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Pulaski Financial 10-Q 2007

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-Q

 


(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

0-24571

Commission File Number

 


Pulaski Financial Corp.

(Exact name of registrant as specified in its charter)

 


 

Missouri   43-1816913

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

12300 Olive Boulevard St. Louis, Missouri   63141-6434
(Address of principal executive office)   (Zip Code)

Registrant’s telephone number, including area code: (314) 878-2210

Not Applicable

(Former name, address and former fiscal year, if changed since last report)

 


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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 whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes  ¨    No  x

Indicate the number of shares outstanding of the registrant’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at August 8, 2007

Common Stock, par value $.01 per share

  9,934,390 shares

 



Table of Contents

PULASKI FINANCIAL CORP. AND SUBSIDIARIES

FORM 10-Q

JUNE 30, 2007

TABLE OF CONTENTS

 

          Page
PART I    FINANCIAL INFORMATION   
Item 1.    Financial Statements   
   Consolidated Balance Sheets at June 30, 2007 and September 30, 2006 (Unaudited)    1
   Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended June 30, 2007 (Unaudited) and 2006 (Unaudited)    2
   Consolidated Statement of Stockholders’ Equity for the Nine Months Ended June 30, 2007 (Unaudited)    3
   Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2007 and 2006 (Unaudited)    4
   Notes to Unaudited Consolidated Financial Statements (Unaudited)    6
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    10
Item 3.    Quantitative and Qualitative Disclosures About Market Risk and Off-Balance Sheet Arrangements    22
Item 4.    Controls and Procedures    24
PART II    OTHER INFORMATION   
Item 1.    Legal Proceedings    26
Item 1A.    Risk Factors    26
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds    26
Item 3.    Defaults Upon Senior Securities    27
Item 4.    Submission of Matters to a Vote of Security Holders    27
Item 5.    Other Information    27
Item 6.    Exhibits    27
   Signatures    28


Table of Contents

PART I - FINANCIAL INFORMATION


Table of Contents

PULASKI FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2007 (UNAUDITED) AND SEPTEMBER 30, 2006

 

     

June 30,

2007

   

September 30,

2006

 
ASSETS     

Cash and amounts due from depository institutions

   $ 24,880,371     $ 19,085,655  

Federal funds sold and overnight deposits

     11,191,205       3,030,571  
                

Total cash and cash equivalents

     36,071,576       22,116,226  

Interest bearing time deposits in other banks

     99,000       792,000  

Equity securities available for sale, at fair value

     3,937,548       4,517,259  

Debt securities held to maturity, at amortized cost (fair value, $10,955,782 and $12,874,121 at June 30, 2007 and September 30, 2006, respectively)

     10,961,717       12,932,036  

Mortgage-backed and related securities held to maturity, at amortized cost (fair value, $411,366 and $469,713 at June 30, 2007 and September 30, 2006, respectively)

     385,596       441,266  

Mortgage-backed securities available for sale, at fair value

     2,781,836       3,190,125  

Capital stock of Federal Home Loan Bank, at cost

     8,891,600       9,524,300  

Loans receivable held for sale, at lower of cost or market

     85,366,980       60,371,296  

Loans receivable, net of allowance for loan losses of $9,999,251 and $7,817,317 at June 30, 2007 and September 30, 2006, respectively

     919,396,711       785,199,024  

Real estate acquired in settlement of loans, net of allowance for losses of $105,035 and $26,350 at June 30, 2007 and September 30, 2006, respectively

     2,891,804       2,764,167  

Premises and equipment, net

     18,897,203       18,165,840  

Bank-owned life insurance

     24,802,313       24,043,698  

Accrued interest receivable

     6,249,701       5,532,177  

Goodwill

     3,938,524       3,938,524  

Core deposit intangible

     538,330       657,802  

Deferred tax asset

     5,041,900       4,907,912  

Other assets

     5,407,858       3,366,444  
                

Total assets

   $ 1,135,660,197     $ 962,460,096  
                
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Liabilities:

    

Deposits

   $ 825,568,916     $ 655,576,578  

Advances from Federal Home Loan Bank of Des Moines

     168,000,000       172,800,000  

Note payable

     3,150,000       3,320,000  

Subordinated debentures

     19,589,000       19,589,000  

Advance payments by borrowers for taxes and insurance

     2,345,407       3,054,713  

Accrued interest payable

     2,130,266       1,800,764  

Due to other banks

     23,725,882       22,066,374  

Other liabilities

     10,951,980       8,426,121  
                

Total liabilities

     1,055,461,451       886,633,550  
                

Stockholders’ Equity:

    

Preferred stock—$.01 par value per share, authorized 1,000,000 shares; none issued or outstanding

     —         —    

Common stock—$.01 par value per share, authorized 18,000,000 shares; 13,068,618 shares issued at June 30, 2007 and September 30, 2006

     130,687       130,687  

Treasury stock—at cost; 3,087,825 and 3,122,275 shares at June 30, 2007 and September 30, 2006, respectively

     (16,312,776 )     (15,982,452 )

Treasury stock—equity trust—at cost; 192,665 and 255,053 shares at June 30, 2007 and September 30, 2006, respectively

     (2,513,911 )     (3,131,404 )

Additional paid-in capital

     50,134,913       50,067,003  

Accumulated other comprehensive loss

     (76,971 )     (12,933 )

Retained earnings

     48,836,804       44,755,645  
                

Total stockholders’ equity

     80,198,746       75,826,546  
                

Total liabilities and stockholders’ equity

   $ 1,135,660,197     $ 962,460,096  
                

See accompanying notes to the unaudited consolidated financial statements.

 

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Table of Contents

PULASKI FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

THREE AND NINE MONTHS ENDED JUNE 30, 2007 (UNAUDITED) AND 2006 (UNAUDITED)

 

     Three Months Ended June 30,     Nine Months Ended June 30,  
     2007     2006     2007     2006  

Interest and Dividend Income:

        

Loans receivable

   $ 17,793,950     $ 13,943,895     $ 50,283,652     $ 37,282,855  

Debt and equity securities

     204,239       116,141       613,286       353,230  

Mortgage-backed securities

     38,532       48,179       121,386       157,378  

Capital stock of the Federal Home Loan Bank

     154,852       88,229       340,436       220,751  

Other

     49,771       62,378       157,633       175,439  
                                

Total interest and dividend income

     18,241,344       14,258,822       51,516,393       38,189,653  
                                

Interest Expense:

        

Deposits

     8,293,269       5,174,344       22,612,704       13,452,550  

Advances from Federal Home Loan Bank of Des Moines

     2,274,896       2,016,338       6,533,852       5,410,961  

Subordinated debentures

     376,902       358,557       1,132,516       1,007,715  

Note payable

     55,780       62,189       171,684       174,139  
                                

Total interest expense

     11,000,847       7,611,428       30,450,756       20,045,365  
                                

Net interest income

     7,240,497       6,647,394       21,065,637       18,144,288  

Provision for loan losses

     1,911,482       291,664       3,166,517       1,151,035  
                                

Net interest income after provision for loan losses

     5,329,015       6,355,730       17,899,120       16,993,253  
                                

Non-Interest Income:

        

Retail banking fees

     918,714       785,599       2,455,910       2,217,958  

Mortgage revenues

     1,903,553       1,406,881       4,071,091       3,535,373  

Title policy revenues

     227,152       186,221       670,711       558,644  

Investment brokerage revenues

     158,584       151,952       534,240       419,153  

Appraisal division revenues

     259,150       —         682,713       —    

Gain on the sale of securities

     —         —         143,720       56,163  

Gain on the sale of branch

     —         —         —         2,473,853  

Bank-owned life insurance income

     247,550       245,770       758,615       597,755  

Other

     55,806       224,926       553,671       510,492  
                                

Total non-interest income

     3,770,509       3,001,349       9,870,671       10,369,391  
                                

Non-Interest Expense:

        

Salaries and employee benefits

     3,177,659       2,876,648       9,126,454       7,881,121  

Occupancy, equipment and data processing expense

     1,453,797       1,427,427       4,135,708       3,762,478  

Advertising

     394,409       277,818       1,013,292       743,111  

Professional services

     318,109       278,663       979,070       942,525  

Loss (gain) on derivative instruments

     (131,123 )     (146,073 )     (444,793 )     334,173  

Charitable contributions

     37,210       16,625       103,561       325,165  

Data processing termination expense

     —         —         219,534       —    

Real estate foreclosure losses and expense, net

     111,804       35,798       347,861       91,100  

Other

     779,479       711,152       2,306,417       2,106,374  
                                

Total non-interest expense

     6,141,344       5,478,058       17,787,104       16,186,047  
                                

Income before income taxes

     2,958,180       3,879,021       9,982,687       11,176,597  

Income tax expense

     974,637       1,401,140       3,308,408       3,956,251  
                                

Net income

   $ 1,983,543     $ 2,477,881     $ 6,674,279     $ 7,220,346  
                                

Other comprehensive loss

     (76,971 )     (45,369 )     (64,038 )     (22,240 )
                                

Net comprehensive income

   $ 1,906,572     $ 2,432,512     $ 6,610,241     $ 7,198,106  
                                

Per Share Amounts:

        

Basic earnings per share

   $ 0.20     $ 0.25     $ 0.68     $ 0.80  

Weighted average common shares outstanding—basic

     9,825,886       9,755,591       9,826,523       9,009,505  

Diluted earnings per share

   $ 0.19     $ 0.24     $ 0.65     $ 0.76  

Weighted average common shares outstanding—diluted

     10,266,592       10,243,755       10,267,007       9,536,280  

See accompanying notes to the unaudited consolidated financial statements.

