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 December 31, 1997.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-28076
PIONEER FINANCIAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
KENTUCKY 61-1273657
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
25 EAST HICKMAN STREET, WINCHESTER, KENTUCKY 40391
- -------------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (606) 744-3972
--------------
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 ninety days. Yes X No
--- ---
As of February 10, 1998, 208,233 shares of the registrant's common stock were
issued and outstanding.
Page 1 of 13 Pages
CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1997 (unaudited)
and September 30, 1997........................................... 3
Consolidated Statements of Income for the Three Month Periods
Ended December 31, 1997 and 1996 (unaudited)..................... 4
Consolidated Statements of Cash Flows for the Six-Month Periods
Ended December 31, 1997 and 1996 (unaudited)..................... 5
Notes to Consolidated Financial Statements....................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 12
Item 2. Changes in Securities............................................ 12
Item 3. Defaults Upon Senior Securities.................................. 12
Item 4. Submission of Matters to a Vote of Security Holders.............. 12
Item 5. Other Information................................................ 12
Item 6. Exhibits and Reports on Form 8-K................................. 12
SIGNATURES
PIONEER FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
----------------
AS OF AS OF
DECEMBER 31, SEPTEMBER 30,
ASSETS 1997 1997
------------ ------------
(unaudited)
Cash $ 800,569 $ 1,188,974
Interest bearing deposits 1,887,967 1,138,456
Federal Funds sold 475,000 7,151,000
Available-for-sale securities 5,407,655 5,949,386
Held-to-maturity securities 26,430,359 22,621,995
Loans receivable, net 34,337,567 34,490,871
Loans held for sale 90,000 152,750
Accrued interest receivable 486,776 455,824
Premises and equipment, net 1,347,996 1,412,264
Prepaid expenses and other assets 269,643 263,944
----------- -----------
Total assets $71,533,532 $74,825,464
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $60,827,000 $64,585,148
FHLB Advances 644,103 652,225
Advance payments by borrowers for taxes and insurance 14,226 39,607
Federal income tax payable 528,366 216,675
Other liabilities 216,740 593,611
----------- -----------
Total liabilities 62,230,435 66,087,266
----------- -----------
Stockholders' equity:
Common stock, $1 par value, 500,000 shares authorized;
208,233 shares issued and outstanding 208,233 208,233
Additional paid-in capital 1,797,432 1,797,432
Retained earnings, substantially restricted 7,408,673 6,957,353
Unallocated Employee Stock Ownership Plan (ESOP) stock (183,442) (224,922)
Net unrealized appreciation on available-for-sale securities 72,201 102
----------- -----------
Total stockholders' equity 9,303,097 8,738,198
----------- -----------
Total liabilities and stockholders' equity $71,533,532 $74,825,464
=========== ===========
See accompanying notes to consolidated financial statements.
3
PIONEER FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
----------------
FOR THE THREE-MONTH PERIODS
ENDED DECEMBER 31
---------------------------
1997 1996
------------ -------------
Interest income:
Interest on loans $ 765,291 $ 774,912
Interest and dividends on securities 441,568 520,871
Other interest income 72,527 64,416
---------- ----------
Total interest income 1,279,386 1,360,199
---------- ----------
Interest expense:
Interest on deposits 642,840 653,463
Interest on FHLB advances 10,721 15,231
---------- ----------
Total interest expense 653,561 668,694
---------- ----------
Net interest income: 625,825 691,505
Provision for loan losses
Net interest income after provision for loan losses 625,825 691,505
---------- ----------
Non-interest income:
Loan and other service fees, net 74,001 93,940
Gain (loss) on sale of fixed assets (654)
Gain (loss) on sale of loans 20,973 27,020
Gain (loss) on sale of branch 567,614
---------- ----------
Total non-interest income 661,934 120,960
---------- ----------
Non-interest expense:
Compensation and benefits 271,944 242,204
Occupancy expense 43,200 40,646
Office supplies and postage 29,098 21,764
Federal and other insurance premiums 19,949 38,116
Advertising 6,451 5,398
Data processing expense 44,894 33,632
State franchise tax 16,530 16,386
Legal fees 10,301 1,653
Other operating expense 39,017 28,824
---------- ----------
Total non-interest expense 481,384 428,623
---------- ----------
Income before income tax expense 806,375 383,842
Provision for income taxes 274,171 122,772
---------- ----------
Net income $ 532,204 $ 261,070
========== ==========
Earnings per common share $2.62 $1.25
========== ==========
Earnings per common share assuming dilution $2.62 $1.25
========== ==========
See accompanying notes to consolidated financial statements.
