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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended September 30, 2000 OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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.
The aggregate market value of the shares of Registrant's common stock held
by non-affiliates of the Registrant was $26.0 million as of December 20, 2000
based on the average of the closing bid and ask price of such stock on the
Nasdaq National Market 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 3,025,337 shares of the Registrant's
common stock as of December 20, 2000.
Documents Incorporated by Reference
Portions of 2000 Annual Report to Stockholders (Part II).
Portions of the Definitive Proxy Statement for the 2001 Annual Meeting of
Stockholders (Part III).
INDEX
PART I
Page No.
--------
Item 1. Business........................................................................ 1
Item 2. Properties...................................................................... 30
Item 3. Legal Proceedings............................................................... 31
Item 4. Submission of Matters to a Vote of Security Holders............................. 31
PART II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters................................................. 31
Item 6. Selected Financial Data......................................................... 31
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation.............................................. 31
Item 7A. Quantitative and Qualitative Disclosure About
Market Risk..................................................................... 31
Item 8. Financial Statements and Supplementary Data..................................... 31
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure............................................. 31
PART III
Item 10. Directors and Executive Officers of the Registrant.............................. 32
Item 11. Executive Compensation.......................................................... 32
Item 12. Security Ownership of Certain Beneficial Owners
and Management.................................................................. 33
Item 13. Certain Relationships and Related Transactions.................................. 33
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K................................................................... 33
SIGNATURES...................................................................................... 35
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 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 and changes in federal and state legislation and
regulation. 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.
- ----------------
General
Pulaski Financial Corp. (the "Company" or the "Registrant") was formed in
1998 to become the holding company for Pulaski Bank (the "Bank") upon the Bank's
reorganization from the mutual holding company to the stock holding company form
of organization. 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 five offices in the greater St. Louis
metropolitan area. The Bank's business consists principally of attracting
retail deposits from the general public and primarily using them to originate
mortgage loans secured by one-to four-family residences and to a lesser extent
consumer based loans and home equity loans.
Market Area
The Bank conducts operations out of its main office and four branch offices
located in St. Louis County, in the city of St. Louis and in St. Charles County,
Missouri. Most of the Bank's depositors live in the areas surrounding its
branches. However, the Bank's lending area is broader, consisting primarily of
the Missouri counties of St. Charles, Franklin, Jefferson and St. Louis County,
and the city of St. Louis. A minority of the Bank's loans are originated in
neighboring counties in Illinois.
Competition
The Bank faces intense competition attracting savings deposits (its primary
source of lendable funds) and originating loans. Its most direct competition for
savings deposits has historically come from commercial banks, other thrift
institutions, and credit unions 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 financial institutions, mortgage banking companies and
mortgage brokers. The Bank expects competition to increase in the future as a
result of legislative, regulatory and technological changes and the continuing
trend of consolidation in the financial services industry. Technological
advances, for example, have lowered barriers to market entry, allowed banks to
expand their geographic reach by providing services over the Internet and made
it possible for non-depository institutions to offer products and services that
traditionally have been provided by banks. The Gramm-Leach-Bliley Act, which
permits affiliation among banks, securities firms and insurance companies, also
will change the competitive environment in which the Bank conducts business.
Lending Activities
General. The following table sets forth the composition of the Bank's loan
portfolio (before deductions for loans in process, deferred fees and discounts
and allowance for loan losses) at the dates indicated.
