| • 10-Q • EX-31.1 • EX-31.2 • EX-32.1 • EX-32.2 • XBRL INSTANCE DOCUMENT • XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT • XBRL TAXONOMY EXTENSION CALCULATION LINKBASE DOCUMENT • XBRL TAXONOMY EXTENSION LABELS LINKBASE DOCUMENT • XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE DOCUMENT • XBRL TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2012
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
0-24571 Commission File Number
Pulaski Financial Corp. (Exact name of registrant as specified in its charter)
Registrant’s telephone number, including area code: (314) 878-2210
Not Applicable (Former name, address and former fiscal year, if changed since last report)
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 o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No x
Indicate the number of shares outstanding of the registrant’s classes of common stock, as of the latest practicable date.
PULASKI FINANCIAL CORP. AND SUBSIDIARIES
FORM 10-Q
MARCH 31, 2012
PULASKI FINANCIAL CORP. AND SUBSIDIARIES
MARCH 31, 2012 AND SEPTEMBER 30, 2011 (UNAUDITED)
See accompanying notes to the unaudited consolidated financial statements.
PULASKI FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME THREE AND SIX MONTHS ENDED MARCH 31, 2012 AND 2011 (UNAUDITED)
See accompanying notes to the unaudited consolidated financial statements.
PULASKI FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY SIX MONTHS ENDED MARCH 31, 2012 (UNAUDITED)
See accompanying notes to the unaudited consolidated financial statements.
PULASKI FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED MARCH 31, 2012 AND 2011 (UNAUDITED)
Continued on next page.
PULASKI FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED MARCH 31, 2012 AND 2011, CONTINUED (UNAUDITED)
See accompanying notes to the unaudited consolidated financial statements.
PULASKI FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of Pulaski Financial Corp. (the “Company”) and its wholly owned subsidiary, Pulaski Bank (the “Bank”), and the Bank’s wholly owned subsidiaries, Pulaski Service Corporation and Priority Property Holdings, LLC. All significant intercompany accounts and transactions have been eliminated. The assets of the Company consist primarily of the investment in the outstanding shares of the Bank and its liabilities consist principally of obligations on its subordinated debentures. Accordingly, the information set forth in this report, including the consolidated financial statements and related financial data, relates primarily to the Bank. The Company, through the Bank, operates as a single business segment, providing traditional community banking services through its full service branch network.
In the opinion of management, the unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the financial condition of the Company as of March 31, 2012 and September 30, 2011 and its results of operations for the three- and six-month periods ended March 31, 2012 and 2011. The results of operations for the three- and six-month period ended March 31, 2012 are not necessarily indicative of the operating results that may be expected for the entire fiscal year or for any other period. These unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended September 30, 2011 contained in the Company’s 2011 Annual Report to Stockholders, which was filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended September 30, 2011.
The preparation of these consolidated financial statements 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 that affect the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates. The allowance for loan losses is a significant estimate reported within the consolidated financial statements.
Certain reclassifications have been made to fiscal 2011 amounts to conform to the fiscal 2012 presentation.
The Company has evaluated all subsequent events to ensure that the accompanying financial statements include the effects of any subsequent events that should be recognized in such financial statements as of March 31, 2012, and the appropriate disclosure of any subsequent events that were not recognized in the financial statements.
2. PREFERRED STOCK
In January 2009, as part of the U.S. Department of Treasury’s Capital Purchase Program, the Company issued 32,538 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, $1,000 per share liquidation preference, and a warrant to purchase up to 778,421 shares of the Company’s common stock for a period of ten years at an exercise price of $6.27 per share in exchange for $32.5 million in cash from the U.S. Department of Treasury. The proceeds, net of issuance costs consisting primarily of legal fees, were allocated between the preferred stock and the warrant on a pro rata basis based upon the estimated market values of the preferred stock and the warrant. As a result, $2.2 million of the proceeds were allocated to the warrant, which increased additional paid in capital from common stock. The amount allocated to the warrant is treated as a discount on the preferred stock and is being accreted using the level yield method over a five-year period through a charge to retained earnings. Such accretion does not reduce net income, but reduces income available to common shares.
