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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, 2002 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. ____.
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act.) Yes _____ No X .
-----
The market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and ask price of such common equity, as of the
last business day of the registrant's most recently completed second fiscal
quarter was $47.3 million.
There were issued and outstanding 2,762,088 shares of the Registrant's
common stock as of December 24, 2002.
Documents Incorporated by Reference
Portions of 2002 Annual Report to Stockholders (Part II).
Portions of the Definitive Proxy Statement for the 2003 Annual Meeting of
Stockholders (Part III).
INDEX
PART I
Page No.
--------
Item 1. Business ................................................................ 1
Item 2. Properties .............................................................. 31
Item 3. Legal Proceedings ....................................................... 32
Item 4. Submission of Matters to a Vote of Security Holders ..................... 32
PART II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters ......................................... 32
Item 6. Selected Financial Data ................................................. 32
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation ...................................... 32
Item 7A. Quantitative and Qualitative Disclosure About
Market Risk ............................................................. 32
Item 8. Financial Statements and Supplementary Data ............................. 32
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure ..................................... 32
PART III
Item 10. Directors and Executive Officers of the Registrant ...................... 33
Item 11. Executive Compensation .................................................. 33
Item 12. Security Ownership of Certain Beneficial Owners
and Management .......................................................... 34
Item 13. Certain Relationships and Related Transactions .......................... 34
PART IV
Item 14 Controls and Procedures ................................................. 34
Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K ............................................................. 34
SIGNATURES .............................................................................. 36
CERTIFICATIONS .......................................................................... 36
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. Subject
to applicable law and regulation, 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. The Company has no significant assets, other than all of the
outstanding shares of the Bank, and no significant liabilities. 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. 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
home equity loans.
Market Area
The Bank conducts operations out of its main office and four branch offices
located in St. Louis County, the city of St. Louis and St. Charles County,
Missouri. The Bank has an additional branch in O'Fallon, Missouri that is
scheduled to open in 2003. 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. The Bank also
operates a loan production office in the Kansas City metropolitan area.
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 has changed the competitive environment as several
non-traditional banking companies have begun collecting deposits in the
metropolitan area.
Lending Activities
General. The following table sets forth the composition of the Bank's loan
portfolio at the dates indicated.
At September 30,
2002 2001 2000 1999 1998
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------------------------------------------------------------------------------------
(Dollars in thousands)
Real Estate Loans:
Conventional - residential and
multi-family (1) .................. $159,853 67.58% $157,071 75.92% $168,073 79.07% $135,416 74.62% $118,501 83.45%
FHA and VA - residential and
multi-family (1) .................. 4,947 2.09 5,748 2.78 6,242 2.94 7,351 4.05 8,767 6.17
Commercial ........................ 8,559 3.62 1,408 0.68 412 0.19 567 0.31 553 0.39
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real estate loans ........... 173,359 73.29 164,227 79.38 174,727 82.20 143,334 78.98 127,821 90.01
Consumer and Other Loans:
Automobile loans .................. 5,886 2.49 12,109 5.85 21,450 10.09 31,600 17.41 12,946 9.12
Home equity loans ................. 55,410 23.42 28,586 13.82 14,396 6.77 5,022 2.77 - -
Other ............................. 1,893 0.80 1,956 0.94 1,983 0.94 1,513 0.84 1,233 0.87
-------- ----- -------- ------ -------- ----- -------- ----- -------- -----
Total consumer and other Loans .... 63,189 26.71 42,651 20.62 37,829 17.80 38,135 21.02 14,179 9.99
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans ....................... 236,548 100% 206,878 100% 212,556 100% 181,469 100% 142,000 100%
===== ===== ===== ===== =====
Less:
Loans in process .................. 7,293 1,577 2,288 364 115
Unamortized loan origination
charges, net of direct costs .... (879) (658) (1,017) (1,413) (647)
Allowance for loan losses ......... 2,553 1,844 1,366 986 763
-------- -------- -------- -------- --------
Total loans receivable, net ....... $227,581 $204,115 $209,919 $181,532 $141,769
======== ======== ======== ======== ========
(1) Aggregate conventional and FHA and VA multi-family loan balances were
approximately $3.8 million, $700,000, $900,000, $1.3 million, and
$1.5 million at September 30, 2002, 2001, 2000, 1999 and 1998,
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, 2002, $161.0 million, or 68.1%,
of the Bank's total loan portfolio consisted of loans secured by one-to
four-family residential property and $3.8 million, or 1.6%, of the Bank's total
loan portfolio consisted of loans secured by multi-family real estate.
The majority of the Bank's mortgage production has been sold on a best
efforts, flow basis, servicing released, to more than fifteen different regional
and national secondary market investors. This strategy enables the Bank to have
a much larger lending capacity, provide a much more comprehensive product
offering and drastically reduce the interest rate, prepayment and credit risks
associated with residential lending. This strategy also allows the Bank to offer
more competitive interest rates. Loans originated for sale are closed in the
name of the Bank and held in "warehouse" until they are sold to the investors,
typically within 30 days. The loans held in warehouse provide an attractive
asset yield because the Bank is able to fund a longer-term asset (typically a 30
year mortgage) with low yielding, short term funds. Loan sale activity is the
Bank's largest source of non-interest income.
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
Veterans' Administration ("VA"), which enables designated qualified Bank
personnel to approve or reject loans on behalf of VA. At September 30, 2002, the
Bank had $4.9 million of FHA- or VA-insured loans. The Bank also participates in
programs to provide financing for low-to moderate-income housing through the
Missouri Housing Development Commission.
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, the 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 2.75%
above the one-year constant maturity U.S. Treasury index. The periodic interest
rate cap (the maximum amount by which the interest rate may be increased or
decreased in a given period) on 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, 2002, the Bank had approximately
$115.3 million of ARM loans, or 66.5% of the Bank's real estate loan portfolio.
The Bank also originates fixed-rate mortgage loans on one-to
four-family residential properties. At September 30, 2002, the Bank had
approximately $49.8 million, or 28.7% of the Bank's real estate loan portfolio,
in fixed-rate residential mortgage loans. Fixed-rate loans 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 the majority of fixed-rate
mortgage loans to
3
investors through its correspondent relationships. In the future, 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 the Bank's portfolio. These loans are
underwritten using an internal credit-scoring model, which assesses credit risk
and assigns one of four ratings to the loan ("A," "A-," "B," and "C"). The Bank
generally charges a higher interest rate to compensate for non-conforming
features. At September 30, 2002, the Bank had approximately $56.9 million of
such loans, with only $6.1 million in the "C" category.
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.
