SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF the SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
OR
[ ] TRANSITION REPORT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-17103
Pioneer Financial Corporation
(Exact name of registrant as specified in its charter)
Virginia 54-1439439
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
5601 Ironbridge Parkway, Chester, VA 23831
(Address of principal executive office) Zip Code
Registrant's telephone number, including area code: (804) 748-9733
Common Stock ($1.00 par value per share)
(Title and Class)
Indicate by using an X 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
As of August 8, 1994 there were issued and outstanding 2,352,857 shares of
the common stock of Pioneer Financial Corporation.
PIONEER FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Statements of Financial Condition,
June 30, 1994 (unaudited) and
September 30, 1993 3
Statements of Operations, Three Months
and Nine Months Ended June 30, 1994 and
1993 (unaudited) 4
Statement of Stockholders' Equity
(unaudited), June 30, 1994 5
Statements of Cash Flows, Nine Months
Ended June 30, 1994 and 1993 (unaudited) 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
PART II. OTHER INFORMATION 20
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3 Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security
Holders
Item 5. Other Materially Important Events
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
Consolidated Statements of Financial Condition
Dollars in Thousands - Except Per Share Amounts
(Unaudited)
Assets June 30, 1994 Sept. 30, 1993
Cash 1,676 2,309
Interest bearing deposits 9,778 22,640
Federal funds sold 1,003 197
Securities
Held to maturity (estimated market value of $65,278 70,275 488
and $488)
Available for sale (cost of $58,372 and $135,294) 56,457 136,403
Loans receivable, net 204,458 210,399
Investment in Federal Home Loan Bank stock 6,935 6,763
Real estate, net:
Acquired in settlement of loans 409 506
In-substance foreclosure - 3,277
Held for development or resale 15,221 14,319
Properties and equipment, net 4,137 4,327
Accrued interest receivable :
Loans 1,774 2,249
Securities and other interest-earning assets 1,232 945
Prepaid expenses and other assets 3,379 3,826
Total Assets 376,734 408,648
Liabilities and Stockholders' Equity
Liabilities:
Deposits 297,005 313,674
Securities sold under agreements to repurchase
and other borrowings 6,562 10,300
Advances from Federal Home Loan Bank 20,000 30,000
Advance payments by borrowers for taxes and insurance 931 1,013
Other liabilities 1,312 3,525
Total Liabilities 325,810 358,512
Stockholders' Equity:
Common stock 2,351 2,342
Additional capital 5,873 5,811
Retained earnings 43,891 41,423
Net unrealized gain (loss) on securities available for sale (1,191) 560
Total Stockholders' Equity 50,924 50,136
Total Liabilities and Stockholders' Equity 376,734 408,648
Book value, per share 21.66 21.40
Consolidated Statements of Operations (Unaudited)
Dollars in Thousands - Except Per Share Amounts
Three Months Ended Nine Months Ended
June 30, 1994 June 30, 1993 June 30, 1994 June 30, 1993
Interest income
Loans receivable
Real estate loans 4,189 4,687 12,920 13,392
Other loans 402 386 1,213 1,033
Securities
Held to maturity 1,016 846 2,196 4,358
Available for sale 666 2,141 2,660 4,394
Trading - 8 3 10
Other interest-earning assets 132 158 582 1,155
Total interest income 6,405 8,226 19,574 24,342
Interest expense
Deposits 3,032 3,340 9,369 10,251
Short term borrowings 231 813 756 2,495
Long term borrowings - 316 - 2,101
Total interest expense 3,263 4,469 10,125 14,847
Net Interest Income 3,142 3,757 9,449 9,495
Provision for loan losses (50) 156 56 356
Net interest income after provision
for loan losses 3,192 3,601 9,393 9,139
Noninterest income
Gain (loss) from securities
Held to maturity - - 18 176
Available for sale - 698 242 1,750
Trading - (70) 67 (73)
Gain on sale of loans 72 268 450 600
Loan servicing fees 314 152 868 747
Income (loss) from real estate operations 63 (351) (413) (1,451)
Deposit servicing fees 109 111 356 343
Other 12 361 56 466
Total noninterest income 570 1,169 1,644 2,558
Noninterest expense
Compensation and employee benefits 1,088 1,136 3,336 3,432
Occupancy 448 524 1,367 1,588
Advertising 30 81 221 354
Data processing services 25 38 82 116
Insurance 268 246 785 756
Other 957 352 1,680 1,422
Total noninterest expense 2,816 2,377 7,471 7,668
Income before income taxes 946 2,393 3,566 4,029
Income taxes 28 755 746 1,157
Net income before extraordinary items 918 1,638 2,820 2,872
Extraordinary items:
Penalty from early extinguishment of
Federal Home Loan Bank advances
(net of tax benefit of $1,358) - 2,216 - 2,216
NET INCOME 918 (578) 2,820 656
Earnings per common share
Income before extraordinary item 0.38 0.68 1.15 1.18
Extraordinary item - (0.92) - (0.92)
Earnings per common share 0.38 (0.24) 1.15 0.26
Dividends paid per common share 0.05 - 0.15 0.10
Average shares outstanding 2,463,371 2,408,828 2,452,359 2,440,502
Consolidated Statement Of Stockholders' Equity (Unaudited)
(Dollars in Thousands)
As of June 30, 1994 Net Unrealized
Gain (Loss) on
Securities Total
Common Additional Retained Available for Stockholders'
Stock Capital Earnings Sale Equity
Balance at
September 30, 1993 2,342 5,811 41,423 560 50,136
Net income for the nine