4
PIONEER FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE-MONTHS ENDING
DECEMBER 31,
---------------------------
1997 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 532,204 $ 261,070
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses
Amortization of investment premium (discount) 21,875 7,881
Amortization of organizational cost 3,377 3,377
Provision for depreciation 16,453 13,205
Gain on sale of branch (567,614)
Amortization of loan fees (36,756) (27,900)
FHLB stock dividend (10,100) (9,100)
Securities gain (loss)
Loans originated for sale (2,014,475) (2,078,431)
Proceeds from loans held for sale 2,035,448 2,084,121
Loans held for sale (gain) loss (20,973) (27,101)
ESOP benefit expense 5,241
Change in:
Income taxes payable 274,549 3,467
Interest receivable (30,952) 38,874
Interest payable 14,592 14,976
Accrued liabilities (391,463) (480,058)
Prepaid expense (3,062) 105,198
----------- -----------
Net cash provided by operating activities (171,656) (90,421)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in loans 252,810 1,068,499
Matured held-to-maturity securities 748,183
Purchase of held-to-maturity securities (4,644,116) (4,986,379)
Sale of FHLB stock
Purchase of premises and equipment (9,571) (334)
Purchase of available-for-sale securities
Sale of available-for-sale securities
Principal repayments on securities 1,468,149 1,254,913
----------- -----------
Net cash (used) by investing activities (2,932,728) (1,915,118)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits, NOW accounts and savings accounts (1,528,493) 449,577
Net increase (decrease) in certificates of deposit (2,229,655) (59,904)
Payments on FHLB advances (8,122) (15,200)
Cash dividend payments (80,884) (72,882)
Net increase (decrease) in custodial accounts (25,380) (10,237)
Proceeds from sale of branch 625,000
Payment on ESOP loan 37,024
----------- -----------
Net cash provided (used) by financing activities (3,210,510) 291,354
----------- -----------
Increase (decrease) in cash and cash equivalents (6,314,894) (1,714,185)
Cash and cash equivalents, beginning of period 9,478,430 5,473,454
----------- -----------
Cash and cash equivalents, end of period $ 3,163,536 $ 3,759,269
=========== ===========
Supplemental disclosures:
The Bank made no income tax payments during the three month periods ended
December 31, 1997 and 1996, respectively.
The Bank paid $638,969 and $668,694 in interest on deposits and other
borrowings during the three month periods ended December 31, 1997 and 1996,
respectively.
See accompanying notes to consolidated financial statements.
5
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Pioneer Financial Corporation (the "Company") was formed at the direction
of Pioneer Federal Savings Bank (the "Bank") to become the holding company
of the Bank, which was completed on December 24, 1994 under an Agreement
and Plan of Reorganization, dated October 31, 1994. Since the
Reorganization, the Company's primary assets have been the outstanding
capital stock of the Bank, and its sole business is that of the Bank.
Accordingly, the consolidated financial statements and discussions herein
include both the Company and the Bank.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
("GAAP") 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 GAAP for complete
financial statements. In the opinion of management, all adjustments
(consisting of only normal recurring accruals) necessary for fair
presentation have been included. The results of operations and other data
for the three month periods ended December 31, 1997 are not necessarily
indicative of results that may be expected for the entire fiscal year
ending September 30, 1998.
2. EARNINGS PER SHARE
Earnings per common share for the three month periods ended December 31,
1997 and 1996 amounted to $2.62 and $1.25 per share, respectively, based on
weighted average common stock shares outstanding. The weighted average
number of common shares outstanding for the three month periods ended
December 31, 1997 and 1996 was 203,361 and 208,233 shares, respectively.
Shares of common stock held by the ESOP are considered outstanding when
they are committed to be released.
3. DIVIDENDS
The Company paid dividends of $0.40 per share or $80,884 for the three
month period ended December 31, 1997 compared to $0.35 per share or $72,882
for the same period in 1996.
6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION
Total assets decreased $3.3 million, or 4.4%, from $74.8 million at September
30, 1997 to $71.5 million at December 31, 1997. The decrease primarily reflected
a $6.3 million decrease in cash and cash equivalents offset by 3.3 million
increase in investment securities. The decrease in assets was due primarily to
the transfer of deposits to the Purchaser as part of the sale of the Stanton
Branch bank.