At September 30,
2000 1999 1998 1997 1996
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
----------------------------------------------------------------------------------------------------
(Dollars in thousands)
Real Estate Loans:
Conventional - residential
and multi-family (1)....... $168,073 79.07% $135,416 74.62% $118,501 83.45% $114,300 87.34% $117,584 87.42%
FHA and VA - residential and
multi-family (1)........... 6,242 2.94 7,351 4.05 8,767 6.17 10,745 8.21 11,845 8.81
Commercial.................... 412 0.19 567 0.31 553 0.39 1,779 1.36 3,452 2.57
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real estate loans....... 174,727 82.20 143,334 78.98 127,821 90.01 126,824 96.91 132,881 98.79
Consumer and Other Loans:
Automobile loans.............. 23,298 10.97 31,600 17.41 12,946 9.12 3,352 2.56 1,115 0.83
Home equity loans............. 14,396 6.77 5,022 2.77 - - - - - -
Other......................... 135 0.06 1,513 0.84 1,233 0.87 699 0.53 513 0.38
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total consumer and other
loans...................... 37,829 17.80 38,135 21.02 14,179 9.99 4,051 3.09 1,628 1.21
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans................... 212,556 100% 181,469 100% 142,000 100% 130,875 100% 134,509 100%
===== ===== ===== ===== =====
Less:
Loans in process.............. 2,288 364 115 47 27
Unamortized loan origination
fees (charges), net of
direct costs............... (1,017) (1,413) (647) (143) (41)
Unearned discounts............ - - - - -
Allowance for loan losses..... 1,366 986 763 613 479
-------- -------- -------- -------- --------
Total loans receivable, net... $209,919 $181,532 $141,769 $130,358 $134,044
======== ======== ======== ======== ========
(1) Aggregate conventional and FHA and VA multi-family loan balances were $900
thousand, $1.3 million, $1.5 million, $1.1 million and $1.4 million at
September 30, 2000, 1999, 1998, 1997 and 1996, respectively.
2
Residential Real Estate Lending. The primary lending activity of the Bank
is the origination of mortgage loans to enable borrowers to purchase new or
existing homes or to refinance their 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, 2000, $173.4 million, or 82.0%
of the Bank's total loan portfolio consisted of loans secured by one-to four-
family residential property and $900,000, or 0.4%, of the Bank's total loan
portfolio consisted of loans secured by multi-family real estate.
The Bank is a direct endorsement lender with the 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,
2000, the Bank had $6.2 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. These
ARM loans may be sold in the secondary market, or originated for portfolio
investment. The loan fees charged, interest rates and other provisions of the
Bank's ARM loans are determined by the Bank on the basis of its own pricing
criteria, composition and interest rate risk of its current loan portfolio 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.
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 for portfolio investment. The Bank believes that the periodic adjustment
feature of its ARM loans 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, 2000, the Bank had approximately $126.5 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, 2000, the Bank had
approximately $45.8 million, or 22% 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 sold
fixed-rate mortgage 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 retain servicing rights. Retaining fixed-rate loans
in its portfolio would subject the Bank to a higher degree of interest rate
risk.
Residential mortgage loans that do not meet the standards for sale in the
secondary market are retained in its portfolio. The Bank generally charges a
higher interest rate to compensate for their non-conforming features. At
September 30, 2000, the Bank had approximately $29.9 million of such loans.
3
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, delinquency, or prepayment.
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.
Fixed-rate single-family residential real estate loans are normally
originated with 15- or 30-year terms. 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 equal to the greater of the outstanding loan balance or the full
replacement cost of the dwelling.
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 generally 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-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, 2000, commercial real estate
loans in the Bank's portfolio totaled $412,000 and consisted of 10 loans. Loans
secured by commercial real estate generally have larger loan values and involve
4
greater risks than one- to four-family residential mortgage loans. Payments on
loans secured by such properties are often dependent on successful management
and operation 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's consumer loan department makes non-commercial consumer
loans to residents of the metropolitan St. Louis area. These loans consist of
home equity loans, automobile loans, unsecured loans, and other secured consumer
goods loans. In the past year, the Bank redirected its strategic focus to home
equity lending and decided to exit the indirect automobile financing business.
