10-Q 1 a13-5998_110q.htm 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 March 31, 2013

 

OR

 

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

 

For the transition period from                       to                      

 

0-24571

Commission File Number

 

Pulaski Financial Corp.

(Exact name of registrant as specified in its charter)

 

Missouri

 

43-1816913

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification Number)

 

12300 Olive Boulevard

 

 

St. Louis, Missouri

 

63141-6434

(Address of principal executive offices)

 

(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 Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x  No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company x

(Do not check if a smaller reporting company.)

 

 

 

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

 

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

 

Class

 

Outstanding at May 1, 2013

 

Common Stock, par value $.01 per share

 

11,353,588 shares

 

 

 

 



Table of Contents

 

PULASKI FINANCIAL CORP. AND SUBSIDIARIES

 

FORM 10-Q

 

MARCH 31, 2013

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Unaudited Consolidated Balance Sheets at March 31, 2013 and September 30, 2012

1

 

 

 

 

Unaudited Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months Ended March 31, 2013 and 2012

2

 

 

 

 

Unaudited Consolidated Statement of Stockholders’ Equity for the Six Months Ended March 31, 2013

3

 

 

 

 

Unaudited Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2013 and 2012

4

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

6

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

33

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

53

 

 

 

Item 4.

Controls and Procedures

53

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

55

 

 

 

Item 1A.

Risk Factors

55

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

55

 

 

 

Item 3.

Defaults Upon Senior Securities

56

 

 

 

Item 4.

Mine Safety Disclosures

56

 

 

 

Item 5.

Other Information

56

 

 

 

Item 6.

Exhibits

56

 

 

 

 

Signatures

 

 



Table of Contents

 

PART I - FINANCIAL INFORMATION

 



Table of Contents

 

PULASKI FINANCIAL CORP. AND SUBSIDIARIES

 

UNAUDITED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2013 AND SEPTEMBER 30, 2012

 

 

 

March 31,

 

September 30,

 

 

 

2013

 

2012

 

ASSETS

 

 

 

 

 

Cash and amounts due from depository institutions

 

$

16,274,156

 

$

15,834,193

 

Federal funds sold and overnight interest-bearing deposits

 

53,833,320

 

46,500,729

 

Total cash and cash equivalents

 

70,107,476

 

62,334,922

 

Debt and mortgage-backed securities available for sale, at fair value

 

34,287,192

 

21,921,417

 

Mortgage-backed securities held to maturity, at amortized cost (fair value of $5,650,508 and $6,096,227 at March 31, 2013 and September 30, 2012, respectively)

 

5,277,629

 

5,656,963

 

Capital stock of Federal Home Loan Bank, at cost

 

4,535,100

 

5,558,600

 

Mortgage loans held for sale, at lower of cost or market

 

144,031,014

 

180,574,694

 

Loans receivable (net of allowance for loan losses of $18,607,768 and $17,116,595 at March 31, 2013 and September 30, 2012, respectively)

 

1,003,362,753

 

975,727,642

 

Real estate acquired in settlement of loans (net of allowance for losses of $1,328,300 and $4,706,775 at March 31, 2013 and September 30, 2012, respectively)

 

8,818,133

 

13,952,168

 

Premises and equipment, net

 

17,955,572

 

18,415,977

 

Goodwill

 

3,938,524

 

3,938,524

 

Accrued interest receivable

 

3,595,979

 

3,888,611

 

Bank-owned life insurance

 

32,297,378

 

31,844,074

 

Deferred tax assets

 

10,467,964

 

11,638,492

 

Prepaid expenses, accounts receivable and other assets

 

11,960,594

 

12,065,342

 

Total assets

 

$

1,350,635,308

 

$

1,347,517,426

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Liabilities:

 

 

 

 

 

Deposits

 

$

1,094,251,455

 

$

1,081,698,318

 

Borrowed money

 

97,942,729

 

109,981,455

 

Subordinated debentures

 

19,589,000

 

19,589,000

 

Advance payments by borrowers for taxes and insurance

 

2,698,626

 

5,589,385

 

Accrued interest payable

 

606,194

 

695,111

 

Other liabilities

 

12,646,371

 

11,796,985

 

Total liabilities

 

1,227,734,375

 

1,229,350,254

 

Stockholders’ Equity:

 

 

 

 

 

Preferred stock - $.01 par value per share, 1,000,000 shares authorized; 25,418 shares issued at March 31, 2013 and September 30, 2012: $1,000 per share liquidation value, net of discount

 

25,152,015

 

24,976,239

 

Common stock - $.01 par value per share, 18,000,000 shares authorized; 13,068,618 shares issued at March 31, 2013 and September 30, 2012

 

130,687

 

130,687

 

Treasury stock at cost; 2,078,929 and 2,114,246 shares at March 31, 2013 and September 30, 2012, respectively

 

(15,960,354

)

(15,939,378

)

Additional paid-in capital

 

57,639,834

 

56,849,475

 

Accumulated other comprehensive income, net

 

2,386

 

21,475

 

Retained earnings

 

55,936,365

 

52,128,674

 

Total stockholders’ equity

 

122,900,933

 

118,167,172

 

Total liabilities and stockholders’ equity

 

$

1,350,635,308

 

$

1,347,517,426

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

1



Table of Contents

 

PULASKI FINANCIAL CORP. AND SUBSIDIARIES

 

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
THREE AND SIX MONTHS ENDED MARCH 31, 2013 AND 2012

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2013

 

2012

 

2013

 

2012

 

Interest and Dividend Income:

 

 

 

 

 

 

 

 

 

Loans receivable

 

$

11,644,480

 

$

12,648,909

 

$

23,583,029

 

$

25,849,908

 

Mortgage loans held for sale

 

1,413,160

 

1,277,343

 

2,981,774

 

2,587,840

 

Securities and other

 

118,616

 

84,495

 

224,243

 

196,635

 

Total interest and dividend income

 

13,176,256

 

14,010,747

 

26,789,046

 

28,634,383

 

Interest Expense:

 

 

 

 

 

 

 

 

 

Deposits

 

1,326,738

 

1,819,203

 

2,761,345

 

3,955,689

 

Borrowed money

 

235,367

 

232,229

 

474,377

 

472,641

 

Subordinated debentures

 

125,422

 

138,514

 

257,256

 

270,666

 

Total interest expense

 

1,687,527

 

2,189,946

 

3,492,978

 

4,698,996

 

Net interest income

 

11,488,729

 

11,820,801

 

23,296,068

 

23,935,387

 

Provision for loan losses

 

1,375,000

 

5,500,000

 

3,440,000

 

8,500,000

 

Net interest income after provision for loan losses

 

10,113,729

 

6,320,801

 

19,856,068

 

15,435,387

 

Non-Interest Income:

 

 

 

 

 

 

 

 

 

Mortgage revenues

 

3,148,369

 

1,896,565

 

6,136,143

 

3,583,281

 

Retail banking fees

 

993,711

 

978,353

 

