<PAGE>
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 June 30, 1996.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 33-85958
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 July 30, 1996, 208,233 shares of the registrant's common stock were issued
and outstanding.
Page 1 of 17 Pages Exhibit Index at Page N/A
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CONTENTS
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1996 (unaudited)
and September 30, 1995............................................................. 3
Consolidated Statements of Income for the Three and
Nine-Month Periods Ended June 30, 1996 and 1995 (unaudited)........................ 4
Consolidated Statements of Cash Flows for the Nine-Month Periods Ended
June 30, 1996 and 1995 (unaudited)................................................. 5
Notes to Consolidated Financial Statements............................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................. 8
PART II OTHER INFORMATION
-----------------
Item 1. Legal Proceedings........................................................................ 16
Item 2. Changes in Securities.................................................................... 17
Item 3. Defaults Upon Senior Securities.......................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders...................................... 17
Item 5. Other Information........................................................................ 17
Item 6. Exhibits and Reports on Form 8-K......................................................... 17
SIGNATURES
</TABLE>
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PIONEER FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
----------------
<TABLE>
<CAPTION>
AS OF AS OF
JUNE 30, SEPTEMBER 30,
ASSETS 1996 1995
- ------ ------------- -------------
(unaudited)
<S> <C> <C>
Cash $ 685,597 $ 790,037
Interest bearing deposits 8,664,705 4,874,490
Certificates of deposit 194,000 288,000
Federal Funds Sold 4,146,092
Available-for-sale securities 7,976,650 5,468,682
Held-to-maturity securities 24,555,081 33,207,364
Loans receivable, net 33,827,387 32,026,342
Loans held for sale 72,649 187,363
Accrued interest receivable 589,155 675,154
Premises and equipment, net 1,136,319 1,177,412
Prepaid expenses and other assets 35,725 141,074
----------- -----------
Total assets $81,883,360 $78,835,918
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $69,224,011 $67,087,921
FHLB Advances 709,979 742,430
Advance payments by borrowers for taxes and insurance 21,424 23,396
Federal income tax payable 281,185 128,034
Other liabilities 645,189 314,359
----------- -----------
Total liabilities 70,881,788 68,296,140
----------- -----------
Stockholders' equity:
Common stock, $1 par value, 500,000 shares authorized;
272,477 shares issued and outstanding 272,477 272,477
Additional paid-in capital 2,351,858 2,351,858
Retained earnings, substantially restricted 8,374,403 7,907,176
Net unrealized appreciation on
available-for-sale securities 2,834 8,267
----------- -----------
Total stockholders' equity 11,001,572 10,539,778
----------- -----------
Total liabilities and stockholders' equity $81,883,360 $78,835,918
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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PIONEER FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE-MONTH PERIODS FOR THE NINE-MONTH PERIODS
ENDED JUNE 30, ENDED JUNE 30,
----------------------------- ---------------------------
1996 1995 1996 1995
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Interest income:
Interest on loans $ 772,802 $ 722,580 $2,273,106 $2,055,108
Interest and dividends on securities 523,241 598,080 1,656,206 1,841,664
Other interest income 136,645 110,932 362,021 305,741
---------- ---------- ---------- ----------
Total interest income 1,432,688 1,431,592 4,291,333 4,202,513
---------- ---------- ---------- ----------
Interest expense:
Interest on deposits 711,222 674,913 2,141,973 1,860,837
Interest on FHLB advances 11,501 12,215 35,043 37,134
---------- ---------- ---------- ----------
Total interest expense 722,723 687,128 2,177,016 1,897,971
---------- ---------- ---------- ----------
Net interest income: 709,965 744,464 2,114,317 2,304,542
Provision for loan losses 8,433 12,000 27,433 17,000
---------- ---------- ---------- ----------
Net interest income after provision
