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| PULB > SEC Filings for PULB > Form 10-Q on 13-Aug-2012 | All Recent SEC Filings |
13-Aug-2012
Quarterly Report
FORWARD-LOOKING STATEMENTS
This report contains certain "forward-looking statements" within the meaning of the federal securities laws, which are made in good faith pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These statements are not historical facts; rather, they are statements based on Pulaski Financial Corp.'s (the "Company") current expectations regarding its business strategies, intended results and future performance. Forward-looking statements are generally 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 that could affect actual results include interest rate trends, the economy 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 demand, the quality of the loan portfolio, including trends in adversely classified loans, charge-offs, troubled debt restructurings and loan delinquency rates, changes in accounting policies and changes in federal and state legislation and regulation. The Company provides greater detail regarding some of these factors in its Form 10-K for the year ended September 30, 2011, including the Risk Factors section of that report. The Company's forward-looking statements may also be subject to other risks and uncertainties, including those that it may discuss elsewhere in this report or in its other filings with the Securities and Exchange Commission. 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 to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.
GENERAL
Pulaski Financial Corp., operating in its ninetieth year, is a community-based, financial institution holding company headquartered in St. Louis, Missouri. It conducts operations primarily through Pulaski Bank (the "Bank"), a federally chartered savings bank with $1.35 billion in assets at June 30, 2012. Pulaski Bank provides an array of financial products and services for businesses and consumers primarily through its thirteen full-service offices in the St. Louis metropolitan area and eight loan production offices in the St. Louis and Kansas City metropolitan areas, Joplin, Missouri and Wichita, Kansas.
The Company has primarily grown its assets and deposits internally by building its residential and commercial lending operations, by opening de novo branches, and by hiring experienced bankers with existing customer relationships in its market areas. The Company's goal is to continue to deliver value to its shareholders and enhance its franchise value and earnings through controlled growth in its banking operations, while maintaining the personal, community-oriented customer service that has characterized its success to date.
RESULTS OF COMMUNITY BANKING STRATEGY
The Company's community banking strategy emphasizes high-quality, responsive, and personalized customer service. The Company has been successful in distinguishing itself from the larger regional banks operating in its market areas by offering quicker decision making in the delivery of banking products and services, offering customized products where needed, and providing customers access to senior decision makers. Crucial to this strategy is growth in the Company's three primary business lines: commercial banking services, retail mortgage lending and retail banking services.
Commercial Banking Services
The Company's commercial banking services are centered on serving small- to medium-sized businesses primarily in the St. Louis metropolitan area, and the Company's operations continue to be driven by its staff of experienced commercial bankers and the commercial banking relationships they generate. The commercial loan portfolio includes permanent mortgage loans secured by owner and non-owner occupied commercial and multi-family residential real estate, commercial and industrial loans, and to a much lesser extent, commercial and multi-family construction loans and land acquisition and development loans.
Although the distressed local and national economic climate continued to dampen the supply of quality commercial loans, the Company continued to originate commercial loans to its most credit-worthy customers under tightened credit standards. Given the increased level of risk associated with certain types of commercial real estate lending created by the distressed economic climate, the Company's emphasis in recent years has been on commercial and industrial lending and owner-occupied commercial real estate lending. Commercial loan originations totaled $144.6 million and $368.1 million during the three and nine months ended June 30, 2012 compared with $121.1 million and $307.3 million during the same periods last year, respectively. The commercial loan portfolio increased $25.1 million, or 4.4%, during the nine-month period to $596.0 million at June 30, 2012 compared with $570.9 million at September 30, 2011. Commercial and multi-family real estate loans increased $7.4 million to $323.6 million at June 30, 2012 compared with $316.2 million at September 30, 2011. Commercial and industrial loans increased $23.8 million to $204.6 million at June 30, 2012 compared with $180.8 million at September 30, 2011. Partially offsetting these increases were decreases in real estate construction and development loans and land acquisition and development loans. Real estate construction and development loans decreased $2.1 million to $20.2 million at June 30, 2012 compared with $22.3 million at September 30, 2011, primarily as the result of $7.7 million of such loans converting to permanent financing, resulting in a similar increase in commercial and multi-family real estate loans. Land acquisition and development loans decreased $4.0 million to $47.5 million at June 30, 2012 compared with $51.5 million at September 30, 2011.
The Company's commercial loan customers are also among the best sources of core deposit accounts. Commercial checking and money market demand accounts totaled $231.9 million, or 20.4% of total deposits, at June 30, 2012 compared with $210.8 million, or 18.8% of total deposits, at September 30, 2011.