At September 30, 2000, the Bank's consumer and other loans totaled
approximately $37.8 million, or 17.8% of the Bank's total loans. Of this total,
automobile loans amounted to $23.3 million and home equity loans were $14.4
million. The automobile portfolio, consists of lower yielding fixed rate
assets, is decreasing as a result of repayment and because the bank is no longer
originating such loans, while the prime-rate adjustable home equity loans are
increasing through increased originations.
The automobile loans currently in the portfolio consist of loans secured by
both new and used cars and light trucks. New cars are financed for a period of
up to 72 months while used cars are financed for 60 months or less depending on
the year and model. Collision and comprehensive insurance coverage is required
on all automobile loans. At September 30, 2000, automobile loans amounted to
$23.3 million, or 11% 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 loans (a.k.a. home equity lines of credit)
to borrowers which allows them to draw upon their equity in their home. The home
equity lines of credit 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 rates on the home equity lines of credit are adjustable
and are tied to the current prime interest rate. This rate is obtained from the
Wall Street Journal and adjusts on a monthly basis. Some borrowers may qualify
for a special introductory rate for the first six months of the loan. The
interest rates are based upon the loan-to-value ratio of the property with
better rates given to borrowers with more equity. Home equity lines of credit
generally are secured by stronger collateral than automobile loans and because
of the adjustable rate structure, contain less interest rate risk to the Bank.
Lending up to 100% of the value of the property presents greater credit risk to
the Bank, consequently, the Bank limits this product to customers with a very
favorable credit history. At September 30, 2000, home equity lines of credit
amount to $14.4 million, or 6.8% of the Bank's total loans.
5
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, 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, 2000, the aggregate amount of consumer loans 90 days or more past
due was $316 thousand, which represents 1% of total consumer loans.
Loan Maturity and Repricing. The following table sets forth certain
information at September 30, 2000 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.
After
One Year
Within Through Beyond
One Year Five Years Five Years Total
-------- ---------- ---------- ------
(In thousands)
Residential real estate....... $43,245 $74,578 $53,992 $171,815
Consumer and other............ 15,222 22,153 318 37,693
Commercial real estate........ 382 - 29 411
------- ------- ------- --------
Total loans................ $58,849 $96,731 $54,339 $209,919
======= ======= ======= ========
The following table sets forth, as of September 30, 2000, the dollar amount
of all loans due or repricing after September 30, 2001, which have fixed
interest rates and have adjustable interest rates.
Fixed Adjustable
----- ----------
(In thousands)
Residential real estate........ $40,586 $87,983
Consumer and other............. 22,338 134
Commercial real estate......... 29 -
------- -------
Total..................... $62,953 $88,117
======= =======
Scheduled contractual principal repayments of loans generally do not
reflect the actual life of such assets. The average life of loans is
substantially less than their contractual terms because of prepayments.
6
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.
Loan Solicitation and Processing. Loan applicants come through direct
marketing efforts by commissioned loan officers 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. Loans sold into the secondary mortgage market are
generally serviced by the purchaser. Loans sold on a participation basis are
serviced by the Bank. Loan officers are compensated for their loan production
based upon the dollar volume closed, as well as the gain on the sale produced.
Upon receipt of a loan application from a prospective borrower, a credit
report and other data are obtained to verify specific information relating to
the loan applicant's employment, income and credit standing. An appraisal of
the real estate offered as collateral 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 one Senior
Officer and an underwriter. Loans over $400,000 and up to $750,000 require the
approval of the Chief Lending Officer in conjunction with underwriters, Senior
Officers and a member of the Executive Committee, depending upon the amount of
the loan. Any loans in excess of $750,000 require consent of the Executive
Committee and approval by the Chief Lending 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, 2000, 1999 and 1998, the Bank's total gross loan originations were $233
million, $210.8 million and $180.4 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 applicant applies for the loan or anytime up to the
date of closing. 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 generally negotiates a best efforts delivery, which
minimizes any exposure from loans that do not close.