months ended June 30, 1994 - - 2,820 - 2,820
Cash Dividends -
Common Stock,
$0.15 per share - - (352) - (352)
Stock options exercised 9 62 - - 71
Net unrealized gain
(loss) on securities
available for sale - - - (1,751) (1,751)
Balance at June 30, 1994 2,351 5,873 43,891 ( 1,191) 50,924
Consolidated Statements of Cash Flow
(Dollars in Thousands) Nine Months Ended Nine Months Ended
June 30, June 30,
1994 1993
Operating Activities
Net income (loss) 2,820 656
Adjustments
Purchase of trading account securities (14,751) (110,876)
Proceeds from sale of trading account securities 14,818 110,873
Provision for losses 334 1,551
Gain on sale of assets (759) (1,842)
Amortization and depreciation 343 514
(Increase) decrease in accrued interest receivable (188) (882)
Other (1,423) (1,709)
Net Cash Provided (Absorbed) By Operating Activities 1,194 (1,715)
Investing Activities
Purchase of securities
Investment - (121,183)
Held for sale (120,619) (111,910)
Proceeds from sale of securities
Investment 483 176
Held for sale 122,565 159,047
Proceeds from principal payments and maturities of securities
Investment 740 5,405
Held for sale 4,673 32,333
Proceeds from sale of loans 27,949 34,503
Loan originations and principal payments on loans (21,312) (64,870)
Proceeds from sale of real estate 5,020 5,421
Proceeds from sale (purchase) of Federal Home Loan Bank stock (172) (283)
Other (2,439) (1,606)
Net Cash Provided (Absorbed) By Investing Activities 16,888 (62,967)
Financing Activities
Net increase (decrease) in deposits (16,669) 13,142
Repurchase of common and preferred stock - (1,039)
Cash dividends paid on common stock (352) (246)
Repayments of Federal Home Loan Bank advances (10,000) (63,000)
Proceeds from securities sold under agreements
to repurchase and from other borrowings 155,547 176,620
Payments on securities sold under agreements to
repurchase and other borrowings (159,285) (165,858)
Decrease in escrow deposits (82) (319)
Other 70 -
Net Cash Absorbed By Financing Activities (30,771) (40,700)
Increase in Cash and Cash Equivalents (12,689) (105,382)
Cash and Cash Equivalents - beginning of year 25,146 122,776
Cash and Cash Equivalents - end of year 12,457 17,394
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
The condensed consolidated financial statements included herein have
been prepared by Pioneer Financial Corporation (the "Corporation" or "Pioneer
Financial"), without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). Pioneer Financial is the
Holding company of Pioneer Federal Savings Bank (the "Bank" or "Pioneer
Federal"), and Pioneer Properties Inc. (a real estate brokerage company).
The majority of the earnings and performance figures herein reflect the
results of Pioneer Federal. Pioneer Federal is a federally chartered savings
bank with executive and administrative offices in Chester, Virginia, which
conducts business through a total of 11 full service retail banking offices
located in central Virginia in the cities of Richmond, Colonial Heights,
Petersburg and Hopewell, Virginia; the counties of Chesterfield and Henrico;
and the town of Chase City, Virginia. The Savings Bank, through a wholly
owned subsidiary also has a separate mortgage loan production office in
Henrico county.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the results of operations
for the applicable periods have been made. All significant intercompany
balances and transactions have been eliminated in consolidation. Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have
been condensed or omitted pursuant to such rules and regulations, although
the Company believes that the disclosures are adequate to make the
information presented not misleading.
It is suggested that these condensed consolidated financial statements
be read in
conjunction with the consolidated financial statements and the
notes thereto in the Company's Annual Report to Stockholders for the year
ended September 30, 1993, filed with the SEC on or about December 28, 1993.
The results for the period covered hereby will not necessarily be indicative
of the operating results for the full year ending September 30, 1994.
PIONEER FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A--Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management
of Pioneer Financial Corp., all adjustments necessary for a fair presentation
of the financial statements have been included. The results of operations
for the nine month period ended June 30, 1994 are not necessarily indicative
of the results which may be expected for the entire year. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's annual report on Form 10-K for the year
ended September 30, 1993.
Note B--Per Share Data
Earnings per share is computed by dividing earnings by the weighted
average number of shares outstanding during the period. For the three and
nine months ended June 30, 1994 the weighted average number of shares of
common stock was adjusted for the effects of existing stock options, which
are considered common stock equivalents. The calculation of earnings per
share for the three and nine months ended June 30, 1993 did not include the
existing stock options as their dilutive effect was less than three percent.
The weighted average number of shares of common stock outstanding were
2,452,359 and 2,440,502 for the nine months ended June 30, 1994 and 1993,
respectively.