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. During periods of rising interest
rates, the risk of default on ARM loans increases 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 some cases, borrowers choose to obtain subordinate financing to
limit the first mortgage to 80% or less. These second mortgages are priced with
enhanced yields so that the Bank is compensated for the absence of mortgage
insurance. In the cases of loans guaranteed by FHA or VA, the Bank offers loans
on loan-to-value
4
ratios of up to 97% and 100%, respectively. At September 30, 2002, the Bank had
a $18.6 million balance of residential mortgage loans with a combined loan to
value of greater than 90% and no private mortgage insurance.
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, typically through participation arrangements
with other banks in St. Louis. The Bank has expanded its commercial real estate
portfolio to provide diversification and to generate assets that are sensitive
to fluctuations in interest rates. Commercial real estate loans are generally
prime-based floating rate loans, or short-term (1-5 year) rate loans. In
addition to participating with other commercial banks, the high volume of
single-family residential loan borrowers has presented opportunities for the
Bank to originate commercial real estate loans to a larger, more diversified
customer base, who often seek to consolidate all of their financing with one
local lender. At September 30, 2002, commercial real estate loans in the Bank's
portfolio totaled $8.6 million. Loans secured by commercial real estate
generally have larger loan values and involve 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. The
Bank's lending personnel or an agent of the Bank inspects all of the properties
securing the Bank's commercial real estate loans before the loan is made. The
Bank also obtains appraisals on each property in accordance with applicable
regulations.
Consumer and Other Loans. The Bank's consumer loan department makes
consumer loans to residents of the metropolitan St. Louis area. These loans
consist of home equity lines of credit ("HELOC"), automobile loans, unsecured
loans, and other secured consumer goods loans.
At September 30, 2002, the Bank's consumer and other loans totaled
approximately $63.2 million, or 26.7% of the Bank's total loans. Of this total,
HELOC loans amounted to $55.4 million, automobile loans amounted to $5.9 million
and other consumer loans totaled $1.9 million. The automobile portfolio is
decreasing as a result of repayment of the existing portfolio and because the
Bank has shifted its focus away from such loans to the prime-rate adjustable
HELOC loans.
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. 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. The Bank's
introductory rate on HELOC loans is also the floor rate on all new originations.
The Bank does not currently offer a discounted rate during an introductory
period. 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
favorable credit history.
5
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, 2002, automobile loans
amounted to $5.9 million, or 2.5% 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).
Consumer loans entail greater risk than residential mortgage loans,
particularly in the case of consumer loans that are unsecured or secured by
rapidly depreciating assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not warrant
further 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 that 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,
2002, the aggregate amount of consumer loans 90 days or more past due was
$156,000, which represents 0.2% of total consumer loans.
Loan Maturity and Repricing. The following table sets forth certain
information at September 30, 2002 regarding the dollar amount of loans maturing
in the Bank's portfolio based on their contractual terms to maturity, but does
not include 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, deferred
fees and allowance for loan losses.
Due After
Due One Year Due
Within Through Beyond
One Year Five Years Five Years Total
---------- ------------ ------------ -------
(In thousands)
Residential real estate ........... $ 51,545 $72,958 $32,034 $156,537
Consumer and other ................ 50,796 6,367 5,322 62,485
Commercial real estate ............ 1,272 7,079 208 8,559
-------- ------- ------- --------
Total loans .............. $103,613 $86,404 $37,564 $227,581
======== ======= ======= ========
6
The following table sets forth, as of September 30, 2002, the dollar
amount of all loans due or repricing after September 30, 2003, which have fixed
interest rates and have adjustable interest rates.
Fixed Adjustable
------- ------------
(In thousands)
Residential real estate ........... $34,975 $70,017
Consumer and other ................ ` 6,423 5,266
Commercial real estate ............ 4,460 2,827
------- -------
Total .................... $45,858 $78,110
======= =======
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. In
addition, due-on-sale clauses on loans generally give the Bank the right to
declare loans immediately due and payable if, among other things, 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 is performed 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, 2002, 2001 and 2000, the Bank's total gross loan originations were
$907.2 million, $509.2 million and $233.5 million, respectively.
7
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 on deposits
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 deposit 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.
During the year ended September 30, 2002, the Bank sold $701.0 million of
residential mortgage loans to correspondent lenders, servicing released,
compared to $397.2 million in fiscal 2001 and $148.1 million in fiscal 2000. At
September 30, 2002, the Bank was servicing approximately $330,000 of loans for
the MHDC and $104,000 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. During fiscal 2002, the Bank
purchased $446,000 in loans from investors. The loans purchased during 2002 were
all government guaranteed FHA loans that the Bank originated and sold to
investors; however, recourse provisions required the Bank to repurchase them due
to customer default. The Bank purchased $500,000 in loans in fiscal year 2001,
which consisted entirely of FHA loans repurchased from investors. In addition to
the purchase of single-family residences, the Bank has expanded its lending
activities to include purchase of participating interests in commercial real
estate loans originated by other local commercial banks. Many of these loans are
to finance the short-term construction of commercial real estate, and generally
are for terms of 12-18 months, and are prime-based. During the fiscal year ended
September 30, 2002, participations purchased totaled $13.1 million. At year-end,
the outstanding balance of all commercial loans was $8.6 million.
8
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
Years Ended September 30,
2002 2001 2000
-----------------------------------------------
(In thousands)
Total gross loans, including loans held for sale,
at beginning of period ................................ $ 244,723 $ 226,868 $ 189,603
Loans originated:
Residential real estate ............................. 837,871 475,231 212,644
Commercial real estate .............................. 4,046 75 33
Consumer and other .................................. 65,288 33,907 20,808
---------- --------- ---------
Total loans originated .......................... 907,205 509,213 233,485
---------- --------- ---------
Loans purchased:
Residential real estate ............................. 446 500 -
Commercial real estate .............................. 13,051 - -
---------- --------- ---------
Loans sold:
Total whole loans sold .............................. (701,003) (397,155) (148,145)
---------- --------- ---------
Mortgage loan principal repayments ....................... (44,713) (39,548) (24,826)
Consumer loan repayments and all other ................... (86,766) (55,155) (23,249)
---------- --------- ---------
Net loan activity ........................................ 88,220 17,855 37,265
---------- --------- ---------
Total gross loans, including loans held
for sale, at end of period ............................ $ 332,943 $ 244,723 $ 226,868
========== ========= =========
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 $18.2 million at September 30, 2002, of which $6.6 million were
fixed-rate commitments and $11.6 million were either adjustable-rates loans or
were conforming loans committed to be sold. Additionally, the Bank had unused
lines of credit on home equity lines amounting to $68.7 million at September 30,
2002. 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 interest income adjustments at the time of prepayment. The Bank
had approximately $879,000 of net deferred loan charges at September 30, 2002.