2,147,192

 

1,979,914

 

Investment brokerage revenues

 

263,639

 

396,601

 

557,129

 

770,928

 

Bank-owned life insurance

 

221,436

 

249,482

 

453,304

 

510,652

 

Other

 

8,737

 

33,724

 

58,252

 

125,375

 

Total non-interest income

 

4,635,892

 

3,554,725

 

9,352,020

 

6,970,150

 

Non-Interest Expense:

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

4,412,598

 

3,780,550

 

8,978,995

 

7,523,999

 

Occupancy, equipment and data processing expense

 

2,544,869

 

2,329,166

 

4,905,194

 

4,509,818

 

Advertising

 

111,406

 

104,609

 

230,600

 

212,811

 

Professional services

 

800,834

 

402,775

 

1,355,284

 

829,212

 

FDIC deposit insurance premium expense

 

276,078

 

440,882

 

710,170

 

881,742

 

Real estate foreclosure losses and expense, net

 

239,874

 

388,088

 

1,454,156

 

1,133,273

 

Postage, document delivery and office supplies

 

176,206

 

179,008

 

366,761

 

481,098

 

Other

 

543,852

 

316,661

 

962,750

 

501,214

 

Total non-interest expense

 

9,105,717

 

7,941,739

 

18,963,910

 

16,073,167

 

Income before income taxes

 

5,643,904

 

1,933,787

 

10,244,178

 

6,332,370

 

Income tax expense

 

1,991,730

 

564,780

 

3,464,275

 

1,921,287

 

Net income

 

$

3,652,174

 

$

1,369,007

 

$

6,779,903

 

$

4,411,083

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on debt and mortgage-backed securities available for sale

 

(35,652

)

13,429

 

(30,789

)

30,924

 

Income tax benefit (expense)

 

13,548

 

(5,103

)

11,700

 

(11,751

)

Net unrealized gains (losses)

 

(22,104

)

8,326

 

(19,089

)

19,173

 

Comprehensive income

 

$

3,630,070

 

$

1,377,333

 

$

6,760,814

 

$

4,430,256

 

Income available to common shares

 

$

3,246,407

 

$

851,149

 

$

5,968,677

 

$

3,375,754

 

Per Common Share Amounts:

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.30

 

$

0.08

 

$

0.55

 

$

0.32

 

Weighted average common shares outstanding - basic

 

10,916,522

 

10,659,123

 

10,865,523

 

10,632,225

 

Diluted earnings per common share

 

$

0.29

 

$

0.08

 

$

0.54

 

$

0.30

 

Weighted average common shares outstanding - diluted

 

11,136,801

 

11,132,612

 

11,101,194

 

11,069,306

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

2



Table of Contents

 

PULASKI FINANCIAL CORP. AND SUBSIDIARIES

 

UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
SIX MONTHS ENDED MARCH 31, 2013

 

 

 

Preferred

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Stock,

 

 

 

 

 

Additional

 

Other

 

 

 

 

 

 

 

Net of

 

Common

 

Treasury

 

Paid-In

 

Comprehensive

 

Retained

 

 

 

 

 

Discount

 

Stock

 

Stock

 

Capital

 

Income, Net

 

Earnings

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2012

 

$

24,976,239

 

$

130,687

 

$

(15,939,378

)

$

56,849,475

 

$

21,475

 

$

52,128,674

 

$

118,167,172

 

Net income

 

 

 

 

 

 

6,779,903

 

6,779,903

 

Other comprehensive loss

 

 

 

 

 

(19,089

)

 

(19,089

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock dividends ($0.19 per share)

 

 

 

 

 

 

(2,160,986

)

(2,160,986

)

Preferred stock dividends

 

 

 

 

 

 

(635,450

)

(635,450

)

Accretion of discount on preferred stock

 

175,776

 

 

 

 

 

(175,776

)

 

Stock options exercised (8,400 shares)

 

 

 

29,568

 

34,390

 

 

 

63,958

 

Stock option and award expense

 

 

 

 

754,613

 

 

 

754,613

 

Common stock issued under employee compensation plans, net (7,214 shares)

 

 

 

(213,873

)

(39,943

)

 

 

(253,816

)

Commission on shares purchased for dividend reinvestment plan

 

 

 

 

(11,710

)

 

 

(11,710

)

Issuance of equity trust shares from Treasury, net of forfeitures (20,498 shares)

 

 

 

 

236,280

 

 

 

236,280

 

Distribution of equity trust shares, net (19,703 shares)

 

 

 

163,329

 

(265,379

)

 

 

(102,050

)

Amortization of equity trust expense

 

 

 

 

70,063

 

 

 

70,063

 

Tax cost from release of equity trust shares

 

 

 

 

12,045

 

 

 

12,045

 

Balance, March 31, 2013

 

$

25,152,015

 

$

130,687

 

$

(15,960,354

)

$

57,639,834

 

$

2,386

 

$

55,936,365

 

$

122,900,933

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

3



Table of Contents

 

PULASKI FINANCIAL CORP. AND SUBSIDIARIES

 

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS                

SIX MONTHS ENDED MARCH 31, 2013 AND 2012

 

 

 

Six Months Ended

 

 

 

March 31,

 

 

 

2013

 

2012

 

Cash Flows From Operating Activities:

 

 

 

 

 

Net income

 

$

6,779,903

 

$

4,411,083

 

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

 

 

 

 

 

Depreciation, amortization and accretion:

 

 

 

 

 

Premises and equipment

 

1,000,312

 

1,012,616

 

Net deferred loan costs

 

746,630

 

1,110,291

 

Debt and mortgage-backed securities premiums and discounts, net

 

206,689

 

196,323

 

Equity trust expense, net

 

70,063

 

142,612

 

Stock option and award expense

 

754,613

 

540,047

 

Provision for loan losses

 

3,440,000

 

8,500,000

 

Provision for losses on real estate acquired in settlement of loans

 

1,203,626

 

1,364,244

 

Gains on sales of real estate acquired in settlement of loans

 

(301,464

)

(308,287

)

Originations of mortgage loans held for sale

 

(690,305,100

)

(686,962,005

)

Proceeds from sales of mortgage loans held for sale

 

723,548,814

 

640,646,666

 

Gain on sales of mortgage loans held for sale

 

(6,290,814

)

(2,943,666

)

Increase in cash value of bank-owned life insurance

 

(453,304

)

(510,652

)

Decrease in deferred tax asset

 

1,170,528

 

2,732,166

 

Common stock issued under employee compensation plan

 

41,999

 

45,878

 

Excess tax benefit from stock-based compensation

 

 

(1,286

)

Tax (benefit) expense for release of equity trust shares

 

(12,045

)

1,334

 

Increase (decrease) in accrued expenses

 

129,871

 

(411,880

)

Decrease in current income taxes payable

 

(1,934,998

)

(2,641,967

)

Changes in other assets and liabilities

 

2,986,721

 

272,484

 

Net adjustments

 

36,002,141

 

(37,215,082

)

Net cash provided by (used in) operating activities

 

42,782,044

 

(32,803,999

)

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

Proceeds from:

 

 

 

 

 

Maturities of debt securities available for sale

 

37,900,000

 

23,300,000

 

Principal payments on mortgage-backed securities

 

427,479

 

2,953,539

 

Redemption of Federal Home Loan Bank stock

 

8,139,000

 

2,147,300

 

Sales of real estate acquired in settlement of loans

 

9,187,377

 

1,668,757

 

Purchases of:

 

 

 

 

 

Debt securities available for sale

 

(50,551,398

)

(19,911,937

)

Federal Home Loan Bank stock

 

(7,115,500

)

(2,987,300

)

Premises and equipment

 

(539,907

)

(994,810

)

Net (increase) decrease in loans receivable

 

(27,186,465

)

12,230,297

 

Net cash (used in) provided by investing activities

 

$

(29,739,414

)

$

18,405,846

 

 

Continued on next page.