7
During the year ended September 30, 2000, the Bank sold $149.5 million of
residential mortgage loans to correspondent lenders, servicing released,
compared to $125.9 million in fiscal 1999. The Bank did not sell any first
time home buyer loans' to MHDC, with servicing released, during fiscal year
2000. In fiscal year 1999, the Bank sold $9.7 million of such loans to MHDC,
with servicing released. 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, 2000, the Bank was servicing
approximately $713,000 of loans for MHDC and $1.0 million for other investors.
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.
The Bank occasionally purchases real estate loans in the secondary market
subject to the Bank's underwriting standards. 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. However during the fiscal
year 2000, the Bank did not purchase any such loans.
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
8
Years Ended September 30,
2000 1999 1998
---------------------------------------------------------------
(In thousands)
Total gross loans, including loans held for sale,
at beginning of period........................ $ 189,603 $ 155,387 $ 145,189
Loans originated:
Residential real estate....................... 212,644 173,633 166,438
Commercial real estate........................ 33 256 -
Consumer and other............................ 20,808 36,912 13,923
--------- --------- ---------
Total loans originated..................... 233,485 210,801 180,361
--------- --------- ---------
Loans purchased:
Residential real estate....................... - 195 -
--------- --------- ---------
Loans sold:
Total whole loans sold........................ (148,145) (125,894) (115,479)
Loans securitized and sold.................... - - (9,106)
--------- --------- ---------
Mortgage loan principal repayments.............. (24,826) (32,175) (30,231)
Consumer loan repayments and all other.......... (23,249) (18,711) (15,347)
--------- --------- ---------
Net loan activity............................... 37,265 34,216 10,198
--------- --------- ---------
Total gross loans, including loans held
for sale, at end of period.................... $ 226,868 $ 189,603 $ 155,387
========= ========= =========
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 $5.7
million at September 30, 2000, of which $0.25 million were fixed rate
commitments and $5.45 million were either adjustable rates loans or were
conforming loans committed to be sold. See Note 18 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
approximately $1 million of net deferred loan charges at September 30, 2000.
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
9
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. 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. 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.
The following table sets forth information with respect to the Bank's
nonperforming assets at the dates indicated.
10
At September 30,
2000 1999 1998 1997 1996
----------------------------------------------------------
(Dollars in thousands)
Loans accounted for on
a nonaccrual basis:
Residential real estate............... $ 314 $ 223 $ 519 $ 214 $ 51
Commercial real estate................ - - 224 - -
Consumer and other.................... 99 35 10 3 -
------ ------ ------ ------ -----
Total.............................. 413 258 753 217 51
------ ------ ------ ------ -----
Accruing loans which are contractually
past due 90 days or more:
Residential real estate............... 1,297 1,082 369 708 547
Commercial real estate................ - - - 236 -
Consumer and other.................... 217 71 54 20 22
------ ------ ------ ------ -----
Total.............................. 1,514 1,153 423 964 569
------ ------ ------ ------ -----
Troubled debt restructurings.............. - - - 69 85
------ ------ ------ ------ -----
Nonperforming loans (1)................... 1,927 1,411 1,176 1,250 705
Real estate owned (net)................... 28 228 106 - 133
Other nonperforming assets................ 7 - 7 - -
------ ------ ------ ------ -----
Total nonperforming assets............ $1,962 $1,639 $1,289 $1,250 $ 838
====== ====== ====== ====== =====
Total loans delinquent 90 days or more
as a percentage of net loans........... 0.68% 0.61% 0.27% 0.67% 0.40%
Total loans delinquent 90 days or more
as a percentage of total assets........ 0.54% 0.47% 0.22% 0.54% 0.32%
Total nonperforming assets
as a percentage of total assets........ 0.69% 0.67% 0.67% 0.70% 0.47%
(1) Includes $444,000, $363,000, $207,000, $219,000 and $210,000 of FHA/VA
loans at September 30, 2000, 1999, 1998, 1997 and 1996, respectively, the
principal and interest payments on which are fully insured.