for loan losses 701,532 732,464 2,086,884 2,287,542
---------- ---------- ---------- ----------
Non-interest income:
Loan and other service fees, net 104,397 101,385 301,112 291,827
Gain (loss) on sale of securities 0 0 33,310 1,822
Gain (loss) on sale of loans 8,291 12,691 7,415 15,742
---------- ---------- ---------- ----------
Total non-interest income 112,688 114,076 341,837 309,391
---------- ---------- ---------- ----------
Non-interest expense:
Compensation and benefits 231,813 236,495 660,887 647,612
Occupancy expense 40,159 50,442 137,576 138,339
Office supplies and postage 25,479 26,133 84,077 73,309
Federal and other insurance premiums 43,637 43,847 131,112 127,193
Advertising 5,918 4,579 19,322 20,584
Data processing expense 33,132 33,245 99,097 104,602
State franchise tax 16,386 15,632 48,404 48,777
Legal fees 14,283 12,535 32,677 91,043
Other operating expense 22,352 28,948 66,994 79,387
---------- ---------- ---------- ----------
Total non-interest expense 433,159 451,856 1,280,146 1,330,846
---------- ---------- ---------- ----------
Income before income tax expense 381,061 394,684 1,148,575 1,266,087
Provision for income taxes 133,261 138,275 400,651 437,233
---------- ---------- ---------- ----------
Net income $ 247,800 $ 256,409 $ 747,924 $ 828,854
========== ========== ========== ==========
Earnings per share $0.91 $.94 $2.74 $3.04
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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PIONEER FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
-----------------------
<TABLE>
<CAPTION>
FOR THE NINE-MONTHS ENDING
JUNE 30
1996 1995
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 747,924 $ 828,854
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 27,433 17,000
Amortization of investment premium (discount) 136,115 98,354
Provision for depreciation 50,795 33,474
Amortization of loan fees (72,114) (70,699)
FHLB stock dividend (27,400) (27,600)
Securities gain (loss) (33,310) (1,822)
Loans originated for sale (8,107,526) (3,055,035)
Proceeds from loans held for sale 8,114,941 3,070,777
Loans held for sale (gain) loss (7,415) (15,742)
Change in:
Income taxes payable 155,950 83,546
Interest receivable 85,999 (57,917)
Interest payable 40,085 18,967
Accrued liabilities 290,745 (41,705)
Prepaid expense 105,304 21,190
----------- ------------
Net cash provided by operating activities 1,507,526 901,642
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in loans (1,641,650) (3,164,054)
Matured certificates of deposit 94,000
Matured held-to-maturity securities 14,660,085 7,560,000
Purchase of held-to-maturity securities (9,984,665) (13,806,328)
Sale of FHLB stock 55,200 92,400
Purchase of premises and equipment (9,702) ( 11,124)
Purchase of available-for-sale securities (3,614,506)
Sale of available-for-sale securities 4,511,167
Principal repayments on securities 4,944,564 2,692,296
----------- ------------
Net cash (used) by investing activities 4,503,326 (2,125,643)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits, NOW accounts
and savings accounts 2,519,351 (2,021,130)
Net increase (decrease) in certificates of deposit (383,262) 3,124,744
Payments on FHLB advances (32,451) (4,172)
Cash dividend payments (280,651) (261,578)
Net increase (decrease) in custodial accounts (1,972) 22,318
----------- ------------
Net cash provided (used) by financing activities 1,821,015 860,182
----------- ------------
Increase (decrease) in cash and cash equivalents 7,831,867 (363,819)
Cash and cash equivalents, beginning of period 5,664,527 6,904,464
----------- ------------
Cash and cash equivalents, end of period $13,496,394 $ 6,540,645
=========== ============
</TABLE>
Supplemental disclosures:
The Bank made income tax payments of $385,000 and $457,000 during the nine
month periods ended June 30, 1996 and 1995, respectively.
The Bank paid $2,136,931 and $1,862,545 in interest on deposits and other
borrowings during the nine month periods ended June 30, 1996 and 1995,
respectively.
See accompanying notes to consolidated financial statements.
5
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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; The reorganization 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 and nine month periods ended June 30, 1996 are not
necessarily indicative of results that may be expected for the entire
fiscal year ending September 30, 1996.