 

4



Table of Contents

 

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED MARCH 31, 2013 AND 2012, CONTINUED

 

 

 

Six Months Ended

 

 

 

March 31,

 

 

 

2013

 

2012

 

Cash Flows From Financing Activities:

 

 

 

 

 

Net increase (decrease) in deposits

 

$

12,553,137

 

$

(8,330,182

)

Net increase (decrease) in overnight retail repurchase agreements

 

10,961,274

 

(3,370,673

)

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

 

(23,000,000

)

20,000,000

 

Net decrease in advance payments by borrowers for taxes and insurance

 

(2,890,759

)

(2,170,539

)

Proceeds from stock options excercised

 

63,958

 

209,931

 

Issuance of treasury shares to equity trust

 

236,280

 

179,973

 

Excess tax benefit from stock based compensation

 

 

1,286

 

Tax expense (cost) for release of equity trust shares

 

12,045

 

(1,334

)

Dividends paid on common stock

 

(2,160,986

)

(2,146,324

)

Dividends paid on preferred stock

 

(635,450

)

(813,450

)

Common stock purchased under dividend reinvestment plan

 

 

(11,033

)

Commission on shares purchased reinvestment plan

 

(11,710

)

 

Common stock surrendered to satisfy tax withholding

 

 

 

 

 

obligations of stock-based compensation

 

(397,865

)

(99,160

)

Net cash (used in) provided by financing activities

 

(5,270,076

)

3,448,495

 

Net increase (decrease) in cash and cash equivalents

 

7,772,554

 

(10,949,658

)

Cash and cash equivalents at beginning of period

 

62,334,922

 

57,071,006

 

Cash and cash equivalents at end of period

 

$

70,107,476

 

$

46,121,348

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest on deposits

 

$

2,855,383

 

$

4,079,313

 

Interest on borrowed money

 

473,288

 

472,253

 

Interest on subordinated debentures

 

255,631

 

268,218

 

Cash paid during the period for interest

 

3,584,302

 

4,819,784

 

Income taxes, net

 

4,205,000

 

1,842,887

 

 

 

 

 

 

 

Noncash Investing Activities:

 

 

 

 

 

Real estate acquired in settlement of loans receivable

 

5,349,554

 

2,702,751

 

Loans made to facilitate the sale of real estate acquired in settlement of loans receivable

 

394,050

 

1,660,323

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

5



Table of Contents

 

PULASKI FINANCIAL CORP. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

1.                      BASIS OF PRESENTATION

 

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

 

The accompanying unaudited consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, the unaudited consolidated financial statements do not contain all of the information and disclosures required by U.S. GAAP as applied to annual reports on Form 10-K.  Therefore, these unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended September 30, 2012 contained in the Company’s 2012 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, 2012.

 

In the opinion of management, the unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the financial condition of the Company as of March 31, 2013 and September 30, 2012 and its results of operations for the three- and six-month periods ended March 31, 2013 and 2012.  The results of operations for the three- and six-month periods ended March 31, 2013 are not necessarily indicative of the operating results that may be expected for the entire fiscal year or for any other period.

 

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

 

Certain reclassifications have been made to the 2012 amounts to conform to the 2013 presentation.

 

The Company has evaluated all subsequent events to ensure that the accompanying financial statements include the effects of any subsequent events that should be recognized in such financial statements as of March 31, 2013, and the appropriate disclosure of any subsequent events that were not recognized in the financial statements.

 

2.                      PREFERRED STOCK

 

On January 16, 2009, as part of the U.S. Department of Treasury’s Capital Purchase Program, the Company issued 32,538 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, $1,000 per share liquidation preference (the “Preferred Stock”), and a warrant to purchase up to 778,421 shares of the Company’s common stock for a period of ten years at an exercise price of $6.27 per share (the “Warrant”) in exchange for $32.5 million in cash from the U.S. Department of Treasury.  The proceeds, net of issuance costs consisting primarily of legal fees, were allocated between the Preferred Stock and the Warrant on a pro rata basis, based upon the estimated fair values of the Preferred Stock and the Warrant.  As a result, $2.2 million of the proceeds were allocated to the Warrant, which increased additional paid-in capital from common stock.  The amount allocated to the Warrant is considered a discount on the Preferred Stock and

 

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has been amortized using the level yield method over a five-year period through a charge to retained earnings.  Such amortization does not reduce net income, but reduces income available for common shares.

 

The Preferred Stock pays cumulative dividends of 5% per year for the first five years and 9% per year thereafter.  The Company may, at its option, redeem the Preferred Stock at the liquidation preference plus accrued and unpaid dividends.

 

The fair value of the Preferred Stock was estimated on the date of issuance by computing the present value of expected future cash flows using a risk-adjusted rate of return for similar securities of 12%.  The fair value of the Warrant was estimated on the date of grant using the Black-Scholes option pricing model assuming a risk-free interest rate of 4.30%, expected volatility of 35.53% and a dividend yield of 4.27%.

 

The Treasury sold all of the Preferred Stock to private investors in a Dutch auction that was completed in July 2012. During the quarter ended September 30, 2012, the Company completed the repurchase from private investors of $7.1 million in par value of the Preferred Stock in exchange for $6.6  million in cash.  Subsequent to March 31, 2013, the Company repurchased another $2.0 million in par value of its Preferred Stock from private investors in exchange for $2.0  million in cash.  Also during the quarter ended September 30, 2012, the Company completed the repurchase of the Warrant from the Treasury in exchange for $1.1 million in cash.  Following the Treasury’s auction of the Preferred Stock and the Company’s repurchase of the Warrant, the U.S. Treasury has no remaining equity stake in the Company.