 

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Table of Contents

PULASKI FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

NINE MONTHS ENDED JUNE 30, 2007 (UNAUDITED)

 

     Common
Stock
  

Treasury

Stock

    Additional
Paid-In
Capital
    Accumulated
Other
Comprehensive
Loss
    Retained
Earnings
    Total  

Balance, September 30, 2006

   $ 130,687    $ (19,113,856 )   $ 50,067,003     $ (12,933 )   $ 44,755,645     $ 75,826,546  
                                               

Comprehensive income:

             

Net income

     —        —         —         —         6,674,279       6,674,279  

Unrealized loss on investment securities, net of tax

     —        —         —         (64,038 )     —         (64,038 )
                                               

Net comprehensive income

     —        —         —         (64,038 )     6,674,279       6,610,241  
                                               

Dividends ($.09 per share)

     —        —         —         —         (2,593,120 )     (2,593,120 )

Stock options exercised

     —        234,386       121,320       —         —         355,706  

Stock option and award expense

     —        —         230,774       —         —         230,774  

Stock issued under dividend reinvestment plan (18,720 shares)

     —        77,875       209,735       —         —         287,610  

Stock repurchased (40,837 shares)

     —        (642,585 )     —         —         —         (642,585 )

Purchase of equity trust shares (50,628 shares)

     —        (732,500 )     —         —         —         (732,500 )

Release of equity trust shares (113,016 shares)

     —        1,349,993       (1,349,993 )     —         —         —    

Amortization of equity trust expense

     —        —         649,784       —         —         649,784  

Excess tax benefit from stock based compensation

     —        —         206,290       —         —         206,290  
                                               

Balance, June 30, 2007

   $ 130,687    $ (18,826,687 )   $ 50,134,913     $ (76,971 )   $ 48,836,804     $ 80,198,746  
                                               

See accompanying notes to the unaudited consolidated financial statements.

 

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Table of Contents

PULASKI FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR NINE MONTHS

ENDED JUNE 30, 2007 (UNAUDITED) AND JUNE 30, 2006 (UNAUDITED)

 

     Nine Months Ended June 30,  
     2007     2006  

Cash Flows From Operating Activities:

    

Net income

   $ 6,674,279     $ 7,220,346  
                

Adjustments to reconcile net income to net cash from operating activities:

    

Depreciation, amortization and accretion:

    

Premises and equipment

     1,114,030       986,046  

Net deferred loan costs

     2,407,782       2,092,222  

Net amortization of debt and equity securities premiums and discounts

     (483,126 )     (218,909 )

Broker fees financed under interest-rate swap agreements

     147,699       98,466  

Equity trust expense

     649,784       629,716  

Stock option and award expense

     230,774       224,223  

Provision for loan losses

     3,166,517       1,151,035  

Provision for losses on real estate acquired in settlement of loans

     115,535       102,884  

Losses on sale of real estate acquired in settlement of loans

     121,519       30,753  

Originations of loans receivable for sale to correspondent lenders

     (1,016,388,684 )     (831,792,112 )

Proceeds from sales of loans to correspondent lenders

     994,501,293       822,674,969  

Gain on sale of loans held for sale

     (3,108,293 )     (2,882,969 )

Loss on sale of loan pools

     —         122,299  

Gain on sale of securities available for sale

     (143,720 )     (56,163 )

Gain on sale of branch, net of expense

     —         (2,473,852 )

Loss (gain) on derivative instruments

     (444,793 )     334,173  

Increase in cash value of bank-owned life insurance

     (758,615 )     (597,755 )

Decrease in accrued expenses

     (493,999 )     (715,333 )

Excess tax benefit from stock-based compensation

     (206,290 )     (71,259 )

Changes in other assets and liabilities

     1,257,162       1,376,985  
                

Net adjustments

     (18,315,425 )     (8,984,581 )
                

Net cash used in operating activities

     (11,641,146 )     (1,764,235 )
                

Cash Flows From Investing Activities:

    

Proceeds from sales of equity securities available for sale

     772,648       7,286,858  

Proceeds from sales of mortgage-backed securities available for sale

     —         779,618  

Proceeds from maturities of time deposits

     693,000       198,000  

Proceeds from maturities of debt securities available for sale

     —         450,000  

Proceeds from maturities of debt securities held to maturity

     40,000,000       28,500,000  

Proceeds from redemption of FHLB stock

     10,289,300       10,550,400  

Purchases of debt securities available for sale

     (223,592 )     (567,489 )

Purchases of debt securities held to maturity

     (37,542,697 )     (31,736,851 )

Purchases of FHLB stock

     (9,656,600 )     (11,400,600 )

Purchase of bank-owned life insurance policies

     —         (6,500,000 )

Principal payments received on mortgage-backed securities

     492,567       907,798  

Proceeds from sale of loan pools

     —         13,862,739  

Net increase in loans

     (143,857,078 )     (125,810,651 )

Proceeds from sales of real estate acquired in settlement of loans receivable

     3,720,400       1,548,715  

Proceeds from disposal of equipment

     637       10,731  

Purchases of premises and equipment

     (1,846,030 )     (3,278,778 )

Cash paid for interest in joint venture

     (100,000 )     —    

Cash received for branch acquisition, net of cash and cash equivalents paid

     —         15,733,735  

Cash paid on sale of branch

     —         (19,448,123 )
                

Net cash used in investing activities

   $ (137,257,445 )   $ (118,913,898 )
                

See accompanying notes to the unaudited consolidated financial statements.

 

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Table of Contents

PULASKI FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR NINE MONTHS

ENDED JUNE 30, 2007 (UNAUDITED) AND JUNE 30, 2006 (UNAUDITED)

 

     Nine Months Ended June 30,  
     2007     2006  

Cash Flows From Financing Activities:

    

Net increase in deposits

   $ 169,992,338     $ 83,864,291  

(Repayment of) proceeds from Federal Home Loan Bank advances, net

     (4,800,000 )     17,500,000  

Payment on note payable

     (170,000 )     (170,000 )

Net increase in due to other banks

     1,659,508       1,897,616  

Cash paid to trustee for purchase of equity trust shares

     (732,500 )     (1,254,911 )

Net decrease in advance payments by borrowers for taxes and insurance

     (709,306 )     (599,974 )

Proceeds from common stock offering

     —         16,139,230  

Proceeds from cash received in dividend reinvestment plan

     287,610       124,483  

Excess tax benefit for stock based compensation

     206,290       71,259  

Treasury stock issued for stock options exercised

     355,706       434,413  

Dividends paid on common stock

     (2,593,120 )     (2,307,129 )

Stock repurchases

     (642,585 )     (88,301 )
                

Net cash provided by financing activities

     162,853,941       115,610,977  
                

Net increase (decrease) in cash and cash equivalents

     13,955,350       (5,067,156 )

Cash and cash equivalents at beginning of period

     22,116,226       25,688,486  
                

Cash and cash equivalents at end of period

   $ 36,071,576     $ 20,621,330  
                

Supplemental Disclosures of Cash Flow Information:

    

Cash paid during the period for:

    

Interest on deposits

   $ 22,347,762     $ 13,096,602  

Interest on advances from FHLB

     6,525,405       5,386,713  

Interest on subordinated debentures

     1,132,754       993,738  

Interest on notes payable

     115,334       174,959  
                

Cash paid during period for interest

     30,121,255       19,652,012  

Income taxes, net

     1,715,663       5,230,000  

Noncash Investing Activities:

    

Real estate acquired in settlement of loans receivable

   $ 4,085,091     $ 4,009,731  

See accompanying notes to the unaudited consolidated financial statements.

 

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Table of Contents

PULASKI FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

1. BASIS OF PRESENTATION

The unaudited consolidated financial statements include the accounts of Pulaski Financial Corp. (the “Company”) and its wholly owned subsidiary, Pulaski Bank (the “Bank”), and its wholly owned subsidiary, Pulaski Service Corporation. All significant intercompany accounts and transactions have been eliminated. The assets of the Company consist primarily of the investment in the outstanding shares of the Bank and its liabilities consist principally of subordinated debentures. Accordingly, the information set forth in this report, including the consolidated financial statements and related financial data, relates primarily to the Bank. The Company, through the Bank, operates as a single business segment, providing traditional community banking services through its full service branch network.

In the opinion of management, the unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the financial condition of the Company as of June 30, 2007 and September 30, 2006 and its results of operations for the three- and nine-month periods ended June 30, 2007 and 2006. The results of operations for the three- and nine-month periods ended June 30, 2007 are not necessarily indicative of the operating results that may be expected for the entire fiscal year. These unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended September 30, 2006 contained in the Company’s 2006 Annual Report to Stockholders, which was filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended September 30, 2006.

The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements that affect the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates. The allowance for loan losses and fair values of financial instruments are significant estimates reported within the consolidated financial statements.

 

2. EARNINGS PER SHARE

Basic earnings per share is computed using the weighted average number of common shares outstanding. The dilutive effect of potential common shares outstanding is included in diluted earnings per share. The computations of basic and diluted earnings per share are presented in the following table.

 

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Three Months Ended

June 30,

  

Nine Months Ended

June 30,

     2007    2006    2007    2006

Weighted average shares outstanding – basic

     9,825,886      9,755,591      9,826,523      9,009,505

Treasury stock—equity trust

     149,433      118,552      131,176      124,658

Equivalent shares—employee stock options and awards

     291,273      369,612      309,308      402,117
                           

Weighted average shares outstanding—diluted

     10,266,592      10,243,755      10,267,007      9,536,280
                           

Net income per share—basic

   $ 0.20    $ 0.25    $ 0.68    $ 0.80

Net income per share—diluted

   $ 0.19    $ 0.24    $ 0.65    $ 0.76

Under the treasury stock method, outstanding stock options are dilutive when the average market price of the Company’s common stock, combined with the effect of any unamortized compensation expense, exceed the option price during a period. In addition, proceeds from the assumed exercise of dilutive options along with the related tax benefit are assumed to be used to repurchase common shares at the average market price of such stock during the period.

The following options to purchase shares during the three- and nine-month periods ended June 30, 2007 and 2006 were not included in the respective computations of diluted earnings per share because the exercise price of the options, when combined with the effect of the unamortized compensation expense, was greater than the average market price of the common shares and were considered anti-dilutive. These options expire in various periods from 2015 thru 2017, respectively.