9
Nonperforming Assets and Delinquencies. When a mortgage loan borrower fails
to make a required payment, the Bank institutes collection procedures. The first
notice is mailed to the borrower 18 days after the payment due date. Attempts to
contact the borrower by telephone generally begin approximately 20 days after
the payment due date. If a satisfactory response is not obtained, continuous
follow-up contacts are attempted until the loan has been brought current. At the
45th day after the due date, a default letter is sent. Before the 60th day of
delinquency, attempts to interview the borrower, preferably in person, are made
to establish: (1) the cause of the delinquency; (2) whether the cause is
temporary; (3) the attitude of the borrower toward the debt; and (4) a mutually
satisfactory arrangement for curing the default. Also, in the case of second
mortgage loans, before the 60th day of delinquency, all superior lien holders
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 lien holder intends to do to resolve the
delinquency.
If the borrower cannot be reached and does not respond to collection
efforts, a personal collection visit or property inspection is made and a
photograph of the exterior 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. The Bank daily receives a
computer-generated collection report. The customer is contacted by telephone to
ascertain the nature of the delinquency. If by the 30th day following the
payment due date, no progress has been made, a written notice is mailed
informing the borrowers of their right to cure the delinquency within 20 days
and of the Bank's intent to begin legal action if the delinquency is not
corrected. Depending on the type of property held as collateral, the Bank either
obtains a judgment in small claims court or takes action to repossess the
collateral.
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 status when, in the opinion
of management, the financial position of the borrower indicates there is no
longer any reasonable doubt as to the timely collectibility of interest or
principal.
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.
10
The following table sets forth information with respect to the Bank's
non-performing assets at the dates indicated.
At September 30,
2002 2001 2000 1999 1998
-------------------------------------------------------------
(Dollars in thousands)
Loans accounted for on
a non-accrual basis:
Residential real estate ................................ $ 303 $ 165 $ 314 $ 223 $ 519
Commercial real estate ................................. - - - - 224
Consumer and other ..................................... 78 111 99 35 10
------ ------ ------ ------ ------
Total ................................................ 381 276 413 258 753
------ ------ ------ ------ ------
Accruing loans which are contractually
past due 90 days or more:
Residential real estate ................................ 1,920 1,935 1,297 1,082 369
Commercial real estate ................................. - - - - -
Consumer and other ..................................... 156 158 217 71 54
------ ------ ------ ------ ------
Total ................................................ 2,076 2,093 1,514 1,153 423
------ ------ ------ ------ ------
Troubled debt restructurings ................................ 7 222 158 - -
------ ------ ------ ------ ------
Non-performing loans (1) .................................... 2,461 2,591 2,085 1,411 1,176
Real estate owned (net) ..................................... - - 28 228 106
Other non-performing assets ................................. 8 - 7 - 7
------ ------ ------ ------ ------
Total non-performing assets ............................ $2,469 $2,591 $2,120 $1,639 $1,289
====== ====== ====== ====== ======
Total loans delinquent 90 days or more
as a percentage of net loans ............................. 0.64% 0.86% 0.68% 0.61% 0.27%
Total loans delinquent 90 days or more
as a percentage of total assets .......................... 0.56% 0.72% 0.54% 0.47% 0.22%
Total non-performing assets
as a percentage of total assets .......................... 0.67% 0.90% 0.75% 0.67% 0.67%
(1) Includes $288,000, $684,000, $444,000, $363,000, and $207,000 of FHA/VA
loans at September 30, 2002, 2001, 2000, 1999 and 1998, respectively, the
principal and interest payments on which are fully insured.
Interest income that would have been recorded for the years ended September
30, 2002, 2001 and 2000 had non-accruing and restructured loans been current in
accordance with their original terms was $33,482, $29,933 and $33,303,
respectively. No interest from these loans was included in net income for these
periods.
11
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, 2002, the Bank did not have
any real estate owned.
Asset Classification. The Bank has adopted the Uniform Credit
Classification Policy issued by the Federal Financial Institutions Examination
Council, which was subsequently adopted by the OTS regarding problem assets of
savings institutions. The regulations require that each insured institution
review and classify its assets on a regular basis. In addition, in connection
with examinations of insured institutions, OTS examiners have authority to
identify problem assets and, if appropriate, require them to be classified.
There are three classifications for problem assets: substandard, doubtful and
loss. Substandard assets must have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified as loss is considered uncollectible and
of such little value that continuance as an asset of the institution without
establishment of a specific reserve is not warranted. If an asset or portion
thereof is classified as loss, the insured institution establishes specific
allowances for loan losses for the full amount of the portion of the asset
classified as loss. A portion of general loan loss allowances established to
cover 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, Executive Vice
President 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, 2002:
Special
Loss Doubtful Substandard Mention
----------------- ---------------- ---------------- -----------------
Number Amount Number Amount Number Amount Number Amount
------ ------ ------ ------ ------ ------ ------ ------
(Dollars in thousands)
Real estate:
Residential ............... - $ - - $ - 20 $1,366 - $ -
Commercial ................ - - - - - - - -
Consumer ..................... 18 42 - - 35 242 - -
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
12
the borrower over the term of the loan, general economic conditions and, in the
case of a secured loan, the quality of the security for the loan. All
charged-off loans are charged to the allowance 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.
The Bank has developed a methodology to determine the allowance for loan
loss balance necessary to cover inherent losses in its loan portfolio. The Bank
makes an allocation to allowance for loan losses of 15% of all assets considered
substandard according to regulatory guidance on classified assets. In addition,
the Bank makes additional allocations based upon specific characteristics of the
Bank's portfolio, including 0.5% for "A" , 0.7% for "A-", 1.0% for "B", and 1.2%
for "C" one-to four-family loans other than nonconforming loans. The Bank
allocates 1.5% of the balance of consumer auto loans and 1.3% for home equity
loans.
At September 30, 2002, the Bank had an allowance for loan losses of $2.6
million, which represented 0.78% of total loans and 103.74% of non-performing
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 principles
generally accepted in the United States, 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.
13
The following table sets forth an analysis of the Bank's allowance for
loan losses for the periods indicated.