 

3.                      EARNINGS PER SHARE

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2013

 

2012

 

2013

 

2012

 

Net income

 

$

3,652,174

 

$

1,369,008

 

$

6,779,903

 

$

4,411,083

 

Less:

 

 

 

 

 

 

 

 

 

Preferred dividends declared

 

(317,725

)

(406,725

)

(635,450

)

(813,450

)

Accretion of discount on preferred stock

 

(88,042

)

(111,134

)

(175,775

)

(221,879

)

Income available to common shares

 

$

3,246,407

 

$

851,149

 

$

5,968,678

 

$

3,375,754

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic

 

10,916,522

 

10,659,123

 

10,865,523

 

10,632,225

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Treasury stock held in equity trust - unvested shares

 

179,027

 

303,890

 

194,740

 

303,141

 

Equivalent shares - employee stock options and awards

 

41,252

 

44,551

 

40,931

 

42,941

 

Equivalent shares - common stock warrant

 

 

125,048

 

 

90,999

 

Weighted average common shares outstanding - diluted

 

11,136,801

 

11,132,612

 

11,101,194

 

11,069,306

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.30

 

$

0.08

 

$

0.55

 

$

0.32

 

Diluted

 

$

0.29

 

$

0.08

 

$

0.54

 

$

0.30

 

 

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

 

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Similarly, outstanding warrants are dilutive when the average market price of the Company’s common stock exceeds the exercise price during a period.  Proceeds from the assumed exercise of dilutive warrants are assumed to be used to repurchase common shares at the average market price of such stock during the period.

 

Options to purchase common shares totaling 436,311 and 595,090 were excluded from the computations of diluted earnings per share for the three months ended March 31, 2013 and 2012, respectively, and 457,811 and 625,093 for the six months ended March 31, 2013 and 2012, respectively, because the exercise price of the options, when combined with the effect of the unamortized compensation expense, were greater than the average market price of the common shares and were considered anti-dilutive.

 

4.  STOCK-BASED COMPENSATION

 

The Company maintains shareholder-approved, stock-based incentive plans which permit the granting of options to purchase common stock of the Company and awards of restricted shares of common stock.  All employees, non-employee directors and consultants of the Company and its affiliates are eligible to receive awards under the plans.  The plans authorize the granting of awards in the form of options intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code, options that do not so qualify (non-statutory stock options) and granting of restricted shares of common stock.  Stock option awards are generally granted with an exercise price equal to the market value of the Company’s shares at the date of grant and generally vest over a period of three to five years.  The exercise period for all stock options generally may not exceed 10 years from the date of grant.  Restricted stock awards generally vest over a period of two to five years. Generally, option and share awards provide for accelerated vesting if there is a change in control (as defined in the plans).  Shares used to satisfy stock awards and stock option exercises are generally issued from treasury stock.  At March 31, 2013, the Company had 568,184 reserved but unissued shares that can be awarded in the form of stock options or restricted share awards.

 

Restricted Stock Awards - A summary of activity in the Company’s restricted stock awards as of and for the six-month period ended March 31, 2013 is as follows:

 

 

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

Number

 

Grant-Date

 

 

 

Of Shares

 

Fair Value

 

Nonvested at September 30, 2012

 

365,170

 

$

7.13

 

Granted

 

37,092

 

8.58

 

Vested

 

(137,861

)

7.27

 

Forfeited

 

 

 

Nonvested at March 31, 2013

 

264,401

 

$

7.27

 

 

During the year ended September 30, 2012, the Company granted an aggregate of 250,000 shares of contingent, performance-based restricted stock to six executive officers.  The shares of restricted stock vest as follows: 25% on the date of the filing of the annual report on Form 10-K for the year ended September 30, 2012; 25% on the date of the filing of the annual report on Form 10-K for the year ended September 30, 2013; and 50% on the date of the filing of the annual report on Form 10-K for the year ended September 30, 2014. In each case the vesting is subject to the Company’s achievement of certain earnings per share targets. The grants do not provide for partial vesting for performance levels achieved below the stated targets nor will additional shares be granted if the Company’s performance exceeds the earnings per share targets. If an earnings per share target is not met, vesting may still occur in a subsequent period based on cumulative results. Additionally, recipients cannot receive the final vesting unless the Company’s total shareholder return exceeds certain peer indices. One-third of the shares received are required to be held until the earlier of retirement or five years from the date of vesting.

 

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Stock Option Awards - A summary of activity in the Company’s stock option program as of and for the six months ended March 31, 2013 is as follows:

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

Weighted

 

 

 

Average

 

 

 

 

 

Average

 

Aggregate

 

Remaining

 

 

 

Number

 

Exercise

 

Intrinsic

 

Contractual

 

 

 

Of Shares

 

Price

 

Value

 

Life (years)

 

Outstanding at September 30, 2012

 

629,936

 

$

11.20

 

 

 

 

 

Granted

 

17,500

 

8.39

 

 

 

 

 

Exercised

 

(8,400

)

7.61

 

 

 

 

 

Forfeited

 

(18,100

)

9.59

 

 

 

 

 

Outstanding at March 31, 2013

 

620,936

 

$

11.22

 

$

578,534

 

4.4

 

Exercisable at March 31, 2013

 

571,053

 

$

11.26

 

$

531,868

 

4.2

 

 

The weighted-average fair value per share of stock options granted during the six months ended March 31, 2013 was $2.12.  Cash received from stock options exercised during the six months ended March 31, 2013 totaled $64,000.  The total intrinsic value of stock options exercised during the six months ended March 31, 2013 was $9,000.

 

As of March 31, 2013, the total unrecognized compensation expense related to nonvested stock options and restricted stock awards was approximately $39,000 and $1.1 million, respectively, and the related weighted average periods over which it is expected to be recognized is approximately 1.0 and 1.6 years, respectively.

 

There were no stock options granted during the six months ended March 31, 2012.  The fair value of stock options granted during the six months ended March 31, 2013 was estimated on the dates of grant using the Black-Scholes option pricing model with the following average assumptions:

 

Risk-free interest rate

 

0.85

%

Expected volatility

 

44.36

%

Expected life in years

 

6.0

 

Dividend yield

 

5.02

%

Expected forfeiture rate

 

5.30

%

 

Equity Trust Plan - The Company maintains a deferred compensation plan (“Equity Trust Plan”) for the benefit of key loan officers and sales staff.  The plan is designed to recruit and retain top-performing loan officers and other key revenue-producing employees who are instrumental to the Company’s success.  The plan allows the recipients to defer a percentage of commissions earned into a rabbi trust for the benefit of the participants.  The assets of the trust are limited to shares of Company common stock and cash.  Awards related to participant contributions generally vest immediately or over a period of two to five years.  Awards related to Company contributions generally vest over a period of three to five years. The participants will generally forgo any accrued but unvested benefits if they voluntarily leave the Company.  Vested shares in the plan are treated as issued and outstanding when computing basic and diluted earnings per share, whereas unvested shares are treated as issued and outstanding only when computing diluted earnings per share.  During the six months ended March 31, 2013, the plan purchased 10,100 shares on behalf of the participants at an average price of $9.90 and distributed 30,005 vested shares to participants with an aggregate market value at the time of distribution of $297,000.  At March 31, 2013, there were 372,163 shares in the plan with an aggregate carrying value of $3.3 million.  Such shares were included in treasury stock in the Company’s consolidated financial statements, including 181,435 shares that were not yet vested.

