-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M5L7V+w5Bsi+bqVDzFSBcc1ki3KlPW6Wss/ZsFvfbY6HpLomQAIZhx78wedRU49t uVMPen7aaFw9SF6o6bDm0w== 0000928385-96-001712.txt : 19961224 0000928385-96-001712.hdr.sgml : 19961224 ACCESSION NUMBER: 0000928385-96-001712 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961223 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PIONEER FINANCIAL CORP \KY\ CENTRAL INDEX KEY: 0001011166 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 611273657 STATE OF INCORPORATION: KY FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-28076 FILM NUMBER: 96685230 BUSINESS ADDRESS: STREET 1: 25 EAST HICKMAN ST CITY: WINCHESTER STATE: KY ZIP: 40391 BUSINESS PHONE: 6067443972 MAIL ADDRESS: STREET 1: 25 EAST HICKMAN STREET CITY: WINCHESTER STATE: KY ZIP: 40391 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K (Mark One) [XX] ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) of THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required) For the Year Ended: September 30, 1996 [ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) of THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) For the transition period from ______ to ______ Commission File Number 0-28076 PIONEER FINANCIAL CORPORATION ----------------------------- (Exact name of registrant as specified in its charter) United States 61-1273657 ------------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 25 East Hickman Street, Winchester, Kentucky 40391 -------------------------------------------- ------ (Address of principal executive offices) (Zip Code) (606) 744-3972 -------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: not applicable. Securities registered pursuant to Section 12(g) of the Act: Common Stock, $1.00 ------------------- par value (Title of Class) - --------- 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 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 December 19, 1996, the aggregate market value of the shares of common stock of the registrant outstanding was $8,641,670. This figure is based on the last known sales price of $41.50 per share, which sale took place during the week of November 25, 1996. The number of shares of the registrant's common stock outstanding as of December 19, 1996 was 208,233 shares. The aggregate market value of the shares of common stock held by non-affiliates of the registrant was $6,574,597 as of December 19, 1996. DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- List hereunder the following documents incorporated by reference and the Part of Form 10K into which the document is incorporated: (1) Portions of Annual Report to Stockholders for the year ended September 30, 1996, is incorporated into Part II, Items 5-8 and Part III, Item 11 of this Form 10-K. (2) Portions of definitive proxy statement for the January 8, 1997 Annual Meeting of stockholders is incorporated into Part III, Items 10-13 of this Form 10-K. 1 PIONEER FINANCIAL CORPORATION Pioneer Financial Corporation (herein "Corporation"), a Kentucky corporation, was organized in 1994 as a thrift holding company. On December 20, 1994, the stockholders of Pioneer Federal Savings Bank (herein "Pioneer Federal" or "Bank") approved an agreement and Plan of Reorganization dated October 31, 1994, whereby the Bank became a wholly-owned subsidiary of Pioneer Financial Corporation. In accordance with the Reorganization Plan, the stockholders of the Bank exchanged their shares of common stock on a one for one basis for common shares in Pioneer Financial Corporation. Pioneer Federal is the main asset of Pioneer Financial, and the consolidated financial statements of the Corporation and of the Bank are attached hereto. Pioneer Federal Savings Bank, with assets of more than $74.4 million at September 30, 1996, is the larger of the two thrift institutions in Winchester, Kentucky. Pioneer Federal is a federally chartered stock savings bank which conducts business from its corporate headquarters and home office in Winchester, Clark County, Kentucky, and branch banking offices in Winchester and in Stanton, Powell County, Kentucky. Pioneer Federal was chartered in 1885 by the Commonwealth of Kentucky as the Winchester Building and Savings Association. In 1985, Pioneer Federal obtained a federal mutual savings bank charter and changed its name to Pioneer Federal Savings Bank. As of June 30, 1987, Pioneer Federal completed its conversion from a federal mutual to a federal stock savings bank. The Bank is a member of the Federal Home Loan Bank System, and its deposits are insured by the Savings Association Insurance Fund ("SAIF"), which is administered by the Federal Deposit Insurance Corporation ("FDIC"). PART I ITEM 1. BUSINESS GENERAL Pioneer Financial Corporation has no significant assets other than the outstanding capital stock of the Bank. The principal business of Pioneer Financial Corporation is operating the Bank. Pioneer Federal is primarily engaged in the business of attracting deposits from the general public and using such deposits, together with other borrowings and funds, to make residential mortgage loans, commercial real estate loans, consumer