The Company's aggregate investment securities portfolio increased $3.3 million,
or 11.4%, to $31.8 million at December 31, 1997 from $28.6 million at September
30, 1997. Securities classified as available-for-sale and recorded at market
value per SFAS No. 115 decreased $541,000, due to a $613,000 decrease in
principal repayments and amortization of investment premiums offset by a $72,000
increase due solely to the increase in the market value of such securities.
Securities classified as held-to-maturity increased $3.8 million due to an
increase of $4.6 million from the purchase of a FHLB Note and two municipal
bonds offset by a decrease of $800,000 due the principal repayments and
amortization of investment premiums.
Under SFAS No. 115, unrealized gains or losses on securities available-for-sale
are recorded net of deferred income tax as a separate component of stockholders'
equity. At December 31, 1997, the Company included net unrealized gains of
approximately $72,000 in stockholders' equity. At September 30, 1997, the
Company included net unrealized gains of approximately $100 in stockholders'
equity. Per SFAS No. 115, such gains or losses will not be reflected as a charge
or credit to earnings until the underlying securities are sold, and then only to
the extent of the amount of gain or loss, if any, actually realized at the time
of sale.
Deposits decreased $3.8 million, or 5.8%, from $64.6 million at September 30,
1997 to $60.8 million at December 31, 1997. This decrease was primarily due to
the sale of the Company's branch office in Stanton, Kentucky. The agreement to
sell the Stanton Branch was finalized October 29, 1997, whereby the Bank
transferred to the Purchaser deposits totaling $4.9 million. In addition, loans
secured by deposits transferred in the agreement totaling $34,000 and property
and equipment having a book value of approximately $50,000 were included in the
sale. The net gain realized by the Bank in connection with this sale was
$568,000. The $4.9 million deposits transferred in connection with this sale
amounted to approximately 7.6% of the Bank's total deposits.
Stockholders' equity increased approximately $565,000, or 6.4%, to $9.3 million
at December 31, 1997 compared to $8.7 million at September 30, 1997. The
increase was due to net income of $532,000, an increase of $72,000 in net
unrealized appreciation on investments held-for-sale and an increase of $42,000
related to the ESOP's release of shares from collateral offset by a decrease of
$81,000 due to the payment of dividends.
7
The following summarizes the Bank's capital requirements and position at
December 31, 1997 and September 30, 1997.
DECEMBER 31, 1997 SEPTEMBER 30, 1997
----------------- ------------------
(DOLLARS IN THOUSANDS)
AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------ -------
Tangible capital $9,012 12.60% $8,638 11.50%
Tangible capital requirement 1,079 1.50% 1,123 1.50%
------ ----- ------ -----
Excess $7,933 11.10% $7,515 10.00%
====== ===== ====== =====
Core capital $9,012 12.60% $8,638 11.50%
Core capital requirement 2,159 3.00% 2,245 3.00%
------ ----- ------ -----
Excess $6,853 9.60% $6,393 8.50%
====== ===== ====== =====
Tangible capital $9,012 30.10% $8,638 28.60%
General valuation allowance 375 1.25% 378 1.20%
------ ----- ------ -----
Total capital 9,387 31.35% 9,016 29.8%
Risk-based capital requirement 2,395 8.0% 2,419 8.0%
------ ----- ------ -----
Excess $6,992 23.35% $6,597 21.8%
====== ===== ====== =====
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
NET INCOME. Net income increased $271,000 for the quarter ended December 31,
1997 to $532,000, compared to $261,000 for the same period in 1996. The net
increase of $271,000 was due to an increase of $541,000 in non-interest income
offset by a decrease of $66,000 in net interest income, an increase in non-
interest expense of $53,000 and an increase of $151,000 in income tax expense.
The increase in non-interest income included a gain of $567,000 from the sale of
the branch bank located in Stanton, Kentucky. Net income for the quarter ended
December 31, 1997, excluding the net gain on the sale of the branch was $157,579
compared to $261,070 for the same period in 1996.
NET INTEREST INCOME. Net interest income decreased $66,000 or 9.5% to $626,000
for the quarter ended December 31, 1997 compared to $692,000 for the same period
in 1996. The decrease of $66,000 was due to a decrease in interest income of
$81,000 offset by a decrease of $15,000 in interest expense for 1997 compared to
1996.