 

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5.  INCOME TAXES

 

Deferred tax assets totaled $10.5 million and $11.6 million at March 31, 2013 and September 30, 2012, respectively, and resulted primarily from the temporary differences related to the allowance for loan losses.  Deferred tax assets are recognized only to the extent that they are expected to be used to reduce amounts that have been paid or will be paid to tax authorities.  Management believes, based on all positive and negative evidence, that the realization of the deferred tax asset at March 31, 2013 is more likely than not, and accordingly, no valuation allowance has been recorded.  The ultimate outcome of future facts and circumstances could require a valuation allowance and any charges to establish such valuation allowance could have a material adverse effect on the Company’s results of operations and financial position.

 

At March 31, 2013, the Company had $137,000 of unrecognized tax benefits, $129,000 of which would affect the effective tax rate if recognized.  The Company recognizes interest related to uncertain tax positions in income tax expense and classifies such interest and penalties in the liability for unrecognized tax benefits.  As of March 31, 2013, the Company had approximately $8,000 accrued for the payment of interest and penalties.  The tax years ended September 30, 2010 through 2012 remain open to examination by the taxing jurisdictions to which the Company is subject.

 

6.              DEBT AND MORTGAGE-BACKED SECURITIES

 

The amortized cost and estimated fair value of debt and mortgage-backed securities held to maturity and available for sale at March 31, 2013 and September 30, 2012 are summarized as follows:

 

 

 

March 31, 2013

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

HELD TO MATURITY:

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

Ginnie Mae

 

$

72,356

 

$

9,700

 

$

 

$

82,056

 

Fannie Mae

 

5,200,620

 

363,130

 

 

5,563,750

 

Total

 

5,272,976

 

372,830

 

 

5,645,806

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations:

 

 

 

 

 

 

 

 

 

Freddie Mac

 

4,653

 

49

 

 

4,702

 

 

 

 

 

 

 

 

 

 

 

Total held to maturity

 

$

5,277,629

 

$

372,879

 

$

 

$

5,650,508

 

 

 

 

 

 

 

 

 

 

 

Weighted average yield at end of period

 

3.76

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AVAILABLE FOR SALE:

 

 

 

 

 

 

 

 

 

Debt obligations of government- sponsored entities

 

$

34,046,131

 

$

9,048

 

$

(12,481

)

$

34,042,698

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

Ginnie Mae

 

237,214

 

7,280

 

 

244,494

 

Total available for sale

 

$

34,283,345

 

$

16,328

 

$

(12,481

)

$

34,287,192

 

 

 

 

 

 

 

 

 

 

 

Weighted average yield at end of period

 

0.66

%

 

 

 

 

 

 

 

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September 30, 2012

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

HELD TO MATURITY:

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

Ginnie Mae

 

$

89,752

 

$

13,085

 

$

 

$

102,837

 

Fannie Mae

 

5,562,187

 

426,125

 

 

5,988,312

 

Total

 

5,651,939

 

439,210

 

 

6,091,149

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations:

 

 

 

 

 

 

 

 

 

Freddie Mac

 

5,024

 

54

 

 

5,078

 

 

 

 

 

 

 

 

 

 

 

Total held to maturity

 

$

5,656,963

 

$

439,264

 

$

 

$

6,096,227

 

 

 

 

 

 

 

 

 

 

 

Weighted average yield at end of period

 

3.76

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AVAILABLE FOR SALE:

 

 

 

 

 

 

 

 

 

Debt obligations of government- sponsored entities

 

$

21,594,679

 

$

4,705

 

$

(4,289

)

$

21,595,095

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

Ginnie Mae

 

292,101

 

34,221

 

 

326,322

 

Total available for sale

 

$

21,886,780

 

$

38,926

 

$

(4,289

)

$

21,921,417

 

 

 

 

 

 

 

 

 

 

 

Weighted average yield at end of period

 

0.46

%

 

 

 

 

 

 

 

As of March 31, 2013 and September 30, 2012, the Company had no debt or mortgage-backed securities that were in a continuous loss position for twelve months or more and thus, based on the existing facts and circumstances, no other-than-temporary impairment exists.  In addition, the Company has no intent to sell any securities in unrealized loss positions prior to their recovery and it is not more-likely-than-not that the Company would be required to sell such securities.  Debt and mortgage-backed securities with carrying values totaling approximately $39.4 million and $27.3 million at March 31, 2013 and September 30, 2012, respectively, were pledged to secure deposits of public entities, trust funds, retail repurchase agreements and for other purposes as required by law.

 

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7.  LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

 

Loans receivable at March 31, 2013 and September 30, 2012 are summarized as follows:

 

 

 

March 31,

 

September 30,

 

 

 

2013

 

2012

 

Single-family residential:

 

 

 

 

 

First mortgage

 

$

213,685,287

 

$

211,759,949

 

Second mortgage

 

41,454,730

 

42,091,046

 

Home equity lines of credit

 

129,651,175

 

143,931,567

 

Total single-family residential

 

384,791,192

 

397,782,562

 

Commercial:

 

 

 

 

 

Commercial and multi-family real estate

 

346,678,067

 

323,333,936

 

Land acquisition and development

 

46,350,048

 

47,262,727

 

Real estate construction and development

 

18,617,229

 

21,906,992

 

Commercial and industrial

 

220,414,010

 

197,754,774

 

Total commercial

 

632,059,354

 

590,258,429

 

Consumer and installment

 

2,396,226

 

2,673,925

 

Total principal

 

1,019,246,772

 

990,714,916

 

Add (less):

 

 

 

 

 

Deferred loan costs, net

 

3,023,465

 

3,115,384

 

Loans in process

 

(299,716

)

(986,063

)

Allowance for loan losses

 

(18,607,768

)

(17,116,595

)

Total, net

 

$

1,003,362,753

 

$

975,727,642

 

 

 

 

 

 

 

Weighted average interest rate at end of period

 

4.75

%

4.92

%

 

 

 

 

 

 

Ratio of allowance to total outstanding loans

 

1.83

%

1.73

%

 

Allowance for Loan Losses

 

The Company maintains an allowance for loan losses to absorb probable losses in the Company’s loan portfolio.  Loan charge-offs are charged against and recoveries are credited to the allowance.  Provisions for loan losses are charged to income and credited to the allowance in an amount necessary to maintain an appropriate allowance given the risks identified in the portfolio.  The allowance is comprised of specific allowances on impaired loans (assessed for loans that have known credit weaknesses) and pooled or general allowances based on assigned risk ratings and historical loan loss experience for each loan type.  The allowance is based upon management’s estimates of probable losses inherent in the entire loan portfolio.

