232,760 shares of Company stock, will
be allocated in shares on an annual basis to each participant in an amount that
is equivalent to the ratio of each participant's salary to that of the total
payroll as of December 31. The contributions will be allocated annually over a
15-year term as of December 31 of each year. Contributions may be made by
Pulaski Bank at its discretion over the term of the Plan and may at any time be
accelerated. The second allocation to the Plan will be made in the fourth
calendar quarter 1999.
Financial Condition
Total assets at September 30, 1999 were $244.0 million, an increase of $50.8
million or 26% from $193.2 million at September 30, 1998. The increase in total
assets is primarily attributable to increases in cash and cash equivalents,
mortgage-backed securities, and loans receivable, offset by decreases in
investment securities and loans receivable held for sale.
Loans receivable (excluding loans held for sale) increased $39.7 million, or 28%
from $141.8 at September 30, 1998 to $181.5 million at September 30, 1999. The
increase is largely due to a greater volume of consumer loans (primarily auto)
made as a result of an effort to diversify the Bank's asset mix, increase
portfolio yield, and to utilize proceeds from the conversion to a stock holding
company. The balance of consumer loans grew from $14.1 million at September 30,
1998 to $33.1 million at September 30, 1999, or 134%. The Bank has recently
chosen to discontinue origination of indirect auto loans, and to focus marketing
efforts on prime rate-based home equity line of credit, as well as 1 to 4 family
mortgage loans. Home equity loans were chosen because they provide greater
yields and create an additional long-term relationship with a customer.
-5-
<PAGE>
Cash and cash equivalents increased $5.8 million primarily as a result of
proceeds received from the stock offering, which was completed on December 2,
1998. Balances are maintained in overnight investments to meet the needs for
loan funding, stock repurchases, and provide for withdrawals from deposits.
Mortgage-backed securities increased $18.4 million, or 267% from $6.9 million at
September 30, 1998 to $25.3 million at September 30, 1999. The increase was
due, primarily to implementation of a $20 million leverage strategy utilizing
laddered maturity borrowings from the Federal Home Loan Bank to fund investment
in mortgage-backed securities with similar durations.
The increase in assets was offset by net maturities and redemptions of $7.9
million of investment securities, and a reduction of $5.3 million in the
outstanding balance of Loans Held for Sale, from $13.4 million at September 30,
1998 to $8.1 million at September 30, 1999.
Total liabilities at September 30, 1999 were $194.1 million, an increase of
$26.1 million, or 15% from the $168.0 million at September 30, 1998. The
increase in total liabilities is primarily attributable to the increase in
borrowings from the Federal Home Loan Bank of Des Moines. Borrowings increased
from $1.9 million at September 30, 1998 to $28.6 million at September 30, 1999
and were used to purchase mortgage-backed securities, and to fund loan
originations.
Deposits increased $5.1 million, or 3% from $156.2 million at September 30, 1998
to $161.4 million at September 30, 1999. Most of the growth in deposits is
attributable to checking and money market accounts, which grew $3.3 million and
$2.9 million, respectively. The Bank continues to market its "High Performance
Checking Account" program (begun in January 1998), which involves frequent
direct mailings and television advertisement with gifts for new checking
accounts. The goals of the promotion are (i) to increase the percentage of
transaction accounts to total deposits, thereby decreasing the Bank's cost of
funds, (ii) to increase fee income through insufficient funds charges, service
charges, and fees levied on checking accounts and (iii) to add new customer
relationships to the Bank. The number of checking and money market accounts
increased 2,800 or 50% over September 30, 1998. Currently, the Bank has no
plans to discontinue this program. The Company also believes that it has
benefited from the mergers and consolidations in the St. Louis market.
Customers have left larger banks to come to smaller, more personal, service-
oriented financial institutions. For the year ended September 30, 1999 savings
accounts decreased slightly by $50,000, and certificate balances declined $1.1
million.
These increases in liabilities were partially offset by a refund of $5.1 million
in stock oversubscriptions related to the stock offering completed in December
1998.
Total stockholders' equity at September 30, 1999 was $49.9 million, an increase
of $24.7 million over $25.2 million at September 30, 1998. The large increase
is due primarily to the addition of net proceeds of $26.0 million from the
conversion and stock offering completed December 2, 1998, net income of $2.1
million, less dividends of $1.3 million, and completion of a 5% stock
repurchase for $2.3 million.
The Company has received regulatory approval to repurchase in the open market up
to 15% of its outstanding shares of common stock or up to 594,885 shares. A
repurchase of 5%, or 198,000 shares, of outstanding shares was completed on
August 3, 1999 at an average price of $11.73 per share. An additional 5%
repurchase under this approval authority was initiated October 27, 1999 and was
completed on November 29, 1999. A total of 198,295 shares were repurchased at
an average price of $11.01 per share.
Non-Performing Assets and Delinquencies
Loans accounted for on a non-accrual basis amounted to $258,000 at September 30,
1999 as compared to $753,000 at September 30, 1998. The non-accrual loans
consist primarily of single-family residential loans.
-6-
<PAGE>
Accruing loans that were contractually past due 90 days or more at September 30,
1999 amounted to $1.1 million of which $363,000 were FHA/VA government-insured
loans. The allowance for loan losses was $986,000 at September 30, 1999, or
.52% of total loans. Real estate acquired in settlement of loans, net of
allowance for losses, increased from $106,000 at September 30, 1998 to $228,000
at September 30, 1999, and consisted of 1-4 family residences.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998:
General
Net income for the year ended September 30, 1999 was $2.1 million compared to
$1.8 million for the year ended September 30, 1998. The increase of $288,000 is
attributable to higher interest income, higher non-interest income, offset by
higher non-interest expense, and taxes. Interest income increased as a result
of investment of net proceeds from conversion to a full stock company. Non-
interest income increased as a result of higher service fees, and certain gains
on sales. Non-interest expenses increased due to higher compensation, occupancy
and equipment expenses, professional services, advertising, and other operating
expenses.
Interest Income
Interest income increased $1.7 million, from $13.6 million for fiscal 1998 to
$15.3 for fiscal 1999. The increase resulted primarily from an increase in
interest on loans of $1.3 million, as well as an increase of $414,000 in
interest on mortgage-backed securities, offset by a decrease in interest on
overnight funds of $115,000.
The increase in interest income on consumer loans resulted from an increase in
the average balance of consumer loans outstanding from $7.9 million for the
twelve months ended September 30, 1998 to $27.2 million for the September 30,
1999 fiscal year, offset by a decrease in the average yield on these loans from
8.39% in 1998 to 7.34% for 1999. The lower average yield on consumer loans is
the result, primarily of a lower yield curve in early 1999 combined with
competitive, aggressive pricing by the Bank to grow the consumer loan portfolio.
Interest income on mortgage loans decreased $45,000 for the year ended September
30, 1999. The average balance of mortgage loans increased from $135.8 million
for fiscal 1998 to $144.8 million for fiscal 1999, but was offset by a decrease
in the average yield from 7.99% to 7.46%. The lower average yield on mortgage
loans is the result of mortgage loan refinancing payoffs, prepayments of higher-
rate loans, lower rate repricings on adjustable rate loans, and the origination
of lower-rate loans for the portfolio to replace loans paid off or refinanced.
Interest income on mortgage-backed securities increased as a result of the $20
million investment made in these types of securities during the June 30, 1999
quarter. The average balance of mortgage-backed securities increased from $6.2
million for the year ended September 30, 1998 to $12.7 million for the year
ended September 30, 1999. The average yield declined from 8.17% in fiscal 1998
to 7.26% in fiscal 1999, and reflects amortization and prepayment of older
higher-rate securities, and the addition of the $20 million in new securities at
current, but lower rates.
The increase in interest income in investment securities, of $72,000, resulted
primarily from an increase in the average balance from $15.2 million in 1998 to
$17.5 million in 1999, but was offset by a decrease in the
-7-
<PAGE>
average yield from 5.79% for the year ended September 30, 1998 to 5.46% for the
year ended September 30, 1999. The reduced yield reflects the lower rate
environment at the time of purchase.
Interest income from investment in overnight funds decreased $115,000 as a
result of lower average rates. The average balance for the September 30, 1998
year was $12.6 million, and the average balance for the year ended September 30,
1999 was $12.1 million. The average yield declined from 5.47% to 4.75% over the
same period. The decline in average balance is the result of re-investment of
overnight funds into higher earning assets, primarily loans. The reduced
average yield is the result of lower short-term rates in effect in the earlier
months of the fiscal year.
Interest Expense
Interest expense increased $181,000, from $7.1 million in fiscal 1998 to $7.3
million for fiscal 1999. The increase is due primarily to higher interest
expense on borrowings from the Federal Home Loan Bank of Des Moines, offset by
decreased interest on deposits.
The average balance of deposits increased from $152.4 million for the September
30, 1998 year, to $157.5 million for the September 30, 1999 year. Deposit gains
were in checking accounts and money-market accounts, and are the result of the
continuation of the "High Performance Checking Account" program. The Bank also
believes that it has benefited from an influx of new depositors as a result of
the consolidation of financial institutions in the St. Louis market. The
weighted average cost decreased from 4.60% to 4.26% over the same period.
Management has adopted a pricing strategy to reduce the overall cost of funds,
and began implementing the strategy in the March 31, 1999 quarter. The average
balance of FHLB advances increased from $2.0 million for the year ended
September 30, 1998 to $10.6 million for the year ended September 30, 1999. The
increase in average balance was attributable to the use of advances to fund
purchases of mortgage-backed securities, and to fund loan originations. The
average rate decreased from 6.34% to 5.86% over the twelve-month period ended
September 30, 1999.
Provision for Loan Losses
The provision for loan losses increased $56,000, from $209,000 for fiscal 1998
to $265,000 in fiscal 1999. Management deemed it necessary to increase the
provision for loan losses after considering the increase in the higher risk
consumer loan portfolio. The provision for loan losses is determined by
management as the amount to be added to the allowance for loan losses after net
charge-offs have been deducted to bring the allowance to a level which is
considered adequate to absorb losses inherent in the loan portfolio. Because
management believes it adheres to specific loan underwriting guidelines focusing
on mortgage loans secured by one-to-four-family residences, the Bank's
historical loan loss experience has been low. No assurances, however, can be
given as to future loan loss levels. Consumer loans are generally considered to
carry a greater inherent risk of loss than residential mortgage loans.
Accordingly, the Bank may experience higher delinquency or loss levels in future
periods as a result of the significant growth in the consumer loan portfolio.
Other Income
Other income increased $622,000, or 37%, from $1.7 million for the year ended
September 30, 1998 to $2.3 million for the year ended September 30, 1999. The
increase in other income is primarily the result of increased service charges on
deposits, which increased 215% from $169,000 in fiscal 1998 to $531,000 for the
fiscal year ended September 30, 1999. This revenue growth is a result of the
greater volume of checking accounts generated by the Bank's "High Performance
Checking Account" program.
-8-
<PAGE>
Gains on the sale of loans for the year decreased $18,000 from $851,000 in 1998
to $833,000 in 1999. The volume of loan sales for fiscal 1999 were up
approximately 9%, but the profit margin declined over the pricing received in
fiscal 1998.
Insurance commissions earned by the Bank's subsidiary increased slightly from
$255,000 for the year ended September 30, 1998, to $283,000 for the year ended
September 30, 1999. During the fiscal year ended September 30, 1999, the
Company elected to sell the book of business relating to sales of property and
casualty insurance and concentrate on sales of annuities and long-term care
insurance. The higher amount of commission is due primarily to increased sales
of annuities.
Other income increased $249,000 primarily as a result of recording $294,000 of
gains on the sales of the property and casualty insurance operations, and gains
on the sale of mortgage servicing rights. The Bank decided to sell servicing
rights on a portfolio of $29.8 million, and at September 30, 1999 the Bank's
remaining servicing portfolio amounted to $864,000.
Other Expenses
Other expenses increased from $5.1 million to $6.6 million. The increase was
primarily due to increases in compensation expense of $396,000, increased other
expense of $383,000, increased occupancy, equipment and data processing expense
of $329,000, increased professional fees of $248,000 and increased marketing
expenses of $136,000.
Compensation expense increased from $2.8 million for the year ended September
30, 1998 to $3.2 million for the year ended September 30, 1999. The increase
was the result of additional staffing for mortgage and consumer lending, salary
increases, incentive payments as a result of implementation of a "pay for
performance" based compensation system, higher health insurance premiums, higher
corporate liability insurance premiums, and the additional expenses associated
with an employee stock ownership plan. Salaries of senior management were
frozen for both calendar 1998 and 1999.
Occupancy, equipment and data processing expense increased from $1.1 million for
the year ended September 30, 1998 to $1.5 million for the year ended September
30, 1999, primarily as a result of increased depreciation and operational
expense associated with the purchase and installation of 5 ATMs.
Professional services increased from $241,000 for fiscal 1998 to $489,000 for
fiscal 1999. The increase is the result of higher professional fees and use of
consultants for improved business practices. The Bank expects to benefit from
recommendations received regarding improved business practices in fiscal 2000.