The fair value of the preferred stock was estimated on the date of issuance by computing the present value of expected future cash flows using a risk-adjusted rate of return for similar securities equal to 12%. The fair value of the warrant
was estimated on the date of grant using the Black-Scholes option pricing model assuming a risk-free interest rate of 4.30%, expected volatility of 35.53% and a dividend yield of 4.27%.
The preferred stock pays cumulative dividends of 5% per year for the first five years and 9% per year thereafter. The Company may, at its option, redeem the preferred stock at its liquidation preference plus accrued and unpaid dividends. The securities purchase agreement between the Company and the U.S. Treasury subjects the Company to certain executive compensation limitations included in the Emergency Economic Stabilization Act of 2008, as amended by the American Recovery and Reinvestment Act of 2009.
3. EARNINGS PER COMMON SHARE
Basic earnings per common share is computed using the weighted average number of common shares outstanding. The dilutive effect of potential common shares outstanding is included in diluted earnings per share. The computations of basic and diluted earnings per common share are presented in the following table.
Under the treasury stock method, outstanding stock options are dilutive when the average market price of the Company’s common stock, combined with the effect of any unamortized compensation expense, exceeds the option price during a period. Proceeds from the assumed exercise of dilutive options along with the related tax benefit are assumed to be used to repurchase common shares at the average market price of such stock during the period. Similarly, outstanding warrants are dilutive when the average market price of the Company’s common stock exceeds the exercise price during a period. Proceeds from the assumed exercise of dilutive warrants are assumed to be used to repurchase common shares at the average market price of such stock during the period.
Options to purchase common shares totaling 595,090 and 635,195 during the three months ended March 31, 2012 and 2011, respectively, and 625,093 and 641,903 during the six months ended March 31, 2012 and 2011, respectively, were excluded from the computations of diluted earnings per share because the exercise price of the options, when combined with the effect of the unamortized compensation expense, were greater than the average market price of such stock during the periods. There were no warrants determined to be anti-dilutive that were excluded from the respective computations of diluted earnings per share during the three- and six-month periods ended March 31, 2012 and 2011.
4. STOCK-BASED COMPENSATION
The Company maintains shareholder-approved, stock-based incentive plans, which permit the granting of options to purchase common stock of the Company and awards of restricted shares of common stock. Employees, non-employee directors and consultants of the Company and its affiliates are eligible to receive awards under the plans. The plans authorize the granting of awards in the form of options intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code, options that do not so qualify (non-statutory stock options) and granting of restricted shares of common stock. Stock option awards are generally granted with an exercise price equal to the market value of the Company’s shares at the date of grant and generally vest over a period of three to five years. The exercise period for all stock options generally may not exceed 10 years from the date of grant. Restricted stock awards generally vest over a period of two to five years. Generally, option and share awards provide for accelerated vesting if there is a change in control (as defined in the plans). As a participant in the U.S. Department of Treasury’s Capital Purchase Program, certain employees are prohibited from receiving golden parachute payments while the Company has any outstanding preferred stock related to the program. Under the Treasury’s regulations, golden parachute payments are defined to include any payment due to a change in control of the Company, which includes the acceleration of vesting in stock-based incentive plans due to the departure of a covered employee or a change in control. Accordingly, the affected employees have signed agreements to forfeit the right to accelerated vesting while any funds related to the Treasury’s program are outstanding. Shares used to satisfy stock awards and stock option exercises are generally issued from treasury stock. At March 31, 2012, the Company had 106,026 reserved but unissued shares that can be awarded in the form of stock options or restricted share awards.
A summary of the Company’s restricted stock awards as of March 31, 2012 and changes during the six-month period then ended, is presented below:
A summary of the Company’s stock option program as of March 31, 2012 and changes during the six-month period then ended, is presented below:
As of March 31, 2012, the total unrecognized compensation expense related to non-vested stock options and restricted stock awards was approximately $145,000 and $1.5 million, respectively, and the related weighted average period over which it is expected to be recognized is approximately 0.98 and 2.2 years, respectively. There were no stock options granted during the six-month periods ended March 31, 2012 and 2011.