 

In general, impairment losses on all single-family residential real estate loans that become 180 days past due and all consumer loans that become 120 days past due are recognized through charge-offs to the allowance for loan losses.  For impaired single-family residential real estate and consumer loans that do not meet these criteria, management considers many factors before charging off a loan and might establish a specific reserve in lieu of a charge-off.  While the delinquency status of the loan is a primary factor in determining whether to establish a specific reserve or record a charge-off, other key factors are considered, including the overall financial condition of the borrower, the progress of management’s collection efforts and the value of the underlying collateral.  For purposes of determining the general allowance for loan losses, all residential and consumer loan charge-offs and changes in the level of specific reserves are included in the determination of historical loss rates for each pool of loans with similar risk characteristics, as described below.

 

For commercial loans, all or a portion of a loan is charged off when circumstances indicate that a loss is probable and there is no longer a reasonable expectation that a change in such circumstances will result in the collection of the full amount of the loan.  Similar to single-family residential real estate loans, management considers many factors before charging off a loan.  While the delinquency status of the loan is a primary factor, other key factors

 

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are considered and the Company does not charge off commercial loans based solely on a predetermined length of delinquency.  The other factors considered include the overall financial condition of the borrower, the progress of management’s collection efforts and the value of the underlying collateral.  For purposes of determining the general allowance for loan losses, all commercial loan charge-offs and changes in the level of specific reserves are included in the determination of historical loss rates for each pool of loans with similar risk characteristics, as described below.

 

As the result of the Company’s required change from the Office of Thrift Supervision’s (“OTS”) Thrift Financial Reports to the Office of the Comptroller of the Currency’s (“OCC”) Call Reports that became effective March 31, 2012, the Company modified its charge-off policy during the three months ended March 31, 2012 to comply with the OCC’s guidelines.  As permitted by the OTS, the Company had previously used specific loan loss reserves to recognize impairment charges on certain collateral-dependent loans under certain circumstances.  In general under the Company’s previous policy, a specific reserve could have been recorded in lieu of a charge-off on an impaired collateral-dependent loan when management believed that the borrower still had the ability to bring the loan current or could provide additional collateral.  The Company did not charge off loans based solely on a predetermined length of delinquency.  Also, to enhance tracking of payment performance and facilitate billing and collection efforts, specific reserves were generally established in lieu of partial charge-offs on single-family residential real estate loans.  Once collection efforts failed, all or a portion of the loan was generally charged off, as appropriate.  The OCC generally requires such impairment charges to be recognized through loan charge-offs.  For purposes of determining the general allowance for loan losses, all charge-offs and changes in the level of specific reserves were included in the determination of historical loss rates for each pool of loans with similar risk characteristics.  As the result of the modifications to the loan charge-off policy to comply with the OCC’s guidance, the Company recorded $5.9 million of charge-offs during the March 2012 quarter for loans that it had established specific reserves in previous periods.  Because these losses had been recognized in prior periods, the charge-off of the $5.9 million of specific reserves had no impact on the Company’s provision for loan losses or stockholders’ equity during the six months ended March 31, 2012.

 

During the three months ended March 31, 2013 and 2012, charge-offs of non-performing and impaired loans totaled $1.6 million and $13.2 million, respectively, including partial charge-offs of $269,000 and $8.1 million, respectively.  During the six months ended March 31, 2013 and 2012, charge-offs of impaired loans totaled $5.2 million and $16.2 million, respectively, including partial charge-offs of $2.7 million and $8.1 million, respectively.  At March 31, 2013 and September 30, 2012, the remaining principal balance of non-performing and impaired loans for which the Company previously recorded partial charge-offs totaled $13.1 million and $16.2 million, respectively.

 

For purposes of determining the allowance for loan losses, the Company has segmented its loan portfolio into the following pools (or segments) that have similar risk characteristics: residential loans, commercial loans and consumer loans.  Loans within these segments are further divided into subsegments, or classes, based on the associated risks within these subsegments.  Residential loans are divided into three classes, including single-family first mortgage loans, single-family second mortgage loans and home equity lines of credit.  Commercial loans are divided into four classes, including land acquisition and development loans, real estate construction and development loans, commercial and multi-family real estate loans and commercial and industrial loans.  Consumer loans are not subsegmented because of the small balance in this segment.

 

The following is a summary of the significant risk characteristics for each segment of loans:

 

Residential mortgage loans are secured by one- to four-family residential properties with loan-to-value ratios at the time of origination generally equal to 80% or less.  Such loans with loan-to-value ratios of greater than 80% at the time of origination generally require private mortgage insurance.  Second mortgage loans and home equity lines of credit generally involve greater credit risk than first mortgage loans because they are secured by mortgages that are subordinate to the first mortgage on the property.  If the borrower is forced into foreclosure, the Company will receive no proceeds from the sale of the property until the first mortgage loan has been completely repaid.  Second mortgage loans and home equity lines of credit often have high loan-to-value ratios when combined with the first mortgage on the property.  Loans with high combined loan-to-value ratios will be more sensitive to declining property values than loans with lower combined loan-to-value ratios and, therefore, may experience a higher

 

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incidence of default and severity of losses.  Prior to 2008, the Company offered second mortgage loans that exceeded 80% combined loan-to-value ratios, which were priced with enhanced yields.  The Company continues to offer second mortgage loans, but only up to 80% of the collateral values and on a limited basis to credit-worthy borrowers.  However, the current underwriting guidelines are more stringent due to the current adverse economic environment.  Since substantially all second mortgage loans and home equity lines of credit are originated in conjunction with the origination of first mortgage loans eligible for sale in the secondary market, and the Company typically does not service the related first mortgage loans if they are sold, the Company may be unable to track the delinquency status of the related first mortgage loans and whether such loans are at risk of foreclosure by others.

 

Home equity lines of credit are initially offered as “revolving” lines of credit whereby funds can be borrowed during a “draw” period. The only required payments during the draw period are scheduled monthly interest payments.  In previous years, the Company offered home equity lines of credit with ten-year maturities that included a draw period for the entire ten years. The full principal amount was due at the end of the draw period as a lump-sum balloon payment and no required monthly principal payments were due prior to maturity.  Beginning in 2012, the Company discontinued this product and began offering home equity lines of credit with 15-year maturities, including a five-year draw period requiring interest-only payments, followed by the required monthly payment of principal and interest on a fully-amortizing basis for the remaining ten-year term.  The conversion of a home equity line of credit to a fully amortizing basis presents an increased level of default risk to the Company since the borrower no longer has the ability to make principal draws on the line, and the amount of the required monthly payment could substantially increase to provide for scheduled repayment of principal and interest.  At March 31, 2013, all of the Company’s home equity lines of credit were in the interest-only payment phase and all of its second mortgage loans were fully amortizing.

