Pulaski's CEO Discusses F4Q 2013 Results - Earnings Call Transcript

Nov. 1.13 | About: Pulaski Financial (PULB)

Pulaski Financial Corporation (NASDAQ:PULB)

F4Q 2013 Results Earnings Call

October 30, 2013 11:00 AM ET

Executives

Paul Milano - Chief Financial Officer

Gary Douglass - Chief Executive Officer

Analysts

Andrew Liesch - Sandler O'Neill & Partners

Brian Martin - FIG Partners

Daniel Cardenas - Raymond James

Operator

Good morning. And welcome to the Pulaski Financial Fourth Quarter Results. My name is Tunisia, and I will be facilitating audio portion of today’s interactive broadcast. All lines have been placed on mute to prevent any background noise. For those of you on the stream please signal of the options available in your event console.

At this time, I would like to turn the show over to Paul Milano, CFO.

Paul Milano

Good morning, everyone. I’d like to begin the call by restating -- reciting our usual Safe Harbor language. This conference call may contain forward-looking statements about Pulaski Financial Corp., which the company intends to be covered under the Safe Harbor provisions contained in the Private Securities Litigation Reform Act of 1995. Statements that are not historical or current facts, including statements about beliefs and expectations are forward-looking statements.

For discussion of risks that may cause actual results to differ from expectations expressed in forward-looking statements, please refer to our annual report on Form 10-K for the year ended September 30, 2012 on file with the SEC, including the sections entitled Risk Factors. Forward-looking statements speak only as of the date they are made and the company undertakes no obligation to update them in light of any new information or future events.

I’d now like to turn the call over to Gary Douglass, our Chief Executive Officer.

Gary Douglass

Thanks, Paul, and good morning to everyone listening in today and thank you for being with us. As is customary, I have a brief set of prepared remarks, after which we’ll open the lines for questions and comments.

Needless to say, we are very pleased with our September quarter our full fiscal year results. In preparing today's remarks, I look back at our outlook, I presented to you a year ago on this same call in conjunction with the wrap-up of fiscal 2012. It is particularly gratifying to be able report to you today that we accomplished just about everything in fiscal 2013 that we told you we were going to do.

In fact, when comparing the impressive fiscal 2013 EPS of $1.10 to the three-year plan we initiated at the beginning of fiscal 2012, it reveals that we are a full year ahead of schedule with respect to our earnings performance.

Let me now just take a few minutes to share with you my views on our major accomplishments for the year. As to earnings, we operated at a very high level of profitability relative to the industry as evidenced by our return on assets at 1.06% and return on equity of 12.4%.

We continued our strong and accelerating earnings growth trend as EPS grew to $0.27 in the September 2013 quarter, compared to $0.23 in the comparable quarter of 2012 is 17% increase. More impressively, for the full year of 2013, EPS grew to a $1.10 from $0.74 a 41% increase.

Asset quality improvement, we substantially reduced our credit risk down to levels that should result in lower overall credit card cost going forward and such that resources once dedicated to improving answer quality can now be redirected toward growing the business.

As predicted at the end of our 2012 fiscal year, we expected to see an acceleration in the pace of declining non-performing asset levels in fiscal 2013 and we did. Non-performing assets declined another 21% in the September 2013 quarter to 2.65% of total assets. For the full year, NPAs declined 45% from 4.56% of total assets at September 30, 2012 to 2.65% at September 30, 2013.

Moving onto revenue growth, while our principal focus for fiscal 2013 was on asset quality improvement, we also began to refocus meaningful efforts toward overall revenue growth and despite significant industry headwinds. We were able to grow total revenues for the year by $1.2 million or 2%.

By taking advantage of the favorable mortgage environment that existed for the first three quarters of the year, as well as our market leadership position, we grew mortgage revenues to $12.3 million or by 41%.

Equally impressive in a relatively low growth environment, our commercial loan portfolio grew 8.8% to $642 million. With a particular focus on commercial and industrial business that portion of our portfolio grew 18% to $233 million.