loans (including automobile and personal loans), and other investments. The executive offices of the Corporation are located at 25 East Hickman Street, Winchester, Kentucky 40391, and its telephone number is (606) 744-3972. The principal sources of funds for the Bank's lending activities are deposits received from the general public, proceeds from the sale of loans, principal repayments on loans, mortgage-backed securities and other investments, as well as funds provided by operations. Another source of funding available to the Bank is advances from the Federal Home Loan Bank of Cincinnati ("FHLB of Cincinnati"). The Bank's primary sources of income are interest on loans, interest on mortgage-backed securities, interest and dividends on investment securities, commission income and fees charged in connection with its lending and deposit activities and services. Its principal 2 expenses are interest paid on deposits and personnel costs incurred in the operations of the Bank's offices. Pioneer Federal has a wholly-owned subsidiary, Pioneer Service Corporation, which was formed for the purpose of holding stock in Intrieve, Incorporated. Intrieve provides on line computer processing and inquiry service for Pioneer Federal and numerous other thrift institutions in the region. Pioneer Federal invested $16,000 in the stock of Pioneer Service Corporation, which is carried on its books at cost. The executive offices of the Bank are located at 25 East Hickman Street, Winchester, Kentucky 40391, and its telephone number is (606) 744-3972. MARKET AREA The Bank's primary market area consists of Clark and Powell Counties, Kentucky which have populations of 30,000 and 12,000 respectively. This area is primarily rural with a large amount of agri-business. The primary lending concentration is in the Bank's market area, an area mainly comprised of the cities of Winchester and Stanton. Historically, the economy in the Bank's market area has been dependent on agriculture, agriculture related industries and manufacturing. The largest employers in the market area are East Kentucky Power and the Clark County Board of Education. Economic growth in the Bank's market area remains dependent upon the local economy. In addition, the deposit and loan activity of the Bank is significantly affected by economic conditions in its market area. LENDING ACTIVITIES Generally, federally chartered thrift institutions may invest up to 10% of assets in secured or unsecured non-real estate loans for commercial, corporate, business or agricultural purposes, up to 30% of assets in consumer loans and up to 10% of assets in tangible personal property in order to engage in equipment leasing. In addition, commercial real estate loans are not required to be secured by first liens. Under FIRREA, the aggregate amount of non-residential real estate loans which a federal savings institution may make may not exceed 400% of the institution's capital as determined under the capital standards mandated by FIRREA. Previously, such loans were permitted up to 40% of a savings institution's assets. On September 30, 1996, the Bank was permitted to make non-residential real estate loans aggregating approximately $34 million. Geographic Lending Area. All real estate mortgage loans originated by Pioneer Federal are secured by real estate located within an 85 mile radius of Winchester, Kentucky. The Bank has concentrated its lending activity in the Clark and Powell Counties area. Within limits, the Bank may originate and purchase participation or whole loans secured by real estate located in other parts of the United States. 3 General. The principal lending activity of Pioneer Federal historically has been the origination of single family conventional loans (i.e., loans that are neither insured nor partially guaranteed by governmental agencies). Second mortgage loans, construction loans, loans on agricultural property, loans on multi-family dwellings, and commercial real estate loans are also offered by the Bank. The vast majority of the Bank's real estate loans are made on existing property. A limited number of construction loans have been made. The Bank is not engaged in real estate development activities. Real Estate Loans. The loan-to-value ratio, maturity and other provisions of the loans made by Pioneer Federal generally reflect the Bank's policy of making the maximum loan permissible consistent with applicable regulations, sound lending practices, market conditions and the Bank's underwriting standards. Historically, Pioneer Federal made long-term real estate loans with fixed rates of interest. Beginning in 1980, Pioneer Federal diversified its loan portfolio by offering adjustable rate loans and short-term fixed rate loans with a balloon payment. Adjustable rate loans are those in which the interest rate may change during the term of the loan. Adjustable rate loans and shorter term, fixed-rate loans allow the average yield received by the Bank on its total loan portfolio to more closely reflect prevailing interest rates, so as to keep pace with changes in interest rates paid on savings accounts. Most fixed rate loans that are offered