At September 30,
2002 2001 2000 1999 1998
------- ------ ------ ------ ------
(Dollars in thousands)
Allowance at beginning of period .................. $1,844 $1,366 $ 986 $763 $613
Provision for loan losses ......................... 1,011 752 499 265 209
Charge-offs:
Residential real estate ........................ 34 20 10 36 63
Consumer and other ............................. 286 255 123 16 3
------ ------ ------ ---- ----
Total charge-offs ............................ 320 275 133 52 66
Recoveries ........................................ 18 1 14 10 7
------ ------ ------ ---- ----
Net charge-offs ................................... 302 274 119 42 59
------ ------ ------ ---- ----
Allowance at end of period ..................... $2,553 $1,844 $1,366 $986 $763
====== ====== ====== ==== ====
Allowance for loss losses as a percentage
of total loans outstanding at the end of
the period ..................................... 0.78% 0.76% 0.61% 0.52% 0.49%
Net charge-offs as a percentage of average
loans outstanding during the period ............ 0.12% 0.12% 0.06% 0.02% 0.04%
Allowance for loan losses as a percentage
of non-performing loans ........................ 103.74% 77.84% 70.89% 69.88% 64.88%
14
The following table sets forth the breakdown of the allowance for loan
losses by loan category and the percentage of loans in each category to total
loans at the dates indicated.
At September 30,
2002 2001 2000 1999
Percent Percent Percent Percent
of Loans of Loans of Loans of Loans
In Each In Each In Each In Each
Amount Category Amount Category Amount Category Amount Category
to Total to Total to Total to Total
Loans Loans Loans Loans
----------------------------------------------------------------------------------------
(Dollars in thousands)
Residential real estate ................. $ 1,348 69.67% $1,237 78.70% $ 917 82.01% $ 86 78.67%
Commercial real estate .................. 118 3.62 - 0.68 - - - 0.31
Consumer and other ...................... 1,087 26.71 607 20.62 369 17.99 34 21.02
Unallocated ............................. - - - - 80 - 866 -
-------- ----- ------ ----- ------ ----- ---- -----
Total allowance for loan losses ..... $ 2,553 100% $1,844 100% $1,366 100% $986 100%
======== ===== ====== ===== ====== ===== ==== =====
1998
Percent
of Loans
In Each
Amount Category
to Total
Loans
------------------------
Residential real estate ................. $124 89.62%
Commercial real estate .................. 34 0.39
Consumer and other ...................... 11 9.99
Unallocated ............................. 594 -
---- -----
Total allowance for loan losses ..... $763 100%
==== =====
15
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.
Generally accepted accounting principles ("GAAP") 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. Statement of Financial Accounting Standards ("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 included in other comprehensive income (net of tax). Investment
in securities includes $1.7 million in equities of other financial institutions.
At September 30, 2002, the fair market value of these equities was $2.0 million.
The Company maintains a portfolio of mortgage-backed 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 in recent years.
The Investment Committee, comprised of the Company's President and Chief
Executive Officer, Chief Financial Officer, Executive Vice President and Former
CFO, Consultant and Director, 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 considered. The interest rate, yield, settlement date
and maturity are also reviewed.
All of the Company's debt securities and mortgage-backed securities carry
market risk insofar as increases in market interest rates would generally cause
a decline in their market value. They also carry prepayment risk insofar as they
may be called or repaid before their stated maturity during times of low market
interest rates, so that the Company may have to reinvest the funds at a lower
interest rate.
16
The following table sets forth the carrying value of the Company's
investment and mortgage-backed securities portfolio at the dates indicated. The
Company's investment securities portfolio at September 30, 2002 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,
2002 2001 2000
-------------------------------------------
(In thousands)
Held to maturity at amortized cost:
Investment securities:
U.S. Treasury and agency obligations .................. $ - $1,737 $13,634
Mortgage-backed securities:
Mortgage-backed securities ............................ $1,592 $2,156 $ 2,676
CMOs .................................................. 203 361 458
------ ------ -------
Total mortgage-backed securities .................... $1,795 $2,517 $ 3,134
====== ====== =======
FHLB stock .............................................. $5,840 $3,960 $ 3,580
Available for sale, at fair value:
Investment securities:
U.S. Treasury and agency obligations .................. $2,914 $2,898 $ 4,469
Mortgage-backed securities:
Fannie Mae ............................................ $5,687 $8,788 $19,470
Equity securities ....................................... $1,963 $1,327 $ 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, 2002. 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, 2002, the Company's portfolio did
not include any callable securities. The following table does not take into
consideration the effects of scheduled repayments or the effects of possible
prepayments.
17
At September 30, 2002
Due in Due in Due in Due in
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:
Mortgage-backed securities:
Mortgage-backed securities ....... $ - - 10 7.82% $ 186 9.71% $1,396 8.75%
CMOs ............................. - - - - - - 203 2.71%
------ ------ ------ ------
Total mortgage-backed
securities .................. $ - - 10 7.82% $ 186 9.71% $1,599 7.98%
====== ====== ====== ======
Available for sale:
Investment securities:
U.S. Treasury and agency
obligations .................... $ 774 6.19% $2,140 6.86% $ - $ - $ - -
Mortgage-backed securities:
Mortgage-backed securities ....... - - - - $1,161 5.99% $4,526 7.14%
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.
Deposit Accounts. The Bank's depositors reside predominately in 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's Asset Liability Committee regularly reviews its deposit mix and
pricing. At September 30, 2002, the Bank had issued $17.5 million in brokered
cash deposits. The brokered deposits were issued to satisfy seasonal lending
volumes. The Bank's ability to issue brokered deposits is limited by the Bank's
capital levels, which must be "well capitalized" according to regulatory capital
requirements (see Note 13 in the Notes to the consolidated financial
statements).
18
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,
2002 2001 2000
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------------------------- ---------- ------------ ------------ ------------
(Dollars in thousands)
Non-interest-bearing ........................ $ 5,736 2.85% $ 4,770 2.51% $ 4,130 2.45%
NOW checking ................................ 21,591 10.73 17,643 9.30 15,665 9.30
Regular savings ............................. 27,539 13.68 24,836 13.09 23,649 14.04
Money market deposit ........................ 41,898 20.82 41,172 21.70 15,781 9.37
Certificates which mature (1):
Within 1 year ........................... 78,048 38.78 77,178 40.68 83,829 49.78
After 1 year, but within 3 years ........ 18,707 9.29 22,177 11.70 21,347 12.68
Certificate maturing thereafter ......... 7,751 3.85 1,934 1.02 4,012 2.38
----------- ------ ---------- ------ ----------- ------
Total ................................ $ 201,270 100% $ 189,710 100% $ 168,413 100%
=========== ====== ========== ====== =========== ======
(1) At September 30, 2002, 2001 and 2000, jumbo certificates amounted to $28.7
million, $12.3 million and $10.6 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,
2002. Jumbo certificates of deposit represent minimum deposits of $100,000 and
are not issued at premium interest rates; however, special rates are offered to
"President Club" members who have deposits of $50,000 or more.