Interest income that would have been recorded for the years ended September
30, 2000 and 1999 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 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, 2000, the Bank had $28,000
of real estate owned (net), which consisted of a single one-to four-family
residential loan.
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
11
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, Senior Vice
President, Controller 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, 2000:
Special
Loss Doubtful Substandard Mention
--------------- ---------------- ----------------- -----------------
Number Amount Number Amount Number Amount Number Amount
------ ------ ------ ------ ------ ------ ------ ------
(Dollars in thousands)
Real estate:
Residential............. - $ - - $ - 10 $ 447 - $ -
Commercial.............. - - - - - - - -
Consumer................... 1 2 - - 31 395 - -
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 may affect the borrower's ability to
repay, the estimated value of any underlying collateral and current economic
conditions.
12
At September 30, 2000, the Bank had an allowance for loan losses of $1.4
million, which represented 0.61% of total loans and a 70.9% of nonperforming
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 accounting principals
generally accepted in the United States of America, 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 will 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.
At September 30,
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(Dollars in thousands)
Allowance at beginning of period.......... $ 986 $ 763 $ 613 $ 479 $ 419
Provision for loan losses................. 499 265 209 169 65
Charge-offs:
Residential real estate................. 10 36 63 38 17
Commercial real estate.................. - - - - -
Consumer and other...................... 123 16 3 5 -
------ ------ ------ ------ ------
Total charge-offs..................... 133 52 66 43 17
Recoveries................................ 14 10 7 8 12
------ ------ ------ ------ ------
Net charge-offs........................... 119 42 59 35 5
------ ------ ------ ------ ------
Allowance at end of period.............. $1,366 $ 986 $ 763 $ 613 $ 479
====== ====== ====== ====== ======
Allowance for loss losses as a percentage
of total loans outstanding at the end
of the period......................... 0.61% 0.52% 0.49% 0.42% 0.34%
Net charge-offs as a percentage of average
loans outstanding during the period.... 0.06% 0.02% 0.04% 0.02% -%
Allowance for loan losses as a percentage
of nonperforming loans................. 70.89% 69.88% 64.88% 49.04% 67.93%
13
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated.
At September 30,
2000 1999 1998 1997 1996
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)
Residential real estate.. $ 917 82.01% $ 86 78.67% $124 89.62% $ 98 95.54% $ 62 96.22
Commercial real estate... - - - 0.31 34 0.39 37 1.36 - 2.58
Consumer and other....... 369 17.99 34 21.02 11 9.99 1 3.10 6 1.20
Unallocated.............. 80 - 866 - 594 - 477 - 411 -
------ ----- ---- ----- ---- ----- ---- ----- ---- -----
Total allowance for loan
losses................. $1,366 100% $986 100% $763 100% $613 100% $479 100%
====== ===== ==== ===== ==== ===== ==== ===== ==== =====
14
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.
Investments in securities includes $1,032,000 in equities of other financial
institutions. At September 30, 2000, the fair market value of these equities was
$1,024,000.
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 maintains a
portfolio of collateralized mortgage obligations ("CMOs"), which are securities
issued by special purpose entities generally collateralized by pools of
mortgage-backed securities called tranches. 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 Company has not purchased any CMOs for several years.
The Investment Committee, comprised of the Company's President and Chief
Executive Officer, Chief Financial Officer/Treasurer and Controller, 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.
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
15
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.
The following table sets forth the book value of the Company's investment
and mortgage-backed securities portfolio at the dates indicated. Our investment
securities portfolio at September 30, 2000 did not contain securities of any
issuer with an aggregate book value in excess of 10% of retained earnings,
excluding those issued by the government or its agencies.