Advertising expenses increased $135,000, from $300,000 for the year ended
September 30, 1998 to $435,000 for the year ended September 30, 1999. The
increase is due to increased use of cable television advertising in addition to
direct mail promotion costs incurred as a result of the Bank's efforts to
increase checking account deposits, and marketing costs related to the re-
location of the North County Branch to Jamestown Mall in Florissant, Missouri.
Other miscellaneous expenses increased from $502,000 in fiscal 1998 to $884,000
in fiscal 1999. The increase was primarily due to increased postage, telephone
and other expenses of $206,000, loan operational costs of $90,000, and franchise
taxes of $82,000.
-9-
<PAGE>
Income Taxes
The provision for income taxes increased $262,000 from $989,000 for the year
ended September 30, 1998 to $1.3 million for the year ended September 30, 1999.
The increase is primarily attributable to increased levels of taxable income.
The effective tax rate increased from 34.9% to 37.0% resulting principally from
state taxes.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997:
General
Net income for the year ended September 30, 1998 was $1.8 million compared to
$1.9 million for the year ended September 30, 1997. The decrease of $78,000 is
attributable to higher non-interest expense, partially offset by gains on sale
of loans. Advertising expense increased from $57,000 for the year ended
September 30, 1997 to $300,000 for the year ended September 30, 1998.
Compensation expense increased $259,000 over the same period. These expense
increases were partially offset by an increase in gain on sale of loans of
$443,000 over the prior year.
Interest Income
Interest income increased $219,000 from $13.4 million in 1997 to $13.6 million
in 1998. The increase is due primarily to an increase in interest on loans of
$163,000, and interest on overnight investments increased $219,000. Offsetting
these increases was a decrease of $101,000 on income from investments and a
decrease of $63,000 in income from mortgage-backed securities.
The increase in interest from overnight investments resulted from an increase in
the average balance from $8.9 million in 1997 to $12.6 million in 1998. The
weighted average rate increased from 5.32% to 5.47% over the same period of
time. Excess cash flows were invested in overnight deposits during the year,
but by the end of the year, all overnight funds had been deployed into loans.
The increase in the interest on loans resulted from an increase in the average
balance of loans, from $140.8 million in 1997 to $143.8 million in 1998. The
weighted average rate decreased from 8.07% in 1997 to 8.01% in 1998.
The decrease in interest income from investment securities is a result of the
decline in the average balance from $16.9 million for the year ended September
30, 1997 to $15.2 million for the year ended September 30, 1998. The average
yield decreased slightly from 5.82% to 5.79% over the same period of time.
Proceeds from maturing securities were used to fund loan growth.
The decrease in interest income on mortgage-backed and related securities
resulted primarily from a decrease in the average balance from $6.9 million in
1997 to $6.2 million in 1998. The average rate changed from 8.30% in 1997 to
8.17% in 1998. During the year, higher rate mortgage-backed securities
experienced greater prepayments. Purchases of mortgage-backed securities were
$1.5 million for the fiscal year ended September 30, 1998.
-10-
<PAGE>
Interest Expense
Interest expense increased $157,000, from $7.0 million in 1997 to $7.1 million
in 1998. The increase resulted primarily from increased interest on interest-
bearing deposits of $187,000, offset by reduced expense on borrowings from the
FHLB of Des Moines of $30,000.
The increase in interest expense on deposits was the result of an increase of
the average balance of deposits, from $148.0 million in 1997 to $152.4 million
in 1998. The increase in deposits is the result of the implementation of the
"High Performance Checking Account" program which involves frequent direct
mailings and gifts for new accounts. The Company also believes it has benefited
from an influx of new depositors as a result of the consolidation of financial
institutions in the St. Louis market. The average yield decreased slightly from
4.61% at September 30, 1997 to 4.60% at September 30, 1998.
The decrease in interest on FHLB of Des Moines advances of $30,000 is the result
of the scheduled repayments.
Provision for Loan Losses
The provision for loan losses is determined by management as the amount to be
added to the allowance for loan losses after net chargeoffs have been deducted
to bring the allowance to a level which is considered adequate to absorb losses
inherent in the loan portfolio. Because the Company's loan portfolio is
composed primarily of owner-occupied 1 to 4 family residences, the Company has
experienced very low loan losses. No assurances, however, can be given as to
future loan loss levels.
The provision for loan losses increased $40,000, from $169,000 in 1997 to
$209,000 in 1998. The increase is attributed primarily to higher volume of
consumer loans, which are inherently subject to higher risk of default, as well
as the increase in non-performing assets. Management believes that credit risk
is being adequately mitigated by more stringent collection efforts and
additional monitoring activities. Management believes that the current level of
allowance for loan losses is adequate to absorb estimated losses inherent in the
loan portfolio.
Other Income
Other income increased $679,000, from $1.0 million in 1997 to $1.7 million in
1998. The increase is due primarily to an increase in the gains on sales of
loans, which were $408,000 in 1997, and $851,000 in 1998. Sales of loans for
the fiscal year ended September 30, 1998 were approximately 116% above the
previous year.
Service charges on deposits increased $93,000 over the fiscal year ended
September 30, 1997 as a result of the growth in checking accounts.
Insurance commissions have increased from $130,000 for the year ended September
30, 1997 to $255,000 for the year ended September 30, 1998 primarily as a result
of increased sales of annuities.
Other Expenses
Other expenses increased from $4.3 million to $5.1 million. The increase was
primarily due to increases in advertising expenses of $243,000, compensation
expense of $259,000, professional services of $118,000, occupancy, equipment and
data processing expenses of $176,000, and miscellaneous expenses of $62,000.
-11-
<PAGE>
Advertising expense for the year ended September 30, 1998 was $300,000, an
increase of $243,000 from $57,000 for the year ended September 30, 1997.
Advertising expense consisted of $20,000 of expense related to the celebration
of the Bank's 75th anniversary, and $208,000 associated with the commencement of
the high performance checking account program.
Compensation expense increased from $2.6 million for the year ended September
30, 1997 to $2.8 million for the year ended September 30, 1998. Fringe benefit
costs relating to the Company's payroll increased approximately $62,000 during
the year. Increased incentive programs and commissions were up $62,000 and
salary increases and additional staffing costs accounted for approximately
$80,000.
Occupancy, equipment and data processing expense increased from $956,000 for the
fiscal year 1997 to $1.1 million for the fiscal year 1998. Included in this
increase is approximately $52,000 of expense related to year 2000 compliance.
Professional services increased from $123,000 for the year ended September 30,
1997 to $241,000 for the year ended September 30, 1998. The increase is
attributable to certain consultative services provided to Company management,
including fees related to the "High Performance Checking Account" program.
Other consulting services include fees for re-engineering the Company's
compensation plan to a performance-based system as well as fees for development
of strategic business and management development programs.
Other miscellaneous expenses increased from $440,000 for the year ended
September 30, 1997 to $502,000 for the year ended September 30, 1998. The
increase was primarily due to stationary and supplies, postage and miscellaneous
costs.
Income Taxes
The provision for income taxes in 1998 decreased $35,000 as the result of less
taxable income. The effective tax rate remained consistent.
Market Risk Analysis
Quantitative Aspects of Market Risk - The Company does not maintain a trading
account for any class of financial instrument nor does the Company engage in
hedging activities or purchase high-risk derivative instruments. Furthermore,
the Company is not subject to foreign currency exchange rate risk or commodity
price risk.
-12-
<PAGE>
The following table presents the Company's financial instruments that are
sensitive to changes in interest rates, categorized by expected maturity, and
the instruments' fair values at September 30, 1999. Expected maturities use
certain assumptions based on historical experience and other data available to
management.
<TABLE>
<CAPTION>
One Year After Three After Five Carrying
Average Within One to Years to Five Years to Beyond Value Fair
Interest Sensitive Assets Rate Year Three Years Years Ten Years Ten Years Total Value
-----------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable - net (2) 7.51% $ 46,422 $21,559 $61,494 $27,338 $24,462 $181,275 $179,783
Loans held for sale - net 7.53% 8,159 8,159 8,256
Mortgage backed securities - HTM 8.37% 1,029 2 25 212 2,729 3,997 4,155
Mortgage backed securities - AFS 6.86% 1,248 20,108 21,356 21,356
Investments - HTM 5.25% 7,211 299 1,500 9,010 9,002
Investments - AFS 5.37% 2,746 750 738 4,234 4,234
Federal funds/overnight deposits 5.11% 5,400 5,400 5,400
-------- ------- ------- ------- ------- -------- --------
Total interest sensitive assets $ 70,967 $22,610 $63,757 $28,798 $47,299 $233,431 $232,186
======== ======= ======= ======= ======= ======== ========
Interest Sensitive Liabilities
Checking accounts and money market (3) 2.49% $ 29,266 $ - $ - $ - $ - $ 29,266 $ 29,246
Savings accounts 1.86% 25,619 25,619 25,619
Certificate accounts 4.97% 73,699 22,598 7,341 127 103,765 102,809
Borrowings 5.74% 10,300 7,800 10,500 28,600 28,158
-------- ------- ------- ------- ------- -------- --------
Total interest sensitive liabilities $138,884 $30,398 $17,841 $ 127 $ - $187,250 $185,832
======== ======= ======= ======= ======= ======== ========
Off Balance Sheet Items
Commitments to extend credit (1) 7.71% $ 8,933
Unused lines of credit - home equity 3,840
</TABLE>
(1) Includes commitments to sell loans of $6.3 million.
(2) Excludes non-accrual loans of $258,000.
(3) Excludes noninterest checking accounts of $2.7 million.
-13-
<PAGE>
Qualitative Aspects of Market Risk - The Company's principal financial objective
is to achieve long-term profitability while reducing its exposure to fluctuating
market interest rates. The Company has sought to reduce the exposure of its
earnings to changes in market interest rates by attempting to manage the
mismatch between asset and liability maturities and interest rates. In order to
reduce the exposure to interest rate fluctuations, the Company has developed
strategies to manage its liquidity, shorten its effective maturities of certain
interest-earning assets and increase the interest rate sensitivity of its asset
base. Management has sought to decrease the average maturity of its assets by
emphasizing the origination of adjustable-rate residential mortgage loans
("ARM") and consumer loans. In addition, the majority of long-term, fixed-rate
single-family residential mortgage loans are underwritten according to the
guidelines of Fannie Mae and Freddie Mac and usually sold for cash in the
secondary market. The retention of ARM loans, which reprice at regular
intervals (three to five years), helps to ensure that the yield on the Company's
loan portfolio will be sufficient to offset increases in the Company's cost of
funds. However, periodic and lifetime interest rate adjustment limits may
prevent ARM loans from repricing to market interest rates during periods of
rapidly rising interest rates. The Company does not use any hedging techniques
to manage the exposure of its assets to fluctuating market interest rates. The
Company relies on retail deposits and Federal Home Loan Bank borrowings as its
primary source of funds. Management believes retail deposits, compared to
brokered deposits, reduce the effects of interest rate fluctuations because they
generally represent a more stable source of funds.
The Company uses interest rate sensitivity analysis to measure its interest rate
risk by computing changes in NPV (net portfolio value) of its cash flows from
assets, liabilities and off-balance sheet items in the event of a range of
assumed changes in market interest rates. NPV represents the market value of
portfolio equity and is equal to the market value of assets minus the market
value of liabilities, with adjustments made for off-balance sheet items. This
analysis assesses the risk of loss in market risk sensitive instruments in the
event of a sudden and sustained 100 to 300 basis point increase or decrease in
market interest rates with no effect given to any steps that management might
take to counter the effect of that interest rate movement (see table below).
Using data compiled by the OTS, the Company receives a report which measures
interest rate risk by modeling the change in NPV (net portfolio value) over a
variety of interest rate scenarios. This procedure for measuring interest rate
risk was developed by the OTS to replace the "gap" analysis (the difference
between interest-earning assets and interest-bearing liabilities that mature or
reprice within a specific time period).
<TABLE>
<CAPTION>
Estimated Change
in Net Portfolio Value
Change in Interest Rates (in thousands)
<S> <C>
300 basis point rise (9,531)
200 basis point rise (5,871)
100 basis point rise (2,589)
Base scenario -
100 basis point decline 1,566
200 basis point decline 2,546
300 basis point decline 3,507
</TABLE>
The preceding table indicates that at September 30, 1999, in the event of a
sudden and sustained increase in prevailing market interest rates, the Company's
NPV would be expected to decrease, and in the event of a sudden and sustained
decrease in prevailing market interest rates, the Company's NPV would be
expected to increase.
Certain assumptions utilized by the OTS in assessing the interest rate risk of
savings associations within its region were utilized in preparing the preceding
table. These assumptions relate to interest rates, loan prepayment rates,
deposit decay rates, and the market values of certain assets under differing
interest rate scenarios, among others.
-14-
<PAGE>
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as ARM loans, have features which restrict
changes in interest rates on a short-term basis and over the life of the asset.
Further, in the event of a change in interest rates, expected rates of
prepayments on loans and early withdrawals from certificates could deviate
significantly from those assumed in calculating the table.
Liquidity and Capital Resources
The Company's principal sources of funds are proceeds from maturities of
investment securities, principal payments received on mortgage-backed and
related securities, loan repayments, deposits and FHLB borrowings.
The primary investing activities of the Company are originating and purchasing
loans, purchasing investments, mortgage-backed and related securities. Proceeds
from maturities of investment securities and principal payments received on
mortgage-backed and related securities provided $19.3 million of liquidity for
the year ended September 30, 1999. These sources of cash were offset by net loan
originations of $40.7 million and purchasing of investment securities of $30.2
million.