 

Commercial loans represent loans to varying types of businesses, including municipalities, school districts and nonprofit organizations, to support working capital, operational needs and term financing of equipment.  Repayment of such loans is generally provided through operating cash flows of the business.  Commercial and multi-family real estate loans include loans secured by real estate occupied by the borrower for ongoing operations, non-owner occupied real estate leased to one or more tenants and greater-than-four family apartment buildings.  Land acquisition and development loans are made to borrowers for the purpose of infrastructure improvements to vacant land to create finished marketable residential and commercial lots or land.  Most land development loans are originated with the intention that the loans will be paid through the sale of developed lots or land by the developers generally within twelve months of the completion date.  Real estate construction and development loans include secured loans for the construction of residential properties by real estate professionals and, to a lesser extent, individuals, and business properties that often convert to a commercial real estate loan at the completion of the construction period.  Commercial and industrial loans include loans made to support working capital, operational needs and term financing of equipment and are generally secured by equipment, inventory, accounts receivable and personal guarantees of the owner.  Repayment of such loans is generally provided through operating cash flows of the business, with the liquidation of collateral as a secondary repayment source.

 

Consumer loans include primarily loans secured by savings accounts and automobiles.  Savings account loans are fully secured by restricted deposit accounts held at the Bank.  Automobile loans include loans secured by new and pre-owned automobiles.

 

In determining the allowance and the related provision for loan losses, the Company establishes valuation allowances based upon probable losses identified during the review of individually impaired loans. These estimates are based upon a number of objective factors, such as payment history, financial condition of the borrower and discounted collateral exposure.  For further information, see the discussion of impaired loans below.  In addition, all loans that are not evaluated individually for impairment and any individually evaluated loans determined not to be impaired are segmented into groups based on similar risk characteristics as described above.  The Company’s methodology includes factors that allow management to adjust its estimates of losses based on the most recent information available.  Such risk factors are generally reviewed and updated quarterly, as appropriate.  Historical loss rates for each risk group, which are updated quarterly, are quantified using all recorded loan charge-offs, changes in specific allowances on loans and real estate acquired through foreclosure and any gains and losses on the final disposition of real estate acquired through or in lieu of foreclosure.  These historical loss rates for each risk group are used as the starting point to determine the level of the allowance.

 

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Such rates are then adjusted to reflect actual changes and anticipated changes in national and local economic conditions and developments, the volume and severity of delinquent and internally classified loans, including the impact of scheduled loan maturities, loan concentrations, assessment of trends in collateral values, assessment of changes in borrowers’ financial stability, and changes in lending policies and procedures, including underwriting standards and collections, charge-off and recovery practices.

 

In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses.  Such agencies may require the Company to modify its allowance for loan losses based on their judgment about information available to them at the time of their examination.

 

The following table summarizes the activity in the allowance for loan losses for the six months ended March 31, 2013 and 2012:

 

 

 

Six Months Ended

 

 

 

March 31,

 

 

 

2013

 

2012

 

Balance, beginning of period

 

$

17,116,595

 

$

25,713,622

 

Provision charged to expense

 

3,440,000

 

8,500,000

 

Charge-offs:

 

 

 

 

 

Residential real estate loans:

 

 

 

 

 

First mortgage

 

1,602,051

 

5,052,599

 

Second mortgage

 

867,706

 

1,428,006

 

Home equity lines of credit

 

1,349,249

 

3,837,273

 

Total residential real estate loans

 

3,819,006

 

10,317,878

 

Commercial loans:

 

 

 

 

 

Commercial & multi-family real estate

 

564,315

 

3,610,249

 

Land acquisition & development

 

23,044

 

261,725

 

Real estate construction & development

 

259,743

 

241,501

 

Commercial & industrial

 

483,620

 

1,234,631

 

Total commercial loans

 

1,330,722

 

5,348,106

 

Consumer and other

 

59,110

 

492,080

 

Total charge-offs

 

5,208,838

 

16,158,064

 

Recoveries:

 

 

 

 

 

Residential real estate loans:

 

 

 

 

 

First mortgage

 

28,484

 

10,967

 

Second mortgage

 

109,182

 

20,414

 

Home equity lines of credit

 

157,138

 

79,816

 

Total residential real estate loans

 

294,804

 

111,197

 

Commercial loans:

 

 

 

 

 

Commercial & multi-family real estate

 

1,108,769

 

59,636

 

Land acquisition & development

 

16,660

 

6,431

 

Real estate construction & development

 

1,797,077

 

465

 

Commercial & industrial

 

25,147

 

13,363

 

Total commercial loans

 

2,947,653

 

79,895

 

Consumer and other

 

17,554

 

7,731

 

Total recoveries

 

3,260,011

 

198,823

 

Net charge-offs

 

1,948,827

 

15,959,241

 

Balance, end of period

 

$

18,607,768

 

$

18,254,381

 

 

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The following table summarizes, by loan portfolio segment, the changes in the allowance for loan losses for the six months ended March 31, 2013 and 2012, respectively.

 

 

 

Six Months Ended March 31, 2013

 

 

 

Residential

 

 

 

 

 

 

 

 

 

 

 

Real Estate

 

Commercial

 

Consumer

 

Unallocated

 

Total

 

Activity in allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

9,348,111

 

$

7,633,303

 

$

28,272

 

$

106,909

 

$

17,116,595

 

Provision charged (credited) to expense

 

3,596,746

 

(229,741

)

37,351

 

35,644

 

3,440,000

 

Charge offs

 

(3,819,006

)

(1,330,722

)

(59,110

)

 

(5,208,838

)

Recoveries

 

294,804

 

2,947,653

 

17,554

 

 

3,260,011

 

Balance, end of period

 

$

9,420,655

 

$

9,020,493

 

$

24,067

 

$

142,553

 

$

18,607,768

 

 

 

 

Six Months Ended March 31, 2012

 

 

 

Residential

 

 

 

 

 

 

 

 

 

 

 

Real Estate

 

Commercial

 

Consumer

 

Unallocated

 

Total

 

Activity in allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

16,842,446

 

$

8,256,032

 

$

444,281

 

$

170,863

 

$

25,713,622

 

Provision charged (credited) to expense

 

4,929,593

 

3,442,492

 

212,553

 

(84,638

)

8,500,000

 

Charge offs

 

(10,317,878

)

(5,348,106

)

(492,080

)

 

(16,158,064

)

Recoveries

 

111,197

 

79,895

 

7,731

 

 

198,823

 

Balance, end of period

 

$

11,565,358

 

$

6,430,313

 

$

172,485

 

$

86,225

 

$

18,254,381

 

 

The following table summarizes the information regarding the balance in the allowance and the recorded investment in loans by impairment method as of March 31, 2013 and September 30, 2012, respectively.