The Company maintains a deferred compensation plan (“Equity Trust Plan”) for the benefit of key loan officers and sales staff. The plan is designed to recruit and retain top-performing loan officers and other key revenue-producing employees who are instrumental to the Company’s success. The plan allows the recipients to defer a percentage of commissions earned into a rabbi trust for the benefit of the participants. The assets of the trust are limited to shares of Company common stock and cash. Awards generally vest over a period of three to five years, and the participants will forgo any accrued but unvested benefits if they voluntarily leave the Company. Vested shares in the plan are treated as issued and outstanding when computing basic and diluted earnings per share, whereas unvested shares are treated as issued and outstanding only when computing diluted earnings per share. During the six months ended March 31, 2012, the Company purchased 27,211 shares on behalf of the participants at an average price of $6.67 and distributed 2,878 vested shares to participants with an aggregate market value at the time of distribution of $25,400. At March 31, 2012, there were 530,796 shares in the plan with an aggregate market value of $4.7 million. Such shares were included in treasury stock in the Company’s consolidated financial statements, including 255,657 shares that were not yet vested.
5. INCOME TAXES
Deferred tax assets totaled $10.0 million at March 31, 2012 and $12.8 million at September 30, 2011, and resulted primarily from the temporary differences related to the allowance for loan losses. Deferred tax assets are recognized only to the extent that they are expected to be used to reduce amounts that have been paid or will be paid to tax authorities. Management believes, based on all positive and negative evidence, that the realization of the deferred tax asset at March 31, 2012 is more likely than not, and accordingly, no valuation allowance has been recorded. The ultimate outcome of future facts and circumstances could require a valuation allowance and any charges to establish such valuation allowance could have a material adverse effect on the Company’s results of operations and financial position.
At March 31, 2012, the Company had $137,000 of unrecognized tax benefits, $129,000 of which would affect the effective tax rate if recognized. The Company recognizes interest related to uncertain tax positions in income tax expense and classifies such interest and penalties in the liability for unrecognized tax benefits. As of March 31, 2012, the Company had approximately $8,000 accrued for the payment of interest and penalties. The tax years ended September 30, 2008 through 2011 remain open to examination by the taxing jurisdictions to which the Company is subject.
6. DEBT SECURITIES
The amortized cost and estimated fair value of debt securities available for sale at March 31, 2012 and September 30, 2011 are summarized as follows:
As of March 31, 2012 and September 30, 2011, the Company did not have any debt securities available for sale that were in a continuous loss position for twelve months or more. Debt securities with carrying values totaling approximately $10.9 million at March 31, 2012 were pledged to secure deposits of public entities, trust funds, and for other purposes as required by law.
7. MORTGAGE-BACKED SECURITIES
Mortgage-backed securities held to maturity and available for sale at March 31, 2012 and September 30, 2011 are summarized as follows:
As of March 31, 2012, the Company did not have any mortgage-backed securities held to maturity that were in a continuous loss position for 12 months or more. The following summary below displays the length of time mortgage-backed securities available for sale were in a continuous unrealized loss position as of March 31, 2012. The unrealized losses were not deemed to be other than temporary. The Company does not have the intent to dispose of these investments and it is not more likely than not that the Company will be required to sell these investments prior to recovery of the unrealized losses. Further, the Company believes the deterioration in value is attributable to changes in market interest rates and not the credit quality of the issuer.
As of September 30, 2011, the Company did not have any mortgage-backed securities held to maturity or available for sale that were in a continuous loss position for 12 months or more. Mortgage-backed securities with carrying values totaling approximately $7.0 million at March 31, 2012 were pledged to secure deposits of public entities, trust funds, and for other purposes as required by law.
8. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
Loans receivable at March 31, 2012 and September 30, 2011 are summarized as follows:
Allowance for Loan Losses
The Company maintains an allowance for loan losses to absorb probable losses in the Company’s loan portfolio. Loan charge-offs are charged against and recoveries are credited to the allowance. Provisions for loan losses are charged to income and credited to the allowance in an amount necessary to maintain an appropriate allowance given the risks identified in the portfolio. The allowance is comprised of specific allowances on impaired loans (assessed for loans that have known credit weaknesses) and pooled or general allowances based on risk characteristics and historical loan loss experience for each loan type. The allowance is based upon management’s quarterly estimates of probable losses inherent in the loan portfolio.