Typically, the Company's most significant financing activities are deposits
accounts, FHLB of Des Moines borrowings, taxes and insurance on behalf of
borrowers, and the payment of dividends. The issuance of common stock under the
conversion/reorganization provided $24.6 million of cash and net borrowings of
FHLB of Des Moines advances provided $26.7 million of funds. Additionally, net
deposits increased by $7.1 million. Payments to acquire treasury stock of $2.3
million and dividend payments totaling $1.3 million were the primary uses of
cash during 1999.
On December 2, 1998, the Conversion and Reorganization was completed. The net
proceeds raised by the Company provided a larger capital base and enabled it to
pursue lending and investment opportunities, as well as opportunities for growth
and expansion.
Federal regulations require the Bank to maintain minimum levels of liquid assets
(i.e., cash and eligible investments). The required percentage has varied from
time to time based upon economic conditions and savings flows and is currently
4% of the average daily balance of its net withdrawable savings deposits and
short-term borrowings. The Bank attempts to maintain levels of liquidity at
levels in excess of those required by regulation. Maintaining levels of
liquidity acts, in part, to reduce the Company's balance sheet exposure to
interest rate risk. At September 30, 1999, the Bank's liquidity ratio (liquid
assets as a percentage of net withdrawable savings deposit and short-term
borrowings) was 21.9%.
The Company must also maintain adequate levels of liquidity to ensure the
availability of funds to satisfy loan commitments and deposit withdrawals. At
September 30, 1999, the Bank had outstanding commitments to originate loans of
$8.9 million, to sell loans of $14.5 million and to fulfill commitments under
unused home equity lines of credit of $3.8 million. At the same time,
certificates of deposit which are scheduled to mature in one year or less
totaled $73.7 million. Based upon historical experience, management believes the
majority of maturing certificates of deposit will remain with the Company.
If the Company requires funds beyond its ability to generate them internally, it
has the ability to borrow funds from the FHLB of Des Moines under a blanket
agreement which assigns all investments in FHLB Stock as well as qualifying
first mortgage loans equal to 150% of the outstanding advances as collateral to
secure the amounts borrowed. At September 30, 1999 the Company had approximately
$62.4 million available to it
-15-
<PAGE>
under the above-mentioned borrowing arrangement. At September 30, 1999, the
Company had $28.6 million in advances from the FHLB of Des Moines.
The Company's ability to pay dividends depends primarily on the Bank's ability
to pay dividends to the Company. Under federal regulations the Bank cannot pay
cash dividends in excess of the higher of (i) net income to date during the
calendar year plus one-half of surplus capital over regulatory capital or
amounts which would result in the Bank not maintaining adequate capital
requirements imposed by the OTS or (ii) 75% of net income over the most recent
four quarter period. In addition, the Bank cannot pay dividends if the effect of
the payment would be to reduce the Bank's capital below the balance of the
liquidation account controlled by the Bank for the benefit of its eligible
depositors in connection with the Conversion and Reorganization.
The Company is not subject to any separate regulatory capital requirements. The
Bank is required to maintain specific minimum amounts of capital pursuant to OTS
regulations. The OTS minimum capital standards generally require the maintenance
of regulatory capital sufficient to meet each of three tests, hereinafter
described as the tangible capital requirement, the core capital requirement and
risked-based requirement. The tangible capital requirement provides for minimum
tangible capital (defined as stockholders' equity less all intangible assets)
equal to 1.5% of adjusted total assets. The core capital requirement provides
for minimum core capital (tangible capital plus certain forms of supervisory
goodwill and other qualifying intangible assets) equal to 3.0% of adjusted
assets.
The risk-based capital requirements provides for the maintenance of core capital
plus a portion of unallocated loss allowances equal to 8.0% of risk-weighted
assets. In computing risk-weighing assets the Bank multiplies the value of each
asset on its balance sheet by a defined risk-weighing factor (e.g., one- to
four-family conventional residential loans carry a risk-weighted factor of 50%).
At September 30, 1999, the Bank's tangible capital totaled $39.6 million, or
16.9% of adjusted total assets, which exceeded the minimum 1.5% requirement by
$36.1 million, or 15.4%. The Bank's core capital at September 30, 1999 totaled
$39.6 million or 16.9% of adjusted total assets, which was approximately $32.6
million, or 13.9% above the minimum requirement of 3.0%. The Bank's risk-based
capital at that date totaled $40.6 million, or 29.1% of risk-weighted assets,
which is $29.4 million, or 21.1% above the 8.0% fully phased-in requirement.
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with GAAP, which require the measurement
of financial position and operating results in terms of historical dollars,
without considering the change in the relative purchasing power of money over
time due to inflation. The impact of inflation is reflected in the increased
cost of the Company's operations. Unlike most industrial companies, virtually
all the assets and liabilities of a financial institution are monetary in
nature. As a result, interest rates generally have a more significant impact on
a financial institution's performance than do general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services.
Year 2000
The Company is a user of computers, computer software and equipment utilizing
embedded microprocessors that will be affected by the year 2000 issue. The year
2000 issue exists because many computer systems and applications use two-digit
date fields to designate a year. As the century date change occurs, date-
sensitive systems may recognize the year 2000 as 1900, or not at all. This
inability to recognize or properly treat the
-16-
<PAGE>
year 2000 may cause erroneous results, ranging from system malfunctions to
incorrect or incomplete processing.
The Company established a year 2000 committee in 1997 headed by the Senior Vice
President. Other members are President, Executive Vice President, and an outside
Board member. The committee provides periodic reports to the Board of Directors
in order to assist the directors in their year 2000 readiness oversight role.
The plan is comprised of the following phases:
1. Awareness - Educational initiatives on year 2000 issues and concerns. This
phase is ongoing, especially as it relates to informing customers of the
Company's year 2000 preparedness.
2. Assessment - Inventory of all technology assets and identification of
third-party vendors and service providers. This phase has been completed.
3. Renovation - Review of vendor and service providers responses to the
Company's year 2000 inquiries and development of a follow-up plan and time
line. This phase has been completed.
4. Validation - Testing all systems and third-party vendors for year 2000
compliance. This phase has been completed. A third-party service bureau
processes all customer transactions and has completed upgrades to its
systems to be year 2000 compliant.
The Company's third-party service bureau provided access to their system on
November 8, 1998 for the Company to test its upgraded hardware and Local
Area Network, and to test all applications the service bureau provides to
the Company. The testing of equipment and Local Area Network indicated no
problems and the Company was able to roll the date on the file server and
sign on the Host System that was dated January 3, 2000.
The Company processed transactions for all applications, Savings,
Certificates of Deposit, Mortgage Loans, Consumer Loans, Individual
Retirement Accounts, etc. The General Ledger system was also tested and the
Company received a file containing all transactions that were processed
during the test. This file was entered into the General Ledger system and
all accounts were properly updated.
The Company's item processor conducted a test with their service bureau.
The Company has also participated in Proxy Testing with their ATM
Processor. This test was completed and the results were satisfactory. Other
third-party vendors have indicated their compliance. Where it is possible,
the Company plans to test third-party vendors for compliance. Where testing
is not possible, the Company will rely on certifications from vendors. In
the event that testing reveals that the third-party systems are not year
2000 compliant, the Company's service bureau intends to either transfer the
Company to other systems that are year 2000 compliant or provide additional
resources to resolve the year 2000 issues. The Company's ATM processor has
conducted tests with the various ATM switches. They have had successful
test results.
5. Implementation - Replacement or repair of non-compliant technology. As the
Company progresses through the validation phase, the Company expects to
determine necessary remedial actions and provide for their implementation.
The Company has already implemented a new year 2000 compliant computerized
teller system and has verified the year 2000 compliance of its computer
hardware and other equipment containing embedded microprocessors.
Currently, the Company's total cost to replace computer equipment, software
programs and other equipment containing embedded microprocessors that were not
year 2000 compliant is approximately $100,000. For the year ended September 30,
1998, approximately, $58,000 of this amount was incurred. As of September 30,
1999 an additional $37,600 was expensed. System maintenance or modification
costs are being expensed as
-17-
<PAGE>
incurred, including the cost of new hardware, software or other equipment. The
Company does not separately track the internal costs and time that its own
employees spend on year 2000 issues. Such costs are principally payroll costs.
Because the Company is substantially dependent on its computer systems and the
computer systems of third parties, the failure of these systems to be year 2000
compliant could cause substantial disruption of the Company's business and could
have a material adverse financial impact on the Company. Failure to resolve year
2000 issues presents the following risks to the Company: (1) the Company could
lose customers to other financial institutions, resulting in a loss of revenue,
if the Company's third-party service bureau is unable to properly process
customer transactions; (2) governmental agencies, such as the Federal Home Loan
Bank, and correspondent banks could fail to provide funds to the Company, which
could materially impair the Company's liquidity and affect the Company's ability
to fund loans and deposit withdrawals; (3) concern on the part of depositors
that year 2000 issues could impair access to their deposit account balances
could result in the Company experiencing deposit outflows prior to December 31,
1999; and (4) the Company could incur increased personnel costs if additional
staff is required to perform functions that inoperative systems would have
otherwise performed. Management believes that it is not possible to estimate the
potential lost revenue due to the year 2000 issue, as the extent and longevity
of any potential problem cannot be predicted. Because substantially all of the
Company's loan portfolio consists of residential mortgage and consumer loans,
management believes that year 2000 issues will not impair the ability of the
Company's borrowers to repay their debt. The Bank does not have any commercial
loans, other than commercial real estate loans, which represent an insignificant
percentage of outstanding loans.
There can be no assurance that the Company's year 2000 plan will effectively
address the year 2000 issue, that the Company's estimates of the timing and
costs of completing the plan will ultimately be accurate or that the impact of
any failure of the Company or its third-party vendors and service providers to
be year 2000 compliant will not have a material adverse affect on the Company's
business, financial condition or results of operations.
The Bank has developed a contingency plan to mitigate the risks associated with
the failure of mission critical systems. The renovation of mission critical
items and testing of them has time lines that permit senior management to
monitor progress of the plan. In addition, the Bank's regulator OTS continues to
monitor our progress. Most recently they completed an exam in June 1999.
Management has developed a plan of action to ensure the Bank continues to
function capably in the event that the year 2000 date change does not transition
as planned for the Bank and its related systems and services.
Management has selected one office to act as the central site in the event they
do not have full electric power. Management has developed an action plan to
enable the processing of core business such as deposits and loan payments. This
plan calls for manual processing of transactions, and may require installation
of a generator.
In preparation for the possible implementation of the contingency plan, the
Company has gathered the necessary supplies and equipment that would be required
to process our core business.
The Company has, and will continue, to monitor all systems.
The Bank is in contact with its regulators and is presently completing a plan
for the "critical period" from December 31, 1999 through January 7, 2000.
-18-
<PAGE>
Yields Earned and Rates Paid
The following table sets forth for the three years ended September 30, 1999,
1998 and 1997 and at September 30, 1999 and 1998, the weighted average yields
earned on the Company's assets, the weighted average interest rates paid on the
Company's liabilities, together with the net yield on interest-earning assets.
<TABLE>
<CAPTION>
Years Ended September 30, September 30,
------------------------------------------ --------------------------
1999 1998 1997 1999 1998
<S> <C> <C> <C> <C> <C>
Weighted average yield on loans (2) 7.44% 8.01% 8.07% 7.52% 7.98%
Weighted average yield on investment securities 5.46% 5.79% 5.82% 5.29% 5.63%
Weighted average yield on mortgage-backed securities 7.26% 8.17% 8.30% 7.09% 7.72%
Weighted average yield on Federal funds sold and
overnight deposits 4.75% 5.47% 5.32% 5.11% -
Weighted average yield on all interest-earning assets 7.12% 7.64% 7.72% 7.20% 7.64%
Weighted average rate paid on savings deposits 4.26% 4.60% 4.61% 3.94% 4.54%
Weighted average rate paid on FHLB advances (1) 5.86% 6.34% 6.20% 5.74% 6.32%
Weighted average rate paid on all interest-bearing
liabilities (1) 4.36% 4.62% 4.64% 4.27% 4.61%
Interest rate spread (spread between weighted average
rate on all interest-earning assets and all
interest-bearing liabilities) (1) 2.76% 3.02% 3.08% 2.93% 3.03%
Net interest margin (net interest income as a
percentage of average interest-earning assets) (1) 3.70% 3.63% 3.69% N/A N/A
</TABLE>
(1) Data for 1998 does not include the stock subscription balance of $5.1
million. Accrued interest on these stock subscriptions is considered
immaterial.
(2) Includes loans held for sale of $8.2 million and $13.4 million,
respectively.
-19-
<PAGE>
Average Balance Sheet
The following table sets forth information regarding average balances of assets
and liabilities as well as the total dollar amounts of interest income from
average interest-earning assets and interest expense on average interest-bearing
liabilities, resultant yields, interest rate spread, net interest margin, and
ratio of average interest-earning assets to average interest-bearing liabilities
for the periods indicated. Average balances have been calculated using average
of month-end balances in 1997 and daily averages in 1998 and 1999.