 

     Three Months Ended
June 30,
   Nine Months Ended
June 30,
     2007    2006    2007    2006

Number of option shares

   144,828    75,596    131,707    37,523

Equivalent anti—dilutive shares

   38,391    19,662    34,240    8,830

 

3. STOCK-BASED COMPENSATION

The Company’s shareholder-approved, stock-based incentive plans permit the grant of awards in the form of options intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code, options that do not so qualify (non-statutory stock options), and grants of restricted shares of common stock. All employees, non-employee directors and consultants of the Company and its affiliates are eligible to receive awards under the plans. Except as described below, all stock option awards were granted with an exercise price equal to the market value of the Company’s shares at the date of grant and vest over a period of three to five years. The exercise period for stock options generally may not exceed 10 years from the date of grant. Generally, option and share awards provide for accelerated vesting if there is a change in control (as defined in the plans). On July 19, 2006, the Company granted stock option awards totaling 10,500 shares of its common stock to non-employee directors with exercise prices at a premium of 10% over the market value of the Company’s shares at the date of grant. These stock option awards were immediately vested on the date of grant and are exercisable for a period of five years from the date of grant.

 

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A summary of the Company’s stock option programs as of June 30, 2007 and changes during the nine-month period then ended, is presented below:

 

     Number
Of Shares
    Weighted
Average
Exercise
Price
  

Aggregate
Intrinsic
Value

(in millions)

   Weighted-
Average
Remaining
Contractual
Life

Outstanding at October 1, 2006

   820,300     $ 8.21      

Granted

   38,000       15.33      

Exercised

   (56,567 )     6.29      

Expired

   —         —        

Forfeited

   (13,425 )     15.53      
              

Outstanding at June 30, 2007

   788,308       8.56    $ 5.4    5.53 years
              

Exercisable at June 30, 2007

   553,128       6.33      5.0    4.54 years
              

The total intrinsic value of stock options exercised during the nine months ended June 30, 2007 and 2006 was $551,000 and $905,000, respectively. The weighted average grant-date fair value of options granted during the nine months ended June 30, 2007 was $4.19. As of June 30, 2007, the total unrecognized compensation expense related to non-vested stock options and awards was $806,000 and the related weighted average period over which it is expected to be recognized is 2.8 years.

The fair value of stock options granted in the nine-month periods ended June 30, 2007 and 2006 is estimated on the date of grant using the Black-Scholes option pricing model with the following average assumptions:

 

     Nine Months
Ended June 30,
 
     2007     2006  

Risk free interest rate

   4.56 %   4.40 %

Expected volatility

   27.50 %   27.93 %

Expected life in years

   5.7     6.0  

Dividend yield

   2.13 %   1.82 %

Expected forfeiture rate

   1.24 %   1.50 %

The Company maintains an Equity Trust Plan for the benefit of key loan officers and sales staff. The plan is designed to recruit and retain top-performing loan officers and other key revenue-producing employees who are instrumental to the Company’s success. Currently, none of the Company’s executive officers participate in the plan. The plan allows the recipients to defer a percentage of commissions earned, which is partially matched by the Company and paid into a rabbi trust for the benefit of the participants. The assets of the trust are limited to the purchase of Company shares in the open market. In exchange for the opportunity to defer income, the participants are required to sign a four-year or five-year contract prohibiting them from competing against the Company in the Company’s market area. Should the participants voluntarily leave the Company, they forgo any accrued benefits. At June 30, 2007, there were 192,665 total shares in the plan, of which 151,556 were not yet vested. Vested shares in the plan are treated as issued and outstanding when computing basic and diluted earnings per share, whereas unvested shares are treated as issued and outstanding only when computing diluted earnings per share. Since the majority of the Company’s loans originated are sold on a servicing-released basis, most of the deferred expense is recorded as a reduction of the mortgage revenue realized upon sale. Excess tax benefits associated with all share based payments totaled approximately $206,000 for the nine months ended June 30, 2007.

 

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4. LOANS RECEIVABLE

Loans receivable at June 30, 2007 and September 30, 2006 are summarized as follows:

 

    

June 30,

2007

    September 30,
2006
 

Real estate mortgage:

    

One to four family residential

   $ 330,703,287     $ 314,746,084  

Multi-family residential

     24,659,939       13,628,962  

Commercial real estate

     192,192,035       150,528,577  

Real estate construction and development:

    

Residential

     38,786,108       30,586,090  

Multi-family

     13,977,879       6,042,116  

Commercial

     34,971,164       20,566,734  

Commercial and industrial

     76,927,272       48,785,481  

Equity lines

     215,118,497       207,152,688  

Consumer and installment

     6,844,830       6,276,425  
                
     934,181,011       798,313,157  

Add (less):

    

Deferred loan costs

     5,197,358       4,879,507  

Loans in process

     (9,982,407 )     (10,176,323 )

Allowance for loan losses

     (9,999,251 )     (7,817,317 )
                

Total

   $ 919,396,711     $ 785,199,024  
                

Weighted average interest rate at end of period

     7.62 %     7.50 %
                

 

5. DEPOSITS

Deposits at June 30, 2007 and September 30, 2006 are summarized as follows:

 

     June 30, 2007     September 30, 2006  
     Amount    Weighted
Average
Interest
Rate
    Amount    Weighted
Average
Interest
Rate
 

Transaction accounts:

          

Non-interest-bearing checking

   $ 54,262,136    —       $ 38,830,048    —    

Interest-bearing checking

     62,424,127    1.75 %     53,448,091    1.66 %

Passbook savings accounts

     30,030,341    0.27 %     31,895,237    0.39 %

Money market

     155,991,583    4.28 %     134,383,061    4.12 %
                  

Total transaction accounts

     302,708,187    2.59 %     258,556,437    2.53 %
                  

Certificates of deposit:

          

Less than $100,000

     236,274,236    5.39 %     207,899,136    5.02 %

$100,000 and greater

     286,586,493    4.74 %     189,121,005    4.43 %
                  

Total certificates of deposit

     522,860,729    5.03 %     397,020,141    4.74 %
                  

Total deposits

   $ 825,568,916    4.14 %   $ 655,576,578    3.87 %
                  

 

6. RECLASSIFICATIONS

Certain reclassifications have been made to 2007 amounts to conform to the 2006 presentation.

 

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MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This report contains certain “forward-looking statements” within the meaning of the federal securities laws, which are made in good faith pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements are not historical facts; rather they are statements based on Pulaski Financial Corp.’s current expectations regarding its business strategies, intended results and future performance. Forward-looking statements are generally preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and similar expressions.

Management’s ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors 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. The Company provides greater detail regarding some of these factors in its Form 10-K for the year ended September 30, 2006, including the Risk Factors section of that report. The Company’s forward-looking statements may also be subject to other risks and uncertainties, including those that it may discuss elsewhere in this report or in its other filings with the SEC. 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.

OVERVIEW

Pulaski Financial Corp. is the holding company for Pulaski Bank, a $1.1 billion asset, growth-oriented bank, focused on becoming the premier community bank in St. Louis. The Bank’s 85-year history operating in the St. Louis market as a deeply rooted community institution servicing tens of thousands of residential, commercial and consumer customers has created years of customer goodwill. The current generation of management is leveraging this legacy of goodwill and customer service in an effort to become the community bank of choice in the metropolitan St. Louis area.

During the quarter ended June 30, 2007, Pulaski Financial Corp. experienced strong results in many areas of its business. Compared to the quarter ended June 30, 2006, net interest income increased 8.9% and non-interest income increased 25.6%, while non-interest expense rose only 12.1%. The growth in non-interest income was bolstered by strong growth in mortgage revenues, appraisal and title policy revenues and retail banking fees. Driving these results were strong lending volumes and robust core deposit growth, which resulted in significant balance sheet growth during the quarter. Mortgage loan sales increased 24.4% during the three months ended March 31, 2007 compared to the same period last year and loans receivable grew 7.3% compared to March 31, 2007. In addition, transaction accounts grew 4.5% compared to March 31, 2007, including 16.3% growth in non-interest-bearing checking accounts.

While in most periods these results would have yielded significant growth in net income and earnings per share, for the quarter ended June 30, 2007, both net income and diluted earnings per share declined 20% compared to the same period a year ago due to a $1.6 million increase in the provision for loan losses. The increased provision was the result of significant growth in the loan portfolio, charge-offs and an increase in the level of non-performing loans. Nationally, a large number of residential real estate markets experienced declining property values in recent periods due to a slowing of activity in the housing market and an increase in housing inventory. This trend is reflected in the Company’s increased provision for loan losses. See Non-Performing Assets.

Core Product Growth

The Company’s top strategic objective is to grow its five primary banking products, which include two deposit products, checking and money market accounts, and three loan products, residential, home equity and commercial loans. These

 

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five products provide the main source of the Company’s operating income and are the focus of the Company’s balance sheet growth. Driving these relationships are a network of ten full-service bank locations in the St. Louis metropolitan area and more than 80 seasoned residential and commercial lenders in the Company’s two market locations, St. Louis and Kansas City.

The Company’s business plan includes reshaping its physical footprint to increase its presence in key business centers of St. Louis. Prior to 2005, five of the six Pulaski Bank locations were located in areas of St. Louis that were primarily retail-based markets. Since August 2005, the Company has added four full-service locations in several business districts of St. Louis, including the Richmond Heights location, which opened on January 5, 2007. By the end of calendar year 2007, the Company anticipates opening two additional bank locations in Downtown St. Louis and Clayton, Missouri.

The addition of new bank locations combined with strong marketing efforts and focused talent acquisition has resulted in rapid growth in the Company’s balance sheet. Core deposits, which consist of checking, money market and passbook savings accounts, have been a key component of this growth and their growth is the primary focus of the Company’s strategic plan. Primarily as the result of successful marketing efforts and new branch locations, core deposits increased 17%, or $44.2 million, to $302.7 million at June 30, 2007 from $258.6 million at September 30, 2006. This growth included a $24.4 million increase in checking account balances to $116.7 million and a $21.6 million increase in money market deposit accounts to $156.0 million at June 30, 2007. Total deposits increased $170.0 million during the nine-month period to $825.6 million. Certificates of deposit totaled $522.9 million at June 30, 2007, including $208.2 million in brokered certificates of deposit. Excluding the increase of $89.7 million in brokered certificates of deposit, time deposits increased $36.1 million during the nine months ended June 30, 2007. Because of the competition for time deposits created by growth of de novo banks in the Company’s market area, the Company often has the ability to raise brokered time deposits on a national level at interest rates lower than in its market area. Management actively chooses between these two sources of time deposits depending on this price differential.