Note C--Transfers from loans to real estate acquired through foreclosure
amounted to approximately $88,000 and $182,000 for the nine months ended June
30, 1994 and 1993 respectively. Transfers from loans to real estate
insubstance foreclosed amounted to $56,000 and $0 for the nine months ended
June 30, 1994 and 1993, respectively, while real estate insubstance
foreclosed transferred to real estate acquired through foreclosure amounted
to approximately $3,570,000 and $6,506,000 for the nine months ended June 30,
1994 and 1993, respectively. Real estate acquired through foreclosure
reclassified to real estate held for development amounted to $5,664,000 for
the nine months ended June 30, 1993. There were no such reclassifications
in 1994.
Note D--Cash and Equivalents
For the purpose of reporting cash flows, the Corporation considers all
highly liquid debt instruments, such as federal funds and overnight deposits,
to be cash equivalents.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
This Management's Discussion and Analysis should be read in conjunction
with the Management's Discussion and Analysis contained in the company's
Annual Report to Stockholders, which focuses upon relevant matters occurring
during the year commencing October 1, 1992 and ending September 30, 1993.
Accordingly, the ensuing discussion focuses upon material matters at and for
the nine months ended June 30, 1994.
General.
Pioneer Financial was incorporated in Virginia in November 1987 and
became the sole shareholder of Pioneer Federal Savings Bank ("Pioneer
Federal"). Presently, the primary business of Pioneer Financial is the
business of Pioneer Federal. Pioneer Financial also owns Pioneer Properties
Inc. which is a real estate brokerage company. At June 30, 1994, the
Corporation had assets of $376.7 million, total deposits of $297.0 million
and stockholders' equity of $50.9 million.
Management estimates that Pioneer Federal has approximately 45.2%
(approximately $115.1 million) of the total financial institution deposits
in the city of Hopewell, Virginia, where it operates its main office and a
branch office. The Savings Bank was chartered as a mutual association in
1933, and became a member of the Federal Home Loan Bank System in 1934. In
July 1984 Pioneer Federal converted to a federal capital stock savings and
loan association and in June 1988 changed its name to Pioneer Federal Savings
Bank upon conversion to a federal capital stock savings bank.
Merger
On February 16, 1994, Pioneer Financial entered into a Reorganization
and Merger Agreement (the "Agreement") providing for the acquisition of
Pioneer Financial by Signet Banking Corporation ("Signet"). The Agreement
provides for the exchange of .6232 shares of Signet common stock, subject to
adjustment under certain conditions, for each share of Pioneer Financial's
common stock, resulting in a price per share of $23.68 based upon the closing
Signet stock price on February 16, 1994. Also as of February 16, 1994,
Pioneer Financial and Signet executed an Option Agreement whereby Pioneer
Financial granted Signet an option to acquire 467,013 shares of Pioneer
Financial's common stock at a price of $21.75 per share, exercisable under
certain specified conditions. All required regulatory approvals have been
received. The acquisition pursuant to the Agreement is subject to the
ratification of various conditions, including the approval of the
shareholders of Pioneer Financial at a meeting to be held on August, 1994.
Further, the acquisition must be consummated not later than December 31,
1994. Management estimates that the acquisition will be completed by
September, 1994.
Changes in Financial Condition
Total assets decreased $31.9 million or 7.8% at June 30, 1994 as
compared to total assets at September 30, 1993. Cash and interest bearing
deposits (down $633,000 and $12.9 million, respectively, for the nine month
period) combined with proceeds from the sale of and principal repayments on
securities and loans were used to repay $11.1 million of Federal Home Loan
Bank ("FHLB") advances and other borrowings and to provide for deposit
withdrawals (deposits were down $16.7 million from September 30, 1993). Also
the Corporation (during the March, 1994 quarter) reclassified approximately
$71.0 million of securities from the available for sale to the held to
maturity category of securities. The net unrealized loss on these securities
($22,000) was recorded as a decrease to shareholders' equity, and will be
amortized into expense over the remaining life of the securities.
Stockholders' Equity increased ($788,000 or 1.6%) as net income for the
nine month period of $2,820,000 was partially offset by three regular
quarterly $0.05 per share common stock dividends totalling $352,000, as well
as an adjustment for the net unrealized loss on securities available for sale
($1,191,000 at June 30, 1994).
Results of Operations for the Three and Nine Months Ended March 31, 1994
The Corporation's results of operations are dependent to a large extent
on its net interest income, which is the difference between the interest
income it receives on its interest-earning assets (principally loans and
securities) and the interest expense, or cost of funds, of its
interest-bearing liabilities (principally deposits and, to a lesser extent,
FHLB
advances and other borrowings). Banking fees, service charges, and other
income; gains or losses on the sale of loans and other assets, and the level
of general and operating expenses (non-interest expense) also have
significant effects on the Corporation's results of operations.
Net Income. The Corporation recorded net income of $936,000 or $.38 per
share for the quarter ended June 30, 1994 as compared to a loss of $578,000
or $.24 per share for the prior year's second quarter. This increase was
mainly attributable to an after tax extraordinary loss of $2,216,000 incurred
during the three months ended June 30, 1993 related to prepayment penalties
charged by the FHLB for the early payoff of the debt. For the nine months
ended June 30, 1994 the Corporation recorded net income of $2,820,000 or
$1.15 per share compared to a net income for the same period a year earlier
of $656,000 or $.26 per share. This increase was also related to prepayment
penalties incurred in the prior year as well as a decrease in required
provisions for loan losses during the current year.