Years Ended September 30,
2000 1999 1998
----------------------------------------------------------
(In thousands)
Held to maturity at amortized cost:
Investment securities:
U.S. Treasury and agency obligations........... $13,634 $ 9,010 $18,923
Mortgage-backed and related securities:
Mortgage-backed securities..................... $ 3,112 $ 3,384 $ 4,475
CMOs........................................... 22 613 937
------- ------- -------
Total mortgage-backed and related
Securities................................ $ 3,134 $ 3,997 $ 5,412
======= ======= =======
FHLB stock...................................... $ 3,580 $ 1,501 $ 1,423
Available for sale, at fair value:
Investment securities:
U.S. Treasury and agency obligations........... $ 4,469 $ 4,234 $ 2,235
Mortgage-backed and related securities:
Fannie Mae..................................... $19,470 $21,356 $ 1,488
Equity securities............................... $ 1,024 $ - $ -
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, 2000. 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, 2000, the Company's portfolio
included $2.2 million of callable securities with a weighted average rate of
5.57%. The following table does not take into consideration the effects of
scheduled repayments or the effects of possible prepayments.
16
At September 30, 2000
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)
Held to maturity:
Investment securities:
U.S. Treasury and agency
obligations............... $12,134 6.46% $ 1,500 5.67% $ - -% $ - -%
Mortgage-backed and related
securities:
Mortgage-backed securities.... 775 7.39% - -% 325 8.79% 2,012 9.08%
CMOs.......................... 22 6.21% - - - - - -
------- ----- ----- -----
Total mortgage-backed
and related securities... $ 797 7.19% $ - -% $ 325 8.79% $ 2,012 9.08%
======= ======= ======= ========
Available for sale:
Investment securities:
U.S. Treasury and agency
obligations............... $ 1,746 6.13% $ 2,723 6.68% $ - -% $ - -%
Mortgage-backed and related
securities:
Mortgage-backed securities.... $ - -% $ - -% $ 1,031 5.99% $ 18,439 6.92%
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. At September 30, 2000 the Company had borrowed $12.5 million to finance
the payment of the special $4.00 per share return of capital paid to
shareholders on September 5, 2000. In October 2000, the Company repaid the $12.5
million loan (see Note 16 of Notes to Consolidated Financial Statements).
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 regularly reviews its deposit mix and pricing.
17
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.
At September 30,
2000 1999 1998
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------------------------- ------------ ----------- ----------- -----------
(Dollars in thousands)
Noninterest-bearing................ $ 4,130 2.45% $ 2,720 1.68% $ 1,704 1.09%
NOW checking....................... 15,665 9.30 13,679 8.48 11,355 7.27
Regular savings.................... 23,649 14.04 25,619 15.88 25,669 16.43
Money market deposit............... 15,781 9.37 15,587 9.66 12,657 8.10
Certificates which mature (1):
Within 1 year..................... 83,829 49.78 73,699 45.67 71,266 45.61
After 1 year, but within 3 years.. 21,347 12.68 22,598 14.00 26,835 17.18
Certificate maturing thereafter... 4,012 2.38 7,469 4.63 6,749 4.32
-------- ----- -------- ------ -------- -----
Total........................... $168,413 100% $161,371 100% $156,235 100%
======== ===== ======== ====== ======== =====
_____________________
(1) At September 30, 2000, 1999 and 1998, jumbo certificates amounted to $10.6
million, $5.8 million and $5.3 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, 2000. Jumbo
certificates of deposit represent minimum deposits of $100,000 and are not
issued at premium interest rates.
Amount
Maturity Period (In thousands)
Three months or less........................ $ 2,944
Over 3 through 6 months..................... 2,995
Over 6 through 12 months.................... 2,367
Over 12 months.............................. 2,272
-------
Total.................................. $10,578
=======
18
Time Deposits by Rates. The following table sets forth the certificates
of deposits in the Bank classified by rates at the dates indicated.