Looking at capital management, we continue to implement our shareholder-friendly capital management strategy by repurchasing an additional $8 million in par value of our preferred stock during fiscal 2013.

This activity when combined with a reasonable -- reasonably comparable amount of purchases in fiscal 2012 left the remaining balance of $17.3 million outstanding at September 30, 2013 or only about half the amount originally issued…

Importantly, all of our repurchases were accomplished through utilization of accumulated earnings in excess capital, thus not necessitating any form of potentially dilutive capital raise. And finally, our shareholders were rewarded for the second year in a row, realizing total shareholder returns of 30% or greater.

Let’s take a closer look at the September quarter. We finished fiscal 2013 with the strong $0.27 per share earnings performance. Compared to the immediately preceding June quarter, the performance was driven by a substantially lower provision for loan losses which was offset by lower levels of net interest income, non-interest income, principally mortgage revenues and slightly higher levels of non-interest expense.

This significantly lower provision for loan losses was result of the continuing acceleration in asset quality improvement and several meaningful recoveries of previously charged off loans during the quarter. The modestly lower level of net interest income was principally the result of lower average portfolio balances, as increases in commercial loans only partially offset the expected decline in the legacy mortgage portfolio.

In addition, the average balances of our mortgage warehouse of loans held for sale declined as loans sales held relatively steady, but more origination activity driven by declines in refinance activity, were not fully offset by increased home purchases. As you are probably aware, following a 100 basis point or more arise in mortgage interest rates in May of 2013, the refinance market has effectively shutdown.

Even though, we are better positioned than most to fair well in a predominantly purchase money mortgage market, our strong purchase originations could not overcome the rapid decline in refinance activity caused by the spike in interest rates. As a result, our gain on sale mortgage revenues fell approximately 20%, compared to the very strong immediately preceding June quarter.

Finally, as it relates to non-interest expense, we are not going to approximate $550,000 additional write-down on an existing REO property, non-interest expense would've remained relatively comparable to June quarter levels.

Looking forward as discussed, we believe our strong execution during 2013 positions us well for 2014, which overall promises to be yet another challenging environment for banking in general. Looking forward, our strategy will continue to focus on growing market share in both our commercial and mortgage divisions. We will be focused on expanding our commercial franchise through a larger sales staff and an increased focus on asset production.

As stated earlier, resources once dedicated to improving asset quality can now be redirected at growing the business. As to mortgage, our focus will be on countering the negative impact that higher interest rates have had on refinance activity locally and nationally.

By continuing to grow our sales force, adding additional loan production offices in surrounding Midwest markets and by exploiting a relative advantage in the purchase money mortgage market, we believe we can replace much of the revenues expected to be lost from a shrinking refinance market. We will also be keenly focused on the efficiency of our delivery platform to ring out unproductive cost.

All in all, we believe successful execution of these initiatives, along with expected lower overall credit costs should enable us to generate another year of solid earnings growth in 2013.

This concludes my prepared remarks. So at this time, Paul and I will be pleased to respond to any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) You have a question from the line of Andrew Liesch.

Gary Douglass

Hey, Andrew.

Paul Milano

Hey, how are you doing, Andrew?

Andrew Liesch - Sandler O'Neill & Partners

Good. Thanks. Want to talk a little bit about the folks that you plan on hiring, like how quickly you think you plan on hiring them for the commercial bank this quarter or early next calendar year and how long do you think it will take them to get wrapped up?

Gary Douglass

As you know, Andrew, we've been in ongoing discussions with the commercial loan officers for the better part of the last year as we started to refocus our efforts toward growth. So those discussions are ongoing. I would not be surprised to see several additions, either late this year or certainly very early into the New Year. They do take -- as you pointed out aptly, they do take a little more time to ramp up then perhaps they used to.