Total assets increased $173.2 million to $1.1 billion at June 30, 2007 from $962.5 million at September 30, 2006. The growth in total assets was primarily due to $134.2 million of growth in loans receivable and $25.0 million in loans held for sale during the nine months ended June 30, 2007. The growth in loans receivable stemmed primarily from growth in the commercial portfolio, as mortgage loans secured by commercial real estate increased $41.7 million to $192.2 million, total real estate construction and development loans increased $30.5 million to $87.7 million, and commercial and industrial loans increased $28.1 million to $76.9 million at June 30, 2007, respectively. These increases were the result of the Company’s continued focus on growing these commercial loan products.

Results of Operations

Earnings for the quarter ended June 30, 2007 were $2.0 million, or $0.19 per diluted share on 10.3 million average diluted shares outstanding, compared with earnings of $2.5 million, or $0.24 per diluted share on 10.2 million average diluted shares outstanding, during the same quarter last year. For the nine months ended June 30, 2007, earnings were $6.7 million, or $0.65 per diluted share on 10.3 million average diluted shares outstanding, compared with $7.2 million, or $0.76 per diluted share on 9.5 million average diluted shares outstanding, for the same period a year ago. Earnings per share reflect the impact of a 1.2 million increase in the number of shares outstanding from stock issued in a secondary public offering in February 2006 and 211,000 shares issued to acquire CWE Bancorp on March 31, 2006.

Net income for the nine months ended June 30, 2006 included a $2.5 million gain on the sale of the Company’s Kansas City bank branch, partially offset by a $250,000 charitable contribution to a St. Louis community-based organization. These items had a combined impact on diluted earnings per share of $0.15 in last year’s nine-month period.

Net interest income rose 9%, or $593,000, to $7.2 million for the quarter ended June 30, 2007 compared with $6.6 million for the same period last year. The increase was fueled by strong growth in the average balances of loans receivable and loans held for sale, which collectively increased to $977.1 million during the quarter ended June 30, 2007 compared with $785.3 million during the quarter ended June 30, 2006. For the nine months ended June 30, 2007, net interest income rose to $21.1 million compared with $18.1 million for the same nine-month period last year. The average balances of loans receivable and loans held for sale collectively increased to $917.6 million during the nine months ended June 30, 2007 compared with $739.3 million during the nine months ended June 30, 2006.

 

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The net interest margin declined during the June 2007 quarter to 2.87% from 3.27% for the quarter ended June 30, 2006. For the nine-month period, the net interest margin declined to 2.95% in 2007 compared with 3.14% in 2006. The decline in the net interest margin was due primarily to strong competition for loan originations, which created pressure on loan yields, combined with an increase in wholesale funding sources, which are typically more costly than retail deposits. Also contributing to the decline was the charge-off of approximately $263,000 and $270,000 of accrued interest on past due loans during the three- and nine-month periods ended June 30, 2007, respectively, compared with a net recovery of $19,000 and the charge-off of $94,000 during the same 2006 periods, respectively.

The provision for loan losses for the three and nine months ended June 30, 2007 was $1.9 million and $3.2 million, respectively, compared with $292,000 and $1.2 million, respectively, for the same periods a year ago. The ratio of nonperforming assets to total assets increased from 1.02% at September 30, 2006 to 1.35% at June 30, 2007. Non-performing assets totaled $15.3 million at June 30, 2007 compared with $9.9 million at September 30, 2006. The balance of nonperforming loans increased $5.4 million to $12.4 million at June 30, 2007 from $7.0 million at September 30, 2006. See Non-Performing Assets.

Non-interest income increased $769,000 to $3.8 million for the three months ended June 30, 2007 compared with $3.0 million for the same period in the prior year. Mortgage revenues increased 35.3% to $1.9 million during the quarter ended June 30, 2007 on loan sales of $399 million, compared with mortgage revenues of $1.4 million during the quarter ended June 30, 2006 on loan sales of $321 million. The increased mortgage activity continued to drive title and appraisal revenues, which collectively increased $300,000 over the June 2006 quarter. The appraisal division is in its third quarter of operations and generated $259,000 in revenue for the quarter ended June 30, 2007. Also contributing to the rise in non-interest income during the quarter was a 17% increase in retail banking fees to $919,000 from $786,000, primarily as the result of the increase in core deposits. For the nine months ended June 30, 2007, non-interest income decreased to $9.9 million compared with $10.4 million for the same nine-month period last year. The March 2006 quarter included a $2.5 million gain on sale of a bank branch. Excluding this gain, non-interest income increased $2.0 million, or 25.0%, during the nine-month period, primarily as the result of a $683,000 increase in appraisal revenues, a $536,000 increase in mortgage revenues and a $238,000 increase in retail banking fees. Loan sales totaled $994.5 million for the nine months ended June 30, 2007 compared with $882.7 million for the same period in 2006. See Discussion of Other Non-Interest Income and Expense for the Three and Nine Months Ended June 30, 2007.

Non-interest expense increased 12% to $6.1 million for the quarter ended June 30, 2007 compared with $5.5 million for the same period a year ago. The increase was primarily due to higher compensation expense, which increased $301,000 to $3.2 million for the quarter ended June 30, 2007, higher advertising expense, which increased $117,000 to $394,000 for the quarter ended June 30, 2007, and higher real estate foreclosure expense and losses, which increased $76,000 to $112,000 for the quarter ended June 30, 2007. Non-interest expense in the current-year quarter was reduced by a $131,000 gain related to changes in the market values of derivative financial instruments compared with a $146,000 gain in the prior-year quarter. For the nine months ended June 30, 2007, non-interest expense was $17.8 million compared with $16.2 million for the same nine-month period last year. Non-interest expense during the nine months ended June 30, 2006 included a $250,000 charitable contribution to a St. Louis community-based organization. See Discussion of Other Non-Interest Income and Expense for the Three and Nine Months Ended June 30, 2007.

AVERAGE BALANCE SHEETS

The following table sets forth information regarding average daily balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread, net interest margin, and ratio of average interest-earning assets to average interest-bearing liabilities for the periods indicated.

 

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     Three Months Ended  
     June 30, 2007     June 30, 2006  
     Average
Balance
    Interest
and
Dividends
   Yield/
Cost
    Average
Balance
    Interest
and
Dividends
   Yield/
Cost
 
     (Dollars in thousands)  

Interest-earning assets:

              

Loans receivable: (1)

              

Real estate and commercial

   $ 679,536     $ 12,242    7.21 %   $ 519,193     $ 8,949    6.89 %

Consumer

     4,156       64    6.19 %     3,712       55    5.88 %

Home equity

     211,077       4,177    7.92 %     205,132       4,007    7.81 %
                                  

Total loans receivable

     894,769       16,483    7.37 %     728,037       13,011    7.15 %

Loans available for sale

     82,297       1,311    6.37 %     57,247       933    6.52 %

Debt securities

     16,528       204    4.94 %     10,880       116    4.27 %

FHLB stock

     9,376       155    6.61 %     8,920       88    3.96 %

Mortgage-backed securities

     3,268       39    4.72 %     4,022       48    4.79 %

Other

     3,995       49    4.98 %     3,839       63    6.50 %
                                  

Total interest-earning assets

     1,010,233       18,241    7.22 %     812,945       14,259    7.02 %
                      

Non-interest-earning assets

     83,982            62,831       
                          

Total assets

   $ 1,094,215          $ 875,776       
                          

Interest-bearing liabilities:

              

Demand deposit

   $ 63,163     $ 276    1.75 %   $ 55,764     $ 241    1.73 %

Savings

     30,070       25    0.34 %     32,170       32    0.40 %

Money market

     154,342       1,647    4.27 %     93,704       759    3.24 %

Time deposits

     497,293       6,345    5.10 %     374,431       4,142    4.42 %
                                  

Total interest-bearing deposits

     744,868       8,293    4.45 %     556,069       5,174    3.72 %
                                  

FHLB advances

     173,481       2,275    5.25 %     168,270       2,017    4.79 %

Note payable

     3,153       56    7.08 %     3,489       62    7.13 %

Subordinated debentures

     19,589       377    7.70 %     19,589       359    7.32 %
                                  

Total interest-bearing liabilities

     941,091       11,001    4.68 %     747,417       7,612    4.07 %
                                  

Non-interest bearing liabilities:

              

Non-interest bearing deposits

     48,208            33,169       

Other non-interest bearing liabilities

     22,458            19,109       
                          

Total non-interest-bearing liabilities

     70,666            52,278       
                          

Stockholders’ equity

     82,458            76,081       
                          

Total liabilities and stockholders’ equity

   $ 1,094,215          $ 875,776       
                          

Net interest income

     $ 7,240        $ 6,647   
                      

Interest rate spread (2)

        2.54 %        2.95 %

Net interest margin (3)

        2.87 %        3.27 %

Ratio of average interest-earning assets to average interest-bearing liabilities

     107.35 %          108.77 %     
                          

(1)

Includes non-accrual loans with an average balance of $2.5 million and $1.5 million for the three months ended June 30, 2007 and 2006, respectively.

(2)

Yield on interest-earning assets less cost of interest-bearing liabilities.

(3)

Net interest income divided by total average interest-earning assets.