Interest Income. Interest income on all interest earning assets was $6.4
million for the quarter ended June 30, 1994 as compared to $8.2 million for
the comparable period in 1993, a decrease of $1.8 million or 22.1%. A $5.0
million increase in the average outstanding balance of loans for the current
quarter was not enough to offset an 11.1% decrease in the average yield
thereon. The majority of this decrease in interest income, however, was the
result of a $68.7 million decrease in the average outstanding balance and a
14.6% decrease in the average yield of securities. Total interest income
from securities amounted to $1.7 million for the three months ended June 30,
1994 as compared to $3.0 million for the three months ended June 30, 1993.
Interest income on all interest earning assets for the nine months ended
June 30, 1994 was $19.6 million, a decrease of approximately $4.8 million or
19.6% over the same period in 1993. Although there was a very slight (6
basis points) increase in the average yield on interest earning assets, a
17.2% decrease in the average outstanding balance of these assets resulted
in the decrease in total interest income. For the nine months ended June 30,
1994 the average balance of all interest earning assets was $371.1 millon
yielding 7.0%, compared to $448.4 million yielding 7.0% in the previous
year.
This $77.3 million decrease in the average balance of all interest earning
assets related to funds used to prepay debt during the year ended September
30, 1993.
For the nine month period ended June 30, 1994 interest income on loans
decreased by approximately $292,000 or 2.0% for the current year. While
average loans outstanding increased 8.9% for the nine month period, the
average yield on these loans decreased 8.7%. For the same two periods,
interest on securities decreased $3.9 million, the direct result of a 37.4%
decrease in the average outstanding balance as well as a 11.2% decrease in
average yield. Interest income on other interest earning assets (FHLB stock,
federal funds sold, and cash) decreased approximately $572,000 or 49.6% due
mainly to a 41.5% decrease in the average outstanding balance of these
assets.
Interest Expense. Total interest expense decreased from $4.5 million
for the quarter ended June 30, 1993 to $3.3 million for the current quarter,
a decrease of almost 27.0%. The majority of this decrease was directly
attributable to a 79.6% decrease in interest expense paid on borrowings.
Total interest on borrowings decreased by $898,000 during the current
quarter, the direct result of prepaying $45.5 million of FHLB advances in
June, 1993 at an after tax penalty of $2.2 million as well as repaying, upon
maturity, $47.5 million in additional debt with the FHLB. $10.0 million of
such debt was paid in October, 1993, and the remainder had been repaid during
the year ended September 30, 1993. Interest expense on deposits decreased
$307,000 or 9.2% for the current three month period due mainly to a 5.8%
decrease in the average cost of deposits.
Interest expense for the nine months ended June 30, 1994 decreased
approximately $4.7 million or 31.8% over the similar period in 1993. A 8.2%
decrease in average cost of deposits combined with a $3.1 million decrease
in average outstanding balance resulted in total interest expense on deposits
decreasing by approximately $882,000 or 8.6%. For the nine months ended June
30, 1994, deposits averaged $310.9 million at an average cost of 4.0%,
compared to an average balance of $313.9 million and an average cost of 4.4%
for the comparable period in 1993. Total interest on borrowings decreased
by over $3.8 million or 83.6%, the direct result of prepaying FHLB advances
as discussed in the preceding paragraph.
Net Interest Margin. Although net interest margin decreased $616,000
or 16.4% for the quarter ended June 30, 1994, net interest spread remained
unchanged at 2.9% for both periods. (See table below)
Although significant decreases were experienced for the nine months
ended June 30, 1994 in both interest income and interest expense, net
interest margin decreased only $46,000 or less than .5%. Net interest spread
has increased from 2.3% for the nine months ended June 30, 1993 to 3.0% for
the current nine month period, reflecting a more rapid decline in the cost
of liabilities than the decline in yield on assets.
The following table sets forth information concerning the yields
earned on interest earning assets, the rates paid on interest bearing
liabilities and the resultant net interest rate spread for the three and nine
month periods ended June 30, 1994 and 1993. The yields earned and rates paid
are based on average balances.
Three Months Ended Nine Months Ended
June 30 June 30
1994 1993 1994 1993
Interest-earning assets:
Real estate loans 8.20% 9.29% 8.46% 9.29%
Other loans 9.42% 9.92% 9.08% 9.81%
Mortgage-backed securities 6.85% 6.35% 6.50% 6.48%
Securities held to maturity 4.28% 9.39% 4.21% 8.68%
Securities available for sale 4.79% 4.39% 4.75% 4.42%
Other investments 4.63% 4.01% 3.81% 3.52%
Total interest-earning assets 6.92% 7.37% 6.97% 7.02%
Interest-bearing liabilities
Deposits 4.01% 4.25% 4.04% 4.40%
Borrowings 3.71% 5.17% 3.28% 5.73%
Total interest-bearing liabilities 3.98% 4.45% 3.98% 4.74%
Net interest rate spread 2.93% 2.92% 2.98% 2.28%
Provision for Possible Loan Losses and Other Asset Valuation Allowances.