We used to think that you could bring a person in with the book of business and that business would come over immediately. It doesn’t happen quite that quickly in this competitive market because the folks that these people are leaving are desperate to hang on to business and there is some fairly irrational things that are happening in the marketplace to keep business.

So this is an ongoing process for us. We’re working hard at it every day and our goal obviously is too add quality people as early in the year as possible to get there. And I would also point out as it relates to that question, we hired two loan officers in late June, early July that -- I think the same kind of question came up last quarter. And I said it’s likely to be probably sometime in the December quarter before you really start seeing their contributions being made. And I think that you will see that exactly happening.

We've had several of them already closing significant loans and several of them are in the pipeline. So it's an ongoing effort, the one that we have to stay with. And we’re confident that we'll get that done.

Andrew Liesch - Sandler O'Neill & Partners

Certainly. And then the (inaudible) where that commercial pipeline stands heading into -- in this quarter. We thought the commercial growth was decent once again (inaudible)?

Gary Douglass

We thought it was going to be even more decent but as usual, things do take longer to get documented and posted these days. And just, it could be the complications or whatever but we have a very good pipeline. I think December will be a very good growth quarter.

I think that pipeline will extend out into the March quarter also. You can always look at that. You can always see about six months on this commercial pipeline because you have to replenish it. But it looks pretty good and some of the stuff that we actually thought was going to close in September is now going to close in this December quarter.

So we feel pretty good about the activity and that includes again these two additional folks that we brought on in June, July period of time and are now getting some of their deals through loan committee and to the finish line.

Andrew Liesch - Sandler O'Neill & Partners

Okay. And then there is one housekeeping question, the other expense line that was about $900,000, up from about $600,000 or so. I’m just curious if there is anything specific driving that?

Gary Douglass

No, I don't think so. I think your comment and you first look this morning was accurate. Our run rate really is in that eight, nine are, 8.9 area, something like that. And I think if you exclude that -- one write-down of that commercial property that we talked about that was in REO. Our run rate is in that 8.9 area. So we should be pretty much on track.

Andrew Liesch - Sandler O'Neill & Partners

Got it. Very good. Thanks so much guys.

Gary Douglass

Thank you, Andrew.

Operator

Your next question comes from the line of Brian Martin.

Brian Martin - FIG Partners

Hi Gary.

Gary Douglass

Hi Brian.

Brian Martin - FIG Partners

So Gary, could you just talk about, just following up on the last questions, just the loans and your outlook. I mean, would your expectation be that when the pipeline is going to be out and you look at kind of full year ‘14 versus ‘13, the loan growth is better given the efforts kind of redirection the resources and you look at our math basis. And my assumption is there is still run-off in residential book but more greater growth in the commercial portfolio?

Gary Douglass

Yes, I think that’s right. I think, two things, one we had -- when you look at year-over-year, we had a pretty good year in commercial given the fact that it’s a relatively low growth environment especially on the C&I book. But with the additional staff and with the additional focus and with asset quality improving as rapidly as it has and the redirection of some of these resources, I would expect them to have a better year than they had in 2013.

And I would also tell you I do expect that the legacy portfolio to moderate in terms of that decline. And as we probably talked about on last quarter's call, we are looking actually at several kind of niche portfolio products for the mortgage division, that should allow us to actually minimize that decline by booking some new quality niche type portfolio of products in the jumbo area for example.

Brian Martin - FIG Partners

Okay. And maybe just jumping to mortgage outlook, this quarter would be refinancing versus the home purchase. I mean, refinancing, I still see zero contribution this quarter. When you look at the purchase activity, I guess, is the level of origination that you are seeing right now makes the last two quarters. I feel like it’s a sustainable type of level. I guess, we think it’s still going to on the origination side, the purchase side still going to bounce around, I mean, this quarter, last two quarters they were both around $200,000 for the quarter.

Gary Douglass

$200 million, I mean.

Brian Martin - FIG Partners

Yeah. I am sorry.