 

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     Nine Months Ended  
     June 30, 2007     June 30, 2006  
    

Average

Balance

   

Interest

and

Dividends

  

Yield/

Cost

   

Average

Balance

   

Interest

and

Dividends

  

Yield/

Cost

 
     (Dollars in thousands)  

Interest-earning assets:

              

Loans receivable: (1)

              

Real estate and commercial

   $ 642,794     $ 34,576    7.17 %   $ 489,917     $ 23,904    6.51 %

Consumer

     3,974       192    6.43 %     3,510       160    6.07 %

Home equity

     207,800       12,615    8.10 %     200,715       11,188    7.43 %
                                  

Total loans receivable

     854,568       47,383    7.39 %     694,142       35,252    6.77 %

Loans available for sale

     63,072       2,900    6.13 %     45,206       2,031    5.99 %

Debt securities

     16,663       613    4.91 %     12,034       353    3.91 %

FHLB stock

     8,957       340    5.07 %     8,552       221    3.44 %

Mortgage-backed securities

     3,413       121    4.74 %     4,415       157    4.75 %

Other

     4,139       159    5.08 %     6,649       175    3.52 %
                                  

Total interest-earning assets

     950,812       51,516    7.22 %     770,998       38,189    6.60 %
                      

Non-interest-earning assets

     78,833            63,158       
                          

Total assets

   $ 1,029,645          $ 834,156       
                          

Interest-bearing liabilities:

              

Demand deposit

   $ 61,114     $ 853    1.86 %   $ 45,913     $ 447    1.30 %

Savings

     30,454       83    0.36 %     32,596       86    0.35 %

Money market

     152,041       4,820    4.23 %     94,438       2,038    2.88 %

Time deposits

     449,177       16,857    5.00 %     362,937       10,882    4.00 %
                                  

Total interest-bearing deposits

     692,786       22,613    4.35 %     535,884       13,453    3.35 %
                                  

FHLB advances

     167,854       6,534    5.19 %     163,222       5,411    4.42 %

Note payable

     3,235       172    7.08 %     3,546       174    6.55 %

Subordinated debentures

     19,589       1,131    7.71 %     19,589       1,007    6.86 %
                                  

Total interest-bearing liabilities

     883,464       30,450    4.60 %     722,241       20,045    3.70 %
                                  

Non-interest bearing liabilities:

              

Non-interest bearing deposits

     46,097            29,466       

Other non-interest bearing liabilities

     19,492            20,341       
                          

Total non-interest-bearing liabilities

     65,589            49,807       
                          

Stockholders’ equity

     80,592            62,108       
                          

Total liabilities and stockholders’ equity

   $ 1,029,645          $ 834,156       
                          

Net interest income

     $ 21,066        $ 18,144   
                      

Interest rate spread (2)

        2.62 %        2.90 %

Net interest margin (3)

        2.95 %        3.14 %

Ratio of average interest-earning assets to average interest-bearing liabilities

     107.62 %          106.75 %     
                          

(1)

Includes non-accrual loans with an average balance of $1.3 million and $2.1 million for the nine months ended June 30, 2007 and 2006, respectively.

(2)

Yield on interest-earning assets less cost of interest-bearing liabilities.

(3)

Net interest income divided by total average interest-earning assets.

 

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RATE VOLUME ANALYSIS

The following table sets forth the effects of changing rates and volumes on net interest income for the periods indicated. The total change for each category of interest-earning asset and interest-bearing liability is segmented into the change attributable to variations in volume (change in volume multiplied by prior period rate) and the change attributable to variations in interest rates (changes in rates multiplied by prior period volume). Changes in interest income and expense attributed to both changes in volume and changes in rate are allocated proportionately to rate and volume.

 

     Three Months Ended
June 30, 2007 vs 2006
   

Nine Months Ended

June 30, 2007 vs 2006

 
     Volume     Rate     Net     Volume     Rate     Net  
     (In thousands)     (In thousands)  

Interest-earning assets:

            

Loans receivable:

            

Real estate and commercial

   $ 2,863     $ 430     $ 3,293     $ 8,055     $ 2,617     $ 10,672  

Consumer

     6       3       9       22       10       32  

Home Equity

     114       56       170       401       1,026       1,427  
                                                

Total loans receivable

     2,983       489       3,472       8,478       3,653       12,131  

Loans available for sale

     522       (144 )     378       821       48       869  

Debt securities

     68       20       88       156       104       260  

FHLB stock

     5       62       67       11       108       119  

Mortgage-backed securities

     (8 )     (1 )     (9 )     (36 )     —         (36 )

Other

     15       (29 )     (14 )     (102 )     86       (16 )
                                                

Net change in income on interest earning assets

     3,585       397       3,982       9,328       3,999       13,327  
                                                

Interest-bearing liabilities:

            

Demand deposits

     32       3       35       177       229       406  

Savings

     (2 )     (5 )     (7 )     (6 )     3       (3 )

Money market

     595       293       888       1,573       1,209       2,782  

Time deposits

     1,500       703       2,203       2,912       3,063       5,975  
                                                

Total interest-bearing deposits

     2,125       994       3,119       4,656       4,504       9,160  

FHLB advances

     63       195       258       157       966       1,123  

Note payable

     (6 )     —         (6 )     (20 )     18       (2 )

Subordinated debentures

     —         18       18       —         124       124  
                                                

Net change in expense on interest bearing liabilities

     2,182       1,207       3,389       4,793       5,612       10,405  
                                                

Change in net interest income

   $ 1,403     $ (810 )   $ 593     $ 4,535     $ (1,613 )   $ 2,922  
                                                

 

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NON-PERFORMING ASSETS

Non-performing assets at June 30, 2007 and September 30, 2006 are summarized as follows:

 

    

June 30,

2007

   

September 30,

2006

 
     (Dollars in thousands)  

Non-accrual loans:

    

Residential real estate

   $ 2,058     $ 794  

Commercial

     3,238       —    

Real estate construction and development

     144       —    

Home equity

     652       119  

Other

     138       27  
                

Total non-accrual loans

     6,230       940  
                

Accruing loans past due 90 days or more:

    

Residential real estate

     2,317       3,984  

Commercial

     383       125  

Real estate construction and development

     —         —    

Home equity

     1,666       1,456  

Other

     25       21  
                

Total accruing loans past due 90 days or more

     4,391       5,586  
                

Restructured loans

     210       220  

Other nonperforming loans

     1,542       302  
                

Total non-performing loans

     12,373       7,048  

Real estate acquired in settlement of loans

     2,892       2,764  

Other nonperforming assets

     43       44  
                

Total non-performing assets

   $ 15,308     $ 9,856  
                

Ratio of non-performing loans to total loans

     1.22 %     0.83 %

Ratio of non-performing assets to totals assets

     1.35 %     1.02 %

Total non-performing assets increased from $9.9 million at September 30, 2006 to $15.3 million at June 30, 2007. Non-accrual loans increased from $940,000 to $6.2 million during the nine-month period ended June 30, 2007, primarily as the result of increases in non-accrual residential real estate and commercial loans. Non-accrual residential real estate loans at June 30, 2007 consisted of 25 individual loans totaling $2.1 million. During the quarter ended June 30, 2007, management determined that a number of past due loans previously classified as accruing should be reclassified as non-accrual based on recent changes in real estate market conditions that could affect the Company’s ability to collect the amounts due on these loans. Non-accrual commercial loans at June 30, 2007 consisted of four loans secured by commercial real estate totaling $3.2 million at June 30, 2007, including a loan totaling $2.5 million secured by an office building in St. Louis County, Missouri. Management performed a detailed review of the loan during the quarter ended June 30, 2007 and believes the loan is adequately collateralized at June 30, 2007. Accruing loans greater than 90 days past due decreased from $5.6 million at September 30, 2006 to $4.4 million at June 30, 2007, primarily as the result of a $1.7 million decrease in loans secured by residential real estate. Loans are placed on non-accrual status when, in the opinion of management, there is reasonable doubt as to the collectibility of interest or principal. Management considers many factors before placing a loan on non-accrual, including the overall financial condition of the borrower, the progress of management’s collection efforts and the value of the underlying collateral. Other nonperforming loans totaled $1.5 million at June 30, 2007 and consisted primarily of 5 loans secured by commercial real estate totaling $1.0 million which were still accruing interest. These loans were less than 90 days past due, but management classified them as non-performing because of the borrowers’ weakening credit conditions.

 

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The allowance for loan losses was $10.0 million at June 30, 2007, or 0.99% of total loans and 80.82% of non-performing loans, compared with $7.8 million at September 30, 2006, or 0.92% of total loans and 110.91% of non-performing loans. The following table is a summary of the activity in the allowance for loan losses for the periods indicated:

 

    

Nine Months Ended

June 30,

 
     2007     2006  
     (Dollars In Thousands)  

Allowance for loan losses, beginning of period

   $ 7,817     $ 6,806  

Provision charged to expense

     3,166       1,151  

Allowance for loans acquired in business combination

     —         282  

Loans charged-off

     (1,011 )     (612 )

Recoveries of loans previously charged-off

     27       8  
                

Allowance for loan losses, end of period

   $ 9,999     $ 7,635  
                
    

June 30,

2007

   

September 30,

2006

 

Specific loan loss reserves related to non-performing loans

   $ 716     $ 92  

Balance of non-performing loans with no specific loan loss reserves

   $ 8,746     $ 6,809  

Ratio of allowance to total loans outstanding

     0.99 %     0.92 %

Ratio of allowance to nonperforming loans

     80.82 %     110.91 %

The provision for loan losses for the three and nine months ended June 30, 2007 was $1.9 million and $3.2 million, respectively, compared with $292,000 and $1.2 million, respectively, for the same periods a year ago. The significant increases in the provision for loan losses for the three- and nine-month periods were the result of significant growth in the loan portfolio, especially in commercial loans, which carry a higher risk of default, increased charge-offs and an increase in the level of non-performing loans. Management performed detailed reviews on a number of past due loans during the June 2007 quarter in light of recent real estate market conditions. Included in this review were two loans secured by commercial real estate totaling $2.8 million and seven loans secured by residential real estate totaling $714,000. The reviews resulted in a provision for loan losses totaling approximately $833,000 in the June 2007 quarter. The remainder of the provision for the nine months ended June 30, 2007 related to the $134.2 million growth and the resulting risk inherent in the Company’s performing loan portfolio and to charge-offs.

Net charge-offs for the nine months ended June 30, 2007 totaled $984,000, or 0.14% on an annualized basis, compared with $604,000, or 0.10% of average loans on an annualized basis, for the same period a year ago. Net charge-offs in 2007 include $629,000 in charge-offs on single-family residential mortgage loans, $120,000 in charge-offs on multi-family real estate loans and $236,000 in charge-offs on home equity loans. Management adheres to specific loan underwriting guidelines focusing primarily on residential and commercial real estate and home equity loans secured by one-to four-family and commercial properties and, as the result, while charge-offs in the 2007 periods have increased significantly, the Company’s five-year average annual historical charge-off experience has been low, totaling only $577,000, or 0.06% of average loans. The Company was historically a lender of only 1-4 family conforming residential loans. Today, the Company has expanded its loan portfolio to include higher-risk home equity, commercial and construction loans. Because the Company’s loan portfolio is typically collateralized by real estate, losses occur more frequently when property values are declining and borrowers are losing equity in the underlying collateral. Recent declines in residential real estate values in the Company’s market areas, as well as nationally, contributed to the increased charge-offs in the 2007 periods.