<TABLE>
<CAPTION>
Years Ended Septemer 30,
----------------------------------------------------------------------------------
1999 1998 1997
-------------------------- ------------------------- ----------------------------
Interest Interest Interest
Average and Yield/ Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost Balance Dividends Cost
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Net loans (1) $171,990 $ 12,804 7.44% $143,795 $ 11,520 8.01% $140,827 $11,357 8.07%
Investment securities 17,482 955 5.46% 15,246 883 5.79% 16,882 983 5.82%
Mortgage-backed and related securities 12,696 922 7.26% 6,216 508 8.17% 6,876 571 8.30%
Federal funds sold and overnight deposits 12,132 576 4.75% 12,640 691 5.47% 8,868 472 5.32%
-------- -------- -------- -------- -------- -------
Total interest-earning assets 214,300 15,257 7.12% 177,897 13,602 7.64% 173,453 13,383 7.72%
Non-interest-earning assets 8,000 6,565 5,366
-------- -------- --------
Total assets $222,300 $184,462 $178,819
======== ======== ========
Interest-bearing liabilities:
Total deposits (2) (5) $157,467 $ 6,701 4.26% $152,451 7,011 4.60% $148,006 6,824 4.61%
FHLB advances 10,595 621 5.86% 2,049 130 6.34% 2,597 161 6.20%
-------- -------- -------- -------- -------- -------
Total interest-bearing liabilities 168,062 7,322 4.36% 154,500 7,141 4.62% 150,603 6,985 4.64%
-------- -------- -------
Non-interest bearing liabilities 7,049 5,335 5,003
Retained earnings 47,189 24,627 23,213
-------- -------- --------
Total liabilities and retained
earnings $222,300 $184,462 $178,819
======== ======== ========
Net interest income $ 7,935 $ 6,461 $ 6,398
======== ======== =======
Interest rate spread (3) 2.76% 3.02% 3.08%
Net interest margin (4) 3.70% 3.63% 3.69%
Ratio of average interest-earning assets to
average interest-bearing liabilities 127.51% 115.14% 115.17%
======== ======= =======
</TABLE>
________________________________________________
(1) Includes non-accrual loans with a average balance of $666,000, $477,000 and
$160,000 at September 30, 1999, 1998 and 1997, respectively.
(2) Includes non-interest-bearing deposits with an average balance of $2.6
million, $1.3 million and $759,000 during 1999, 1998 and 1997,
respectively.
(3) Yield on interest-earning assets less cost of interest-bearing liabilities.
(4) Net interest income divided by average interest-earning assets.
(5) Data for 1998 does not include the stock subscription balance of $5.1
million.
-20-
<PAGE>
Rate Volume Analysis
The following table sets forth the effects of changing rates and volumes on net
interest income for the periods indicated. Information is provided with respect
to (i) effects on interest income attributable to changes in volume (changes in
volume multiplied by prior rate); (ii) effects on interest income attributable
to changes in rate (changes in rate multiplied by prior volume); (iii) changes
in rate/volume (change in rate multiplied by change in volume); and (iv) the net
change (the sum of the prior columns).
<TABLE>
<CAPTION>
1999 Compared to 1998 1998 Compared to 1997 1997 Compared to 1996
Increase (Decrease) Due to Increase (Decrease) Due to Increase (Decrease) Due to
--------------------------------- ----------------------------- -----------------------------
Rate/ Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net Rate Volume Volume Net
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Total net loans $ (814) $2,259 $(161) $1,284 $(76) $239 $(1) $162 $296 $(409) $(11) $(124)
Investment securities (50) 129 (7) 72 (5) (95) 1 (99) 27 349 16 392
Mortgage-backed and related
securities (57) 530 (59) 414 (9) (55) 1 (63) 16 (117) (3) (104)
Federal funds sold and overnight
deposits (91) (28) 4 (115) 13 201 5 219 (5) 11 6
------- ------ ----- ------ ---- ---- --- ---- ---- ----- ---- -----
Total net change in income on
interest-earning assets (1,012) 2,890 (223) 1,655 (77) 290 6 219 334 (166) 2 170
Interest-bearing liabilities:
Interest-bearing deposits (1) (523) 230 (17) (310) (18) 205 (1) 186 1 (62) - (61)
FHLB advances (10) 542 (41) 491 4 (34) - (30) 3 (28) (1) (26)
------- ------ ----- ------ ---- ---- --- ---- ---- ----- ---- -----
Total net change in expense on
interest-bearing liabilities (533) 772 (58) 181 (14) 171 (1) 156 4 (90) (1) (87)
------- ------ ----- ------ ---- ---- --- ---- ---- ----- ---- -----
Net change in net interest income $ (479) $2,118 $(165) $1,474 $(63) $119 $ 7 $ 63 $330 $ (76) $ 3 $ 257
======= ====== ===== ====== ==== ==== === ==== ==== ===== ==== =====
</TABLE>
(1) Data does not consider the stock subscription balance at September 30, 1998
of $5.1 million.
-21-
<PAGE>
[LETTERHEAD OF DELOITTE & TOUCHE LLP APPEARS HERE]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Pulaski Financial Corp.:
We have audited the accompanying consolidated balance sheets of Pulaski
Financial Corp. and subsidiaries (the "Company") as of September 30, 1999 and
1998, and the related consolidated statements of income and comprehensive
income, stockholders' equity and cash flows for each of the three years in the
period ended September 30, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of September 30,
1999 and 1998, and the results of its operations and its cash flows for each of
the three years in the period ended September 30, 1999, in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche LLP
November 12, 1999
(November 29, 1999 as to Note 10)
-22-
<PAGE>
PULASKI FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1999 1998
<S> <C> <C>
Cash and amounts due from depository institutions $ 3,486,957 $ 3,047,328
Federal funds sold and overnight deposits 5,400,000
------------ ------------
Total cash and cash equivalents 8,886,957 3,047,328
Investment securities available for sale, at market value 4,234,145 2,235,133
Investment securities held to maturity, at amortized cost (market value $9,002,455 and
$19,026,432 in 1999 and 1998, respectively) 9,010,427 18,923,006
Mortgage-backed and related securities held to maturity, at amortized cost (market value
$4,154,784 and $5,683,829 in 1999 and 1998, respectively) 3,996,748 5,412,117
Mortgage-backed and related securities available for sale, at market value 21,356,446 1,488,267
Loans receivable held for sale, at lower of cost or market 8,159,085 13,442,421
Loans receivable, net of allowance for loan losses of $985,773 and $762,688 in 1999 and 1998,
respectively 181,532,561 141,769,058
Federal Home Loan Bank stock - at cost 1,501,200 1,423,000
Real estate acquired in settlement of loans, net of allowance for losses of $17,161 and
$18,640 in 1999 and 1998, respectively 228,002 105,628
Premises and equipment, net 2,235,412 2,105,293
Accrued interest receivable:
Investment securities 153,637 224,513
Mortgage-backed securities 151,903 48,584
Loans receivable 1,041,503 907,695
Other 818
Other assets 1,485,537 2,076,332
------------ ------------
TOTAL $243,974,381 $193,208,375
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $161,370,542 $156,235,348
Stock subscriptions 5,129,497
Advances from Federal Home Loan Bank of Des Moines 28,600,000 1,900,000
Advance payments by borrowers for taxes and insurance 2,440,520 3,185,605
Accrued interest payable 221,881 262,600
Other liabilities 1,436,595 1,282,666
------------ ------------
Total liabilities 194,069,538 167,995,716
============ ============
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock - $1.00 par value per share, 10,000,000 shares authorized; none issued
or outstanding - -
Common stock - $.01 par value per share, 25,000,000 shares authorized; 3,972,885 shares
issued 39,729
Common stock - $1.00 par value per share, 20,000,000 shares authorized; 2,105,840
shares issued and outstanding at September 30, 1998 2,105,840
Treasury stock - at cost (198,000 shares) (2,322,004)
Additional paid-in capital 35,685,866 5,258,418
Unearned MRDP shares (18,400) (73,600)
Unearned ESOP shares (217,242 unreleased shares) (2,172,420)
Accumulated other comprehensive income (loss) (235,360) 14,520
Retained earnings 18,927,432 17,907,481
------------ ------------
Total stockholders' equity 49,904,843 25,212,659
------------ ------------
TOTAL $243,974,381 $193,208,375
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
-23-
<PAGE>
PULASKI FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
INTEREST INCOME:
Loans receivable $12,804,360 $11,520,314 $11,356,782
Investment securities 955,382 883,359 983,972
Mortgage-backed and related securities 922,041 507,604 570,691
Other 575,754 690,764 471,697
----------- ----------- -----------
Total interest income 15,257,537 13,602,041 13,383,142
----------- ----------- -----------
INTEREST EXPENSE:
Deposits 6,655,420 7,011,403 6,824,171
Advances from Federal Home Loan Bank 621,429 130,302 160,594
Other 46,010
----------- ----------- -----------
Total interest expense 7,322,859 7,141,705 6,984,765
----------- ----------- -----------
NET INTEREST INCOME 7,934,678 6,460,336 6,398,377
PROVISION FOR LOAN LOSSES 264,936 209,277 169,176
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 7,669,742 6,251,059 6,229,201
----------- ----------- -----------
OTHER INCOME:
Service charges on deposit accounts 531,354 168,596 75,929
Gains on sales of loans 833,370 851,293 408,180
Insurance commissions 283,241 255,251 130,417
Other 668,258 419,542 401,340
----------- ----------- -----------
Total other income 2,316,223 1,694,682 1,015,866
----------- ----------- -----------
OTHER EXPENSES:
Salaries and employee benefits 3,235,893 2,839,610 2,580,931
Occupancy, equipment and data processing expense 1,460,304 1,131,699 955,610
Advertising 435,195 299,663 56,781
Federal insurance premiums 96,623 97,319 142,034
Professional services 489,216 241,001 122,673
Other 884,342 501,827 439,561
----------- ----------- -----------
Total other expenses 6,601,573 5,111,119 4,297,590
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 3,384,392 2,834,622 2,947,477
INCOME TAXES 1,251,661 989,827 1,024,586
----------- ----------- -----------
NET INCOME 2,132,731 1,844,795 1,922,891
OTHER COMPREHENSIVE INCOME (LOSS) - Unrealized gain (loss)
on securities available-for-sale (net of income taxes of
$145,709 and $7,481, respectively) (249,880) 14,520 -
----------- ----------- -----------
COMPREHENSIVE INCOME $ 1,882,851 $ 1,859,315 $ 1,922,891
=========== =========== ===========
NET INCOME PER COMMON SHARE - BASIC N/M N/M N/M
============ ============ ============
NET INCOME PER COMMON SHARE - DILUTED N/M N/M N/M
============ ============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
-24-
<PAGE>
PULASKI FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Unearned
Management
Recognition
Number of Additional and
Shares Common Treasury Paid-In Development
Issued Stock Stock Capital Plan Shares
<S> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1996 2,094,000 $ 2,094,000 $ - $ 5,117,826 $(184,000)
Common stock issued under Stock Option Plan and
related tax benefit 800 800 14,412
Amortization of Management Recognition and Development
Plan shares 55,200
Dividends ($1.03 per share)*
Net income
--------- ----------- ------------ ------------ -----------
BALANCE, SEPTEMBER 30, 1997 2,094,800 2,094,800 - 5,132,238 (128,800)
Amortization of Management Recognition and Development
Plan shares 55,200
Dividends ($1.10 per share)*
Stock options exercised 11,040 11,040 126,180
Comprehensive income:
Net income
Net unrealized gains on securities
Total comprehensive income
--------- ----------- ------------ ------------ -----------
BALANCE, SEPTEMBER 30, 1998 2,105,840 2,105,840 - 5,258,418 (73,600)
Comprehensive income:
Net income
Change in net unrealized gain on securities (c)
Total comprehensive income
Dividends ($.36 per share)
Issuance and exchange of common stock as a result of the
conversion reorganization (a)(b) 1,860,061 (2,066,181) 30,380,966
Assets consolidated from Pulaski Bancshares, MHC
Stock options exercised 6,984 70 44,543
Stock repurchase (2,322,004)
Release of ESOP shares 1,939
Amortization of Management Recognition and Development
Plan shares 55,200
--------- ----------- ------------ ------------ -----------
BALANCE, SEPTEMBER 30, 1999 3,972,885 $ 39,729 $(2,322,004) $35,685,866 $ (18,400)
========= =========== ============ ============ ===========
<CAPTION>
Accumulated
Other Unearned
Comprehensive ESOP Retained
Income Shares Earnings Total
<S> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1996 $ - $ - $15,476,581 $22,504,407
Common stock issued under Stock Option Plan and
related tax benefit 15,212
Amortization of Management Recognition and Development
Plan shares 55,200
Dividends ($1.03 per share)* (639,820) (639,820)
Net income - 1,922,891 1,922,891
----------- ------------ ----------- -----------
BALANCE, SEPTEMBER 30, 1997 - - 16,759,652 23,857,890
Amortization of Management Recognition and Development
Plan shares 55,200
Dividends ($1.10 per share)* (696,966) (696,966)
Stock options exercised 137,220
Comprehensive income:
Net income 1,844,795 1,844,795
Net unrealized gains on securities 14,520 14,520
-----------
Total comprehensive income - 1,859,315
----------- ------------ ----------- -----------
BALANCE, SEPTEMBER 30, 1998 14,520 - 17,907,481 25,212,659
Comprehensive income:
Net income 2,132,731 2,132,731
Change in net unrealized gain on securities (c) (249,880) (249,880)
-----------
Total comprehensive income 1,882,851
-----------
Dividends ($.36 per share) (1,329,760) (1,329,760)
Issuance and exchange of common stock as a result of the
conversion reorganization (a)(b) (2,327,600) 25,987,185
Assets consolidated from Pulaski Bancshares, MHC 216,980 216,980
Stock options exercised 44,613
Stock repurchase (2,322,004)
Release of ESOP shares 155,180 157,119
Amortization of Management Recognition and Development
Plan shares 55,200
----------- ------------ ----------- -----------
BALANCE, SEPTEMBER 30, 1999 $(235,360) $(2,172,420) $18,927,432 $49,904,843
=========== ============ =========== ===========
</TABLE>
* Pulaski Bancshares, M.H.C. ("MHC"), which owned $1,470,000 shares of stock
in the Bank, waived receipt thereby reducing the actual dividend payment to
the amounts shown above.