Retail Mortgage Lending
The Company originates conforming, residential mortgage loans directly through commission-based sales staffs in the St. Louis and Kansas City metropolitan areas, Joplin, Missouri and Wichita, Kansas. The Company is a leading mortgage originator in the St. Louis and Kansas City markets, and has successfully leveraged its reputation for financial strength and quality customer service with its staff of experienced mortgage loan officers who have strong community relationships. Substantially all of the loans originated in the retail mortgage division are one- to four-family residential loans secured by properties in the Company's market areas that are sold to investors on a "best efforts," servicing-released basis. Such sales generate mortgage revenues, which is the Company's largest source of non-interest income. In addition, loans that are closed and are held pending their sale to investors provide a valuable source of interest income until they are delivered to such investors.
The following is a summary of residential mortgage loans originated for sale during each of the quarterly periods in the three quarters ended June 30, 2012 and 2011.
2012 2011
Mortgage Home Mortgage Home
Refinancings Purchases Total Refinancings Purchases Total
(In thousands)
First quarter $ 242,343 $ 140,396 $ 382,739 $ 433,895 $ 195,559 $ 629,454
Second quarter 193,585 110,638 304,223 120,893 87,705 208,598
Third quarter 155,176 185,772 340,948 70,102 186,055 256,157
Total $ 591,104 $ 436,806 $ 1,027,910 $ 624,890 $ 469,319 $ 1,094,209
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Driven by the low level of market interest rates that existed during the nine months ended June 30, 2012, the Company saw strong demand for mortgage refinancings. However, this level of demand was down from the near historically high levels experienced during the first quarter of fiscal 2011. Loans originated to refinance existing mortgages totaled $155.2 million, or 44% of total loans originated for sale, for the quarter ended June 30, 2012 compared with $70.1 million, or 27% of total loans originated for sale, for the same quarter last year. For the nine month periods, mortgage loan refinancing activity totaled $591.1 million, or 58% of total loans originated for sale, in 2012 compared with $624.9 million, or 56% of total loans originated for sale, in 2011. In addition, although the market demand for loans to finance the purchase of homes remained soft as the result of the distressed economic climate and low level of home sale activity, the Company was able to capture a large part of such purchase activity by capitalizing on its strong reputation within its markets and its solid relationships with local realtors. Loans originated to finance the purchase of homes totaled $185.8 million for the quarter ended June 30, 2012 compared with $186.1 million for the same period last year. For the nine month periods, loans originated to finance the purchase of homes totaled $436.8 million in 2012 compared with $469.3 million for the same period last year. Loans originated during the nine months ended June 30, 2012 exceeded loans sold resulting in a $48.0 million, or 47.7%, increase in mortgage loans held for sale to $148.8 million at June 30, 2012 from $100.7 million at September 30, 2011.
The following is a summary of residential loans sold to investors and the related mortgage revenues during each of the quarterly periods in the three quarters ended June 30, 2012 and 2011.
2012 2011
Net Net
Loans Mortgage Profit Loans Mortgage Profit
Sold Revenues Margin Sold Revenues Margin
(Dollars in thousands)
First quarter $ 329,875 $ 1,686 0.51 % $ 614,894 $ 1,847 0.30 %
Second quarter 310,772 1,897 0.61 % 431,618 848 0.20 %
Third quarter 344,636 2,410 0.70 % 260,400 1,295 0.50 %
Total $ 985,283 $ 5,993 0.61 % $ 1,306,912 $ 3,990 0.31 %
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The net profit margins during the 2012 periods benefitted from improved selling prices negotiated with the Company's loan investors and lower direct origination costs as the result of management's focus on reducing such costs. The net profit margins on loans sold during the first and second quarters of fiscal 2011 were abnormally low and were primarily the result of operational processing challenges the Company experienced related to the high mortgage loan refinancing volumes in those periods and tightening investor documentation and underwriting requirements. Such challenges resulted in extended processing times and the inability to deliver a number of loans held for sale to investors within the original interest rate lock commitment periods. As a result, such loans were delivered to investors at significantly reduced gross profit margins as they were repriced at reduced market values. The Company resolved these operational challenges during the second quarter of fiscal 2011, resulting in improved gross profit margins in subsequent quarters.
Also reducing mortgage revenues were charges to earnings totaling $403,000 and $1.4 million during the three- and nine- months ended June 30, 2012, respectively, and $436,000 and $1.3 million during the three- and nine-months ended June 30, 2011, respectively for estimated liabilities due to the Company's loan investors under contractual obligations related to loans that were previously sold and became delinquent or defaulted. Refer to Note 12 of Notes to Unaudited Consolidated Financial Statements for a discussion of the Company's treatment of the estimated liability. The Company does not sell loans directly to government-sponsored enterprises, but rather to large national seller servicers on a servicing-released basis. Reflecting industry-wide trends, the Company experienced an increase in repurchase requests from its investors during the 2011 and 2012 periods. In response, the Company strengthened its review and appeal procedures to respond to such requests. The Company's loans originated for sale are primarily made to its customers within its market areas of metropolitan St. Louis and Kansas City, Joplin, Missouri and Wichita, Kansas and are locally underwritten according to government agency and investor standards. In addition, all loans sold to investors are subject to stringent quality control reviews by the Company and its investors before the purchases are funded.