The provision for loan losses is determined by management as the amount necessary to bring the allowance for loan losses to a level that is considered adequate to absorb probable losses in the loan portfolio. The allowance for loan losses is a critical accounting estimate reported within the consolidated financial statements. The allowance is based upon quarterly management estimates of probable losses inherent in the loan portfolio. Management’s estimates are determined by quantifying certain risks in the portfolio that are affected primarily by changes in the nature and volume of the portfolio combined with an analysis of past-due and classified loans, but can also be affected by the following factors: changes in lending policies and procedures, including underwriting standards and collections, charge-off and recovery practices, changes in national and local economic conditions and developments, and changes in the experience, ability, and depth of lending management staff.

 

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The following assessments are performed quarterly in accordance with the Company’s allowance for loan losses methodology:

Homogeneous residential mortgage loans are given one of five standard risk ratings at the time of origination. The risk ratings are assigned through the use of a credit scoring model, which assesses credit risk determinants from the borrower’s credit history, the loan-to-value ratio, the affordability ratios or other personal history. Five-year historical loss rates and industry data for each credit rating are used to determine the appropriate allocation percentage for each loan grade. Commercial real estate loans are individually reviewed and assigned a credit risk rating on an annual basis by the internal loan committee. Consumer and home equity loans are assigned standard risk weightings that determine the allocation percentage.

Generally, when commercial real estate loans are over 30 days delinquent or residential, consumer or home equity loans are over 90 days past due, they are evaluated individually for impairment. Additionally, loans that demonstrate credit weaknesses that may impact the borrower’s ability to repay or the value of the collateral are also reviewed individually for impairment. The Company considers a loan to be impaired when management believes it will be unable to collect all principal and interest due according to the contractual terms of the loan. If a loan is impaired, the Company records a loss valuation equal to the excess of the loan’s carrying value over the present value of estimated future cash flows or the fair value of collateral if the loan is collateral dependent.

The Company’s methodology includes factors that allow the Company to adjust its estimates of losses based on the most recent information available. Historic loss rates used to determine the allowance are adjusted to reflect the impact of current conditions, including actual collection and charge-off experience. Any material increase in non-performing loans will adversely affect our financial condition and results of operation.

Management believes that the amount maintained in the allowance will be adequate to absorb probable 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 management believes it has established the allowance for loan losses in accordance with U.S. generally accepted accounting principles, there can be no assurance that the Bank’s regulators, in reviewing the Bank’s loan portfolio, will not request the Bank to significantly increase 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 a substantial increase 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 Company’s financial condition and results of operations.

ADDITIONAL DISCUSSION OF FINANCIAL CONDITION

Cash and cash equivalents increased $14.0 million to $36.1 million at June 30, 2007 from $22.1 million at September 30, 2006. The Company maintains cash reserves at its bank branch locations and at its correspondent banks, including the Federal Reserve, to remain in compliance with federal banking regulations. Typically, excess cash inflows are used to retire daily borrowings from the Federal Home Loan Bank.

Debt securities held to maturity decreased $1.9 million to $11.0 million at June 30, 2007 from $12.9 million at September 30, 2006. These securities are primarily held as collateral to secure large commercial and municipal deposits. The total balance held in these securities is adjusted as individual securities mature to reflect fluctuations in the deposits they are securing.

Advances from the Federal Home Loan Bank of Des Moines decreased $4.8 million to $168.0 million at June 30, 2007 from $172.8 million at September 30, 2006. The Company has the ability to raise time deposits on a national level that, at certain times, are available at interest rates lower than those available from the Federal Home Loan Bank. Management actively chooses between these two funding sources depending on this price differential.

Due to other banks increased $1.6 million to 23.7 million at June 30, 2007 compared with $22.1 million at September 30, 2006. Due to other banks represents checks drawn on a correspondent bank’s checking account. On a daily basis, the Company settles with the correspondent bank. The balances primarily represent the checks issued to fund loans on the final business day of the month.

 

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Table of Contents

Total stockholders’ equity at June 30, 2007 was $80.2 million, an increase of $4.4 million from $75.8 million at September 30, 2006. The increase was primarily attributable to net income totaling $6.7 million, partially offset by dividend payments of $2.6 million and the repurchase of 40,837 shares of the Company’s common stock at a cost of $643,000.

DISCUSSION OF OTHER NON-INTEREST INCOME AND EXPENSE FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2007

Title policy revenues totaled $227,000 and $186,000 for the three months ended June 30, 2007 and 2006, respectively, and $671,000 and $559,000 for the nine months ended June 30, 2007 and 2006, respectively. The title division captures sales opportunities from the Company’s residential and commercial lending activities. Its primary activities include researching and issuing title policies on commercial and residential loans. The increased revenues were the result of the Company’s increased loan origination activity.

Appraisal division revenues totaled $259,000 and $683,000 for the three and nine months ended June 30, 2007, respectively. The appraisal division’s operations, which began in July 2006, consist primarily of cross-selling appraisal services to the Company’s mortgage loan customers. The Company expanded its appraisal services to its Kansas City loan market during May 2007.

Investment brokerage revenues totaled $159,000 and $152,000 for the three months ended June 30, 2007 and 2006, respectively, and $534,000 and $419,000 for the nine months ended June 30, 2007 and 2006, respectively. The investment division’s operations consist principally of brokering bonds from wholesale brokerage houses to bank, municipal and individual investors. Revenues are generated on trading spreads and fluctuate with changes in trading volumes.

Gain on sale of securities totaled $144,000 for the nine months ending June 30, 2007 and resulted from the sale of $773,000 of equity securities classified as available for sale compared with a $56,000 gain for the nine months ended June 30, 2006 on sales of $471,000 of available-for-sale equity securities.

Bank-owned life insurance income totaled $248,000 for the three-month period ending June 30, 2007 compared with $246,000 for the three-month period ending June 30, 2006 and totaled $759,000 for the nine-month period ending June 30, 2007 compared with $598,000 for the nine-month period ending June 30, 2006. The increase for the nine-month period was due to increased income earned on $6.5 million of additional policies purchased during February and March of 2006.

Salaries and employee benefits expense increased $301,000 to $3.2 million for the quarter ended June 30, 2007 compared with $2.9 million for the quarter ended June 30, 2006 and increased $1.2 million to $9.1 million for the nine months ended June 30, 2007 compared with $7.9 million for the nine months ended June 30, 2006. The increases resulted from the additional employees at the new Richmond Heights bank location and staff expansion necessary to support increased loan activity. Also contributing to the increase for the nine-month period was the addition of the former Central West End Bank employees following its acquisition on March 31, 2006.

Occupancy, equipment and data processing expense increased to $1.5 million during the three-month period ended June 30, 2007 compared with $1.4 million for the three-month period ended June 30, 2006 and increased to $4.1 million for the nine months ended June 30, 2007 compared with $3.8 million for the nine months ended June 30, 2006. The increase for the nine-month period was primarily the result of the operating expenses associated with the two banking locations acquired during March 2006 in the Central West End Bank purchase, the new Richmond Heights bank location, and additional mortgage origination offices.

Advertising expense increased $117,000 to $394,000 for the quarter ended June 30, 2007 compared with $278,000 for the quarter ended June 30, 2006 and increased $270,000 to $1.0 million for the nine months ended June 30, 2007 compared with $743,000 for the nine months ended June 30, 2006. The growth in advertising expense is consistent with the Company’s objective to grow core deposits through an increased commercial banking presence and a consistent marketing message.

 

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Loss (gain) on derivative instruments was a $131,000 gain for the quarter ended June 30, 2007 compared with a gain of $146,000 for the quarter ended June 30, 2006. For the nine-month period ended June 30, 2007, the gain was $445,000 compared to a loss of $334,000 for the nine-month period ended June 30, 2006. The Company entered into interest rate swap agreements during November 2004 which were designed to convert the fixed rates paid on certain brokered certificates of deposits into variable, LIBOR-based rates. During the first quarter of fiscal year 2006, changes in the estimated fair values of these derivatives were recognized as charges or credits to earnings, as appropriate, during the periods in which the changes occurred. Effective January 1, 2006, the Company began using long-haul, fair-value, hedge accounting.

Data processing termination expense totaled $220,000 for the nine months ended June 30, 2007 due to the write off of capitalized expenses related to the termination of a contract to convert the Company’s core data processing system. There was no such expense in the prior fiscal year.

Real estate foreclosure losses and expense, net increased $76,000 to $112,000 for the quarter ended June 30, 2007 compared with $36,000 for the quarter ended June 30, 2006 and increased $257,000 to $348,000 for the nine months ended June 30, 2007 compared with $91,000 for the nine months ended June 30, 2006. Included in these amounts are net losses on the sale of properties acquired through foreclosure totaling $4,000 and $128,000 for the three and nine months ended June 30, 2007, respectively, compared with net gains of $1,000 and net losses of $9,000 for the three and nine months ended June 30, 2006, respectively. A large part of the increase for the nine-month period were the result of losses and expenses incurred in connection with several residential properties acquired, through foreclosure, from a single borrower. The properties are located in an economically depressed area of St. Louis and experienced significant deterioration in physical condition.

INCOME TAXES

The provision for income taxes was $975,000 and $3.3 million for the three and nine months ended June 30, 2007, respectively, compared with $1.4 million and $4.0 million for the three and nine months ended June 30, 2006, respectively. The effective tax rates for the three-month periods ended June 30, 2007 and 2006 were 32.9% and 36.1%, respectively, and were 33.1% and 35.4%, respectively for the nine-month periods ended June 30, 2007 and 2006. The lower effective tax rates in 2007 were the result of an increase in BOLI income, which is non-taxable, and a $90,000 reduction of the current tax liability in March 2007 following the completion of an Internal Revenue Service exam and the resulting favorable resolution of a potential tax liability.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2007, the Bank had outstanding commitments to originate loans totaling $150.1 million and commitments to sell loans totaling $167.0 million. At June 30, 2007, certificates of deposit totaling $371.3 million are scheduled to mature in one year or less. Based on past experience, management believes the majority of certificates of deposit maturing in one year or less will remain with the Bank.