and retained by the Bank are secured by one-to-four family owner-occupied dwellings for terms of no more than 30 years with rates fixed up to 5 years. The Bank uses the secondary market for the purpose of offering long-term fixed rate loans to its customers, while retaining the servicing of these loans. These types of loans are normally pre-sold to the Federal Home Loan Mortgage Corporation (FHLMC). Pioneer Federal does not have a minimum loan amount requirement for its real property loans. Due to the cost of underwriting and originating a loan, however, the Bank charges a minimum origination fee for all mortgage loans. See "Loan Origination and Other Fees" on page 10. All improved real estate which serves as security for a loan from the Bank must be insured in an amount acceptable to the Bank against fire, extended coverage, vandalism, malicious mischief and other hazards. Each such policy contains a standard mortgage clause in favor of the Bank. Where applicable, flood insurance is also required. Such insurance must be maintained in an amount not less than the Bank's insurable interest in the security. Borrowers of loans exceeding 80% of the value of the property given as collateral are required to have private mortgage insurance in favor of the Bank with a company acceptable to the Bank. Residential Real Estate Loans. The Bank extends loans secured by liens on residential real estate in an amount up to 80% (without private mortgage insurance) or 95% (with private mortgage insurance) of the appraised value or sales price of the security, whichever is less. The maximum term of any loan on a one-to-four family dwelling is 30 years. The maximum loan amount as a percentage of value and term for multi-family properties is handled on a case- by-case basis. The maximum term for loans on multi-family property is 30 years. Generally, second mortgages are taken by the Bank for single-family residences which have an existing first mortgage held by the Bank. Many second mortgages are for home improvement 4 purposes. More and more frequently, in large part due to current tax laws, the Bank takes a second mortgage on residential real property in cases where the residential collateral would not be strictly necessary. These loans are classified as consumer loans rather than as real estate loans as is consistent with federal regulations. This is described in a separate paragraph. Pioneer Federal has a small number of VA-guaranteed and FHA- approved loans in its loan portfolio. The Bank has the necessary approvals to originate VA and FHA loans in any county in the State of Kentucky. The Bank's current policy is to sell any VA or FHA loan which it originates. Construction Loans. Pioneer Federal offers construction loans (loans for the temporary financing of real estate under construction) to individuals and building contractors for building projects, generally homes and small office or commercial buildings. Most construction loans are made for terms less than 12 months, have fixed rates of interest and provide for periodic disbursement of loan funds based on receipts submitted by the builder during construction and periodic site inspections by Bank personnel. These loans are primarily refinanced to permanent loans when construction is completed. The application process is identical to that required for mortgage loans. Additionally, however, these borrowers are required to submit the lot or land location, the name of the builder, copies of plans, specifications, and building cost estimates, which are used by the Bank in determining the lending value of the subject property. Construction loans are generally made for a single building although small project, multi-building loans are occasionally made. Construction loans may be secured by collateral other than or in addition to the real estate under construction (e.g. other real estate or assignments of other types). These loans are classified by the Bank as either real estate loans (in the case of a first lien mortgage) or consumer loans (in the case of a second lien mortgage or an assignment of another type where the value of the real estate is not the primary collateral). Pioneer Federal generally makes construction loans only in those instances where it expects to have the permanent loan on the property. At September 30, 1996, Pioneer Federal had 14 construction loans outstanding, in the total amount of $1,808,092. All of these loans were for single-family residences. Commercial Loans. The Bank offers loans secured by income-producing real estate, primarily small office buildings, restaurants, and retail complexes. Depending on the collateral taken for the loan, the Bank has, in the past, classified loans which are secured by income-producing real estate as either real estate loans or a type of consumer loan (e.g., second lien mortgage loan or assignment loan). Most of the loans secured by mortgages on commercial real estate have terms of 10 to 25 years, with interest adjustable annually. These mortgage loans are limited to 75% of the value of the real estate, unless the borrower would qualify for an unsecured loan, in which case a greater loan