In general, impairment losses on all single-family residential real estate loans that become 180 days past due and all consumer loans that become 120 days past due are recognized through charge-offs to the allowance for loan losses. For impaired single-family residential real estate and consumer loans that do not meet these criteria, management considers many factors before charging off a loan and might establish a specific reserve in lieu of a charge-off. While the delinquency status of the loan is a primary factor in determining whether to establish a specific reserve or record a charge-off, other key factors are considered, including the overall financial condition of the borrower, the progress of management’s collection efforts and the value of the underlying collateral. For purposes of determining the allowance for loan losses, all residential and consumer loan charge-offs and changes in the level of specific reserves are included in the determination of historical loss rates for each pool of loans with similar risk characteristics, as described below.
For commercial loans, all or a portion of a loan is charged off when circumstances indicate that a loss is probable and there is no longer a reasonable expectation that a change in such circumstances will result in the collection of the full amount of the loan. Similar to single-family residential real estate loans, management considers many factors before charging off a loan. While the delinquency status of the loan is a primary factor, other key factors are considered and the Company does not charge off commercial loans based solely on a predetermined length of delinquency. The other factors considered include the overall financial condition of the borrower, the progress of management’s collection efforts and the value of the underlying collateral. For purposes of determining the allowance for loan losses, all commercial loan charge-offs and changes in the level of specific reserves are included in the determination of historical loss rates for each pool of loans with similar risk characteristics, as described below.
As the result of the Company’s required change from the Office of Thrift Supervision’s (“OTS”) Thrift Financial Reports to the Office of the Comptroller of Currency’s (“OCC”) Call Reports that became effective March 31, 2012, the Company modified its charge-off policy during the three months ended March 31, 2012 to comply with the OCC’s guidelines. As formerly permitted by the OTS, the Company had previously used specific loan loss reserves to recognize impairment charges on certain collateral dependent loans under certain circumstances. In general under the Company’s previous policy, a specific reserve could have been recorded in lieu of a charge-off on an impaired collateral dependent loan when management believed that the borrower still had the ability to bring the loan current or could provide additional collateral. The Company did not charge off loans based solely on a predetermined length of delinquency. Also, to enhance tracking of payment performance and facilitate billing and collection efforts, specific reserves were generally established in lieu of partial charge-offs on single-family residential real estate loans. Once collection efforts failed, all or a portion of the loan was generally charged off, as appropriate. The OCC generally requires such impairment charges to be recognized through loan charge-offs. For purposes of determining the allowance for loan losses, all charge-offs and changes in the level of specific reserves were included in the determination of historical loss rates for each pool of loans with similar risk characteristics.
As the result of the modifications to the loan charge-off policy to comply with the OCC’s guidance, the Company recorded $5.9 million of charge-offs during the March 2012 quarter for loans that it had established specific reserves in previous periods. Because these losses had been recognized in prior periods, the charge-off of the $5.9 million of specific reserves had no impact on the Company’s provision for loan losses or stockholders’ equity during the three months ended March 31, 2012.
During the three months ended March 31, 2012 and 2011, charge-offs of impaired loans totaled $13.2 million and $4.2 million, respectively, including partial charge-offs of $8.1 million and $0, respectively. During the six months ended March 31, 2012 and 2011, charge-offs of impaired loans totaled $16.2 million and $8.3 million, respectively, including partial charge-offs of $8.1 million and $2.8 million, respectively. At March 31, 2012 and September 30, 2011, the remaining principal balance of non-performing and impaired loans for which the Company previously recorded partial charge-offs totaled $17.1 million and $317,000, respectively. For further information, see the discussion of impaired loans below.