(a) Includes 635,840, $1.00 par value, shares of Pulaski Bank outstanding at
December 2, 1998, which were converted into 1,056,003, $.01 par value,
shares of Pulaski Financial Corp. based on 1.6608 exchange ratio;
2,909,500, $.01 par value, shares of Pulaski Financial Corp. sold in the
subscription and community offering; and the cancellation of $1,470,000,
$1.00 par value, shares of Pulaski Bank previously held by Pulaski
Bancshares, M.H.C.
(b) 232,760 shares purchased by the ESOP.
(c) Includes change in unrealized gains of ($248,778) and reclassification
adjustment for gains included in income of ($1,102).
See accompanying notes to consolidated financial statements.
-25-
<PAGE>
PULASKI FINANCIAL CORP. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
- -----------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,132,731 $ 1,844,795 $ 1,922,891
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation, amortization and accretion:
Premises and equipment 388,088 289,842 270,254
Management Recognition and Development Plan
stock awards 55,200 55,200 55,200
ESOP shares committed to be released 157,119
Loan fees, discounts and premiums - net (25,516) (119,700) (228,781)
Provision for loan losses 264,936 209,277 169,176
Provision for losses on real estate acquired in
settlement of loans 24,983 33,513 14,653
(Gains) losses on sales of real estate acquired in
settlement of loans (8,573) 6,819 (4,694)
Originations of loans receivable for sale to
correspondent lenders (120,610,664) (123,642,457) (70,365,168)
Proceeds from sales of loans to correspondent lenders 126,727,370 125,435,810 63,598,438
Gains on sales of loans (833,370) (851,293) (408,180)
Gain on sale of investments (1,750)
Deferred income taxes (214,308) (56,124) 435,066
Changes in other assets and liabilities 543,448 (688,030) (1,231,160)
------------- ------------- ------------
Net adjustments 6,466,963 672,857 (7,695,196)
------------- ------------- ------------
Net cash provided by (used in) operating activities 8,599,694 2,517,652 (5,772,305)
------------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities of investment
securities 17,451,750 19,760,000 13,500,000
Purchases of investment securities and Federal Home
Loan Bank stock (9,472,442) (24,426,158) (14,333,318)
Purchases of mortgage-backed and related securities (20,713,884) (1,486,654)
Principal payments received on mortgage-backed and
related securities 1,890,000 965,951 1,070,115
Loan (originations) repayments - net (40,702,040) (11,941,823) 3,511,481
Proceeds from sales of real estate acquired in settlement
of loans receivable 393,627 91,001 126,436
Net additions to premises and equipment (518,211) (586,325) (378,999)
------------- ------------- ------------
Net cash (used in) provided by investing activities (51,671,200) (17,624,008) 3,495,715
------------- ------------- ------------
</TABLE>
(Continued)
-26-
<PAGE>
PULASKI FINANCIAL CORP. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits $ 7,122,709 $ 7,563,127 $ 847,891
Federal Home Loan Bank advances - net 26,700,000 (300,000) (800,000)
Net increase (decrease) in advance payments by
borrowers for taxes and insurance (745,085) 72,512 79,442
(Refunds of) proceeds from stock over-subscriptions (5,129,497) 5,129,497
Common stock issued under Stock Option Plan 44,613 137,220 15,213
Dividends declared on common stock (1,329,760) (696,966) (639,820)
Payments to acquire treasury stock (2,322,004)
Issuance of common stock under conversion/
reorganization 24,570,159
----------- ----------- -----------
Net cash provided by (used in) financing activities 48,911,135 11,905,390 (497,274)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 5,839,629 (3,200,966) (2,773,864)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR 3,047,328 6,248,294 9,022,158
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 8,886,957 $ 3,047,328 $ 6,248,294
=========== =========== ===========
ADDITIONAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest on deposits $ 6,696,139 $ 7,011,635 $ 6,822,800
Interest on advances from the Federal Home Loan Bank 226,930 130,302 160,594
Income taxes 1,237,500 1,185,814 486,190
NONCASH INVESTING ACTIVITIES:
Real estate acquired in settlement of loans receivable 532,412 236,961 2,959
Loans receivable securitized 9,105,517 10,188,257
(Decrease) increase in investments for changes in
unrealized gains and losses (395,589) 22,001
NONCASH FINANCING ACTIVITIES:
Issuance of common stock:
Purchase of ESOP 2,327,600
Proceeds received from deposit transfers 1,987,515
</TABLE>
See accompanying notes to the consolidated financial statements. (Concluded)
-27-
<PAGE>
PULASKI FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Pulaski Financial Corp, (the "Company") was incorporated under Delaware law
in May 1998. The Company was organized for the purpose of becoming the
holding company for Pulaski Bank, A Federal Savings Bank (the "Bank") upon
the Bank's reorganization as a wholly owned subsidiary of the Company
resulting from the conversion of Pulaski Bancshares, M.H.C. ("MHC"), from a
federal mutual holding company to a stock holding company ("Conversion and
Reorganization'). In connection with the Conversion and Reorganization,
which was completed on December 2, 1998, the Company sold 2,909,500 shares
of its common stock to the public at $10 per share in a public offering
("Offering") and issued 1,056,016 shares in exchange for the outstanding
shares of the Bank held by the Bank's stockholders other than the MHC. The
Company has no significant assets, other than all of the outstanding shares
of the Bank and the portion of the net proceeds from the Offering retained
by the Company, and no significant liabilities. Management of the Company
and the Bank are substantially similar and the Company neither owns nor
leases any property, but instead uses the premises, equipment and furniture
of the Bank. Accordingly, the information in the consolidated financial
statements relates primarily to the Bank.
The accounting and reporting policies and practices of the Company and
subsidiaries conform to generally accepted accounting principles and to
prevailing practices within the banking industry. A summary of the
Company's significant accounting policies follows:
Nature of Operations - The Bank is a community-oriented financial
institution that provides traditional financial services through the
operation of four full service branches within St. Louis City and County.
The Bank is engaged primarily in the business of attracting deposits from
the general public and using these and other funds to originate
one-to-four-family residential mortgage loans within the Bank's lending
market area. The Bank is an approved lender/servicer for the Federal
Housing Administration ("FHA") and the Veterans Administration ("VA"), as
well as for the Missouri Housing Development Commission (a government
agency established to provide home buying opportunities for lower income
first time home buyers) ("MHDC"). The Bank is also an approved
seller/servicer for the Government National Mortgage Association ("GNMA").
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of Pulaski Financial Corp. and its wholly
owned subsidiary, Pulaski Bank, and its wholly owned subsidiary Pulaski
Service Corporation, and Pulaski Service Corporation's wholly owned
subsidiary, Pulaski Real Estate Co. All significant intercompany balances
and transactions have been eliminated. Pulaski Real Estate Co. was
liquidated and dissolved during the year ended September 30, 1997. This
transaction did not have a significant impact on the consolidated financial
statements.
Use of Estimates in the Preparation of Financial Statements - The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and that affect the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. The provision for loan losses is a significant estimate reported
within the financial statements.
-28-
<PAGE>
Cash Equivalents - For purposes of reporting cash flows, cash and cash
equivalents include cash and amounts due from depository institutions,
federal funds sold, and overnight deposits. Generally, federal funds are
sold for a one-day period.
The Bank is required by regulation to maintain liquid assets in the form of
cash and securities approved by federal regulations, at a quarterly average
of not less than 4% of customer deposits and short-term borrowings.
Investment Securities and Mortgage-Related Securities, Held-to-Maturity -
Investment securities and mortgage-related securities held-to-maturity are
stated at cost, adjusted for amortization of premium and discount which are
recognized as adjustments to interest income over the life of the
securities using the level-yield method.
To the extent management determines a decline in value in an investment or
mortgage-related security held-to-maturity to be other than temporary, the
Bank will adjust the carrying value and include such expense in the
consolidated statements of income.
Investment Securities and Mortgage-Related Securities, Available-for-Sale -
Investment securities and mortgage-related securities available-for-sale
are recorded at their current fair value. Unrealized gains or losses on
securities available-for-sale are included in a separate component of
equity, net of deferred income taxes. Gains or losses on the disposition of
securities available-for-sale, are recognized using the specific
identification method.
Loans Held for Sale - Loans held for sale are reflected at the lower of
cost or market and are covered by investor commitments and generally sold
servicing released. Accordingly, market values for such loans are based on
commitment prices. Gains or losses on loan sales are recognized at the time
of sale and are determined by the difference between net sales proceeds and
the principal balance of the loans sold, adjusted for net deferred loan
fees. Loan origination and commitment fees, net of certain direct loan
origination costs, are deferred until the sale of the loan.
Loans - Loans are stated at the principal amounts outstanding adjusted for
premiums and discounts. Premiums and discounts are amortized and accreted
using the level yield method.
Interest on loans is accrued based upon the principal amounts outstanding.
The Bank's policy is to discontinue the accrual of interest income on any
loan when, in the opinion of management, there is reasonable doubt as to
the timely collectibility of interest or principal. 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 collectibility of interest or principal.
Loan origination and commitment fees, net of certain direct loan
origination costs, are deferred and amortized to interest income using the
level yield method.
Provision for Loan Losses - The Bank considers a loan to be impaired when
management believes it is probable that it will be unable to collect all
principal and interest due according to the contractual terms of the loan.
If a loan is impaired, the Bank records a loss valuation equal to the
excess of the loan's carrying value over the present value of the estimated
future cash flows discounted at the loan's effective rate based on the
loan's observable market price, or the fair value of the collateral if the
loan is collateral dependent. One-to-four family residential loans and
consumer loans are collectively evaluated for impairment. Loans on
residential properties with greater than four units and loans on
construction and development and commercial properties are evaluated for
impairment on a loan by loan basis. The allowance for loan losses is
increased by charges to income and decreased by charge-offs (net of
-29-
<PAGE>
recoveries). Management's periodic evaluation of the adequacy of the
allowance is based on the Bank's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying
collateral, and current economic conditions.
Real Estate Acquired in Settlement of Loans - Real estate acquired in
settlement of loans represents foreclosed assets held for sale and is
recorded at fair value as of the date of foreclosure less estimated
disposal costs (the new basis) and is subsequently carried at the lower of
the new basis or fair value less selling costs on the current measurement
date. Adjustments for estimated losses are charged to operations when any
significant decline reduces the fair value to less than carrying value.
Costs and expenses related to major additions and improvements are
capitalized while maintenance and repairs which do not improve or extend
the lives of the respective assets are expensed currently. Gains on the
sale of real estate acquired in settlement of loans are recognized upon
disposition of the property to the extent allowable considering the
adequacy of the down payment and other requirements.
Premises and Equipment - Premises and equipment are stated at cost, less
accumulated depreciation. Depreciation charged to operations is primarily
computed utilizing the straight-line method over the estimated useful lives
of the related assets. Estimated lives range from 3 to 45 years for
buildings and improvements and 5 to l0 years for furniture and equipment.
Income Taxes - Deferred income taxes are determined using an asset or
liability approach that requires the recognition of deferred tax assets or
liabilities based upon temporary differences in the tax basis of an asset
or liability and its related financial statement balance. The deferred tax
asset or liability is calculated using the enacted tax rates expected to
apply in the period in which the deferred asset or liability is expected to
be settled or realized.
Earnings Per Share - Earnings per share for the years ended September 30,
1999, 1998 and 1997 are not presented as such presentation would not be
meaningful due to the stock Conversion and Reorganization which was
completed on December 2, 1998.
Mortgage Servicing Rights - During the years ended September 30, 1999 and
1998, $-0- and $155,000 of mortgage servicing rights were capitalized,
respectively. The fair value of the mortgage servicing rights were based
upon the present value of estimated expected future cash flows valuation
technique and in some instances fair value. The discount rate utilized was
commensurate with the risks inherent in the portfolio and the average
portfolio life was based upon relative industry statistics and the Bank's
historic prepayment rate. The cost of mortgage servicing rights is
amortized in proportion to, and over the period of estimated net servicing
revenues. Amortization of mortgage servicing rights was $18,000, $20,367
and $5,461 for the years ended September 30, 1999, 1998 and 1997,
respectively. Effective June 30, 1999, the Bank sold all of its mortgage
servicing rights (see Note 11).