Gary Douglass

Yeah. It’s hard to tell, okay, I began -- and I thought that the purchase activity will be a little stronger right now then it is and I don’t, there is so many things going on, with the rates spike in little bit of property value increase and all the madness in Washington, it’s very hard to tell. You talked to realtors in the marketplace and they will attributed to a lack of existing inventory of homes, lots of our loan officers, they will say that they have got more free qualifications approved but the people can find a home that suits them in terms of their price range or whatever again getting back to the absorption of inventory has been very strong because there has been -- they are still very little with the couple of exceptions new construction activity out there in the marketplace.

So we see all kinds of things going on. All we know for sure on the purchase side is, we are a purchase model, we are a purchase machine, that’s how we are built. And we have to go out there and create -- get a bigger portion of a smaller pie, what really amounts to and that’s why we are actively recruiting loan officers for existing markets, that’s why we continue to look at new markets and follow opportunities there.

And that’s why we, frankly, are spending a lot of time with our existing loan officers, getting them back in the mode of being out there on the street, facing the purchase activity, because for so long the phones were just -- all you really had to do and I am over simplifying this, so I got loan officers listing please don’t be offended, all they do is answer the phone.

So, a lot of, there is a lot of dynamic out there, but we think that our strategy is very clear. We have got to grow origination activity and we think that we are equipped to do that. We will have seasonality probably just to deal with in the March quarter buying -- we haven’t had to deal with for a long time because refi’s know no seasonality. If it’s truly a purchase market we could run in to some of that.

So I think that our view is that we think we can make up some loss ground in terms of the refi market but I think that the mortgage plan will be a back-end loaded plan toward the second, the last two quarters of the year when the spring purchase activity really kicks in. We are expecting gang busters. But it is very hard to control a lot of the noise surrounding the mortgage market. All we can do is add production capacity and that’s what we are doing.

Brian Martin - FIG Partners

All right. Okay. And as far as your outlook as far as will you add new markets, I guess, in fiscal ’14, what would your expectation be as far as what’s you have added?

Gary Douglass

That really -- there is no particular number in mind in terms of how many markets, it is whatever the opportunities are. They have to -- they -- we will stay in the Midwest. It is probably not going to be too many -- we won't be entering on [1z’s and 2z’s] unless there is a pretty good chance that there will be an opportunity to follow on with more critical mass than that.

We have got, just like I was telling to Andrew on the commercial side. We have got ongoing discussions in a number of both out of town markets, as well as ongoing discussions with loan offers in our existing markets and also with respect to different channels.

I will just give you an example, I don’t know their names, but in the -- in one of newer markets, we are working diligently to land a large realtor joint venture opportunity that would be very good for the company, very good for that particular market.

So we are turning overall the stones to try to get out there at a time when a lot of people are pulling their horns in we are trying to take advantage of that and capitalize without by increasing our capacity and growing volumes. It is all about volumes at this point.

Brian Martin - FIG Partners

Right. Okay. That’s helpful. And just maybe a couple of other housekeeping questions, just describe margin, with expectations that commercial growth is kind of accelerating and will be kind of a change in rates here, the expectation still that the margin is probably similar type of level where we are seeing it today, I guess, what’s -- just a general context there?

Gary Douglass

Well, we actually thought it would -- we would trade -- we will trade-off a little bit. I think we have been relatively flat for each of the last two quarters that, Paul is nodding his head, yes, my memory is not totally gone.

But so I think it could, we could see a couple of basis points slippage. But on the other hand, it might not. I mean, it’s held in there pretty well. So I don’t think it’s going to be anything ridiculously off.

As you know it’s a very competitive commercial market out there. So when you get new business in a relatively low growth environment, you are not going to get generally premium pricing, let’s put it that way.

Brian Martin - FIG Partners

Right.

Gary Douglass

So there could be a little slippage. But I have been pretty pleased with how it’s held in there.

Brian Martin - FIG Partners

All right. Okay. Perfect. And just a last couple of things -- the yields that we -- on the held for sale portfolio this quarter were up pretty significantly, is there anything driving that I guess or what was impacting that?