Due to an overall improvement in the status of the Savings Bank's classified
assets, the provision for loan loss was favorable $51,000 (recoveries and the
reversal of a portion of a previous provision exceeded chargeoffs) for the
June 1994 quarter versus a provision of $156,000 for the June 1993 quarter.
For the nine months ended June 30, 1994 provisions for loan loss totalled
$56,000 as compared to $356,000 for the same period last year. Through the
Corporation's Asset Classification Policy, management will continue to
monitor the loan portfolio as well as other assets on a quarterly basis and
evaluate the adequacy of total valuation allowances.
Other Income. Other income of $589,000 for the three months ended June
30, 1994 was a $581,000 decrease over the same period in 1993. Gains on the
sale of securities decreased to $19,000 for the current quarter from
$628,000 for the similar period in 1993. A decrease in gain on the sale of
loans ($196,000) was almost offset by an increase in loan servicing fees
($162,000). Likewise a $414,000 decrease in expenses incurred in the day to
day operations of Real Estate Held, both for development and acquired in
settlement of loans, was partially offset by decreases in other income
($348,000).
Other income was $1,645,000 for the nine months ended June 30, 1994, a
decrease of approximately $913,000 from the nine months ended June 30, 1993.
Included in this decrease are gains from the sale of securities totalling
only $328,000 for the nine months ended June 30, 1994, versus $1,854,000 for
the same period in 1993. This decrease was partially offset by a decrease
in expenses incurred in the day to day operations of Real Estate Held, both
for development and acquired in settlement of loans (loss from real estate
operations decreased almost $1,038,000 for the nine month period).
Other Expenses. Other expenses increased $440,000 or 18.5% for the
three months ended June 30, 1994. With the exception of insurance (which
includes insurance on deposits) and other expenses, all other categories of
noninterest expense decreased for the current quarter.
In March 1994, the Corporation discovered that one of Pioneer Federal's
customers was apparently engaged in "kiting" checks drawn on another
financial institution and deposited in its account at Pioneer Federal. As
a result, an overdraft was created in the approximate amount of $1.9
million.
In order to avoid the expense and uncertainties of litigation, Pioneer
Federal entered into a settlement agreement pursuant to which it received
$1.3 million to settle the claims that Pioneer Federal made against the
parties involved. The Corporation recorded a charge to earnings of
approximately $632,000 for the three months ended June 30, 1994, which is
included in "other" expenses.
Had it not been for the $632,000 charge to other expenses as discussed
in the previous paragraph, all categories of noninterest expense (with the
exception of insurance) would have decreased for the nine months ended June
30, 1994. Noninterest expenses totalled $7,472,000 for the nine months ended
June 30, 1994 as compared to $7,668,000 for the same nine month period in
1993.
Securities.
Securities as of June 30, 1994 were as follows (dollars in thousands):
As of June 30, 1994
Gross
Unrealized Estimated
Amortized Gains Market
Cost (Losses) Value
Held to maturity
Mortgage-backed securities 20,503 (1,428) 19,075
United States Treasury 49,772 (3,569) 46,203
Total Held to Maturity 70,275 (4,997) 65,278
Available for sale
Mortgage-backed securities 854 23 877
Corporate notes 2,001 9 2,010
United States Treasury 24,944 (1,836) 23,108
Asset management fund 25,050 (475) 24,575
Other securities 5,523 364 5,887
Total - Available for sale 58,372 (1,915) 56,457
Total securities 128,647 (1,912) 121,735
Subsequent to June 30, 1994 the Corporation sold approximately $55.3 of
securities classified as Available for Sale for a realized after tax loss of
$1,323,000. Proceeds from the sales were reinvested in overnight
investments.
Asset and Liability Management. Management of the Savings Bank strives
to manage the maturity or repricing match between assets and liabilities.
The degree to which Pioneer Federal is "mismatched" in its maturities is the
primary measure of interest rate risk. In periods when long-term interest
rates are higher than short-term interest rates, net interest income can be
increased through the financing of long-term assets with short-term deposits
and borrowings. Although such a strategy may increase profits in the short
run, it increases the risk of exposure to rising interest rates and can
result in funds costs rising faster than asset yields.
The Savings Bank's efforts to match the repricing maturities of assets
and liabilities are hampered by the lack of demand for mortgages or assets
which would re-price often enough to offer protection against rate changes
and certificates of deposit with lengthy maturities. The percentage of asset
tests imposed by the Internal Revenue code and applicable law require
significant investments in residential loans, thus slowing the Savings Bank's
effort to enlarge its portfolios of assets which re-price quickly and offer
a reasonable return.
The most common measure of interest rate risk is the gap ratio, i.e.,
the difference between interest-earning assets and interest-bearing
liabilities that reprice or mature within one year expressed as a percent of
total assets. Typically the closer the gap ratio is to zero, the less
sensitive is a company's earnings to moderate changes in interest rates.
Pioneer Federal's one year cumulative gap ratio at June 30, 1994 was
- -0.46%.