Year Ended September 30,
2000 1999 1998
---------------------------------------
(In thousands)
3.00 - 3.99%........................ $ - $ 6,292 $ 471
4.00 - 4.99%........................ 39,032 51,426 11,345
5.00 - 5.99%........................ 28,747 32,470 77,007
6.00 - 6.99%........................ 32,256 8,573 11,192
7.00 - 7.99%........................ 9,153 5,004 4,835
-------- -------- --------
Total.......................... $109,188 $103,765 $104,850
======== ======== ========
Time Deposits by Maturities. The following table sets forth the amount and
maturities of time deposits at September 30, 2000.
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
-------- ---------- ---------- ---------- ---------- ---------
(In thousands)
3.00 - 3.99%......................... $ - $ - $ - $ - $ - $ -
4.00 - 4.99%......................... 29,327 4,649 1,914 2,053 1,089 39,032
5.00 - 5.99%......................... 20,426 3,436 4,136 748 1 28,747
6.00 - 6.99%......................... 29,363 1,865 1,028 - - 32,256
7.00 - 7.99%......................... 4,713 4,302 17 - 121 9,153
------ ------ ------ ------ ------ -------
Total............................. 83,829 14,252 7,095 2,801 1,211 109,188
====== ====== ====== ====== ====== =======
Deposit Activity. The following table sets forth the deposit activities of
the Bank for the periods indicated.
Years Ended September 30,
2000 1999 1998
----------------------------------------
(In thousands)
Beginning balance..................... $161,371 $156,235 $148,672
-------- -------- --------
Net increase (decrease) before
interest credited................... 2,948 479 2,386
Interest credited..................... 4,094 4,657 5,177
-------- -------- --------
Net increase (decrease) in savings
deposits............................ 7,042 5,136 7,563
-------- -------- --------
Ending balance........................ $168,413 $161,371 $156,235
======== ======== ========
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
19
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 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, 2000, the Bank had a borrowing capacity of $128.4
million based on available collateral.
The following table sets forth certain information regarding the Bank's use
of FHLB advances during the periods indicated.
Years Ended September 30,
2000 1999 1998
------------------------------------------
(Dollars in thousands)
Maximum balance at any month end......... $69,100 $28,600 $2,200
Average balance.......................... 46,178 10,595 2,049
Period end balance....................... 66,100 28,600 1,900
Weighted average interest rate:
At end of period....................... 6.60% 5.74% 6.32%
During the period...................... 6.42 5.86 6.35
Personnel
As of September 30, 2000, the Bank had 83 full-time and 24 part-time
employees and 16 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, 2000, the Bank's equity investment in its
subsidiary was $628,000.
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
20
and supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the protection of the
insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such 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, 2000, the
Bank's largest aggregate amount of loans to one borrower was $1.15 million,
which was below the Bank's loans to one borrower limit of $4.1 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" 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, 2000, 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."
21
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%. The Bank's liquidity ratio at
September 30, 2000 was 23%, which exceeded the applicable 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, 2000, totalled approximately $54,000.
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.
Community Reinvestment Act. Under the Community Reinvestment Act ("CRA"),
as implemented by OTS regulations, a savings institution has a continuing and
affirmative obligation consistent
22
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.
23
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.
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 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.
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 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,
24
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, 2000, the Bank would not have been subject to any deduction from
capital as a result of its interest rate risk position.
At September 30, 2000, the Bank met each of its capital requirements. See
Note 13 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 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
25
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 2000 was 3
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 2000 for
the assessment for deposit insurance and the FICO payments was $50,000.
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, or 0.3% of the total assets of the Bank, whichever
is greater. The Bank was in compliance with this requirement with an investment
in FHLB stock at September 30, 2000, of $3.6 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, 2000, 1999 and
1998, dividends from the FHLB to the Bank amounted to $158,000, $93,000 and
$104,000, 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 2000, the FRB regulations generally required
that reserves be maintained against aggregate transaction accounts as follows:
For accounts aggregating $44.3 million or less (subject to adjustment by the
FRB), the reserve requirement is 3.0%; and for accounts greater than $ 44.3
million, the reserve requirement is $1.3 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 $44.3 million. The first $5.0 million of
otherwise reservable balances (subject to adjustments by the FRB) were exempted
from the reserve requirements. The Bank has complied with the foregoing
requirements. The balances maintained to meet the reserve requirements imposed
by the FRB may be used to satisfy liquidity requirements imposed by the OTS.