Maturity Period Amount
(In thousands)
Three months or less .............. $ 5,517
Over 3 through 6 months ........... 5,878
Over 6 through 12 months .......... 13,828
Over 12 months .................... 3,463
--------
Total .................... $ 28,686
========
19
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,
2002 2001 2000
--------------------------------------------------------
(In thousands)
1.00 - 1.99% $ 35,741 $ - $ -
2.00 - 2.99% 30,178 5 -
3.00 - 3.99% 13,077 36,615 -
4.00 - 4.99% 15,498 29,544 39,032
5.00 - 5.99% 6,028 20,729 28,747
6.00 - 6.99% 3,841 9,855 32,256
7.00 - 7.99% 143 4,541 9,153
---------- ---------- ----------
Total $ 104,506 $ 101,289 $ 109,188
========== ========== ==========
Time Deposits by Maturities. The following table sets forth the amount
and maturities of time deposits at September 30, 2002.
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)
1.00 - 1.99% $ 35,705 $ 36 $ - $ - $ - $ 35,741
2.00 - 2.99% 25,720 4,287 171 - - 30,178
3.00 - 3.99% 4,073 3,373 5,131 355 145 13,077
4.00 - 4.99% 4,220 3,005 1,876 744 5,653 15,498
5.00 - 5.99% 4,472 631 71 - 854 6,028
6.00 - 6.99% 3,841 - - - - 3,841
7.00 - 7.99% 17 - 126 - - 143
------------ ---------- ---------- ---------- --------- -----------
Total $ 78,048 $ 11,332 $ 7,375 $ 1,099 $ 6,652 $ 104,506
============ ========== ========== ========== ========= ===========
20
Deposit Activity. The following table sets forth the deposit activities of
the Bank for the periods indicated.
Years Ended September 30,
2002 2001 2000
-------------------------------------------
(In thousands)
Beginning balance ......................................... $189,710 $168,413 $161,371
-------- -------- --------
Net increase before interest credited ..................... 8,766 15,229 2,948
Interest credited ......................................... 2,794 6,068 4,094
-------- -------- --------
Net increase in savings deposits .......................... 11,560 21,297 7,042
-------- -------- --------
Ending balance ............................................ $201,270 $189,710 $168,413
======== ======== ========
Borrowings. The Bank uses advances from the FHLB-Des Moines to supplement
its supply of lendable funds and to meet deposit withdrawal requirements. The
FHLB-Des Moines functions as a central reserve bank providing credit for savings
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, 2002, the Bank had a borrowing capacity of
$147.0 million or 40% of the Bank's total assets. At September 30, 2002,
borrowings from the FHLB totaled $116.8 million, resulting in $30.2 million
available borrowing capacity. The line of credit is subject to available
collateral of one-to four- family residential loans.
The following table sets forth certain information regarding the Bank's use
of FHLB advances during the periods indicated.
Years Ended September 30,
2002 2001 2000
-------------------------------------------
(Dollars in thousands)
Maximum balance at any month end, during the period ............... $116,800 $ 79,200 $ 69,100
Average balance, during the period ................................ 74,780 64,247 46,178
Period end balance ................................................ 116,800 55,000 66,100
Weighted average interest rate:
At end of period ............................................. 3.44% 6.05% 6.60%
During the period ............................................ 4.85 6.32 6.42
21
Personnel
As of September 30, 2002, the Bank had 124 full-time employees, 30
part-time employees and 21 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, 2002, the Bank's equity investment in its
subsidiary was $785,000 or 0.2% of the Bank's assets.
Executive Officers of the Registrant
The following table sets forth certain information regarding the executive
officers of the Company and the Bank.
Name Age (1) Position
- ---- ------- --------
William A. Donius 44 Chairman, President, Chief Executive Officer
and Director
Ramsey K. Hamadi 33 Chief Financial Officer
Christopher K. Reichert 38 Executive Vice President
Beverly M. Kelley 60 Senior Vice President
Lisa K. Simpson 42 Senior Vice President
(1) As of September 30, 2002.
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.
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.
Ramsey K. Hamadi joined the Bank in 2000 and has served as Chief Financial
Officer since July of 2001. Prior to assuming his current position, Mr. Hamadi
served the Bank as Controller since June of 2000. Prior to joining the Bank, Mr.
Hamadi was an Examiner at the Federal Reserve Bank of St. Louis.
22
Christopher K. Reichert joined the Bank in 1999 and has served as Executive
Vice President since January of 2001. Prior to assuming his current position,
Mr. Reichert served the Bank as Senior Vice President of Lending. Prior to
joining the Bank, Mr. Reichert was Vice President of Mortgage Production at
Mercantile Bank.
Beverly M. Kelley joined the Bank in 1966 and has served as Senior Vice
President since 1997. Prior to assuming her current position, Mrs. Kelley served
the Bank as Vice President since 1986.
Lisa K. Simpson joined the Bank in 2001 and has served as Senior Vice
President, Human Resources Director since 2002. Prior to joining the Bank, Mrs.
Simpson served in various Human Resource administrative capacities with
Jefferson Heritage Bank since 1983.
REGULATION
General
The Bank is subject to extensive regulation, examination and supervision by
the OTS, as its chartering agency, and the FDIC, as the deposit insurer. The
Bank is a member of the FHLB System and its deposit accounts are insured up to
applicable limits by the SAIF managed by the FDIC. The Bank must file reports
with the OTS and the FDIC concerning its activities and financial condition in
addition to obtaining regulatory approvals prior to entering into certain
transactions such as mergers with, or acquisitions of, other financial
institutions. There are periodic examinations by the OTS and the FDIC to test
the Bank's safety and soundness and compliance with various regulatory
requirements. This regulation and supervision establishes a comprehensive
framework of activities in which an institution can engage and is intended
primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulatory requirements and policies, whether by the OTS, the
FDIC or through legislation, could have a material adverse impact on 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 federal laws. Certain of the
regulatory requirements applicable to the Bank and to the Company are referred
to below or elsewhere herein.
The description of statutory provisions and regulations set forth in this
document do not purport to be a complete description of such statutes and
regulations and their effects on the Company and the Bank.
Federal Savings Institution Regulation
Business Activities. The activities of federal savings institutions are
governed by federal laws and regulations. These laws and regulations delineate
the nature and extent of the activities in which federal associations may
engage. In particular, many types of lending authorities for federal
associations, e.g., commercial, non-residential real property and consumer
loans, are limited to a specified percentage of the institution's capital
assets.
Loans to One Borrower. Federal laws provide that savings institutions are
generally subject to the national bank limits on loans to one borrower. A
savings institution may not make a loan or extend credit to a
23
single or related group of borrowers in excess of 15% of the Bank's unimpaired
capital and surplus. An additional amount may be loaned, equal to 10% of
unimpaired capital and surplus, if secured by readily-marketable collateral. At
September 30, 2002, the Bank's largest aggregate amount of loans to one borrower
was $3.0 million, which was below the Bank's loans to one borrower limit of $4.3
million at such date.