The following table provides information as of June 30, 1994
on the maturity and repricing interval of the Savings Bank's assets and
liabilities, based on their contractual term to maturity and the interest
sensitivity gap of the Savings Bank's assets and liabilities.
MATURITY/REPRICING INTERVAL
Less Than 6 Months 1 to 3 3 to 5 5 to 10 Greater Than
6 Months to 1 Year Years Years Years 10 Years Total
(Dollars in Millions)
Interest-Earning Assets
Mortgage Loans 74.9 27.8 15.0 6.9 4.9 56.6 186.1
Mortgage-Backed Securities - - 0.9 - 19.2 1.3 21.4
Other Loans 8.9 0.1 1.6 2.2 1.2 4.3 18.3
Investment Securities/FHLB Stock 53.3 - 6.9 51.8 0.3 - 112.3
Federal Funds Sold 1.0 - - - - - 1.0
Other Earning Assets 9.8 - - - - - 9.8
Total Interest-Earning Assets 147.9 27.9 24.4 60.9 25.6 62.2 348.9
Interest-Bearing Liabilities Deposits
Deposits
Demand Deposits 4.6 3.6 7.5 2.0 4.5 - 22.2 (1)
Savings Accounts 5.3 4.9 15.5 10.1 24.3 - 60.1 (1)
Money Market Demand Accounts 24.3 11.1 5.0 2.3 2.0 - 44.7 (1)
Certificates of Deposit 56.7 40.3 37.9 35.2 - - 170.1
Notes Payable 6.6 - - - - - 6.6
FHLB Advances 20.0 - - - - - 20.0
Total Interest-Bearing Liabilities 117.5 59.9 65.9 49.6 30.8 - 323.7
Interest Sensitivity Gap 30.4 (32.0) (41.5) 11.3 ( 5.2) 62.2 25.2
Cumulative Gap 30.4 ( 1.6) (43.1) (31.8) (37.0) 25.2
Ratio of Interest-Earning Assets to
Interest-Bearing Liabilities 1.26 0.47 0.37 1.23 0.84 0.00 1.08
Cumulative Ratio of Interest-Earning
Assets to Interest-Bearing Liabilities 1.26 0.99 0.82 0.89 0.89 1.08
Cumulative GAP as a Percent of
Total Earning Assets 8.71% -0.46% -12.35% -9.11% -10.60% 7.22%
<FN>
(1) Repricing of these three types of deposits (demand, savings and money
market demand) are based on repricing assumptions as of March 31,
1994 furnished by the FHLB of Atlanta through their interest rate risk
service.
Real Estate Investment. The Savings Bank's investment in real estate
ventures increased at June 30, 1994 to $15.2 million as compared to $14.3
million at September 30, 1993.
Federal Home Loan Bank System. Pioneer Federal is a member of the FHLB
System and, as a member, is required to own capital stock in the FHLB of
Atlanta in an amount at least equal to the greater of 1% of the aggregate
outstanding balance of its loans secured by residential real property at the
close of each year, or 5% of its outstanding advances from the FHLB of
Atlanta. As a member of the FHLB System, Pioneer Federal is authorized to
borrow funds from the FHLB of Atlanta to meet withdrawals of savings
accounts, seasonal requirements, and to expand its loan portfolio. At
June 30, 1994, Pioneer Federal owned $6,935,000 of stock and had advances
from the FHLB of $20,000,000, which mature in August of 1994.
Asset Classification. Pursuant to applicable regulations, the Savings
Bank has adopted a policy concerning the classification of problem assets.
Under the policy, problem loans and other assets are classified in three
categories: (i) Substandard, (ii) Doubtful, and (iii) Loss.
An asset is classified Substandard if it is determined to involve a
distinct possibility that the Savings bank could sustain some loss if
deficiencies associated with the loan are not corrected. An asset is
classified as Doubtful if full collection is highly questionable or
improbable. An asset is classified as Loss if it is considered
uncollectible, even if a partial recovery could be expected in the future.
All assets classified as loss are 100% reserved. The Savings Bank also
evaluates assets deserving "special mention" which, while not necessarily
exposing the Savings Bank to loss, do possess credit deficiencies or
potential weaknesses deserving management's close attention. If an asset is
classified pursuant to the Savings Bank's policies (or by regulatory
examiners) general valuation allowances ("GVA's") are then established. (See
Valuation Allowances).
Total classified assets have decreased $12.8 million or 47.9% for the
nine month period ended June 30, 1994, comprised of a $13.7 million decrease
in substandard assets and a $964,000 increase in loss assets. The following
table details information concerning the Savings Bank's classified assets at
June 30, 1994, and the ratio of classified assets to total assets:
Substandard Doubtful Loss Total
(Dollars in Thousands)
Commercial real estate 8,681 - 1,151 9,832
Mortgage loans 709 - 709
Construction Loans - - - -
Other loans 248 - 27 275
Real estate held for development 1,468 - 1,066 2,534
Real estate owned 409 - 100 509
Total Classified Assets 11,515 - 2,344 13,859
Ratio of Classified
Assets to Total Assets 3.06% - 0.62% 3.68%
Non-Performing Assets. Loans are reviewed on a regular basis and are
placed on a non-accrual status when, in the opinion of management, the
collection of additional interest is doubtful. Residential mortgage loans
are placed on non-accrual status when either principal or interest is 90 days
or more past due unless collectability is assured in the near future.