INTEREST INCOME. Interest income decreased $81,000 for the quarter ended
December 31, 1997 compared to the same period in 1996. Interest income was $1.3
million, or 7.71% of average interest-earning assets for the quarter ended
December 31, 1997 as compared to $1.4 million, or 7.59% of interest-bearing
assets for the quarter ended December 31, 1996. The decrease in interest income
of $81,000 was due to a decrease in the average balance of interest-earning
assets of $5.4 million offset by the increase of 12 basis points on the average
rate earned on interest earning assets for the quarter ended December 31, 1997
compared to the same period in 1996.
INTEREST EXPENSE. Interest expense decreased $15,000 for the quarter ended
December 31, 1997 compared to the same period in 1996. Interest expense was
$654,000, or 4.29% of average deposits and FHLB advances for the quarter ended
December 31, 1997 as compared to $669,000, or 4.07% for the quarter ended
December 31,
8
1996. The decrease of $15,000 was due to a $4.7 million decrease in the average
balance of interest-bearing liabilities during the quarter ended December 31,
1997 compared to the same period in 1996 offset by a 22-basis point increase in
the average rate paid on interest-bearing liabilities.
PROVISION FOR LOAN LOSSES. There was no provision for loan losses for the
quarters ended December 31, 1997 and 1996. Management considers many factors in
determining the necessary level of the allowance for loan losses, including an
analysis of specific loans in the portfolio, estimated value of the underlying
collateral, assessment of general trends in the real estate market, delinquency
trends, prospective economic, and regulatory conditions, inherent loss in the
loan portfolio, and the relationship of the allowance for loan losses to
outstanding loans. There can be no assurance that management will not decide to
increase the allowance for loan losses or that regulators, when reviewing the
Bank's loan portfolio in the future, will not request the Bank to increase such
allowance, either of which could adversely affect the Bank's earnings. Further,
there can be no assurance that the Bank's actual loan losses will not exceed its
allowance for loan losses.
NON-INTEREST INCOME. Non-interest income amounted to $662,000 and $121,000 for
the quarters ended December 31, 1997 and 1996, respectively. For the quarter
ending December 31, 1997, the Bank recognized a gain of $568,000 from the sale
of its branch office in Stanton, Kentucky, which is included in non-interest
income. The gain on the sale of the branch totaling $568,000 was offset by a
decrease in loan and deposit fees of $20,000 plus a decrease in the gain on sale
of loans of $7,000 in comparing the quarter ended December 31, 1997 to the same
period in 1996.
NON-INTEREST EXPENSE. Non-interest expense totaled $482,000 and $429,000 for
the three months ended December 31, 1997 and 1996, respectively, an increase of
$53,000, or 12.3%, and such expense amounted to 2.6% and 2.3% of average assets
for the three months ended December 31, 1997 and 1996, respectively. The
increase was primarily due to an increase in compensation and benefits of
$30,000, an increase in data processing of $11,000 and an increase of $30,000 in
other non-interest expenses offset by a decrease of $18,000 in federal insurance
premiums. The increase in compensation and benefits was primarily due to
payments of employee bonuses of $33,000 plus an increase of $5,000 related to
the Employee Stock Option Plan in 1997 that was not incurred in the December 31,
1996 quarter. The increase of $11,000 in data processing was due to special
reports ran by the service bureau related to the sale of the branch. The
decrease in federal insurance premiums was the result of the 1996
recapitalization of the SAIF insurance fund, which resulted in lower assessments
on the Bank's deposit base.
INCOME TAX EXPENSE. The provision for income tax expense amounted to $274,000
and $123,000 for the quarters ended December 31, 1997 and 1996, respectively,
which as a percentage of income before income tax expense amounts to 34.4% for
1997 and 32.0% for 1996.
9
NON-PERFORMING ASSETS
The following table sets forth information with respect to the Bank's non-
performing assets at the dates indicated. No loans were recorded as restructured
loans within the meaning of SFAS No. 15 at the dates indicated.
DECEMBER 31, 1997 SEPTEMBER 30 1997
----------------- -----------------
(amounts in thousands)
Loans accounted for on a non-accrual basis:/1/
Real estate:
Residential.................................... $ 3 $ 3
Commercial.....................................