QTL Test. Federal law requires savings institutions to meet a qualified
thrift lender ("QTL") test. Under the test, a savings bank is required to either
be a "domestic building and loan association" within the definition of the
Internal Revenue Code of 1986, as amended (the "Code"), maintain at least 65% of
its "portfolio assets" (total assets less (i) specified liquid assets up to 20%
of total assets, (ii) intangibles, including goodwill, and (iii) the value of
property used to conduct business) in certain "qualified thrift investments"
(primarily residential mortgages and related investments, including certain
mortgage-backed securities) on a monthly basis in 9 out of every 12 months.
A savings institution that fails the QTL test is subject to certain
operating restrictions and may be required to convert to a bank charter. As of
September 30, 2002, the Bank had all of its portfolio assets in qualified thrift
investments except for $8.6 million in commercial loans 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."
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by a savings institution, such as cash dividends,
payments to repurchase its shares and payments to shareholders of another
institution in a cash-out merger. Under the regulations, an application to and
the prior approval of the OTS is required prior to any capital distribution if
the institution does not meet the criteria for "expedited treatment" of
applications under OTS regulations (i.e., generally examination ratings in the
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.
If the Bank's capital fell below its regulatory requirements or the OTS notified
it that it was in need of more than normal supervision, the Bank's ability to
make capital distributions could be restricted. In addition, the OTS could
prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice.
Assessments. Savings institutions are required to pay assessments to the
OTS to fund the agency's operations. The general assessment, paid on a
semi-annual basis, is 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, 2002 totaled approximately $71,000.
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 more
easily diversify their loan portfolios and lines of business geographically. The
OTS authority preempts any state law purporting to regulate branching by federal
savings institutions.
24
Community Reinvestment Act. Under the Community Reinvestment Act ("CRA"),
as implemented by OTS regulations, a savings institution has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution. The CRA also requires all institutions to make public
disclosure of their CRA ratings. The Bank received a "Satisfactory" CRA rating
in its most recent examination.
Transactions with Related Parties. The Bank's authority to engage in
certain transactions with "affiliates" (i.e., any company that controls or is
under common control with an institution, including the Company and any
non-savings institution subsidiaries) is limited by federal law. The aggregate
amount of covered transactions with any individual affiliate is limited to 10%
of the capital and surplus of the savings institution. The aggregate amount of
covered transactions with all affiliates is limited to 20% of the savings
institution's capital and surplus. Certain transactions with affiliates are
required to be secured by collateral in an amount and of a type described in
federal law. The purchase of low quality assets from affiliates is generally
prohibited. Transactions with affiliates must be on terms and under
circumstances that are at least as favorable as those prevailing at the time for
comparable transactions with non-affiliated companies. In addition, savings
institutions are prohibited from lending to any affiliate that is engaged in
activities that are not permissible for bank holding companies and no savings
institution may purchase the securities of any affiliate other than a
subsidiary.
The Bank's authority to extend credit to executive officers, directors and
10% shareholders ("insiders") as well as entities controlled by such persons is
also governed by federal law. Such loans are required to be made on terms
substantially the same as those offered to unaffiliated individuals and may not
involve more than the normal risk of repayment. An exception exists for loans
made pursuant to a benefit or compensation program that is widely available to
all employees of the institution and does not give preference to insiders over
other employees. The law limits both the individual and aggregate amount of
loans the Bank may make to insiders based, in part, on the Bank's capital
position and requires certain board approval procedures to be followed.
Enforcement. The OTS has primary enforcement responsibility over savings
institutions and has the authority to bring actions against the institution and
all institution-affiliated parties, including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Formal
enforcement action may 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 in especially egregious cases. The FDIC has the
authority to recommend to the Director of the OTS that 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
25
institutions before capital becomes impaired. If the OTS determines that an
institution fails to meet any standard prescribed by the guidelines, the OTS may
require the institution to submit an acceptable plan to achieve compliance with
the standard.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 4% leverage ratio (3% for institutions receiving the highest rating on
the CAMELS financial institution rating system, and an 8% risk-based capital
ratio. In addition, the prompt corrective action standards discussed below also
establish, in effect, a minimum 2% tangible capital standard, a 4% leverage
capital ratio (3% for institutions receiving the highest rating in the CAMELS
financial institution rating system) and, together with the risk-based capital
standard itself, a 4% Tier I risk-based capital standard. The OTS regulations
also require that, in meeting the tangible, leverage and risk-based capital
standards, institutions must generally deduct investments in and loans to
subsidiaries engaged in activities as principal that are not permissible for a
national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk weighted assets of 4% and 8%, respectively.
In determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet assets, are multiplied by a risk-weight of 0% to 100%, as
assigned by the OTS capital regulation based on the risks OTS believes are
inherent in the type of asset. Core capital is defined as common stockholders'
equity (including retained earnings), certain non-cumulative perpetual preferred
stock and related surplus, and minority interests in equity accounts of
consolidated subsidiaries less intangibles other than certain mortgage servicing
rights and credit card relationships. The components of supplementary capital
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 and up to 45% of unrealized gains in
available-for-sale securities with readily determinable fair values. Overall,
the amount of supplementary capital included as part of total capital cannot
exceed 100% of core capital.
The capital regulations also incorporate an interest rate risk component. A
savings institutions with "above normal" interest rate risk exposure must deduct
from total capital for purposes of calculating their risk-based capital
requirements. The OTS deferred implementation of the interest rate risk capital
charge and repealed the interest rate risk component in May 2002, concluding
that it was unnecessary in light of other tools available to measure and control
interest rate risk.
At September 30, 2002, 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. The OTS is required to take certain
supervisory actions against undercapitalized institutions, the severity of which
depends upon the institution's degree of under-capitalization. Generally, a
savings institution that has a ratio of total capital to risk-weighted assets of
less than 8%, a ratio of Tier I (core) capital to risk-weighted assets of less
than 4% or a ratio of core capital to total assets of less than 4% (3% or less
for institutions with the highest examination rating) is considered to be
"under-capitalized." A savings institution that has a total risk-based capital
ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio
that is less than 3% is considered to be "significantly undercapitalized" and a
savings institution that has a tangible capital to assets ratio equal to or less
than 2% is deemed to be "critically undercapitalized." Subject to a narrow
exception, the OTS is required to appoint a receiver or conservator for an
institution that is "critically undercapitalized." The regulation also provides
that a capital
26
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 Federal Deposit Insurance Corporation
maintains a risk-based system by which institutions are assigned to one of three
categories based on their capitalization and one of three subcategories based on
examination ratings and other supervisory information. An institution's
assessment rate depends upon the categories to which it is assigned. Assessment
rates for Savings Association Insurance Fund member institutions are determined
semiannually by the Federal Deposit Insurance Corporation and currently range
from zero basis points of deposits for healthy institutions to 27 basis points
of deposits for the riskiest.