2. EARNINGS PER SHARE
------------------
Earnings per share for the three and nine month periods ended June 30, 1996
amounted to $0.91 and $2.74 per share, respectively, based on weighted
average common stock shares outstanding. Earnings per share for the three
and nine month periods ended June 30, 1995 amounted to $.94 and $3.04 per
share, respectively, based on weighted average common stock shares
outstanding. The weighted average number of common shares outstanding for
the three and nine month periods ended June 30, 1996 and 1995 was 272,477
shares.
3. DIVIDENDS
---------
The Company paid dividends of $0.35 per share or $95,367 for the three
month period ended June 30, 1996 compared to $0.33 per share or $89,917 for
the same period in 1995. The Company paid dividends of $1.03 per share or
$280,651 for the nine month period ended June 30, 1996 compared to $0.96
per share or $261,578 for the same period in 1995.
4. IMPAIRED LOANS
--------------
In May 1993, the FASB issued SFAS No. 114 "Accounting by Creditors for
Impairment of a Loan." In October 1994, this statement was amended by SFAS
No. 118 "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosure." SFAS No. 114 as amended generally requires
that
6
<PAGE>
impaired loans be measured based on the present value of the loan's
expected future cash flows discounted at the loan's effective interest
rate. The measurement of impairment for loans that are collateral dependent
may be based on the fair value of the collateral. If the present value or
the fair value of the collateral is less than the recorded investment in
the loan, an impairment will be recognized. This statement as amended
allows a creditor to use existing methods for recognizing interest income
on an impaired loan. Both of these statements are effective for financial
statements for fiscal years beginning after December 15, 1994. The Company
adopted these standards on October 1, 1995.
The Company has defined its population of impaired loans as consisting of
all loans in a non-accrual status. Non-accrual loans, are loans which
management believes may have defined weaknesses whereby it is probable that
all amounts due under the contractual terms of the agreement will not be
collected. Generally, these are loans which are past due as to maturity or
payment of principal or interest for a period of more than 90 days unless
such loans are well-secured and in the process of collection. Payments
received on these loans are either applied to the outstanding principal
balance or recorded as interest income, or both, depending on assessment of
the collectibillity of the loan. Loans may be returned to accrual status
when all principal and interest amounts contractually due (including
arrearage) are reasonably assured of repayment within an acceptable period
of time, combined with sustained repayment performance by the borrower.
As of June 30, 1996, the total amount of impaired loans was $40,932 for
which an allowance for loan losses of $40,932 has been provided. The
average balance of impaired loans for the nine months ended June 30, 1996
was $45,788. There was no interest income from cash receipts on impaired
loans for the three months ended June 30, 1996. The following summarizes
the activity in the allowance for loan losses for the nine months ended
June 30, 1996.
<TABLE>
<CAPTION>
ALLOWANCES FOR GENERAL
LOSSES ON ALLOWANCE FOR
IMPAIRED LOANS LOAN LOSSES TOTAL
--------------- -------------- --------
<S> <C> <C> <C>
Balance, September 30, 1995 $ $ 352,244 $ 352,244
Additions 40,932 (13,499) 27,433
Charge-offs (15,279) (15,279)
Recoveries 5,034 5,034
----------- ----------- -----------
Balance, June 30, 1996 $ 40,932 $ 328,500 $ 369,432
=========== =========== ===========
</TABLE>
7
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5. SUBSEQUENT EVENT
----------------
On July 5, 1996 the Company purchased 64,244 shares of its common stock at
$41.50 per share for a total price of $2,666,126, pursuant to an agreement
approved by the Board of Directors of the Company on October 17, 1995.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The Company's consolidated assets increased $3.1 million, or 3.9% to $81.9
million, at June 30, 1996 compared to $78.8 million at September 30, 1995.
Available-for-sale securities increased $2.5 million, held-to-maturity
securities decreased $8.7 million, loans increased $1.8 million, cash and cash
equivalents plus certificates of deposit increased $7.7 million, and other non-
interest earning assets decreased by $232,000.
Available-for-sale securities increased $2.5 million due to a $3.6 million
purchase of two mortgage-backed securities offset by $900,000 in principal
repayments received on mortgage-backed securities and amortization of premiums.