Consumer......................................... 1 3
---- ----
Total........................................ $ 4 $ 6
==== ====
Accruing loans which are contractually past due
90 days or more:
Real estate:
Residential.................................... 203 149
Commercial.....................................
Consumer.........................................
---- ----
Total........................................ 203 149
==== ====
Total of loans accounted for as non-accrual or as
accruing past due 90 days or more................ $207 $155
==== ====
Percentage of total loans.......................... .60% .45%
==== ====
Other non-performing assets/2/..................... $ $
==== ====
/1/ Non-accrual status denotes loans which management believes may have
defined weaknesses whereby accrued interest is inadequately protected
by the current net worth and paying capacity of the obligor, or of the
collateral pledged.
/2/ Loans more than 90 days past due will continue to accrue interest when
there is no well defined weakness in the loan regarding net worth
and paying capacity of the obligor or of the collateral pledged which would
cause management to believe that interest accrued will be uncollectible.
If income on non-accrual loans had been accrued, such income would have amounted
to approximately $4,482 for the three month period ended December 31, 1997.
At December 31, 1997, there were no loans identified by management, which were
not reflected in the preceding table, but as to which known information about
possible credit problems of borrowers caused management to have serious doubts
as to the ability of the borrowers to comply with present loan repayment terms.
MORTGAGE BANKING ACTIVITY. Mortgage loans of $2.0 million were originated for
sale during the three month period ended December 31, 1997; the Bank retained
the servicing for all loans sold.
10
The portfolio of loans owned by others, but serviced by the Bank decreased 1.0%
to $51.7 million at December 31, 1997 compared to $52.2 million at September 30,
1997. All of the loans serviced by the Bank, but owned by others, were
originated by the Bank.
LIQUIDITY AND CAPITAL RESOURCES. The Bank's principal sources of funds for
operations are deposits from its primary market area, principal, and interest
payments on loans, and proceeds from maturing investment securities. The
principal uses of funds by the Bank include the origination of mortgage and
consumer loans and the purchase of investment securities.
The Bank is required by current OTS regulations to maintain specified liquid
assets of at least 4% of its net withdrawable accounts plus short-term
borrowings. Short-term liquid assets (those maturing in one year or less) may
not be less than 1% of the Bank's liquidity base. At December 31, 1997, the
Bank's liquidity was 19.48%. Management believes that the liquidity levels
maintained are adequate to meet potential deposit outflows, loan demand, and
normal operations.
The bank must satisfy three capital standards, as set by the OTS. These
standards include a ratio of core capital to adjusted total assets of 3.0%, a
tangible capital standard expressed as 1.5% of total adjusted assets, and a
combination of core and "supplementary" capital equal to 8.0% of risk-weighted
assets. At December 31, 1997, the Bank's capital was in excess of these
requirements.
At September 30, 1997, the Bank had outstanding commitments to originate loans
totaling $4.3 million, excluding $699,000 in approved, but unused home equity
lines of credit and $1.9 million in approved, but unused lines of credit. Of the
loan commitments, the Bank anticipates selling $3.8 of the loans approved, but
not closed. Management believes that the Bank's sources of funds are sufficient
to fund all of its outstanding commitments. Certificates of deposit, which are
scheduled to mature in one year or less from December 31, 1997, totaled $27.9
million. Management believes that a significant percentage of such deposits will
remain with the Bank.
IMPACT OF INFLATION AND CHANGING PRICES. The consolidated financial statements
and notes thereto presented herein have been prepared in accordance with
generally accepted accounting principles, which require the measurement of
financial position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
due to inflation. The impact of inflation is reflected in the increased cost of
the Company's operations. Unlike most industrial companies, nearly all the
assets and liabilities of the Company are monetary in nature. As a result,
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the price of goods and services.
11
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS None
Item 2. CHANGES IN SECURITIES None
Item 3. DEFAULTS UPON SENIOR SECURITIES None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None
Item 5. OTHER INFORMATION None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(1) The following exhibit is filed herewith:
Exhibit 27: Financial Data Schedule
(2) No Form 8-K was filed for the quarter ended December 31, 1997.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PIONEER FINANCIAL CORPORATION
Date: /s/ Carl C. Norton, Pres.
---------------------------------------
Carl C. Norton, President
(Duly Authorized Officer)
Date: /s/ Carolyn O. Vermillion
---------------------------------------
Carolyn O. Vermillion, Controller
(Principal Financial and Accounting Officer)
13