Another important source of revenue generated by the Company's mortgage banking operation is interest income on mortgage loans that are held for sale pending delivery to the Company's loan investors. Because such loans are generally held for short periods of time pending delivery to such investors, the Company is able to fund them with short-term, low cost-funding sources, which generally results in interest-rate spreads higher than other interest-earning assets held by the Company. Interest income on loans held for sale increased 124.0% to $1.2 million for the quarter ended June 30, 2012 compared with $557,000 for the quarter ended June 30, 2011. The increase was due to an $85.7 million increase in the average balance of loans held for sale compared with the same 2011 quarter, partially offset by a 74 basis point decrease in the average yield resulting from lower market interest rates. For the nine month periods, interest income on loans held for sale decreased 22.0% to $3.8 million in 2012 compared to $4.9 million during the same period last year. The decrease was due to a $17.9 million decrease in the average balance combined with a 50 basis point decrease in the average yield.
Although the Company primarily originates residential mortgage loans for sale to investors, it has historically retained a certain number of loans in portfolio, consisting of first mortgage, second mortgage and home equity lines of credit, which are revolving lines of credit secured by residential real estate. However, over the past several years, the Company has repeatedly tightened its underwriting standards in response to the prevailing economic conditions and has retained fewer of such loans in portfolio. In addition, the low interest rate environment that has existed over the past several periods has significantly diminished the demand for variable-rate first mortgage loans, which were generally the Company's primary portfolio product in prior periods. As a result, the aggregate balance of residential first mortgage loans, residential second mortgage loans and home equity lines of credit decreased $55.6 million, or 11.8%, to $414.4 million at June 30, 2012 compared with $470.0 million at September 30, 2011.
Retail Banking Services
Core deposits, which include checking, money market and savings accounts, provide a stable funding source for the Bank's asset growth and produce valuable fee income. Growth of relationship-based core deposits continues to be one of the Company's primary, long-term strategic objectives. The Company's approach to attracting deposits involves three key components: providing excellence in customer service, best-in-class products and convenient banking locations. Enhancing its ability to attract depositors, the Bank offers its customers the ability to receive FDIC deposit insurance on their balances in excess of the standard amount of $250,000 per depositor in several ways. It participates in the Promontory Interfinancial Network ("Promontory") Certificate of Deposit Account Registry Service ("CDARS"), which enables its customers to receive FDIC insurance on their account balances up to $10 million. The Bank offers similar arrangements on money market deposit accounts through Promontory and a large international bank. These accounts are offered directly to the Bank's customers in its St. Louis market. It also participates in the FDIC's Transaction Account Guarantee Program, which provides full FDIC insurance coverage through December 31, 2013 for non-interest-bearing transaction accounts and qualifying NOW accounts, regardless of the dollar amount.
Core deposits decreased $2.4 million, or 0.3%, to $695.9 million at June 30, 2012 from $698.3 million at September 30, 2011, primarily as the result of a $18.8 million decrease in deposits from retail customers partially offset by an $8.1 million increase in deposits from commercial customers and a $4.1 million increase in deposits from municipal and public funds. The decrease in core deposits from retail customers was largely due to a shift in such deposits into certificates of deposit
that were paying higher interest rates, and also the result of management's focus on reducing the rates paid on higher-rate accounts that were determined not to have other relationships with the Bank. The increases in core deposits from commercial customers and municipal and public funds were the result of an increase in new customer relationships as well as an increase in balances held by existing customers. The weighted-average cost of interest-bearing checking accounts and money market accounts was 0.16% and 0.22%, respectively, at June 30, 2012, compared with 0.28% and 0.33%, respectively, at September 30, 2011.
Certificates of deposits increased $15.1 million to $439.3 million at June 30, 2012 from $424.2 million at September 30, 2011. The increase was primarily the result of a $14.5 million increase in time deposits received from retail customers, as the result of a shift from lower rate core deposits, and a $9.9 million increase in time deposits received from municipal and public entities, as the result of new deposits received. These increases were partially offset by the maturity of an $8.4 million certificate of deposit obtained through a national broker, which represented the remaining balance of such deposits. Management de-emphasized the use of brokered deposits in prior periods because of the Bank's success in raising deposits in its local market. Total deposits increased $12.7 million, or 1.1%, to $1.14 billion at June 30, 2012.
Retail banking fees include fees charged to customers who have overdrawn their checking accounts and service charges on other retail banking products. Such fees remained relatively constant at $1.0 million and $3.0 million for the three and nine months ended June 30, 2012 compared with $1.1 million and $3.0 million for the three and nine months ended June 30, 2011.