26
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
27
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 10 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 institutions average mortgage lending activity for the six
taxable years preceding 1996 adjusted for inflation.
28
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.
State Taxation
29
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 five full-service banking offices.
The following table sets forth information on those offices as of September 30,
2000.
Year Net Book Owned/ Approximate
Location Opened Value (1) Leased Square Footage
- -------------------------------- ---------- ------------- ---------- ------------------
Main Office: (Dollars in thousands)
12300 Olive Boulevard 1978 $1,813 Owned 29,000 (2)
St. Louis, Missouri 63141-6434
Branch Offices:
199 Jamestown Mall 1967 (3) 78 Leased (4) 2,500
Florissant, Missouri 63033-5398
3760 South Grand Avenue 1967 624 Owned 3,500
St. Louis, Missouri 63118-3487
4225 Bayless Road 1971 46 Leased (5) 2,000
St. Louis, Missouri 63123-7500
1928 Zumbehl Road 2000 381 Leased (6) 2,800
St. Charles, Missouri 63303-2721
___________________________
(1) Represents the net book value of land, buildings, furniture, fixtures and
equipment owned by the Bank.
(2) 1,331 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.
(6) Lease expires on July 31, 2009.
30
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 Equity 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.
31
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.
Name Age (1) Position
- ---- ------- --------
William A. Donius 42 President, Chief Executive Officer and
Director
Michael J. Donius 40 Executive Vice President, Chief Operating
Officer and Director of the Company and the
Bank, Secretary of the Company
Thomas F. Hack 56 Chief Financial Officer, Treasurer and
Director
(1) As of September 30, 2000.
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 and Chief Executive Officer 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.
Mr. Donius resigned from the Bank effective December 31, 2000.
Thomas F. Hack joined the Bank in 1967 and has served as the Treasurer
since 1974 and as the Chief Financial Officer since 1993.
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.
32
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.
PART IV
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,
2000 and 1999
. Consolidated Statements of Income and Comprehensive Income for
the Years Ended September 30, 2000, 1999 and 1998
. Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended September 30, 2000, 1999 and 1998
. Consolidated Statements of Cash Flows for the Years Ended
September 30, 2000, 1999 and 1998
. Notes to Consolidated Financial Statements for the Years ended
September 30, 2000, 1999, and 1998
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.
3. Exhibits
33
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 Severance Agreement with Beverly M. Kelley**
10.4 Pulaski Financial Corp. 2001 Stock-Based Incentive Plan***
10.5 Pulaski Financial Corp. 1994 Stock Option 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 herein 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 2001 Annual Meeting of
Stockholders.
**** Incorporated herein by reference to Pulaski Financial Corp.'s
Definitive Proxy Statement for the 1995 Annual Meeting of
Stockholders.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September 30,
2000.
34
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.
NAME TITLE DATE
- ---- ----- ----
/s/ William A. Donius President and Chief Executive December 20, 2000
- ---------------------
William A. Donius Officer
(principal executive officer)
/s/ Thomas F. Hack Chief Financial Officer, December 20, 2000
- ------------------
Thomas F. Hack Treasurer and Director
(principal financial and accounting
officer)
/s/ Robert A. Ebel Director December 20, 2000
- ------------------
Robert A. Ebel
/s/ E. Douglas Britt Director December 20, 2000
- --------------------
E. Douglas Britt
/s/ Garland A. Dorn Director December 20, 2000
- -------------------
Garland A. Dorn
/s/ Dr. Edward J. Howenstein Director December 20, 2000
- ----------------------------
Dr. Edward J. Howenstein
35