For purposes of determining the allowance for loan losses, the Company has segmented its loan portfolio into the following pools (or segments) that have similar risk characteristics: residential loans, commercial loans and consumer loans. Loans within these segments are further divided into subsegments, or classes, based on the associated risks within these subsegments. Residential loans are divided into three classes, including single-family first mortgage loans, single-family second mortgage loans and home equity lines of credit. Commercial loans are divided into four classes, including land acquisition and development loans, real estate construction and development loans, commercial and multi-family real estate loans and commercial and industrial loans. Consumer loans are not subsegmented because of the small balance in this segment. The following is a summary of the significant risk characteristics for each segment of loans:
Residential mortgage loans are secured by one- to four-family residential properties with loan-to-value ratios at the time of origination generally equal to 80% or less. Such loans with loan-to-value ratios of greater than 80% at the time of origination generally require private mortgage insurance. Second mortgage loans and home equity lines of credit generally involve greater credit risk than first mortgage loans because they are secured by mortgages that are subordinate to the first mortgage on the property. If the borrower is forced into foreclosure, the Company will receive no proceeds from the sale of the property until the first mortgage has been completely repaid. Prior to 2008, the Company offered second mortgage loans that exceeded 80% combined loan-to-value ratios, which were priced with enhanced yields. The Company continues to offer second mortgage loans up to 80% of the collateral values on a limited basis to credit-worthy borrowers. However, the current underwriting guidelines are more stringent due to the current adverse economic environment.
Commercial loans represent loans to varying types of businesses, including municipalities, school districts and nonprofit organizations, to support working capital, operational needs and term financing of equipment. Repayment of such loans is generally provided through operating cash flows of the business. Commercial and multi-family real estate loans include loans secured by real estate occupied by the borrower for ongoing operations, non-owner occupied real estate leased to one or more tenants and greater-than-four family apartment buildings. Land acquisition and development loans are made to borrowers for the purpose of infrastructure improvements to vacant land to create finished marketable residential and commercial lots or land. Most land development loans are originated with the intention that the loans will be paid through the sale of developed lots or land by the developers generally within twelve months of the completion date. Real estate construction and development loans include secured loans for the construction of residential properties by real estate professionals and, to a lesser extent, individuals, and business properties that often convert to a commercial real estate loan at the completion of the construction period. Commercial and industrial loans include loans made to support working capital, operational needs and term financing of equipment and are generally secured by equipment, inventory, accounts receivable and personal guarantees of the owner. Repayment of such loans is generally provided through operating cash flows of the business, with the liquidation of collateral as a secondary repayment source.
Consumer loans include primarily loans secured by savings accounts and automobiles. Savings account loans are fully secured by restricted deposit accounts held at the Bank. Automobile loans include loans secured by new and pre-owned automobiles.
In determining the allowance and the related provision for loan losses, the Company establishes valuation allowances or records loan charge-offs based upon probable losses identified during the review of impaired loans. These estimates are based upon a number of factors, such as payment history, financial condition of the borrower and discounted collateral exposure. For further information, see the discussion of impaired loans below. In addition, all loans that are not evaluated individually for impairment and any individually evaluated loans determined not to be impaired are segmented into groups based on similar risk characteristics as described above. The Company’s methodology includes
factors that allow management to adjust its estimates of losses based on the most recent information available. Such risk factors are generally reviewed and updated quarterly, as appropriate. Historical loss rates for each risk group, which are updated quarterly, are quantified using all recorded loan charge-offs, changes in specific allowances on loans and real estate acquired through foreclosure and any gains and losses on the final disposition of real estate acquired through foreclosure. These historical loss rates for each risk group are used as the starting point to determine allowance provisions. Such rates are then adjusted to reflect actual and anticipated changes in national and local economic conditions and developments, the volume and severity of internally classified loans, loan concentrations, assessment of trends in collateral values, and changes in lending policies and procedures, including underwriting standards and collections, charge-off and recovery practices.
In addition, the Company’s banking regulators, as an integral part of their examination process, periodically review the allowance for loan losses. Such regulators may require the Company to modify its allowance for loan losses based on their judgment about information available to them at the time of their examination.
The following table summarizes the activity in the allowance for loan losses for the six months ended March 31, 2012 and 2011:
The following table summarizes, by loan portfolio segment, the changes in the allowance for loan losses for the six months ended March 31, 2012 and March 31, 2011, respectively.
The following table summarizes the information regarding the balance in the allowance and the recorded investment in loans by impairment method at March 31, 2012 and September 30, 2011, respectively.
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