Recently Adopted Accounting Pronouncements - In June 1997, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standard ("SFAS") No. 131, Disclosures about Segments of an
Enterprise and Related Information. The Statement establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. The Company operates as a single business segment, that of
providing traditional community banking services through its full service
branch network.
-30-
<PAGE>
Reclassifications - Certain amounts included in the 1998 and 1997
consolidated financial statements have been reclassified to conform to the
1999 presentation.
2. INVESTMENT SECURITIES
Investment securities at September 30, 1999 and 1998 are summarized as
follows:
<TABLE>
<CAPTION>
1999
---------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Held to Maturity Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Government and Agency debt
obligations $ 9,010,427 $ 6,955 $ (14,927) $ 9,002,455
============= ========= ========== ===========
Weighted average rate at end of
period 5.25%
=============
</TABLE>
<TABLE>
<CAPTION>
1998
--------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Held to Maturity Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Government and Agency debt
obligations $ 18,923,006 $ 103,426 $ - $19,026,432
============= ========= ========== ===========
Weighted average rate at end of
period 5.64%
=============
</TABLE>
<TABLE>
<CAPTION>
1999
---------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Available for Sale Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Government and Agency debt
obligations $ 4,238,322 $ 5,971 $ (10,148) $4,234,145
============= ============ ========== ==========
Weighted average rate at end of
period 5.37%
=============
</TABLE>
<TABLE>
<CAPTION>
1998
--------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Available for Sale Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Government and Agency debt
obligations $ 2,228,769 $ 6,364 $ - $ 2,235,133
============= ========== ========= ===========
Weighted average rate at end of
period 5.53%
=============
</TABLE>
Proceeds from sales of available for sale securities during 1999 were
$501,750. Realized gains from those sales were not significant. There were
no sales of available for sale securities during 1998.
-31-
<PAGE>
The amortized cost and market values of held to maturity and available for
sale investment securities at September 30, 1999, by contractual maturity,
are shown below.
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
---------------------------------- ---------------------------------
Estimated Estimated
Amortized Market Amortized Market
Term to Maturity Cost Value Cost Value
<S> <C> <C> <C> <C>
One year or less $ 7,211,154 $ 7,208,733 $ 1,750,000 $ 1,748,251
One year through five years 1,799,273 1,793,722 2,488,322 2,485,894
-------------- ------------ ------------ ------------
Tota1 $ 9,010,427 $ 9,002,455 $ 4,238,322 $ 4,234,145
============== ============ ============ ============
</TABLE>
3. MORTGAGE-BACKED AND RELATED SECURITIES
Mortgage-backed and related securities at September 30, 1999 and 1998 are
summarized as follows:
<TABLE>
<CAPTION>
1999
-----------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Held to Maturity Cost Gains Losses Value
<S> <C> <C> <C> <C>
Mortgage-backed securities $3,383,565 $149,698 $ (20) $3,533,243
Collateralized mortgage obligations:
Federal Home Loan Mortgage
Corporation 586,655 8,511 595,166
Private issues 26,528 (153) 26,375
--------- ------------ ---------- ----------
Total $3,996,748 $158,209 $(173) $4,154,784
========== ============ ========== ==========
Weighted average rate at end of period 8.37 %
==========
</TABLE>
<TABLE>
<CAPTION>
1998
----------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Held to Maturity Cost Gains Losses Value
<S> <C> <C> <C> <C>
Mortgage-backed securities $4,475,140 $259,951 $ - $4,735,091
Collateralized mortgage obligations:
Federal Home Loan Mortgage
Corporation 896,547 11,909 908,456
Private issues 40,430 (148) 40,282
---------- ---------- --------- ----------
Total $5,412,117 $271,860 $(148) $5,683,829
========== ========== ========= ==========
Weighted average rate at end of period 8.18 %
==========
</TABLE>
-32-
<PAGE>
<TABLE>
<CAPTION>
1999
------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Available for Sale Cost Gains Losses Value
<S> <C> <C> <C> <C>
Mortgage-backed securities $21,725,857 $ - $ (369,411) $ 21,356,446
=========== =========== ============ =================
Weighted average rate at end
of period 6.86 %
===========
</TABLE>
<TABLE>
<CAPTION>
1998
-------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Available for Sale Cost Gains Losses Value
<S> <C> <C> <C> <C>
Mortgage-backed securities $ 1,472,630 $ 15,637 $ - $1,488,267
================ ============== ================ =================
Weighted average rate at end
of period 6.00%
================
</TABLE>
There were no sales of available-for-sale securities during 1998 or 1999.
The amortized cost and estimated market value of held to maturity and available
for sale mortgage-backed and related securities at September 30, 1999, by
contractual maturity, are shown below.
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
----------------------------- -------------------------------
Estimated Estimated
Amortized Market Amortized Market
Term to Maturity Cost Value Cost Value
<S> <C> <C> <C> <C>
One year or less $ - $ - $ - $ -
One year through five years 26,862 27,359
Five years through ten years 212,526 218,129 1,248,480 1,215,540
Ten years or more 3,757,360 3,909,296 20,477,377 20,140,906
---------- ---------- ----------- -----------
Tota1 $3,996,748 $4,154,784 $21,725,857 $21,356,446
========== ========== =========== ===========
</TABLE>
Actual maturities may differ from contractual maturities as borrowers have
the right to call or prepay certain obligations sometimes without penalties.
-33-
<PAGE>
4. LOANS RECEIVABLE
Loans receivable at September 30, 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Loans secured by residential real estate:
Conventional $135,416,425 $118,500,839
FHA/VA 7,351,160 8,766,654
Home equity lines 5,022,123
------------ ------------
147,789,708 127,267,493
Commercial real estate loans 566,963 552,968
Consumer loans 33,112,905 14,178,749
------------ ------------
181,469,576 141,999,210
Less:
Deferred loan (costs) fees (1,412,559) (647,045)
Loans-in-process 363,801 114,509
Allowance for loan losses 985,773 762,688
------------ ------------
Total $181,532,561 $141,769,058
============ ============
Weighted average rate at end of period 7.50 % 7.98 %
============ ============
</TABLE>
The adjustable rate loans have interest rate adjustment limitations and are
generally indexed to the one year Constant Maturity U.S. Treasury rate.
Future market factors may affect the correlation of the interest rate
adjustment with the rates the Bank pays on the short-term deposits that have
been primarily utilized to fund these loans.
The Bank is subject to numerous lending-related regulations. Under federal
law and regulations, the Bank may not make real estate loans to one borrower
in excess of the greater of 15% of its unimpaired capital and surplus or
$500,000, whichever is greater. As of September 30, 1999, the Bank is in
compliance with this limitation.
The Bank has granted loans to officers and directors. Changes in loans to
officers and directors for the three years ended September 30, 1999 are
summarized as follows:
<TABLE>
<S> <C>
Balance, September 30, 1997 $ 308,521
Additions 234,753
Repayments and reclassifications (289,060)
---------
Balance, September 30, 1998 254,214
Additions 246,650
Repayments and reclassifications (123,136)
---------
Balance, September 30, 1999 $ 377,728
=========
</TABLE>
-34-
<PAGE>
Activity in the allowance for loan losses for the years ended September 30,
1999, 1998 and 1997 follows:
1999 1998 1997
Balance, beginning of year $762,688 $612,852 $478,804
Provision charged to expense 264,936 209,277 169,176
Charge-offs (52,378) (66,305) (43,915)
Recoveries 10,527 6,864 8,787
-------- -------- --------
Balance, end of year $985,773 $762,688 $612,852
======== ======== ========
The Bank did not engage in any troubled debt restructurings during the years
ended September 30, 1999, 1998 and 1997. Loans which were considered impaired
during the years ended September 30, 1999, 1998 and 1997 were insignificant.
Nonaccrual loans totaled approximately $258,000, $753,000 and $217,000 at
September 30, 1999, 1998 and 1997, respectively. Interest income recognized on
impaired loans was not significant for the years ended September 30, 1999, 1998
and 1997. Similarly, the difference between interest that would have been
recognized under the original terms of nonaccrual and renegotiated loans and
interest actually recognized on such loans were not significant for the years
ended September 30, 1999, 1998 and 1997.
At September 30, 1999, 1998 and 1997, the Bank was servicing loans for others
amounting to approximately $864,000, $34,050,000 and $28,972,000, respectively.
Servicing loans for others generally consists of collecting mortgage payments,
maintaining escrow accounts, disbursing payments to investors and foreclosure
processing. Loan servicing income is recorded on the accrual basis and includes
servicing fees from investors and certain charges collected from borrowers. In
connection with these loans serviced for others, the Bank held borrowers' escrow
balances of $33,000, $428,000 and $394,000 at September 30, 1999, 1998 and 1997,
respectively. As noted in Footnote 1, the Bank sold substantially all of its
mortgage servicing rights on June 30, 1999.
The Bank originates certain loans for resale to correspondent lenders. These
sales include recourse provisions that require the Bank to repurchase the loans
upon certain events of default, generally documentation deficiencies, for
periods up to one year from the date of the loan sale. The Bank has not
historically incurred losses as a result of such loans, nor are any losses
anticipated; however actual losses incurred by the Bank in the future due to
these recourse provisions may vary from the Bank's estimate due to a number of
factors beyond the Bank's control. During 1999, 1998 and 1997, the Bank sold
whole loans to correspondent lenders totaling $125.9 million, $115.4 million and
$53.4 million, respectively. The Bank also originates loans for resale to the
Missouri Housing and Development Commission (MHDC). Until June 30, 1999, these
sales were made with servicing retained by the Bank. A change in the MHDC rules
no longer permits servicing to be retained and all loans are sold at pre-
determined prices. During 1999, 1998 and 1997, the Bank securitized and sold
loans to MHDC totaling $0, $9.1 million and $10.2 million.
Effective June 30, 1999 the Bank sold all of its servicing rights to its GNMA
servicing portfolio of approximately $29.8 million. (See Note 11).
-35-
<PAGE>
5. REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS
Real estate acquired in settlement of loans at September 30, 1999 and 1998 is
summarized as follows:
1999 1998
Acquired in settlement of loans $245,163 $124,268
Allowance for losses (17,161) (18,640)
-------- --------
Total $228,002 $105,628
======== ========
Activity in the allowance for losses on real estate owned for the years ended
September 30, 1999, 1998 and 1997 is summarized as follows:
1999 1998 1997
Balance, beginning of year $ 18,640 $ - $ 38,725
Provision charged to expense 24,983 33,513 14,653
Charge-offs (26,462) (14,873) (53,378)
-------- -------- --------
Balance, end of year $ 17,161 $ 18,640 $ -
======== ======== ========
6. PREMISES AND EQUIPMENT
Premises and equipment at September 30, 1999 and 1998 are summarized as
follows:
1999 1998
Land $ 633,763 $ 439,886
Office buildings and improvements 2,486,942 2,408,428
Furniture and equipment 1,855,290 1,609,470
----------- -----------
4,975,995 4,457,784
Less accumulated depreciation (2,740,583) (2,352,491)
----------- -----------
Total $ 2,235,412 $ 2,105,293
=========== ===========
-36-
<PAGE>
7. DEPOSITS
Deposits at September 30, 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------------- ----------------------------------
Weighted Weighted
Average Average
Interest Interest
Amount Rate Amount Rate
<S> <C> <C> <C> <C>
Transaction accounts:
Noninterest-bearing checking $ 2,719,804 - % $ 1,703,686 - %
Interest-bearing checking 13,678,795 1.12 11,355,044 1.75
Money market 15,587,411 3.69 12,657,188 3.84
---------- ----------
Total transaction accounts 31,986,010 2.28 25,715,918 2.66
---------- -----------
Passbook savings account 25,619,428 1.86 25,669,105 2.50
---------- ------------
Certificates of deposit:
3.00% to 3.99% 6,292,057 3.97 470,673 3.94
4.00% to 4.99% 51,425,914 4.42 11,344,743 4.96
5.00% to 5.99% 32,470,314 5.37 77,007,223 5.40
6.00% to 6.99% 8,572,481 6.24 11,192,667 6.22
7.00% to 7.99% 5,004,338 7.03 4,835,019 7.03
------------ ------------
Total certificates of deposit 103,765,104 4.97 104,850,325 5.50
------------ ------------
Total $161,370,542 3.94 $156,235,348 4.54
============ ============
</TABLE>
The aggregate amount of jumbo certificates of deposit with a minimum
principal amount of $100,000 was approximately $5,846,000 and $5,313,000 at
September 30, 1999 and 1998, respectively.