Paul Milano

I would interest rates are driving that, not trying to be smart. But I mean really when we -- and back in May, when we saw that 125 basis point increase in mortgage rates, that’s what’s driving it because if we’re putting a 4.5% to 5% coupon in that, where else that’s going to pulled up.

Brian Martin - FIG Partners

Yeah. Okay. All right. And then just last one was the tax rate was up a little bit in the quarter, was there anything unusual there?

Gary Douglass

I’ll have to pass that away to Mr. Milano.

Paul Milano

I can’t, nothing jumps out at me, Brian.

Brian Martin - FIG Partners

Okay. So may be this is the kind of rate is how to think about it prospectively?

Paul Milano

Beg you pardon?

Brian Martin - FIG Partners

I said maybe just this rate is timed, the decent rate to think about prospectively.

Paul Milano

It should be fairly representative going forward with the overall rate for the areas.

Brian Martin - FIG Partners

Okay. Alright. I’ll let someone else jump in. Thanks.

Paul Milano

Thanks, Brian.

Operator

(Operator Instructions) You have a question from the line of Daniel Cardenas.

Paul Milano

Hi, Dan.

Daniel Cardenas - Raymond James

Good morning, guys. Quick question, you said that you are looking to redeploy assets, folks that were working on credit quality issues to moving asset generation capacity. I mean, how many people are we talking about here?

Paul Milano

Remember Dan, we don’t have one of those special workout divisions. As I’ve told you on different calls, if the loan officer makes a puddle they have to clean it up. And so the folks that are on top about there, really is our entire loan officer group because everyone of them, those folks which is, I know what the number is 10, 11 others now, something like that have been for the last three or four years. They have been pretty much engrossed in working through these credit challenges, which was our primary objective.

And so now, it’s not like they haven’t done anything else in the time period but I can tell you it’s eaten up an awful lot of their time. So, we think that a lot of that time that has been devoted in the past several years to credit quality. While we’re not forgetting about it, but we do think that we’ve totally turned the corner. That will be re-devoted to marketing to for new business. So we are talking about 8 to 10 people here.

Daniel Cardenas - Raymond James

Okay. Good. Good. And then, how quickly can you shift down expenses related to the mortgage side, is that something we’ll see in Q4?

Gary Douglass

Yeah. You’ll see some of that in Q1.

Daniel Cardenas - Raymond James

In Q1.

Gary Douglass

The December quarter, yeah, that’s the other side of it. I didn’t mention here. We talked about originations, but I guess, I did refer to -- we need to ring out all the unproductive cost into platform because there is two things. One is, there is some excess capacity and they are right now because we were very hesitant to cut this thing down and then owing to begin growing in the subsequent quarter. But at the same time there are -- I call it revenue slippage factors or revenue detractors, suspense cost, loan extension cost, lender credit cost, to me there is a whole bunch of things that go to reduce your overall net profit margin on loan sold.

And we think that there is still some reasonably low hanging fruit because those things tend do, they tend to get away from you in rising tide. When everything’s going well and volumes are ridiculously high and gross selling prices are astronomical, some of those things just get to be taken for granted as the cost of doing business. When the tide goes out, which was a refi tight, which will certainly happen now you get a lot more focused on all those revenue detractors or slippage factors. And we’ve got awful lot of people on the operation side looking at all those, so I would expect to see that being immediately evident in the December and the March quarters.

Daniel Cardenas - Raymond James

All right. And then, I guess how much of that is going to be, as you make additional investments into loan production offices throughout the Midwest, as you go after the purchase money mortgage market.

Gary Douglass

It should be -- I think there is a lot more opportunity to ring out unproductive costs than what will be the cost of the new offices because we’ve gotten pretty good at being able to open those rather efficiently. I think we get nothing but better at it, the more we practice.