AVERAGE BALANCE SHEETS
The following table sets forth information regarding average daily 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.
Three Months Ended
June 30, 2012 June 30, 2011
Interest Interest
Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost
(Dollars in thousands)
Interest-earning assets:
Loans receivable: (1)
Residential real estate $ 238,140 $ 3,399 5.71 % $ 276,681 $ 3,963 5.73 %
Commercial 617,439 7,477 4.84 % 597,083 7,736 5.18 %
Home equity lines of credit 156,799 1,413 3.61 % 185,367 1,697 3.66 %
Consumer 2,066 15 2.92 % 2,690 6 0.97 %
Total loans receivable 1,014,444 12,304 4.85 % 1,061,821 13,402 5.05 %
Mortgage loans held for
sale 136,226 1,249 3.67 % 50,525 557 4.41 %
Securities and other 63,219 110 0.70 % 140,556 216 0.61 %
Total interest-earning
assets 1,213,889 13,663 4.50 % 1,252,902 14,175 4.53 %
Non-interest-earning assets 93,495 89,563
Total assets $ 1,307,384 $ 1,342,465
Interest-bearing
liabilities:
Interest-bearing checking $ 297,294 226 0.30 % $ 358,989 615 0.69 %
Savings 36,951 21 0.22 % 33,296 18 0.22 %
Money market 178,905 197 0.44 % 198,269 325 0.66 %
Certificates of deposit 441,047 1,209 1.10 % 447,295 1,785 1.60 %
Total interest-bearing
deposits 954,197 1,653 0.69 % 1,037,849 2,743 1.06 %
FHLB advances 30,538 228 2.98 % 29,000 226 3.12 %
Subordinated debentures 19,589 135 2.76 % 19,589 127 2.59 %
Total interest-bearing
liabilities 1,004,324 2,016 0.80 % 1,086,438 3,096 1.14 %
Non-interest bearing
liabilities:
Non-interest bearing
deposits 162,510 124,229
Other non-interest bearing
liabilities 14,552 12,310
Total non-interest-bearing
liabilities 177,062 136,539
Stockholders' equity 125,998 119,488
Total liabilities and
stockholders' equity $ 1,307,384 $ 1,342,465
Net interest income $ 11,647 $ 11,079
Interest rate spread (2) 3.70 % 3.39 %
Net interest margin (3) 3.84 % 3.54 %
Ratio of average
interest-earning assets to
average interest-bearing
liabilities 120.87 % 115.32 %
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Nine Months Ended
June 30, 2012 June 30, 2011
Interest Interest
Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost
(Dollars in thousands)
Interest-earning assets:
Loans receivable: (1)
Real estate $ 249,049 $ 10,548 5.65 % $ 276,815 $ 11,947 5.75 %
Commercial 612,938 23,049 5.01 % 593,136 23,194 5.21 %
Home equity lines of
credit 164,117 4,496 3.65 % 191,076 5,289 3.69 %
Consumer 2,466 61 3.28 % 3,021 70 3.12 %
Total loans receivable 1,028,570 38,154 4.95 % 1,064,048 40,500 5.07 %
Mortgage loans held for
sale 137,862 3,836 3.71 % 155,743 4,922 4.21 %
Securities and other 52,176 307 0.79 % 90,351 695 1.03 %
Total interest-earning
assets 1,218,608 42,297 4.63 % 1,310,142 46,117 4.69 %
Non-interest-earning
assets 88,403 88,799
Total assets $ 1,307,011 $ 1,398,941
Interest-bearing
liabilities:
Interest-bearing
checking $ 313,745 987 0.42 % $ 358,883 2,099 0.78 %
Passbook savings 36,514 59 0.21 % 31,140 41 0.18 %
Money market 183,160 665 0.48 % 196,001 1,057 0.72 %
Certificates of deposit 427,027 3,911 1.22 % 432,204 5,717 1.76 %
Total interest-bearing
deposits 960,446 5,622 0.78 % 1,018,228 8,914 1.17 %
FHLB advances 31,241 686 2.93 % 99,088 842 1.13 %
Subordinated debentures 19,589 406 2.76 % 19,589 380 2.58 %
Total interest-bearing
liabilities 1,011,276 6,714 0.89 % 1,136,905 10,136 1.19 %
Non-interest bearing
liabilities:
Non-interest bearing
deposits 156,685 128,075
Other non-interest
bearing liabilities 14,586 14,337
Total
non-interest-bearing
liabilities 171,271 142,412
Stockholders' equity 124,464 119,624
Total liabilities and
stockholders' equity $ 1,307,011 $ 1,398,941
Net interest income $ 35,583 $ 35,981
Interest rate spread (2) 3.74 % 3.50 %
Net interest margin (3) 3.89 % 3.66 %
Ratio of average
interest-earning assets
to average
. . .
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