Held-to-maturity securities decreased $8.7 million due to the call and maturity
of four bonds totaling $5.0 million, sale of $55,000 of FHLB stock and $3.7
million in principal repayments received on mortgage backed securities and
amortization of premiums offset by the purchase of a $500,000 FHLB Bond. In
accordance with SFAS No. 115, unrealized gains or losses on available-for-sale
securities are recorded net of deferred income tax as a separate component of
stockholders' equity. At June 30, 1996, the Company included net unrealized
gains of $4,293 net of the tax expense of $1,460 for a total of $2,834 as a
separate component of stockholders' equity. Per SFAS No. 115, such gains or
losses will not be reflected as a charge or credit to earnings until the
underlying gain or loss, if any, is actually realized at the time of sale.
Liabilities of the Company increased $2.6 million or 3.8% to $70.9 million at
June 30, 1996 compared to $68.3 million at September 30, 1995. The increase in
liabilities was primarily due to the increase in deposits of $2.1 million,
reflecting the Company's competitively priced product line within the local
market area.
Stockholders' equity increased by $462,000 to $11.0 million at June 30, 1996
compared to $10.5 million at September 30, 1995. The increase is due to net
income of $748,000 offset by the payment of dividends totaling $280,000 and a
decline in the net unrealized appreciation on available-for-sale securities of
$6,000.
8
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The following summarizes the Bank's capital requirements and position at June
30, 1996 and September 30, 1995.
<TABLE>
<CAPTION>
JUNE 30, 1996 SEPTEMBER 30, 1995
----------------------- ------------------------
(DOLLARS IN THOUSANDS)
AMOUNT PERCENT AMOUNT PERCENT
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Tangible capital $10,922 13.3% $10,442 13.3%
Tangible capital requirement 1,228 1.5% 1,182 1.5%
------- ---- ------- ----
Excess $ 9,694 11.8% $ 9,260 11.8%
======= ==== ======= ====
Core capital $10,922 13.3% $10,442 13.3%
Core capital requirement 2,456 3.0% 2,363 3.0%
------- ---- ------- ----
Excess $ 8,466 10.3% $ 8,079 10.3%
======= ==== ======= ====
Tangible capital $10,922 35.3% $10,442 35.5%
General valuation allowance 329 1.1% 311 1.1%
------- ---- ------- ----
Total capital 11,251 36.4% 10,753 36.6%
Risk-based capital requirement 2,474 8.0% 2,354 8.0%
------- ---- ------- ----
Excess $ 8,777 28.4% $ 8,399 28.6%
======= ==== ======= ====
</TABLE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995
NET INCOME
- ----------
Net income decreased by $9,000 or 3.4% for the three months ended June 30, 1996
as compared to the same period in 1995. The net decrease of $9,000 was due to
decreases of $34,000 in net interest income and $1,000 in non-interest income,
offset in part by a decrease in non-interest expense of $18,000, a decrease in
the provision for loan loses of $3,000 and a decrease in income tax expense for
$5,000.
INTEREST INCOME
- ---------------
Interest income was $1.4 million or 7.37% of average interest-earning assets for
the quarter ended June 30, 1996 as compared to $1.4 million or 7.28% of
interest-earning assets for the quarter ended June 30, 1995. The increase in
the yield on earning assets was due to an increase in interest rates for the
quarter ended June 30, 1996 compared to the same period in 1995, which was
offset by a slight decrease in the average balance of interest earning assets in
the quarter ended June 30, 1996 compared to the same period in 1995.
INTEREST EXPENSE
- ----------------
Interest expense was $723,000 or 4.11% of average deposits and FHLB advances for
the quarter ended June 30, 1996 as compared to $687,000 or 3.69% of average
deposit and FHLB advances for the quarter ended June 30, 1995. The increase of
$36,000 was due primarily to the increase in interest paid on deposits. The
increase in interest paid on deposits was due to a 42 basis point increase in
the average rate paid on deposits, and a $2.1 million increase in the average
balance of deposits during the quarter ended June 30, 1996 compared to the same
period in 1995.