Paul Milano

Yes. Lot of new mortgage office costs are variable. So I mean, we signed relatively expensive leases and drive it with commissions primarily.

Daniel Cardenas - Raymond James

And then is it safe to assume that the impact of these offices, actually, I don’t know if it’s really going to be felt more on the -- in the back half of fiscal 2014?

Gary Douglass

Absolutely. I think as I told Brian, I think it was Brian that asked or maybe didn’t ask. I told him anyway. The mortgage plan is a clearly a more backend loaded plan because of the recent and quick demise of refinance activity coupled with the fact that when you do bring in new production and/or new offices, it does take. There is at least a minimum of the three-month period of time before you start seeing meaningful contributions to those. So I do think it's safe to assume that our mortgage plan will be backend loaded.

Paul Milano

I think we’ve said this several times in the past but I think it's probably important to reiterate our strategy is really not to point to a new market and go try to find someone there. It's really as Gary said earlier, it’s opportunistic, if we find a good producer, a team of producers that becomes our new office. So those people are more likely to be able to get started quickly and trying to sign a lease and find somebody to step it up.

Gary Douglass

We don't do that.

Daniel Cardenas - Raymond James

Okay. And then I guess one last question and I’ll step back, given a building capital base and maybe perhaps a little bit of slowness in early into the first half of this coming year. What are your thoughts about the additional redemptions on your outstanding preferred stock balance?

Paul Milano

Yes. Its good, good question. I’ll go along and I think I was pretty clear last time is that we still like to get -- with $17.3 million left, we'd like to get two thirds of that type thing knocked out before re-prices in January 2014. The weapon of choice would most likely be some type of holding company debt.

Obviously, there's some subjectives there, subject to getting it and subject to getting in approved by the Federal Reserve in terms of allowing us to swap in that particular case debt for equity but if all goes according to plan, we should have a what I would call like fairly nominal amount of that leftover to carry in to calendar 2014 or may not have any because we also may talk to some of our holders to see if they want to do a debt for equity, I mean, a swapping conversion from preferred to common.

But the goal all along was to have a nominal amount, if any left over going into calendar 2014, where we wouldn’t really have much of an earnings impact going forward. And you would be able to, if you chose to not get out over the remaining, four, five, six quarters through again earnings.

Daniel Cardenas - Raymond James

Great. Thanks guys.

Gary Douglass

Thanks, Dan.

Operator

Your next question comes from the line of [Carsen Lapido].

Gary Douglass

Good morning.

Unidentified Analyst

Good morning. Thank you for taking the question. I just want to follow up on refinance activity with the recent decline in rates. Would you be able to provide any guidance regarding any pickup of activity take a back of activity in the last couple of weeks?

Gary Douglass

We'll were hoping -- we haven't seen a lot as of yet. We've obviously reminded our loan officers that the -- the rates backing off again, it would be a good time to get the virtual rolodex app and start doing a little piling for dollars because I think some of the economic reports that are out there. I think there could be an opportunity for -- it would be in my opinion over in many ways as compared to what we’ve had but I think there could be of some opportunities to at least revive what has been pretty much a non event.

I mean, there has been very little -- there were some in the quarter you saw but if you really get down to current activity toward the end of the quarter. I mean, it’s been -- there has been days when I can look across the street to our St. Louis mortgage division and know there’s been no refinances in the pipeline at all which is highly unusual.

So I think there could be an opportunity to pluck off a little that’s kind of, like free money if that happens.

Unidentified Analyst

Excellent. Thank you for your color.

Gary Douglass

Thank you.

Operator

(Operator Instruction)

Gary Douglass

Well, it sounds like Tunisia that there are no further questions. So let me take just a moment and thank everyone again for being with us today. We look forward to our next call in January and as always in the interim, if anyone has any further questions or comments please feel free to contact Paul or me. So that concludes it from our perspective, Tunisia.

Operator

And this does conclude today’s interactive broadcast, you may disconnect.

Gary Douglass

Thank you.

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