The Bank's assessment rate for fiscal 2002 was 3 basis points and the
premium paid for this period was $34,000. The Federal Deposit Insurance
Corporation has authority to increase insurance assessments. A significant
increase in Savings Association Insurance Fund insurance premiums would likely
have an adverse effect on the operating expenses and results of operations of
the Bank. Management cannot predict what insurance assessment rates will be in
the future.
In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980s by Financing
Corporation ("FICO") to re-capitalize the predecessor to the Savings Association
Insurance Fund. During 2002, FICO payments for Savings Association Insurance
Fund members approximated 1.7 basis points of deposits.
Insurance of deposits may be terminated the Federal Deposit Insurance
Corporation upon finding that the institution has engaged in unsafe or unsound
practices, is in unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by the
Federal Deposit Insurance Corporation or the Office of Thrift Supervision. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
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% of the aggregate principal amount of its unpaid residential
mortgage loans and similar obligations at the beginning of each year, or 1/20 of
its advances (borrowings) from the FHLB, whichever is greater. The Bank was in
compliance with this requirement with an investment in FHLB stock at September
30, 2002, of $5.8 million.
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, 2002, 2001 and
2000, dividends from the FHLB to the Bank amounted to approximately $146,000,
$185,000 and $158,000, respectively. If dividends were reduced, or
27
interest on future FHLB advances increased, the Bank's net interest income would
likely also be reduced. Recent legislation has changed the structure of the
FHLBs funding obligations for insolvent thrifts, revised the capital structure
of the FHLBs and implemented entirely voluntary membership for FHLBs. Management
cannot predict the effect that these changes may have with respect to its FHLB
membership.
Federal Reserve System
The FRB regulations require savings institutions to maintain
non-interest-earning reserves against their transaction accounts (primarily NOW
and regular checking accounts). The regulations generally require that reserves
be maintained against aggregate transaction accounts as follows: a 3% reserve
ratio is assessed on net transaction accounts over up to and including $42.1
million; a 10% reserve ratio is applied over $42.1 million. The first $6.0
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.
Holding Company Regulation
The Company is a non-diversified unitary savings and loan holding company
within the meaning of federal law. The Gramm-Leach-Bliley Act of 1999 provides
that no company may acquire control of a savings association after May 4, 1999
unless it engages only in the financial activities permitted for financial
holding companies under the law or for multiple savings and loan holding
companies as described below. Further, the Gramm-Leach-Bliley Act specifies
that, subject to a grandfather provision, existing savings and loan holding
companies may only engage in such activities. The Company does qualify for the
grandfathering. Permissible holding company activities include banking services
such as lending, trust services, insurance activities and underwriting,
investment banking and real estate investments.
A savings and loan holding company is prohibited from, directly or
indirectly, acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company, without prior written approval
of the Office of Thrift Supervision and from acquiring or retaining control of a
depository institution that is not insured by the Federal Deposit Insurance
Corporation. In evaluating applications by holding companies to acquire savings
institutions, the Office of Thrift Supervision considers the financial and
managerial resources and future prospects of the company and institution
involved, the effect of the acquisition on the risk to the deposit insurance
funds, the convenience and needs of the community and competitive factors.
The Office of Thrift Supervision may not approve any acquisition that would
result in a multiple savings and loan holding company controlling savings
institutions in more than one state, subject to two exceptions; (i) the approval
of interstate supervisory acquisitions by savings and loan holding companies and
(ii) the acquisition of a savings institution in another state if the laws of
the state of the target savings institution specifically permit such
acquisitions. The states vary in the extent to which they permit interstate
savings and loan holding company acquisitions.
Although savings and loan holding companies are not currently subject to
specific capital requirements or specific restrictions on the payment of
dividends or other capital distributions, federal regulations do prescribe such
restrictions on subsidiary savings institutions as described below. The Bank
must notify the Office of Thrift Supervision 30 days before declaring any
dividend to the Company. In addition, the financial
28
impact of a holding company on its subsidiary institution is a matter that is
evaluated by the Office of Thrift Supervision and the agency has authority to
order cessation of activities or divestiture of subsidiaries deemed to pose a
threat to the safety and soundness of the institution.
Acquisition of the Company. Under the Federal Change in Bank Control Act
("CIBCA"), a notice must be submitted to the Office of Thrift Supervision if any
person (including a company), a group acting in concert, seeks to acquire 10% or
more of the Company's outstanding voting stock, unless the Office of Thrift
Supervision has found that the acquisition will not result in a change in
control of the Company. Under the CIBCA, the Office of Thrift Supervision has 60
days from the filing of a complete notice to act, taking into consideration
certain factors, including the financial and managerial resources of the
acquirer and the anti-trust effect of the acquisition. Any company that so
acquires control would then be subject to regulation as a savings and loan
holding company.
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. 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
29
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
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
30
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, 2002.
Year Net Book Owned/ Approximate
Location Opened Value (1) Leased Square Footage
- -------------------------------- -------- ------------- -------- ----------------
Main Office: (Dollars in thousands)
12300 Olive Boulevard 1978 $3,160 Owned 29,000
St. Louis, Missouri 63141-6434
Branch Offices:
199 Jamestown Mall 1998 52 Leased (2) 2,500
Florissant, Missouri 63033-5398
3760 South Grand Avenue 1967 588 Owned 3,500
St. Louis, Missouri 63118-3487
4226 Bayless Road 2001 640 Owned (3) 3,200
St. Louis, Missouri 63123-7500
1928 Zumbehl Road 2000 928 Leased (4) 2,800
St. Charles, Missouri 63303-2721
1700 O'Fallon Road
O'Fallon, Missouri 63106 2003 626 Owned (5) 4,000
- ------------------------
(1) Represents the net book value of land, buildings, furniture, fixtures and
equipment owned by the Bank.
(2) 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. Lease expires on July 31, 2004.
(3) The Bank purchased the building at 4226 Bayless Road and disposed of the
lease of the former branch location 4225 Bayless Road in January 2001.
(4) Lease expires on October 31, 2004 (contains (3) five year extensions)
(5) The O'Fallon office is expected to open in February 2003.
31
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 and supplementary data are included in Item 15.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- -----------------------------------------------------------------------
Financial Disclosure
--------------------
There have been no changes in or disagreements with accountants on
accounting and financial disclosure that have not been previously reported by
the Company. For information regarding the Company's change in accountants
during fiscal 2001, see the section captioned "Proposal 3-Independent Auditors"
in the Proxy Statement.