Consumer loans generally are charged off when the loan becomes over 120 days
delinquent. Commercial, business and real estate loans are placed on
non-accrual status when the loan is 90 days or more past due, unless
circumstances require alternate treatment ( a loan can be past due more than
90 days and still be accruing interest). Interest accrued and unpaid at the
time a loan is placed on non-accrual status is charged against interest
income.
The following table sets forth information with respect to the Savings
Bank's non-performing loans at the dates indicated.
06/30/94 09/30/93 09/30/92 09/30/91
Loans accounted for on a
non-accrual basis:
Real Estate:
Residential 95 91 376 1,893
Commercial 6,753(1) - 243 1,545
Commercial Business - 363 391 1,144
Consumer - - 17 21
Total 6,848 454 1,027 4,603
Accruing loans which are
contractually past due
90 days or more:
Real Estate:
Residential 613 143 322 582
Commercial - 3,998 - -
Commercial Business 250 238 849 -
Consumer - - - -
Total 863 4,379 1,171 582
Total of nonaccrual and
90 days past due loans 7,711(2) 4,833 2,198 5,185
Percentage of Total Loans 3.77% 2.30% 1.33% 2.92%
<FN>
(1) At June 30, 1994 Pioneer Federal was involved in negotiations with the
borrower regarding the repayment of this loan secured by an office
building that has since been demolished because of its proximity to a
sinkhole that developed in February, 1994. Subsequent to June 30, 1994
insurance proceeds were received and the loan, which had been previously
written down, was paid off.
<FN>
(2) Nonperforming loans which are classified assets as well are as
follows:
Special Mention 5,989
Substandard 951
Doubtful -
Loss 771
Total 7,711
Valuation Allowances. It is the Savings Bank's policy to establish
specific valuation allowances for loss against specific assets based on
current appraisals, discounted cash flow analysis and other factors when
possible losses are indicated on the loans or other assets. At June 30, 1994
allowances related to specific assets (loans and real estate) amounted to
$3.1 million.
In addition to specific valuation allowances, the Corporation also
calculates general valuation allowances ("GVA's") using two methods. The
first method applies certain percentages to classified asset balances which
have first been reduced for any specific valuation allowances. GVA's of
this type totalled $1.5 million at June 30, 1994. In addition to this type
of GVA, the Corporation also calculates GVA's on pass and unreviewed assets
(all assets that are not classified), based on, among other factors,
historical loss experience for each type of loan, trends in connection with
portfolio amounts and composition, and current economic conditions relating
to the collectability of loans in the portfolio. GVA's of this type totalled
$1.4 million at June 30, 1994. Total valuation allowances, both specific
and general, totalled $6.0 million at June 30, 1994.
The following table sets forth the breakdown of the allowance for losses
by category at the dates indicated.
Analysis of Valuation Allowances
Specific Valuation Allowances 6/30/94 9/30/93 9/30/92
Loans:
Residential Mortgage 56 38 356
Commercial Mortgage 1,151 653 739
Construction - - -
Commercial Business 38 100 146
Consumer 20 73 183
Total Specific Valuation Allowance - Loans 1,265 864 1,424
Percent of Total Loans 0.6% 0.4% 0.8%
Real Estate
In-substance Foreclosure - - -
Real Estate Held for Development 1,138 807 154
Real Estate Owned 100 431 841
Total Specific Valuation Allowance - Real Estate 1,238 1,238 995
Percent of Total Real Estate 7.9% 6.8% 4.3%
Other Assets 632 - -
Percent of Related Other Asset 32.7% - -
Total Specific Valuation Allowance 3,135 2,102 2,419
Percent of Total Loans/Real Estate/Other Assets 1.4% 0.9% 1.3%
General Valuation Allowances
Loans:
Residential Mortgage 182 112 107
Commercial Mortgage 1,732 2,012 2,614
Construction 463 441 117
Commercial Business 178 191 67
Consumer 14 22 115
Total GVA - Loans 2,569 2,778 3,020
Percent of Total Loans 1.3% 1.3% 1.8%
Real Estate:
In-substance Foreclosures - 364 -
Real Estate Held for Development 264 722 -
Real Estate Owned 41 118 -
Total GVA - Total Real Estate 305 1,204 -
Percent of Total Real Estate 2.0% 6.7% -
Total GVA's 2,874 3,982 3,020
Percent of Total Loans/Real Estate and Other 1.3% 1.7% 1.6%
Total Valuation Allowances 6,009 6,084 5,439
Percent of Total Loans/Real Estate and Other 2.6% 2.7% 2.9%
Real Estate Owned. Real estate owned includes property acquired in
settlement of loans and loans classified as insubstance foreclosure.