At September 30, 1999, the scheduled maturities of certificates of deposit
were as follows:
<TABLE>
<CAPTION>
Weighted
Average
Mature within fiscal year: Amount Rate
<S> <C> <C>
2000 $ 73,698,568 4.91 %
2001 18,342,129 5.05
2002 4,255,650 4.94
2003 5,098,960 5.50
2004 2,242,281 4.78
Thereafter 127,516 7.41
------------
Total $103,765,104 4.97 %
============
</TABLE>
-37-
<PAGE>
A summary of interest expense on deposits for the years ended September 30,
1999, 1998 and 1997 follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Transaction accounts $ 770,738 $ 640,535 $ 514,021
Savings and certificates of deposit accounts 5,884,682 6,370,868 6,310,150
---------- ---------- ----------
$6,655,420 $7,011,403 $6,824,171
========== ========== ==========
</TABLE>
8. ADVANCES FROM FEDERAL HOME LOAN BANK OF DES MOINES
Advances from the Federal Home Loan Bank ("FHLB") of Des Moines at September
30, 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------------- -------------------------------
Weighted Weighted
Average Average
Maturing Within Fiscal Year Interest Interest
Ending September 30, Amount Rate Amount Rate
<S> <C> <C> <C> <C>
1999 $ - - % $ 300,000 5.93 %
2000 10,300,000 5.40 300,000 6.15
2001 3,300,000 5.81 300,000 6.35
2002 4,500,000 5.99 500,000 6.40
2003 500,000 6.57 500,000 6.57
2009 (callable in 2004) 10,000,000 5.92
----------- ----------
$28,600,000 5.74 % $1,900,000 6.32 %
=========== ==========
</TABLE>
The Bank has the ability to borrow funds from the FHLB of Des Moines under a
blanket agreement which assigns all investments in FHLB of Des Moines stock
as well as qualifying first mortgage loans equal to 150% of the outstanding
balance as collateral to secure the amounts borrowed. At September 30, 1999,
the Bank had approximately $62,362,000 in borrowing capacity available to it
under the above-mentioned borrowing arrangement. Additionally, the Bank has
secured the right to borrow an additional $7.5 million under an open line of
credit due to year 2000 considerations.
9. INCOME TAXES
Income tax (benefits) expense for the years ended September 30, 1999, 1998
and 1997 is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Current $1,428,142 $1,045,951 $ 589,520
Deferred (176,481) (56,124) 435,066
---------- ---------- ----------
Total $1,251,661 $ 989,827 $1,024,586
========== ========== ==========
</TABLE>
-38-
<PAGE>
Income tax expense for the years ended September 30, 1999, 1998 and 1997
differs from that computed at the Federal statutory rate of 34 percent as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------ -------------------------- --------------------------
Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory Federal
income tax rate $1,150,693 34.0 % $963,771 34.0 % $1,002,142 34.0 %
Increase (decrease)
resulting from:
State taxes 100,505 3.0 44,858 1.6 94,606 3.2
Other 463 (18,802) (0.7) (72,162) (2.4)
---------- ----- -------- ----- ---------- -----
Total $1,251,661 37.0 % $989,827 34.9 % $1,024,586 34.8 %
========== ===== ======== ===== ========== =====
</TABLE>
The components of deferred tax assets and liabilities at September 30, 1999
and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Deferred tax assets:
Bad debt reserve $ 446,767 $341,728
Deferred loan fees 10,702 34,693
Premises and equipment 272,946 302,453
Management Recognition and Development Plan stock awards 34,040 37,720
Supplemental retirement plan 92,038 106,328
Unrealized losses on securities available-for-sale 138,228
Other 32,927 36,740
---------- --------
Total deferred tax assets 1,027,648 859,662
Deferred tax liabilities:
FHLB stock dividends 130,481 144,587
Mortgage servicing rights 132,616
---------- --------
Total deferred tax liabilities 130,481 277,203
---------- --------
Net deferred tax assets $ 897,167 $582,459
========== ========
</TABLE>
10. STOCK REPURCHASE
The Company received regulatory approval to repurchase in the open market up
to 15% of its outstanding shares of common stock or up to 594,885 shares. On
August 3, 1999, the Company repurchased 198,000 shares for $2,322,004. On
November 29, 1999, the Company repurchased an additional 198,295 shares for
$2,182,508.
11. OTHER INCOME
In 1999, the Bank sold their property and casualty insurance operations as
well as $29.8 million of mortgage servicing rights. The Bank recognized
gains of approximately $294,000 in connection with the transactions which
are reflected in the financial statements as other income.
-39-
<PAGE>
12. REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain off-
balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures that have been established by regulation to ensure
capital adequacy require the Bank to maintain minimum capital amounts and
ratios (set forth in the table below). The Bank's primary regulatory agency,
the OTS, requires that the Bank maintain minimum ratios of tangible capital
(as defined in the regulations) of 1.5%, core capital (as defined) of 3%,
and total risk-based capital (as defined) of 8%. The Bank is also subject to
prompt corrective action capital requirement regulations set forth by the
FDIC. The FDIC requires the Bank to maintain minimum of total and Tier I
capital (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier I capital (as defined) to average assets (as defined).
Management believes, as of September 30, 1999, that the Bank meets all
capital adequacy requirements to which it is subject.
As of September 30, 1999 and 1998, the most recent notification from the OTS
categorized the Bank as "well capitalized" under the regulatory framework
for prompt corrective action. To be categorized as "well capitalized" the
Bank must maintain minimum total risk-based, Tier I risk-based, Tier I
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the Bank's
category.
<TABLE>
<CAPTION>
To be
Categorized
as
"Well
Capitalized"
Under Prompt
For Capital Corrective
Adequacy Action
Actual Purposes Provisions
------------------------- ------------------------- -------------------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1999:
Tangible capital (to total assets) $39,598 16.94 % $ 3,505 1.50 % N/A N/A
Core capital (to total assets) 39,598 16.94 % 7,018 3.00 % N/A N/A
Total risk-based capital (to risk-
weighted assets) 40,565 29.07 % 11,163 8.00 % 13,954 10.00 %
Tier I risk-based capital (to risk-
weighted assets) 39,598 28.38 % N/A N/A 8,372 6.00 %
Tier I leverage capital (to average
assets) 39,598 18.51 % N/A N/A 10,695 5.00 %
As of September 30, 1998:
Tangible capital (to total assets) $25,133 13.01 % $ 2,898 1.50 % N/A N/A
Core capital (to total assets) 25,133 13.01 % 5,794 3.00 % N/A N/A
Total risk-based capital (to risk-
weighted assets) 25,893 22.43 % 9,235 8.00 % 11,544 10.00 %
Tier I risk-based capital (to risk-
weighted assets) 25,133 21.77 % N/A N/A 6,926 6.00 %
Tier I leverage capital (to average
assets) 25,133 13.63 % N/A N/A 9,223 5.00 %
</TABLE>
-40-
<PAGE>
A reconciliation, at September 30, 1999 and 1998, of the Bank's stockholders'
equity and regulatory risk-based capital follows (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Stockholders' equity $39,379 $25,213
Less disallowed mortgage servicing rights (65)
Add: Unrealized (gains) losses on available for sale securities 219 (15)
------- -------
Tangible capital 39,598 25,133
General valuation allowances 967 760
------- -------
Regulatory risk-based capital $40,565 $25,893
======= =======
</TABLE>
The Bank cannot pay cash dividends in excess of the higher of (i) net income
to date during the calendar year plus one-half of surplus capital over
regulatory capital or amounts which would result in the Bank not maintaining
adequate capital requirements imposed by the OTS or (ii) 75% of net income
over the most recent four-quarter period. In addition, the Bank is
prohibited from paying cash dividends if the effect thereof would be to
reduce the regulatory capital of the Bank below the amount required for the
liquidation account that the Bank established in connection with the
consummation with the Plan of Conversion and Reorganization on December 2,
1998.
13. EMPLOYEE BENEFITS
The 1994 Management Recognition and Development Plan ("MRDP") was adopted on
January 18, 1995. The MRDP is administered by the Board of Directors of the
Bank. Collectively, the Board reserved 24,000 shares (or 39,859 shares after
conversion) of the Bank's common stock for award pursuant to the MRDP, all of
which have been awarded and will vest over a five-year period beginning on
January 18, 1995. The value of the common stock contributed to the MRDP is
being amortized to compensation expense over the vesting period. Such
compensation expense amounted to $55,200, $55,200 and $55,200 during the
years ended September 30, 1999, 1998 and 1997, respectively.
During 1996, the Bank executed a Supplemental Retirement Benefit agreement
for its then chief executive officer. Under the terms of the agreement, the
officer is to receive $2,473 monthly, commencing upon retirement, for a total
of 15 years. The net present value of these payments is reflected in other
liabilities and totaled $249,000 and $259,000 at September 30, 1999 and 1998,
respectively. Compensation expense under this plan totaled $19,100, $29,400
and $18,200 for the years ended September 30, 1999, 1998 and 1997,
respectively.
Substantially all full-time salaried employees are included in a trusteed,
defined benefit pension plan. The benefits contemplated by the plan are
funded through payments to the Pentegra Group, which operates as a
multiemployer plan. Statement of Financial Accounting Standards No. 87
("SFAS 87") Employers Accounting for Pensions requires that an employer
participating in a multiemployer plan recognize as net pension cost the
amount of the required contribution for the period and as a liability the
amount of any contributions which are due and unpaid. During the years ended
September 30, 1999, 1998 and 1997, the Bank was not required to make any
contributions to the plan because it was fully funded and accordingly, no
pension expense was required to be recorded. At September 30, 1999, the Bank
had no liability for contributions due and unpaid.
The Bank maintains a 401(k) savings plan for eligible employees. In 1999,
1998 and 1997, the Bank matched 50% of each participant's contribution up to
a maximum of 4%. The Bank's contributions to
-41-
<PAGE>
this plan were approximately $46,800, $42,900 and $37,500 for the years ended
September 30, 1999, 1998 and 1997, respectively.
The Company has entered into three year employment agreements with certain
members of management. Under the agreements, the Bank will pay the members
their initial base salaries which may be increased at the discretion of the
Board of Directors. Additionally, the agreements provide for severance
payments if employment is terminated following a change in control. These
payments will be equal to 2.99 times their average annual compensation paid
during the five years immediately preceding the change in control.
Effective October 1, 1996, the Company adopted Statement of Financial
Accounting Standard No. 123, Accounting for Stock-Based Compensation ("SFAS
123"). As permitted by the standard, the Bank has elected to continue
following the guidance of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, for measurement and recognition of
stock-based transactions with employees.
On January 18, 1995, the Board of Directors established the Stock Option Plan
(the "Plan") and reserved 99,648 shares of the Bank's common stock to be
awarded under the Plan. On January 25, 1995, the Board granted 82,708 shares
to certain officers, employees and directors at an exercise price of $7.15
per share. The remaining 16,940 shares were granted during 1998 to certain
officers and directors at an exercise price of $15.43 per share. These
options vest 20% each year from the date of grant and expire no later than
ten years from the date of grant.
In connection with the Conversion and Reorganization, the Company assumed the
Plan and all outstanding options and shares of Pulaski Bank were converted
into $.01 par value shares of Pulaski Financial Corp. based on 1.6608
exchange ratio. A summary of the status of the Company's stock option plan
for the years ended September 30 and reflecting the Conversion is as follows:
<TABLE>
<CAPTION>
Remaining
Exercise Contractual Exercisable Outstanding
Price Life Shares Shares
<S> <C> <C> <C> <C>
September 30, 1997 7.15 8.33 16,542 82,708
Exercised 7.15 (1,329)
-------
September 30, 1998 7.15 7.33 31,754 81,379
Granted 15.43 16,940
Exercised 7.15 (18,335)
-------
September 30, 1999 7.15 6.33 29,961 63,044
15.43 6.33 3,388 16,940
Exercised 7.15 (6,985)
-------
Total 72,999
=======
</TABLE>
The pro forma effects of applying the fair value approach in accordance with
SFAS 123 is required for those entities which elect to continue following the
guidance of Accounting Principles Board Opinion No. 25, and is applicable for
awards granted subsequent to October 1, 1995. Consequently, pro forma
results are not required for the shares granted on January 25, 1995. The pro
forma effects on net income and earnings per share for the shares granted
during 1998 are not material.
-42-
<PAGE>
Effective January 1, 1998, the Bank established a tax-deferred stock bonus
plan known as the Employee Stock Ownership Plan (the "ESOP") for all
eligible employees. In connection with the Conversion and Reorganization on
December 2, 1998, 232,760 shares were purchased by the ESOP at $10 a share
through an internal loan from the Company. The shares are allocated on an
annual basis to each participant in an amount that is equivalent to the
ratio of each participant's salary to that of the total payroll for each
year ended December 31. The unallocated shares are released on a quarterly
basis over the 15-year repayment term of the internal ESOP loan. As the
shares are released, compensation expense is recognized equal to the fair
value of the shares. In 1999, compensation expense under the plan was
approximately $157,000. At September 30, 1999, the status of the ESOP shares
was as follows:
Allocated shares $ 3,879
Released shares 11,637
Unallocated and unreleased shares 217,244
--------
Total ESOP shares $232,760
========
14.CONTINGENCIES
The Company is a defendant in legal actions arising from normal business
activities. Management, after consultation with general counsel, believes
that the resolution of these actions will not have any material adverse
effect on the Company's consolidated financial statements.
15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers
in the way of commitments to extend credit. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a
fee. The Bank evaluates each customer's creditworthiness on a case-by-case
basis.
At September 30, 1999, the Bank had commitments net of noncash portion of
refinanced loans to originate loans of approximately $8,933,000, of which
approximately $6,338,000 were committed to be sold. Of the remaining
$2,595,000 to be retained, approximately $430,000 were at fixed rates. At
September 30, 1998, the Bank had commitments net of noncash portion of
refinanced loans to originate loans of approximately $9,914,000, of which
approximately $7,645,000 were committed to be sold. Of the remaining
$2,269,000 to be retained, approximately $653,000 were at fixed rates.