 

 

 

March 31, 2013

 

 

 

Residential

 

 

 

 

 

 

 

 

 

 

 

Real Estate

 

Commercial

 

Consumer

 

Unallocated

 

Total

 

Allowance balance at end of period based on:

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

881,887

 

$

356,543

 

$

3,403

 

$

 

$

1,241,833

 

Loans collectively evaluated for impairment

 

8,538,768

 

8,663,950

 

20,664

 

142,553

 

17,365,935

 

Loans acquired with deteriorated credit quality

 

 

 

 

 

 

Total balance, end of period

 

$

9,420,655

 

$

9,020,493

 

$

24,067

 

$

142,553

 

$

18,607,768

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded investment in loans receivable at end of period:

 

 

 

 

 

 

 

 

 

 

 

Total loans receivable

 

$

386,298,156

 

$

633,271,136

 

$

2,401,229

 

 

 

$

1,021,970,521

 

Loans receivable individually evaluated for impairment

 

19,303,129

 

16,810,046

 

73,471

 

 

 

36,186,646

 

Loans receivable collectively evaluated for impairment

 

366,995,027

 

616,461,090

 

2,327,758

 

 

 

985,783,875

 

Loans receivable acquired with deteriorated credit quality

 

 

 

 

 

 

 

 

 

 

September 30, 2012

 

 

 

Residential

 

 

 

 

 

 

 

 

 

 

 

Real Estate

 

Commercial

 

Consumer

 

Unallocated

 

Total

 

Allowance balance at end of period based on:

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

624,825

 

$

 

$

 

$

 

$

624,825

 

Loans collectively evaluated for impairment

 

8,723,286

 

7,633,303

 

28,272

 

106,909

 

16,491,770

 

Loans acquired with deteriorated credit quality

 

 

 

 

 

 

Total balance, end of period

 

$

9,348,111

 

$

7,633,303

 

$

28,272

 

$

106,909

 

$

17,116,595

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded investment in loans receivable at end of period:

 

 

 

 

 

 

 

 

 

 

 

Total loans receivable

 

$

398,732,907

 

$

591,431,264

 

$

2,680,065

 

 

 

$

992,844,236

 

Loans receivable individually evaluated for impairment

 

42,642,539

 

22,271,208

 

208,620

 

 

 

65,122,367

 

Loans receivable collectively evaluated for impairment

 

356,090,368

 

569,160,056

 

2,471,445

 

 

 

927,721,869

 

Loans receivable acquired with deteriorated credit quality

 

 

 

 

 

 

 

 

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Table of Contents

 

Impaired Loans

 

The following is a summary of the unpaid principal balance and recorded investment of impaired loans as of March 31, 2013 and September 30, 2012.  The recorded investments and unpaid principal balances have been reduced by all partial charge-offs of the related loans to the allowance for loan losses.  The recorded investment of certain loan categories exceeds the unpaid principal balance of such categories as the result of the deferral and capitalization of certain direct loan origination costs, net of any origination fees collected, under Accounting Standards Codification (“ASC”) Topic 310-20-30.

 

 

 

March 31, 2013

 

September 30, 2012

 

 

 

Unpaid

 

 

 

Unpaid

 

 

 

 

 

Principal

 

 

 

Principal

 

 

 

 

 

Balance

 

 

 

Balance

 

 

 

 

 

Net of

 

Recorded

 

Net of

 

Recorded

 

 

 

Charge-offs

 

Investment

 

Charge-offs

 

Investment

 

Classified as non-performing loans: (1)

 

 

 

 

 

 

 

 

 

Non-accrual loans

 

$

14,353,753

 

$

14,395,400

 

$

17,462,262

 

$

17,503,014

 

Troubled debt restructurings current under restructured terms

 

16,281,154

 

16,350,631

 

22,198,364

 

22,284,401

 

Troubled debt restructurings past due under restructured terms

 

5,420,955

 

5,440,615

 

7,816,737

 

7,855,686

 

Total non-performing loans

 

36,055,862

 

36,186,646

 

47,477,363

 

47,643,101

 

Troubled debt restructurings returned to accrual status

 

20,834,401

 

20,941,565

 

17,402,455

 

17,479,266

 

Total impaired loans

 

$

56,890,263

 

$

57,128,211

 

$

64,879,818

 

$

65,122,367

 

 


(1) All non-performing loans at March 31, 2013 and September 30, 2012 were classified as non-accrual.

 

A loan is considered to be impaired when, based on current information and events, management determines that the Company will be unable to collect all amounts due according to the loan contract, including scheduled interest payments.  When a loan is identified as impaired, the amount of impairment loss is measured based on either the present value of expected future cash flows, discounted at the loan’s effective interest rate, or for collateral-dependent loans, observable market prices or the current fair value of the collateral.  See Impaired Loans under Note 9, Fair Value Measurements.  If the amount of impairment loss is measured based on the present value of expected future cash flows, the entire change in present value is recorded in the provision for loan losses.  If the fair value of the collateral is used to measure impairment of a collateral-dependent loan and repayment or satisfaction of the loan is dependent on the sale of the collateral, the fair value of the collateral is adjusted to consider estimated costs to sell.  However, if repayment or satisfaction of the loan is dependent only on the operation, rather than the sale of the collateral, the measurement of impairment does not incorporate estimated costs to sell the collateral.  If the value of the impaired loan is determined to be less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), an impairment charge is recognized through a provision for loan losses.  The following table summarizes the principal balance, net of amounts charged off, of impaired loans at March 31, 2013 and September 30, 2012 by the impairment method used.

 

 

 

March 31,

 

September 30,

 

 

 

2013

 

2012

 

 

 

(In Thousands)

 

 

 

 

 

 

 

Fair value of collateral method

 

$

43,755

 

$

42,405

 

Present value of cash flows method

 

13,135

 

22,475

 

Total impaired loans

 

$

56,890

 

$

64,880

 

 

Loans considered for individual impairment analysis include loans that are past due, loans that have been placed on non-accrual status, troubled debt restructurings, loans with internally assigned credit risk ratings that indicate an elevated level of risk, and loans that management has knowledge of or concerns about the borrower’s ability to pay under the contractual terms of the note.  Residential loans to be evaluated for impairment are generally identified through a review of loan delinquency reports, internally-developed risk classification reports, and discussions with the Bank’s loan collectors.  Commercial loans evaluated for impairment are generally identified through a review of loan delinquency reports, internally-developed risk classification reports, discussions with loan officers, discussions with borrowers, periodic individual loan reviews and local media

 

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reports indicating problems with a particular project or borrower.  Commercial loans are individually reviewed and assigned a credit risk rating periodically by the internal loan committee.  See Credit Quality below.

 

The following tables contain a summary of the unpaid principal balances of impaired loans segregated by loans that had partial charge-offs recorded and loans with no partial charge-offs recorded, and the related recorded investments and allowance for loan losses as of March 31, 2013 and September 30, 2012.  The recorded investments have been reduced by all partial charge-offs.

 

 

 

March 31, 2013

 

 

 

Loans with Partial Charges-off Recorded

 

Unpaid

 

Total

 

 

 

 

 

 

 

 

 

 

 

Unpaid

 

Principal

 

Unpaid

 

Total

 

 

 

 

 

 

 

 

 

Principal

 

Balance

 

Principal

 

Recorded

 

 

 

 

 

 

 

Less

 

Balance

 

of Loans

 

Balance

 

Investment

 

Related