9
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PROVISION FOR LOAN LOSSES
- -------------------------
The provision for loan losses was $8,000 for the quarter ended June 30, 1996.
The provision for loan losses was $12,000 for the same period in 1995.
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 $113,000 and $114,000 for the quarters ended
June 30, 1996 and 1995, respectively. Non-interest income is primarily
generated from fees on loans and fees received for servicing loans.
NON-INTEREST EXPENSE
- --------------------
Non-interest expense decreased $19,000 or 4.1% to $433,000 for the quarter ended
June 30, 1996 compared to $452,000 for the same period in 1995. Non-interest
expense was 2.1% of average assets for the quarter ended June 30, 1996 and 2.3%
of average assets for the quarter ended June 30, 1995. The decrease of $19,000
was due primarily to a decrease in occupancy expenses of $10,000. The decrease
in occupancy expense of $10,000 was due to a decrease in depreciation expense.
INCOME TAX EXPENSE
- ------------------
The provision for income tax expense amounted to $133,000 and $138,000 for the
quarters ended June 30, 1996 and 1995, respectively, which as a percentage of
income before income tax expense amounts to 34.9% for 1996 and 35.0% for 1995.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30, 1996 AND 1995
NET INCOME
- ----------
Net income for the nine months ended June 30, 1996 was $748,000 compared to
$829,000 for the corresponding period in 1995, a decrease of $81,000 or 9.8%.
The decrease of $81,000 was due to a $190,000 decrease in net interest income
plus an increase in the provision for loan losses of $10,000, partially offset
by an increase in non-interest income of $32,000, a decrease in non-interest
expense of $51,000, and a decrease in income tax expense of $36,000.
10
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INTEREST INCOME
- ---------------
Interest income was $4.3 million or 7.36% of average interest-earning assets for
the nine month period ended June 30, 1996 as compared to $4.2 million or 7.28%
of average interest-earning assets for the nine month period ended June 30,
1995. Interest income increased by $89,000 or 2.1% for the nine month period
ended June 30, 1996 compared to the same period in 1995. The increase in
interest income was primarily due to a $2.1 million increase in the average
interest-earning assets for the nine month period ended June 30, 1996 compared
to the same period in 1995.
INTEREST EXPENSE
- ----------------
Interest expense was $2.2 million or 4.10% of average deposits and FHLB advances
for the nine month period ended June 30, 1996 as compared to $1.9 million or
3.54% of average deposits and FHLB advances for the same period in 1995.
Interest expense increased by $279,000 or 14.7% for the 1996 period compared to
the same period in 1995. The $279,000 increase in interest expense was due to
increased interest paid on deposits of $281,000 in the 1996 period compared to
the same period in 1995. The increase in interest on deposits was due to a 56
basis point increase in the average rate paid on deposits plus an increase of
$2.1 million in the average balance of deposits for the nine months ended June
30, 1996 compared to the same period in 1995.
PROVISION FOR LOAN LOSSES
- -------------------------
The provision for loan losses was $27,000 and $17,000 for the nine months ended
June 30, 1996 and 1995, respectively. 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.
NON-INTEREST INCOME
- -------------------
Non-interest income amounted to $342,000 and $309,000 for the nine month period
ended June 30, 1996 and 1995, respectively. Non-interest income increased
$33,000 in the 1996 period compared to the same period in 1995. The increase
was due to an additional net gain on the sale of securities and loans of $23,000
plus an increase of $9,000 in service fees on loans and deposits for the nine
month period ended June 30, 1996 compared to the same period in 1995.
NON-INTEREST EXPENSE
- --------------------
Non-interest expense decreased by $51,000 or 3.8% to $1,280,000 for the nine
month period ended June 30, 1996 compared to $1,331,000 for the same period in
1995. Non-interest expense was 2.1% and 2.2% of average assets for the nine
months ended June 30, 1996 and 1995, respectively. The decrease of $51,000 was
primarily due to a decrease in legal expenses of $58,000, offset in part by an
increase in compensation expense of $13,000 and a total net decrease in all
other expense categories of $6,000. The decrease in legal expenses of $58,000
was due
11
<PAGE>
to special legal services performed during 1995, which was not a recurring
expense. The increase of $13,000 in compensation expense was due to normal
adjustments in salaries and benefits.