Properties acquired in settlement of loans and loans classified as
in-substance foreclosure are initially valued at the lower of cost or fair
value
based on available appraisals at foreclosure or in consideration of estimated
sales price and costs of disposal as well as the estimated cost of holding
and maintaining the property. Carrying values are periodically adjusted to
the lower of the adjusted cost or net realizable value throughout the
remaining holding period. Loans classified as insubstance foreclosures
consist of loans accounted for as foreclosed property even though legal
foreclosure has not occurred. Although the collateral underlying these loans
has not been repossessed, the borrower has no equity in the collateral at its
current estimated fair value, proceeds for repayment are expected to come
only from the operation or sale of the collateral, and either the borrower
has abandoned control of the project or it is doubtful the borrower will
rebuild equity in the collateral or repay the loan by other means in the
foreseeable future.
During the year ended September 30, 1993, the Corporation determined
that seven loans with outstanding balances of $3,767,331 had been insubstance
foreclosed, and, although formal foreclosure proceedings had not been
initiated, the investment in the loans had been reported in the same manner
as collateral that has been formally repossessed, regardless of whether the
related loan is formally restructured. Of the seven properties, six were
sold during the quarter ended December 31, 1993. The remaining property, at
a carrying value of $3.4 million was formally foreclosed upon during the
quarter ended March 31, 1994. During the quarter ended June 30, 1994 this
property was sold at no additional loss to the Corporation. As of June 30,
1994 there were no loans classified as insubstance foreclosed.
The following table sets forth the balances in repossessed property at
June 30, 1994, and the allowance for loss by type of property.
Less: Less: Net
Asset Specific General Carrying
Balances Allowance Allowance Value
(Dollars in Thousands)
Real Estate Owned
Single Family Residential 88 3 8 77
Multi-Family Residential - - - -
Construction 116 30 9 77
Commercial 305 67 24 214
Total Real Estate Owned 509 100 41 368
Liquidity and Capital Resources. Under current regulations the Savings
Bank is required to maintain liquid assets at 5% or more of its net
withdrawable deposits plus short-term borrowings. With total liquidity of
29.3% at June 30, 1994, the Savings Bank more than met the 5% requirement.
At June 30, 1993, the Savings Bank had outstanding loan commitments totalling
$4.2 million.
On August 9, 1989, the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 ("FIRREA") was enacted into law to restructure the
regulation of the thrift industry. The legislation affects the thrift
industry in several ways, including more stringent capital requirements and
new investment limitations and restrictions. On November 8, 1989, the OTS
published a final rule implementing three new capital standards. The
regulation requires institutions to have a minimum regulatory tangible
capital of 1.5% of total assets, a minimum core capital ratio of 3.0%, and,
as of December 31, 1992, a 8.0% risk-based capital ratio.
The following table sets forth the capital position of the Savings Bank
as calculated under FIRREA as of June 30, 1994, (in thousands):
Actual % of Required % of Excess % of
Amount Assets(1) Amount Assets(1) Amount Assets(1)
Core 34,918 9.27% 11,218 3.00% 23,700 6.27%
Tangible 34,918 9.27% 5,609 1.50% 29,309 7.77%
Risk-weighted 37,528 17.58% 17,073 8.00% 20,455 9.58%
<FN>
(1) Based upon adjusted total assets for the core and tangible capital
requirements, and risk-weighted assets for the risk-based capital
requirement.
The OTS has recently adopted an amendment to its risk-based capital
requirements that will, effective September 30, 1994, require savings
institutions with more than a "normal" level of interest rate risk to
maintain additional total capital. A savings institution's interest rate
risk will be measured in terms of the sensitivity of its "net portfolio
value" to changes in interest rates. Net portfolio value is defined,
generally, as the present value of expected cash inflows from existing assets
and off-balance sheet contracts less the present value of expected cash
outflows from existing liabilities. A savings institution will be considered
to have a "normal" level of interest rate risk exposure if the decline in its
net portfolio value after an immediate 200 basis point increase or decrease
in market interest rates (whichever results in the greater decline) is less
than two percent of the current estimated economic value of its assets. A
savings institution with a greater than normal interest rate risk will be
required to deduct from total capital, for purposes of calculating its
risk-based capital requirement, an amount (the "interest rate risk
component")
equal to one-half the difference between the institution's measured interest
rate risk and the normal level of interest rate risk, multiplied by the
economic value of its total assets.
The OTS will calculate the sensitivity to a savings institution's net
portfolio value based on data submitted by the institution in a schedule to
its quarterly Thrift Financial Report and using the interest rate risk
measurement model aadopted by the OTS. The amount of the interest rate risk
component, if any, to be deducted from a savings institution's total capital
will be based on the institution's Thrift Financial Report filed two quarters
earlier.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Corporation, the Savings Bank, and subsidiary
thereof are defendants in certain claims and legal actions
arising in the ordinary course of business including legal
proceedings wherein the Savings Bank enforces its security
interest in mortgage loans. In the opinion of management,
after consultation with legal counsel, the ultimate
disposition of these matters is not expected to have a
material adverse effect on the consolidated financial position
of the Corporation.
Item 2. Changes in Securities
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
Item 5. Other Information
Not Applicable.
Item 6. Exhibits and Report on Form 8-K
Not Applicable.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PIONEER FINANCIAL CORPORATION
(Registrant)
Date August 12, 1994 By: \s\ G. R. Whittemore
G. R. Whittemore
President and Chief Executive Officer
Date August 12, 1994 By: \s\ H. Lee Rettig
H. Lee Rettig
Chief Accounting Officer