If the Bank or the Company require funds beyond their ability to generate them internally, the Bank has the ability to borrow funds from the FHLB and to raise certificates of deposit on a national level through broker relationships. The borrowings from the FHLB are obtained under a blanket agreement, which assigns all investments in FHLB stock, qualifying first residential mortgage loans, residential loans held for sale and home equity loans with a 90% or greater LTV as collateral to secure the amounts borrowed. Total borrowings from the FHLB are subject to limitations based upon a risk assessment of the Bank. At June 30, 2007, the Bank had approximately $109.3 million in additional borrowing authority under the arrangement with the FHLB in addition to the $168.0 million in advances outstanding at that date. The Bank also had approximately $134.7 million of additional available borrowing capacity under a line of credit with the Federal Reserve Bank. At June 30, 2007, there were no outstanding borrowings under this arrangement and the Bank had approximately $179.6 million of commercial loans pledged as collateral under this agreement. In addition, the Company maintains a $20.0 million line of credit with a correspondent bank. There were no outstanding borrowings under this arrangement at June 30, 2007. The Company also had a $3.2 million term note outstanding at June 30, 2007 with the same correspondent bank. The note is due May 20, 2010.

 

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SOURCES AND USES OF CASH

The Company is a large originator of residential mortgage loans with more than 87% of such loans sold in the secondary residential mortgage market. Consequently, the primary source and use of cash in operations is the origination and subsequent sale of loans held for sale. During the nine months ended June 30, 2007, the origination of loans held for sale used $1.0 billion of cash and the sales of such loans provided cash totaling $994.5 million. During the nine months ended June 30, 2006, the origination of loans held for sale used $831.8 million of cash and the sales of such loans provided cash totaling $822.7 million.

The primary use of cash from investing activities is the investment in loans receivable originated for the portfolio. During the nine months ended June 30, 2007, the Company had a net increase in loans receivable of $143.9 million compared with an increase of $125.8 million for the nine months ended June 30, 2006. See Overview for a discussion of the growth in loans receivable. In addition, the Company purchased $37.5 million in debt securities during the nine months ended June 30, 2007, primarily to serve as collateral for large municipal deposits, compared with $31.7 million during the same period last year.

The Company’s primary sources of funds from financing activities during the nine months ended June 30, 2007 was a $170.0 million increase in deposits offset by a decrease in Federal Home Loan Bank advances of $4.8 million and dividends paid of $2.6 million.

The following table presents the maturity structure of time deposits and other maturing liabilities at June 30, 2007:

 

     June 30, 2007
    

Certificates

of deposit

  

FHLB

Borrowings

  

Note

Payable

  

Due to Other

Banks

  

Subordinated

Debentures

     (In thousands)

Three months or less

   $ 173,653    $ 110,000    $ —      $ 23,726    $ —  

Over three months through six months

     107,215      15,000      —        —        —  

Over six months through twelve months

     90,439      —        —        —        —  

Over twelve months

     151,554      43,000      3,150      —        19,589
                                  

Total

   $ 522,861    $ 168,000    $ 3,150    $ 23,726    $ 19,589
                                  

CONTRACTUAL OBLIGATIONS

In addition to its owned banking facilities, the Company has entered into long-term operating leases to support ongoing activities. The required payments under such commitments at June 30, 2007 are as follows:

 

Less than one year

   $ 439,875

Over 1 year but less than 5 years

     483,185

Over 5 years

     —  
      

Total

   $ 923,060
      

REGULATORY CAPITAL

The Bank is required to maintain specific amounts of capital pursuant to Office of Thrift Supervision (“OTS”) regulations on minimum capital standards. The OTS’ minimum capital standards generally require the maintenance of regulatory capital sufficient to meet each of three tests, hereinafter described as the tangible capital requirement, the Tier I (core) capital requirement and the risk-based capital requirement. The tangible capital requirement provides for minimum tangible capital (defined as stockholders’ equity less all intangible assets) equal to 1.5% of adjusted total assets. The Tier I capital requirement provides for minimum core capital (tangible capital plus certain forms of supervisory goodwill and other qualifying intangible assets) equal to 4.0% of adjusted total assets. The risk-based capital requirement provides for the maintenance of core capital plus a portion of unallocated loss allowances equal to 8.0% of risk-weighted assets. In computing risk-weighted assets, the Bank multiplies the value of each asset on its balance sheet by a defined risk-weighting factor (e.g., one-to four-family conventional residential loans carry a risk-weighting factor of 50%).

 

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The following table illustrates the Bank’s actual regulatory capital levels compared with its regulatory capital requirements at June 30, 2007 and September 30, 2006.

 

                Regulatgory Capital Requirements  
     Actual    

For Capital

Adequacy Purposes

   

To be Categorized as

“Well Capitalized”

Under Prompt

Corrective Action

Provisions

 
     Amount    Ratio     Amount    Ratio     Amount    Ratio  
     (Dollars in thousands)  

As of June 30, 2007

               

Tangible capital (to total assets)

   $ 96,361    8.53 %   $ 16,950    1.50 %     N/A    N/A  

Total risk-based capital (to risk-weighted assets)

     105,644    11.12 %     76,037    8.00 %   $ 95,046    10.00 %

Tier I risk-based capital (to risk-weighted assets)

     96,361    10.14 %     47,523    5.00 %     57,028    6.00 %

Tier I leverage capital (to average assets)

     96,361    8.53 %     45,201    4.00 %     56,501    5.00 %

As of September 30, 2006

               

Tangible capital (to total assets)

   $ 88,954    9.30 %   $ 14,348    1.50 %     N/A    N/A  

Total risk-based capital (to risk-weighted assets)

     96,598    11.99 %     64,463    8.00 %   $ 80,579    10.00 %

Tier I risk-based capital (to risk-weighted assets)

     88,954    11.04 %     40,289    5.00 %     48,347    6.00 %

Tier I leverage capital (to average assets)

     88,954    9.30 %     38,261    4.00 %     47,826    5.00 %

EFFECTS OF INFLATION

Changes in interest rates may have a significant impact on a bank’s performance because virtually all assets and liabilities of banks are monetary in nature. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. Inflation does have an impact on the growth of total assets in the banking industry, often resulting in a need to increase equity capital at higher than normal rates to maintain an appropriate equity to asset ratio. The Company’s operations are not currently impacted by inflation.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK AND OFF-BALANCE SHEET ARRANGEMENTS

There have been no material changes in the Company’s quantitative or qualitative aspects of market risk during the quarter ended June 30, 2007 from that disclosed in the Company’s Annual Report on Form 10-K for the year ended September 30, 2006.

In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in its financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit. Additionally, the Company engages in certain hedging activities, which are described in greater detail below.

For the quarter ended June 30, 2007, the Company did not engage in any off-balance-sheet transactions reasonably likely to have a material effect on its financial condition, results of operations or cash flows.

The Company originates and purchases derivative financial instruments, including interest rate lock commitments, forward contracts to sell mortgage-backed securities and interest rate swaps. Derivative financial instruments originated by the Company consist of interest rate lock commitments to originate residential loans. Commitments to originate loans consist primarily of residential real estate loans. At June 30, 2007, the Company had issued $150.1 million of unexpired interest rate lock commitments to loan customers compared with $111.7 million of unexpired commitments at September 30, 2006.

 

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The Company typically economically hedges these derivative commitments through one of two means – either by obtaining a corresponding best-efforts lock commitment with an investor to sell the loan at an agreed upon price, or by forward sales of mortgage-backed securities, which is a means of matching a corresponding derivative asset that has similar characteristics as the bank-issued commitment but changes directly opposite in fair value from market movements. Loans hedged through forward sales of mortgage-backed securities are sold individually or in pools on a mandatory delivery basis to investors, whereas the best efforts sales are locked on a loan-by-loan basis shortly after issuing the rate lock commitments to customers. The Company had outstanding forward commitments to sell mortgage-backed securities totaling $21.5 million and $15.0 million in notional value at June 30, 2007 and September 30, 2006, respectively. These hedges were matched against $23.0 million and $19.6 million of interest rate lock commitments at June 30, 2007 and September 30, 2006, respectively that were to be sold through the mandatory delivery of loan pool sales.

The carrying value of the interest rate lock commitment liabilities included in the consolidated balance sheets was a debit balance totaling $286,000 at June 30, 2007 and a credit balance totaling $30,000 at September 30, 2006, respectively. The carrying value of the forward sales commitment assets included in the consolidated balance sheets was a credit balance totaling $210,000 at June 30, 2007 and a debit balance totaling $81,000 at September 30, 2006.

The Company entered into interest rate swap agreements during November 2004 which were designed to convert the fixed rates paid on certain brokered certificates of deposit into variable, LIBOR-based rates. The effect of the swap agreements result in the counterparty paying the fixed rate to the Company while the Company pays the variable LIBOR-based rate to the counterparty. During the quarter ended December 31, 2005, changes in the estimated fair values of these derivatives were recognized as charges or credits to earnings, as appropriate, during the periods in which the changes occurred. Effective January 1, 2006, the Company designated $80.0 million of interest rate swaps as fair value hedges of $80.0 million of the fixed-rate, brokered certificates of deposit under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Financial Instruments and Hedging Activities” (“SFAS No. 133”) using long-haul, fair-value, hedge accounting. At June 30, 2007, these fair value hedges were considered to be highly effective. Any hedge ineffectiveness was deemed not material and the impact was recognized as a charge or credit to earnings, as appropriate, during the period in which the change occurred. The notional amounts of the liabilities being hedged were $80.0 million at June 30, 2007 and September 30, 2006, respectively. At June 30, 2007, there were no swaps in a net settlement receivable position and swaps in a net settlement payable position totaled $1.7 million. At September 30, 2006, there were no swaps in a net settlement receivable position and swaps in a net settlement payable position totaled $2.0 million. Net gains of $131,000 and $445,000 were recognized on fair value hedges during the three and nine months ended June 30, 2007, respectively, compared with a net gain of $146,000 and a net loss of $334,000 during the three and nine months ended June 30, 2006, respectively.