INCOME TAX EXPENSE
- ------------------
The provision for income tax expense amounted to $401,000 and $437,000 for the
nine month periods ended June 30, 1996 and 1995, respectively, which as a
percentage of income before income tax expense amounted to 34.8% for 1996 and
34.5% for 1995.
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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.
<TABLE>
<CAPTION>
JUNE 30, 1996 SEPTEMBER 30 1995
-------------- ------------------
(amounts in thousands)
<S> <C> <C>
Loans accounted for on a non-accrual basis:(1)
Real Estate:
Residential..................................... $ 23 $ 23
Commercial......................................
Consumer......................................... 18 18
------------- -------------
Total.......................................... $ 41 $ 41
============= =============
Accruing loans which are contractually past due
90 days or more:
Real Estate:
Residential 74 151
Commercial
Consumer.........................................
------------- -------------
Total.......................................... 74 151
============= =============
Total of loans accounted for as non-accrual or as
accruing past due 90 days or more................ $ 115 $ 192
============= =============
Percentage of total loans.......................... .34% .57%
============= =============
Other non-performing assets (2).................... $ $
============= =============
</TABLE>
(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 $5,109 for the nine month period ended June 30, 1996.
At June 30, 1996, 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.
13
<PAGE>
MORTGAGE BANKING ACTIVITY
- -------------------------
Mortgage loans of $8.1 million were originated for sale during the nine month
period ended June 30, 1996; the Bank retained the servicing for loans totaling
$7.9 million of these loans.
The portfolio of loans owned by others but serviced by the Bank increased 2.4%
to $51.3 million at June 30, 1996 compared to $50.1 million at September 30,
1995. All of the loans serviced by the Bank, but owned by others, were
originated by the Bank.
LIQUIDITY AND COMMITTED RESOURCES
- ---------------------------------
As of June 30, 1996, the liquidity ratio under applicable federal regulations
was 32.38% as compared to 26.66% at September 30, 1995. Principal sources of
funds during the nine months ended June 30, 1996 included loan principal
repayments, principal repayments on mortgage backed securities, proceeds from
matured and called securities and proceeds from the sale of loans.
As of June 30, 1996 loans approved but not closed amounted to $2.3 million. Of
these, none were evidenced by written commitments. The Bank anticipated selling
$1.3 million of the loans approved but not closed. As of June 30, 1996, there
were no commitments to sell loans which had been closed.
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.
BIF/SAIF PREMIUM DISPARITY
- --------------------------
As a result of a recent reduction by the FDIC of deposit insurance rates
applicable to commercial banks, savings institutions could be at a significant
disadvantage in competing with banks. Generally, commercial banks are insured
by and pay their premiums to the Bank Insurance Fund ("BIF") and savings
associations are insured by and pay their premiums to the Savings Association
Insurance Fund ("SAIF"). Both the BIF and the SAIF are administered by the
FDIC. Both BIF and SAIF members had been paying deposit insurance premiums at
the same rates which ranged from 0.23% for the most highly rated institutions to
0.31% for the lowest rated institutions. On August 8, 1995, the FDIC approved a
decrease in the minimum insurance premium charged to BIF-insured institutions
from 0.23% to 0.04% while leaving the level of premiums intact for SAIF-insured
institutions. This new rate structure is effective for the quarter ended
September 30, 1995. Furthermore, in November 1995, the FDIC further lowered BIF
premiums whereby a significant portion of BIF institutions now pay only the
statutory
14
<PAGE>
minimum of $2,000 annually. As a result of this premium disparity, BIF-insured
institutions could have a significant competitive advantage over SAIF-insured
institutions in attracting and retaining deposits. This premium disparity could
have a material effect on the results of operation and financial condition of
the Bank in future periods.