Additionally, the Bank had outstanding commitments to lend to borrowers
under unused home equity lines of credit of $3,840,000 and $-0- at September
30, 1999 and 1998, respectively.
At September 30, 1999 and 1998, the Bank had commitments to sell loans of
$14,472,000 and $22,014,000, respectively, which includes $8,159,085 and
$13,442,421, respectively, recorded in the financial statements as loans
held for sale.
Substantially all of the Bank's loans are to borrowers located in St. Louis,
Missouri and the surrounding counties.
-43-
<PAGE>
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
Disclosures About Fair Value of Financial Instruments. The estimated fair
value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. However, considerable
judgment is necessarily required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are
not necessarily indicative of the amounts the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair
value amounts.
Approximate carrying values and estimated fair values at September 30, 1999
and 1998 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------- ------------------------------
Approximate Estimated Approximate Estimated
Carrying Fair Carrying Fair
Value Value Value Value
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents $ 8,887,000 $ 8,887,000 $ 3,047,000 $ 3,047,000
Investment securities - HTM 9,010,000 9,002,000 18,923,000 19,026,000
Investment securities - AFS 4,234,000 4,234,000 2,235,000 2,235,000
Mortgage-backed and related securities - HTM 3,997,000 4,155,000 5,412,000 5,684,000
Mortgage-backed and related securities - AFS 21,356,000 21,356,000 1,488,000 1,488,000
Loans:
Loans held for sale 8,159,000 8,256,000 13,442,000 13,617,000
Loans receivable (net of allowance for loan
losses of $985,773 and $762,688 in 1999
and 1998, respectively) 181,533,000 179,783,000 141,769,000 143,913,000
Mortgage servicing rights - - 323,500 323,500
Federal funds sold and overnight deposits 5,400,000 5,400,000 - -
LIABILITIES:
Transaction accounts 31,986,000 31,986,000 25,716,000 25,716,000
Passbook savings accounts 25,619,000 25,619,000 25,669,000 25,669,000
Certificates of deposit 103,765,000 102,809,000 104,850,000 105,703,000
Advances from Federal Home Loan Bank 28,600,000 28,158,000 1,900,000 1,964,000
</TABLE>
Cash and cash equivalents, bankers acceptances, mortgage servicing rights
and passbook savings are shown at their face value.
The fair value of investment and mortgage-backed and related securities is
based on quoted market prices and prices obtained from independent pricing
services. The fair value of loans and advances from Federal Home Loan Bank
is estimated based on present values using applicable risk-adjusted spreads
to the U.S. Treasury curve to approximate current interest rates applicable
to each category of such financial instruments. The fair value of loans
held for sale is estimated using current investor commitment prices.
No adjustment was made to the interest rates for changes in credit of
performing loans for there are no known credit concerns. Management
segregates loans in appropriate risk categories. Management believes that
the risk factor embedded in the interest rates along with the general
reserves applicable to the performing loan portfolio results in a fair
valuation of such loans.
The fair value estimates presented herein are based on pertinent
information available to management as of September 30, 1999. Although
management is not aware of any factors that would significantly
-44-
<PAGE>
affect the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements since
that date and, therefore, current estimates of fair value may differ
significantly from the amounts presented herein.
17. PROSPECTIVE IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The Statement establishes accounting
and reporting standards for derivative instruments including certain
derivative instruments embedded in other contracts (collectively referred
to as derivatives) and hedging activities. The Statement requires an entity
to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. The Statement is effective for the Company's financial statements
for the fiscal year ending September 30, 2001 in accordance with SFAS No.
137 which delayed the effective date of SFAS No. 133 by one year. The
adoption of this Statement is not expected to have a material impact on the
Company's consolidated financial statements.
-45-
<PAGE>
18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The results of operations by quarter for 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
September 30, 1999 Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Interest income $3,624,744 $3,695,783 $3,855,765 $4,081,245
Interest expense 1,856,542 1,701,219 1,759,584 2,005,514
Net interest income 1,768,202 1,994,564 2,096,181 2,075,731
Provision for loan losses 39,582 43,832 60,739 120,783
Net interest income after
loan loss provision 1,728,620 1,950,732 2,035,442 1,954,948
Non interest income 502,634 517,190 533,086 763,313
Non interest expense 1,453,534 1,622,594 1,630,029 1,895,416
Income before taxes 777,720 845,328 938,499 822,845
Income taxes 288,837 315,254 363,607 283,963
Net income 488,883 530,074 574,892 538,882
Earnings per share - basic N/M 0.14 0.15 0.15
Earnings per share - diluted N/M 0.14 0.15 0.15
Weighted average shares
outstanding - basic N/M 3,736,665 3,743,244 3,631,283
Weighted average shares
outstanding - diluted N/M 3,757,902 3,759,960 3,651,035
September 30, 1998
Interest income $3,430,874 $3,362,169 $3,374,342 $3,434,655
Interest expense 1,781,174 1,764,803 1,785,816 1,809,911
Net interest income 1,649,700 1,597,366 1,588,526 1,624,744
Provision for loan losses 79,897 (10,374) 63,538 76,216
Net interest income after
loan loss provision 1,569,803 1,607,740 1,524,988 1,548,528
Non interest income 292,041 442,143 497,686 615,242
Non interest expense 1,132,971 1,268,268 1,228,114 1,634,195
Income before taxes 728,872 781,615 794,559 529,575
Income taxes 255,509 278,425 295,817 160,076
Net income 473,363 503,190 498,742 369,499
Earnings per share - basic N/M N/M N/M N/M
Earnings per share - diluted N/M N/M N/M N/M
</TABLE>
-46-
<PAGE>
19. CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS.
The following table presents the condensed balance sheet of the Company at
September 30, 1999 and the condensed statement of income and cash flows for
the period from December 2, 1998 (date of inception) through September 30,
1999:
<TABLE>
<CAPTION>
Condensed Balance Sheet
<S> <C>
ASSETS:
Cash and cash equivalents $ 5,603,971
Investment in Bank 39,379,328
Investment and mortgage-backed securities 4,880,556
Other assets 40,988
-----------
Total assets $49,904,843
===========
STOCKHOLDERS' EQUITY $49,904,843
===========
Condensed Statement of Income
INTEREST INCOME $ 491,416
NONINTEREST EXPENSE 145,901
-----------
Income before income taxes and equity in earnings of Bank 345,515
PROVISION FOR INCOME TAXES 129,431
-----------
Net income before equity in earnings of Bank 216,084
EQUITY IN EARNINGS OF BANK 1,916,648
-----------
NET INCOME $ 2,132,732
===========
</TABLE>
-47-
<PAGE>
<TABLE>
<CAPTION>
Condensed Statement of Cash Flows
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,132,732
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in earnings of Bank (1,916,648)
Net change in other assets and liabilities (40,988)
Premium discount amortization (54,995)
------------
Net cash provided by operating activities 120,101
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Bank (12,615,231)
Purchase of investments (4,899,769)
Principal payments on mortgage-backed securities 48,347
------------
Net cash used in investing activities (17,466,653)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock (2,322,004)
Issuance of common stock 26,602,287
Dividends paid (1,329,760)
------------
Net cash provided by financing activities 22,950,523
------------
NET INCREASE IN AND ENDING BALANCE OF CASH
AND CASH EQUIVALENTS $ 5,603,971
============
</TABLE>
* * * * * *
-48-
<PAGE>
Common Stock Information
The common stock of the Company trades on the Nasdaq National Market under the
symbol "PULB". Prior to December 2, 1998, the common stock of the Bank traded
on the Nasdaq Small Cap Market under the symbol "PULB" and accordingly, the 1998
information is under the capital structure prior to the Conversion and
Reorganization and the 1999 information is for the capital structure after the
Conversion and Reorganization only. There are approximately 1,072 stockholders
of record of the Company, including brokers or other nominees.
The following table sets forth market price and dividend information for the
Company's common stock for fiscal year 1999 and the Bank's common stock for
fiscal year 1998.
Fiscal 1999 High Low Dividend
First Quarter $ 10.84 $ 9.38 $.09/per share
Second Quarter $ 10.00 $ 9.25 $.09/per share
Third Quarter $ 11.25 $ 9.00 $.09/per share
Fourth Quarter $11.875 $10.375 $.09/per share
Fiscal 1998 High Low Dividend
First Quarter $ 33.00 $ 27.00 $.275/per share
Second Quarter $ 51.00 $ 31.00 $.275/per share
Third Quarter $ 48.00 $ 37.00 $.275/per share
Fourth Quarter $ 39.00 $ 21.00 $.275/per share
The ability of the Company to pay dividends depends primarily on the Bank's
ability to pay dividends. For a discussion of the restrictions on the Bank's
ability to pay dividends, see Note 12 in Notes to Consolidated Financial
Statements.
-49-
<PAGE>
Directors and Officers
<TABLE>
<CAPTION>
Directors Officers
<S> <C>
William A. Donius William A. Donius
Chairman, President and Chief Executive Officer Chairman, President and Chief Executive Officer
Michael J. Donius Michael J. Donius
Executive Vice President, Chief Operating Officer Executive Vice President, Chief Operating Officer and
and Secretary Secretary
Thomas F. Hack Thomas F. Hack
Chief Financial Officer and Treasurer Chief Financial Officer and Treasurer
E. Douglas Britt Daniel N. Dean
Retired Thrift Executive Chief Lending Officer
Garland A. Dorn Beverly M. Kelley
President and Chief Executive Officer of Diagnostic Senior Vice President
Rehabilitation Systems, Inc.
Robert A. Ebel Christopher K. Reichert
President and Chief Executive Officer of Universal Senior Vice President
Printing Co.
Dr. Edward J. Howenstein Michael G. Flaton
Retired Dentist Vice President
Emeritus Director Leslie A. Goldberg
Vice President
Walter A. Donius
</TABLE>
-50-
<PAGE>
Corporate Information
Corporate Headquarters
12300 Olive Boulevard
St. Louis, Missouri
Independent Auditors
Deloitte & Touche LLP
St. Louis, Missouri
General Counsel
Kappel, Neill and Wolff LLC
St. Louis, Missouri
Special Securities Counsel
Muldoon, Murphy & Faucette LLP
Washington, D.C.
Annual Meeting
The annual meeting of the stockholders will be held Friday, January 21, 2000 at
2:00 p.m., Central Time, at The Saint Louis Art Museum (rear entrance), 1 Fine
Arts Boulevard, Forest Park, St. Louis, Missouri.
-51-
<PAGE>
Exhibit 21.0
Subsidiaries of Pulaski Financial Corp.
Registrant
- ----------
Pulaski Financial Corp.
<TABLE>
<CAPTION>
Subsidiaries(1) Percentage of Ownership Jurisdiction or State of Incorporation
- --------------- ----------------------- --------------------------------------
<S> <C> <C>
Pulaski Bank, A Federal Savings Bank 100% United States
Pulaski Service Corporation (2) 100% Missouri
</TABLE>
__________________
(1) The operations of the subsidiaries of the Registrant are included in the
Registrant's Consolidated Financial Statements contained in the Annual
Report to Stockholders.
(2) Wholly-owned by Pulaski Bank, A Federal Savings Bank.
<PAGE>
Exhibit 23.0
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Number
333-84515 of Pulaski Financial Corp. and subsidiaries on Form S-8 of our report
dated November 12, 1999 (November 29, 1999 as to Note 10) appearing in the
Annual Report on Form 10-K of Pulaski Financial Corp. and subsidiaries for the
year ended September 30, 1999.
DELOITTE & TOUCHE LLP
St. Louis, Missouri
December 27, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains financial information extracted from the consolidated
financial statements of Pulaski Financial Corp. for the year ended September 30,
1999 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 3,487
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 5,400
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 25,590
<INVESTMENTS-CARRYING> 13,007
<INVESTMENTS-MARKET> 13,157
<LOANS> 181,469
<ALLOWANCE> 986
<TOTAL-ASSETS> 243,974
<DEPOSITS> 161,371
<SHORT-TERM> 10,300
<LIABILITIES-OTHER> 4,098
<LONG-TERM> 18,300
0
0
<COMMON> 40
<OTHER-SE> 49,865
<TOTAL-LIABILITIES-AND-EQUITY> 243,974
<INTEREST-LOAN> 12,804
<INTEREST-INVEST> 1,877
<INTEREST-OTHER> 576
<INTEREST-TOTAL> 15,258
<INTEREST-DEPOSIT> 6,655
<INTEREST-EXPENSE> 7,323
<INTEREST-INCOME-NET> 7,935
<LOAN-LOSSES> 265
<SECURITIES-GAINS> 2
<EXPENSE-OTHER> 6,602
<INCOME-PRETAX> 3,384
<INCOME-PRE-EXTRAORDINARY> 3,384
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,133
<EPS-BASIC> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.12
<LOANS-NON> 258
<LOANS-PAST> 1,153
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 763
<CHARGE-OFFS> 52
<RECOVERIES> 10
<ALLOWANCE-CLOSE> 986
<ALLOWANCE-DOMESTIC> 120
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 866
</TABLE>
