- Pulaski Financial Corp. reported Q3 '14 earnings.
- In line with my concerns, deposits continued to fall, forcing the bank to turn to more expensive debt to fund portfolio growth.
- Provisions look light and the allowance balance begs for a higher charge that could net out any benefits from preferred share redemptions.
Like a lot of other small regional banks this earnings season, Pulaski Financial Corp. (NASDAQ:PULB) beat last quarter's bottom line, but this period fell short of the results turned in during the same quarter last year. Despite missing earnings forecasts, this quarter saw a significant increase in mortgage revenues (up 146% from prior quarter), and management seems to be pretty confident that shareholders will see earnings continue to grow, as the momentum from this line builds into the next period. I'm not too quick to rally behind anything mortgage related just yet, but this is positive news that was accompanied with a material increase in asset quality (nonperforming assets down 15%).
When I initiated coverage on the bank in late June, I voiced concerns about the lack of deposit growth, coupled with significant additions to the loan portfolio. And, this quarter, deposits actually declined which, coupled with loan growth of $65.4 million, pushed the bank's loan to deposit ratio up to 109%. Needing funding to support the loan growth, the bank had to increase borrowed money by 35.7%, to $224 million. Stepping back a little, significant growth in the loan portfolio should add to net interest income, but this quarter's results showed interest revenue down $4.5 million YOY, and net interest income down $3.34 million.
Management announced that it recently completed an exchange offer and private placement of common stock that "should" result in redemption of all of the remaining preferred stock (could be announced any day). This is very positive news, and a move that will help the bank save ~$175 thousand a quarter, but I still see the bank facing significant headwinds over the course of the next few periods. $175 thousand will help, but investors need time to see how safe the growing loan portfolio is. Earnings were down by $435 thousand YOY, and 3Q 2013's provision charge was $1.6 million larger. The reality is that the bank is adding risk whenever the portfolio increases with additional assets that come with lower yields. Allowances stand at $16.8 million, short of covering nonperforming loans of $23.6 million, and non-performing assets of $31 million. Next quarter we will need to see massive quality improvements to be able to realize any benefits from the redemption of the preferred shares, because provisions could tick up by multiples of the amount saved from the absence of preferred dividend payments.