A number of proposals have been considered to recapitalize the SAIF in order to
eliminate this premium disparity. One proposal which had been approved by the
United States Senate and House of Representatives, but vetoed by the President
for reasons not related to the SAIF recapitalization, required a one-time
assessment of .85% of deposits to be imposed on all SAIF-insured institutions.
The assessment would result, on a pro forma basis as of June 30, 1996, in a one-
time charge to the Bank of up to approximately $590,000 ($389,000 net of income
tax benefit assuming such charge would be tax deductible). If the Bank is
required to pay the proposed special assessment, future deposit insurance
premiums are expected to be reduced from 0.23% to approximately 0.04%. Based
upon the Bank's deposits as of June 30, 1996, the Bank's deposit insurance
expense would decrease by approximately $87,000 per year after taxes.
Management is unable to predict whether this proposal or any similar proposal
will be enacted or whether ongoing SAIF premiums will be reduced to a level
comparable to that of BIF premiums.
A number of other related proposals are also under consideration in Congress,
including those relating to merger of the SAIF and BIF, elimination of the
thrift charter and the federal tax consequences of thrifts' conversion to
national banks. The Company is unable to accurately predict whether these
proposals will be adopted in their current form and thus the company cannot
predict the impact of the BIF/SAIF disparity or recapitalization of SAIF on the
Company's consolidated financial statements.
BAD DEBT RECAPTURE
- ------------------
Legislation being considered by Congress would repeal the bad debt deduction
under the percentage of taxable income method of the Internal Revenue Code.
Savings associations, like the Bank, which have previously used the percentage
of taxable income method in computing its bad debt deduction for tax purposes
would be required to recapture into taxable income post-1987 reserves over a six
year period beginning with the 1996 taxable year. The start of such recapture
may be delayed until the 1998 taxable year if the dollar amount of the
institution's residential loan originations in each year is not less than the
average dollar amount of residential loan originated in each of the six most
recent years disregarding the years with the highest and lowest originations
during such period. For purposes of this test, residential loan originations
would not include refinancing and home equity loans. The Company cannot predict
at this time if such legislation will be enacted, or if enacted, the amount of
bad debt reserves the Company will be required to recapture.
15
<PAGE>
PART II. OTHER INFORMATION
-----------------
Item 1. LEGAL PROCEEDINGS
On July 24, 1994, the Bank filed a lawsuit styled Pioneer Federal
Savings Bank v. Fred M. Higgins, Catherine H. Howard, Charles Lester
Key, Phillip R. Perry, individually and d/b/a East Kentucky Holdings,
a Kentucky general partnership, (collectively, the "EKH Group") in the
United States District Court, Eastern District of Kentucky, Civil
Action No. 94-232. The Complaint alleges that the EKH Group, acting in
concert, engaged in a tender offer with respect to the Bank's stock
without complying with the disclosure and filing requirements of
Sections 14(d) and 14(e) of the Williams Act, the Change in Bank
Control Act, and the applicable regulations. Through that lawsuit, the
Bank sought an injunction requiring the EKH Group to cease tender
offer activities, to comply with applicable laws and to restrict their
activities with respect to the Bank.
The EKH Group filed a counterclaim seeking to enjoin an alleged tender
offer by the Bank, its officers, directors, agents, and others acting
in concert with them. The counterclaim also requested the Court to
order the Bank to declare a dividend to its shareholders, to seek
competitive bids for its legal services, to evaluate and disclose bona
fide offers to purchase the Bank, and fully disclose and address any
conflicts of interest of the Bank's directors.
Following initiation of enforcement proceedings by the Office of
Thrift Supervision ("OTS"), the Corporation's counsel was contacted by
counsel for the EKH Group setting forth the interests of the members
of EKH Group in having their shares in the Corporation redeemed.
Further, the Corporation and the members of the EKH Group proposed to
enter into a Mutual Release and Agreed Order of Dismissal of the civil
litigation pending in Federal Court. The Board of Directors of the
Bank adopted a resolution on October 17, 1995 authorizing redemption
of the EKH stock at a price per share of $41.50 and authorizing the
Corporation's officers to enter the Mutual Release and Agreed Order of
Dismissal of the litigation upon the confirmation from the OTS that
the proposed redemption was consistent with all statutes, rules,
regulations, policies, directives, or orders of the OTS.