The maturity date, notional amounts, interest rates paid and received and fair value of the Company’s interest rate swap agreements as of June 30, 2007 and September 30, 2006 were as follows:

 

          June 30, 2007     September 30, 2006

Maturity Date

  

Notional

Amount

  

Interest

Rate

Paid

   

Interest

Rate

Received

   

Estimated

Fair Value

Of Liability

   

Interest

Rate

Paid

   

Interest

Rate

Received

   

Estimated

Fair Value

Of Liability

October 20, 2008

   $ 10,000,000    5.28 %   4.30 %   $ (121,445 )   5.29 %   4.30 %   $ 154,000

November 19, 2009

     10,000,000    5.30 %   3.50 %     (81,347 )   5.31 %   3.50 %     208,000

November 23, 2009

     10,000,000    5.28 %   3.75 %     (138,658 )   5.28 %   3.75 %     216,000

November 26, 2010

     10,000,000    5.30 %   4.13 %     (382,442 )   5.31 %   4.13 %     365,000

November 26, 2010

     5,000,000    5.29 %   4.13 %     (189,757 )   5.30 %   4.13 %     181,000

November 26, 2010

     5,000,000    5.28 %   4.13 %     (188,295 )   5.29 %   4.13 %     179,000

January 24, 2010

     10,000,000    5.26 %   3.70 %     (92,006 )   5.27 %   3.70 %     321,000

January 28, 2011

     10,000,000    5.28 %   4.30 %     (344,987 )   5.29 %   4.30 %     188,000

February 25, 2011

     5,000,000    5.28 %   4.80 %     (107,277 )   5.28 %   4.80 %     96,000

September 14, 2012

     5,000,000    5.28 %   4.25 %     (69,989 )   5.29 %   4.25 %     98,000
                             

Total

   $ 80,000,000        $ (1,716,203 )       $ 2,006,000
                             

 

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The gross amounts of interest paid to and received from the counterparty under the swap agreements and the related average interest rates during the nine months ended June 30, 2007 and 2006 are as follows:

 

    

Nine Months Ended

June 30,

 
     2007     2006  

Interest paid (variable rate):

    

Total amount (000s)

   $ 3,172.6     $ 2,666.6  

Average interest rate

     5.29 %     4.44 %

Interest received (fixed rate):

    

Total amount (000s)

   $ 2,424.4     $ 2,317.7  

Average interest rate

     4.04 %     3.86 %

CONTROLS AND PROCEDURES

Pulaski Financial maintains “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that the information required to be disclosed in the reports that Pulaski Financial files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to Pulaski Financial’s management including its principal executive and principal financial officers as appropriate to allow timely decisions regarding required disclosure.

During the quarter ended June 30, 2007, Pulaski Financial’s management, including Pulaski Financial’s principal executive officer and principal financial officer, evaluated the effectiveness of Pulaski Financial’s disclosure controls and procedures as of June 30, 2007, and concluded that Pulaski Financial’s disclosure controls and procedures were effective as of such date.

There have been no changes in the Company’s internal controls over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In May 2005, the Financial Accounting Standards Board (“FASB”) issued Statement No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”), a replacement of APB Opinion No. 20, “Accounting Changes,” and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS No. 154 requires retrospective application for voluntary changes in accounting principles unless it is impracticable to do so. SFAS No. 154 is effective for the Company beginning October 1, 2006. The adoption of SFAS No.154 did not have a material effect on the Company’s financial condition or results of operations.

In February 2006, the FASB issued Statement No. 155, “Accounting for Certain Hybrid Financial Instruments” (“SFAS No. 155”), which amends FASB Statements No. 133 and 140. This Statement permits fair value re-measurement for any hybrid financial instrument containing an embedded derivative that would otherwise require bifurcation, and broadens a Qualified Special Purpose Entity’s (“QSPE”) permitted holdings to include passive derivative financial instruments that pertain to other derivative financial instruments. This statement is effective for the Company for all financial instruments acquired, issued or subject to a re-measurement event occurring on or after October 1, 2006. The adoption of SFAS No. 155 did not have a material effect on the Company’s financial condition or results of operations.

In March 2006, the FASB issued Statement No. 156, “Accounting for Servicing of Financial Assets, an Amendment of FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“SFAS No. 156”), which requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable and permits the entities to elect either fair value measurement with changes in fair value reflected in earnings or the amortization and impairment requirements of Statement 140 for subsequent measurement. The subsequent measurement of separately recognized servicing assets and servicing liabilities at fair value eliminates the

 

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necessity for entities that manage the risks inherent in servicing assets and servicing liabilities with derivatives to qualify for hedge accounting treatment and eliminates the characterization of declines in fair value as impairments or direct write-downs. Statement No. 156 is effective for the Company beginning October 1, 2006. The adoption of SFAS No. 156 did not have a material effect on the Company’s financial condition or results of operations.

In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting standards, and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Management has evaluated the requirements of SFAS No. 157 and believes it will not have a material effect on the Company’s financial condition or results of operations.

In September 2006, the FASB issued Statement No. 158, “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS No. 158”), which requires balance sheet recognition of the funded status of pension and other postretirement benefits with the offset to accumulated other comprehensive income. Employers will recognize actuarial gains and losses, prior service cost, and any remaining transition amounts when recognizing a plan’s funded status. SFAS No. 158 is effective for fiscal years ending after December 15, 2006. Management is currently evaluating the requirements of SFAS No. 158 to determine its impact on the Company’s financial condition and results of operations.

In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115” (“SFAS No. 159”). SFAS No. 159 provides companies with an option to report selected financial assets and liabilities at estimated fair value. Most of the provisions of SFAS No. 159 are elective; however, the amendment to SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, applies to all entities that own trading and available-for-sale securities. The fair value option created by SFAS No. 159 permits an entity to measure eligible items at fair value as of specified election dates. The fair value option (a) may generally be applied instrument by instrument, (b) is irrevocable unless a new election date occurs, and (c) must be applied to the entire instrument and not to only a portion of the instrument. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of the fiscal year, has not yet issued financial statements for any interim period of such year, and also elects to apply the provisions of SFAS No. 157. Management is currently evaluating the requirements of SFAS No. 159 to determine its impact on the Company’s financial condition and results of operations.

In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” an interpretation of SFAS No. 109, “Accounting for Income Taxes” (“Interpretation No. 48”), which clarifies the accounting for uncertainty in income taxes in financial statements and prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Interpretation No. 48 is effective for fiscal years beginning after December 15, 2006. Management is currently evaluating the requirements of Interpretation No. 48 to determine its impact on the Company’s financial condition and results of operations.

In September 2006, the SEC Staff issued Staff Accounting Bulletin No. 108 (“SAB No. 108”), “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” which addresses how the effects of prior year uncorrected misstatements should be considered when quantifying misstatements in current year financial statements. SAB No. 108 will require registrants to quantify misstatements using both the balance sheet and income-statement approaches and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. When the effect of initial adoption is determined to be material, SAB No. 108 allows registrants to record that effect as a cumulative effect adjustment to beginning retained earnings. The requirements are effective for the Company beginning October 1, 2006. The adoption of SAB No. 108 had no effect on the Company’s financial condition or results of operations.

In September 2006, the Emerging Issues Task Force Issue 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements,” was ratified. This EITF Issue addresses accounting for separate agreements which split life insurance policy benefits between an employer and employee.

 

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The Issue requires the employer to recognize a liability for future benefits payable to the employee under these agreements. The effects of applying this Issue must be recognized through either a change in accounting principle through an adjustment to equity or through the retrospective application to all prior periods. For calendar year companies, the Issue is effective beginning January 1, 2008. Early adoption is permitted as of January 1, 2007. Management has evaluated the requirements of the Issue and believes it will not have a material effect on the Company’s financial condition or results of operations.

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings:

The Company is not involved in any legal proceedings. Periodically, there have been various claims and lawsuits involving the Bank, such as claims to enforce liens, condemnation proceedings on properties in which the Bank holds security interests, claims involving the making and servicing of real property loans and other issues incident to the Bank’s business. Neither the Bank nor the Company is a party to any pending legal proceedings that it believes would have a material adverse effect on the financial condition or operations of the Company.

 

Item 1A. Risk Factors:

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, 2006, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds:

The following table provides information regarding the Company’s purchases of its equity securities during the three months ended June 30, 2007.

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period

  

(a)

Total

Number

of Shares

(or Units)

Purchased

  

(b)
Average

Price

Paid per

Share

(or Unit)

  

(c)

Total Number of

Shares (or Units)

Purchased as

Part of Publicly

Announced Plans

or Programs

  

(d)

Maximum Number

(or Approximate

Dollar Value) of

Shares (or Units)

That May Yet Be

Purchased Under the

Plans or Programs (1)

April 1, 2007 through April 30, 2007

   —        —      —      492,664

May 1, 2007 through May 31, 2007

   200    $ 15.47    200    492,464

June 1, 2007 through June 30, 2007

   —        —      —      492,464

Total

   200    $ 15.47    200   

(1) In February 2007, the Company announced a repurchase program under which it would repurchase up to 497,000 shares of the Company’s common stock. The repurchase program will continue until it is completed or terminated by the Board of Directors.

 

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Item 3. Defaults Upon Senior Securities: Not applicable

 

Item 4. Submission of Matters to a Vote of Security Holders: Not applicable

 

Item 5. Other Information: Not applicable

 

Item 6. Exhibits:

 

  3.1    Articles of Incorporation of Pulaski Financial Corp.*
  3.2    Certificate of Amendment to Articles of Incorporation of Pulaski Financial Corp.**
  3.3    Bylaws of Pulaski Financial Corp.***
  4.0    Form of Certificate for Common Stock****
31.1    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2    Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer
32.1    Section 1350 Certification of Chief Executive Officer
32.2    Section 1350 Certification of Chief Financial Officer
 
  * Incorporated by reference into this document from the Exhibits to the 2003 proxy statement as filed with the Securities and Exchange Commission on December 27, 2002.
  ** Incorporated by reference into this document from the Form 10-Q, as filed with the Securities and Exchange Commission on February 17, 2004.
  *** Incorporated herein by reference from the Form 10-Q, as filed with the Securities and Exchange Commission on August 9, 2005.
  **** Incorporated by reference from the Form S-1 (Registration No. 333-56465), as amended, as filed with the Securities and Exchange Commission on June 9, 1998.

 

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SIGNATURES

Pursuant to the requirements 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.
Date: August 8, 2007          

/s/ William A. Donius

          William A. Donius
          Chairman and Chief Executive Officer
Date: August 8, 2007          

/s/ Ramsey K. Hamadi

          Ramsey K. Hamadi
          Chief Financial Officer

 

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