32
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" in the Company's annual meeting proxy statement for
information regarding compliance with Section 16 of the Exchange Act.
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.
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.
(d) Equity Compensation Plan Information
33
- -----------------------------------------------------------------------------------------------------------
Plan category Number of securities Weighted-average Number of securities
to be issued upon exercise price of remaining available for
exercise of outstanding outstanding options, future issuance under
options, warrants and warrants and rights equity compensation
rights plans (excluding
securities reflected in
column (a))
(a) (b) (c)
- -----------------------------------------------------------------------------------------------------------
Equity compensation
plans approved by 421,602 8.62 18,089
security holders
- -----------------------------------------------------------------------------------------------------------
Equity compensation
plans not approved --- --- ---
by security holders
- -----------------------------------------------------------------------------------------------------------
Total 421,602 8.62 18,089
- -----------------------------------------------------------------------------------------------------------
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. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. The Company
maintains controls and procedures designed to ensure that information
required to be disclosed in the reports that the Company files or
submits under the Securities Exchange Act of 1934 is recorded,
processed, and summarized and reported with the time periods specified
in the rules and forms on the Securities and Exchange Commission. Based
upon their evaluation of those controls and procedures performed within
90 days of the filing date of this report, the chief executive officer
and the chief financial officer of the Company concluded that the
Company's disclosure controls and procedures were adequate.
(b) Changes in internal controls. The Company made no significant
changes in its internal controls or in other factors that could
significantly affect these controls subsequent to the date of the
evaluation of those controls by the chief executive officer.
Item 15. 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 Balance Sheets at September 30, 2002 and 2001
Consolidated Statements of Income and Comprehensive Income
for the Years Ended September 30, 2002, 2001 and 2000
Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended September 30, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the Years Ended
September 30, 2002, 2001 and 2000
34
Notes to Consolidated Financial Statements for the
Years ended September 30, 2002, 2001, and 2000
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
Independent Auditors' Report of Deloitte & Touche LLP, dated
October 31, 2000:
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Pulaski Financial Corp.:
We have audited the consolidated statements of income and comprehensive income,
stockholders' equity and cash flows of Pulaski Financial Corp. and subsidiaries
(the "Company") for the year ended September 30, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements of Pulaski Financial
Corp. and subsidiaries present fairly, in all material respects, the results of
their operations and their cash flows for the year ended September 30, 2000 in
conformity with accounting principles generally accepted in the United States of
America.
/s/ DELOITTE & TOUCHE LLP
St. Louis, Missouri
October 31, 2000
3. Exhibits
The exhibits listed below are filed as part of this report or are
incorporated by reference herein.
3.1 Certificate of Incorporation of Pulaski Financial
Corp. /1/
3.2 Certificate of Amendment to Certificate of
Incorporation of Pulaski Financial Corp. /2/
3.3 Bylaws of Pulaski Financial Corp. /1/
4.0 Form of Certificate for Common Stock/1/
10.1 Employment Agreement between Pulaski Financial Corp.
and William A. Donius/3/
10.2 Severance Agreement with Beverly M. Kelley/4/
10.3 Pulaski Financial Corp. 2000 Stock-Based Incentive
Plan/5/
10.4 Pulaski Financial Corp. 1994 Stock Option Plan/6/
10.5 Non-Competition and Consulting Agreement with Thomas
F. Hack/7/
10.6 Employment Agreement between Pulaski Bank and William
A. Donius/7/
13.0 Annual Report to Stockholders
21.0 Subsidiaries of Pulaski Financial Corp.
23.0 Consent of Independent Auditor
99.1 Chief Executive Officer Certification Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Chief Financial Officer Certification Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
---------------
/1/ Incorporated herein by reference from the Form S-1
(Registration No. 333-56465), as amended, as filed on
June 9, 1998.
/2/ Incorporated herein by reference to Pulaski Financial
Corp.'s Form 10-Q for the quarterly period ended
December 31, 2001, as filed on February 14, 2002.
/3/ Incorporated herein by reference to Pulaski Financial
Corp.'s Form 10-Q for the quarterly period ended
March 31, 2002, as filed on May 15, 2002.
/4/ 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.
/5/ Incorporated herein by reference to Pulaski Financial
Corp.'s Definitive Proxy Statement for the 2000
Annual Meeting of Stockholders.
/6/ Incorporated herein by reference to Pulaski Financial
Corp.'s Form S-8 (Registration No 333-84515) as filed
on August 4, 1999.
/7/ Incorporated herein by reference to Pulaski Financial
Corp.'s Form 10-K for the year ended September 30,
2001, as filed on December 27, 2001.
(b) Reports on Form 8-K
On August 26, 2002, the Company filed a Form 8-K which it announced
under Item 5 that its Board of Directors appointed a new director to fill a
vacancy created by the death of a director in June. The press release announcing
the appointment was attached by exhibit.
35
On September 24, 2002, the Company filed a Form 8-K which it announced
under Item 5 that it had received regulatory approval to open a lending office
in Overland Park, Kansas. The press release announcing the new office was
attached by exhibit.
36
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 18, 2002
- ---------------------------- Officer
William A. Donius (principal executive officer)
/s/ Ramsey K. Hamadi Chief Financial Officer December 18, 2002
- ---------------------------- (principal accounting and
Ramsey K. Hamadi financial officer)
/s/ Robert A. Ebel Director December 18, 2002
- ----------------------------
Robert A. Ebel
/s/ E. Douglas Britt Director December 18, 2002
- ----------------------------
E. Douglas Britt
/s/ Thomas F. Hack Director December 18, 2002
- ----------------------------
Thomas F. Hack
/s/ Timothy K. Reeves Director December 18, 2002
- ----------------------------
Timothy K. Reeves
/s/ Dr. Edward J. Howenstein Director December 18, 2002
- ----------------------------
Dr. Edward J. Howenstein
37
CERTIFICATION
I, William A. Donius, certify that:
1. I have reviewed this annual report on Form 10K of Pulaski Financial Corp.;
2. Based on my knowledge, the annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report.
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in the annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of the internal
controls which could adversely affect the registrant's ability to
record process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect the internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: December 27, 2002
/s/ William A. Donius
---------------------
Name: William A. Donius
Title: President and Chief Executive Officer
38
CERTIFICATION
I, Ramsey K. Hamadi, certify that:
1. I have reviewed this annual report on Form 10K of Pulaski Financial Corp.;
2. Based on my knowledge, the annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report.
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in the annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of the internal
controls which could adversely affect the registrant's ability to
record process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect the internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: December 27, 2002
/s/ Ramsey K. Hamadi
--------------------
Name: Ramsey K. Hamadi
Title: Chief Financial Officer
39