After receipt of the notice from the OTS and pursuant to a Stock
Redemption Agreement dated June 17, 1996, by and among the Bank, the
Corporation and the members of the EKH Group, as of July 5, 1996, the
Corporation redeemed all of the 58,069 shares of the Corporation owned
by the EKH Group for an aggregate purchase price of $2,409,863.50. The
Corporation also redeemed 6,175 shares of stock owned by the
Corporation's chairperson, Janet W. Prewitt, and certain of those
persons presumed to be acting in concert with her to keep the
ownership of the Corporation's stock by Ms. Prewitt and those presumed
to be acting in concert with her below 10% and thus, avoid the
personal expense and time involved in a control filing with the OTS.
The Mutual Release was signed by the parties on July 5, 1996 and the
Agreed Order of Dismissal dismissing the pending litigation was
entered on July 15, 1996.
16
<PAGE>
Item 2. CHANGES IN SECURITIES None
Item 3. DEFAULTS UPON SENIOR SECURITIES None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of Pioneer Financial Corporation
was held on January 10, 1996 pursuant to notice. Proxies were
solicited by the Corporation. Directors elected at the meeting were
George W. Billings, Nancy M. Lawwill, Wayne M. Martin, and Andrew
Ryan for terms of office to expire at the annual meeting three years
hence; all were nominated by management and had held office of
Director for terms expiring in January 1996. Present directors whose
terms of office expire in 1997 include: Ewart W. Johnson, Nora M.
Linville, and Thomas D. Muncie. Present directors whose terms of
office expire in 1998 include: Carl C. Norton, Janet W. Prewitt,
William M. Cress, and Robert G. Strode. All of management's nominees
were elected to the class indicated above pursuant to vote of the
stockholders. The voting for the directors was as follows:
Nancy M. Lawwill 230,197 votes
Wayne M. Martin 230,089 votes
George W. Billings, Jr. 223,298 votes
Andrew Ryan 222,400 votes
Shareholders voted on the ratification of appointment of auditors.
The voting in regard to the appointment of auditors was 225,771 voted
for, 533 votes against, and 232 votes abstaining.
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 June 30, 1996
17
<PAGE>
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: July 30, 1996
--------------------------------------------
Carl C. Norton, President
(Duly Authorized Officer)
Date: July 30, 1996
--------------------------------------------
Anthony D. Parrish, Chief Financial Officer
(Principal Financial and Accounting Officer)
18
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<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 686
<INT-BEARING-DEPOSITS> 8,859
<FED-FUNDS-SOLD> 4,146
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,977
<INVESTMENTS-CARRYING> 24,555
<INVESTMENTS-MARKET> 23,387
<LOANS> 34,269
<ALLOWANCE> 369
<TOTAL-ASSETS> 81,883
<DEPOSITS> 69,224
<SHORT-TERM> 0
<LIABILITIES-OTHER> 948
<LONG-TERM> 710
0
0
<COMMON> 272
<OTHER-SE> 10,729
<TOTAL-LIABILITIES-AND-EQUITY> 81,883
<INTEREST-LOAN> 2,273
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<INTEREST-OTHER> 362
<INTEREST-TOTAL> 4,291
<INTEREST-DEPOSIT> 2,142
<INTEREST-EXPENSE> 2,177
<INTEREST-INCOME-NET> 2,114
<LOAN-LOSSES> 27
<SECURITIES-GAINS> 41
<EXPENSE-OTHER> 1,280
<INCOME-PRETAX> 748
<INCOME-PRE-EXTRAORDINARY> 748
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 748
<EPS-PRIMARY> 2.74
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.36
<LOANS-NON> 41
<LOANS-PAST> 74
<LOANS-TROUBLED> 0
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<ALLOWANCE-OPEN> 352
<CHARGE-OFFS> 15
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<ALLOWANCE-CLOSE> 369
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