value (up to 85%) may be approved. Under FIRREA, the Bank is permitted to make non- residential real estate loans up to 400% of capital; non-residential real estate loans in excess of such amount must be approved by the Director of the Office of Thrift Supervision (OTS). Consumer and Other Loans. Federal regulations permit federally chartered thrift institutions to make secured and unsecured consumer loans up to 30% of the institution's assets. Though 5 federal thrift institutions have lending authority above the 30% category for certain consumer loans, Pioneer Federal's policy is to limit its investment in consumer loans to 20% of its assets. This limit has never been reached. The Bank makes both secured and unsecured consumer loans. A loan may be secured by a lien on real estate but still be classified as a consumer or other loan rather than as a real estate loan in accordance with federal regulations. The Bank is active in the origination of secured consumer loans for automobiles, home improvements and other purposes with a variety of collateral including automobiles, livestock and equipment. Pioneer Federal offers unsecured consumer loans only to customers with whom Pioneer has had experience. Consumer loans are approved by the President or Treasurer and any one of the following: Loan Officer or Branch Manager of the Bank. LOAN SOLICITATION AND PROCESSING The Bank actively solicits mortgage loan applications from existing customers, customer referrals, and persons making telephone calls and visits to its offices. Applications are not taken over the telephone although in some instances a combination of verbal (by telephone) and written (by mail) applications are received. Upon receipt of a loan application from a prospective borrower, a credit report and verifications of employment and income are obtained. An appraisal of the real estate intended to secure the proposed loan is made by outside appraisers, all of whom have been approved by the Board of Directors. At September 30, 1996 staff appraisers are not being used, but staff appraisers are making periodic construction inspections and completion certification inspections. Approved outside appraisers are used for all loans to employees. Appraisals are prepared in accordance with regulatory guidelines and follow accepted and established appraisal practices as reflected by nationally recognized professional appraisal organizations. All appraisals include a physical inspection of the property. All loan applicants are required to meet specified debt-to-income and stable employment requirements, and possess an acceptable credit history. Loan applications are presented to the Loan Committee for approval. All loan applications for loans over $200,000 are presented to the Executive Committee of the Board of Directors or to the full Board of Directors for approval. Applicants are promptly notified of approval of a loan application. Written notice of adverse action is provided as required by current regulations. 6 Loan Portfolio Composition. The following table sets forth selected data relating to the composition of the Bank's loan portfolio by type of loan as of the dates indicated.
At September 30, ------------------------ 1996 1995 ---- ---- Amount Percent Amount Percent ------ ------- ------ ------- Type of Loans: (Dollars In Thousands) - ----------------------------- REAL ESTATE: One-to-four family residential $21,253 58.63% $20,069 60.01% Multi-family and commercial 3,641 10.05% 3,265 9.76% Agricultural 565 1.56% 789 2.36% Construction 1,808 4.99% 2,055 6.14% CONSUMER: Commercial 3,283 9.06% 2,219 6.64% Loans secured by deposits 1,048 2.89% 973 2.91% Home equity 1,663 4.59% 1,175 3.51% Other secured 2,711 7.48% 2,687 8.03% Unsecured 271 0.75% 212 0.64% ------- ------ ------- ------ Total loans receivable 36,243 100.00% 33,444 100.00% ====== ====== LESS: Loans in process (403) (865) Provisions for loan losses (382) (352) Deferred loan origination fees (211) (201) ----- ---- Loans, receivable net $35,247 $32,026 ======= =======
7 Loan Maturity Schedule. The following table sets forth certain information as of September 30, 1996 (the end of the most recent audit year reported) regarding the dollar amount (in thousands of dollars) of loans maturing in the Bank's portfolio based on contractual terms to maturity for both fixed-rate and variable-rate instruments.
Multi Family Agricultural 1-4 Family and Residential Commercial Construction Consumer Total ----------- ------------ ------------ -------- ----- (In Thousands) Non-performing $ 91 $ 114 $ 3 $ 15 $ 223 ---------- ------------ ------------ -------- ------- Amounts Due: Within 3 months 173 1,805 1,109 3,087 3 months to 1 year 169 4 2,145 2,318 ---------- ------------ ------------ -------- ------- Total due within one year 342 4 1,805 3,254 5,405 ---------- ------------ ------------ -------- ------- After 1 year: 1 to 3 years 313 16 1,005 1,334 3 to 5 years 852 300 2,923 4,075 5 to 10 years 2,988 884 930 4,802 10 to 20 years 9,153 2,072 11,225 Over 20 year 7,513 816 849 9,178 ---------- ------------ ------------ -------- ------- Total due after one year 20,819 4,088 0 5,707 30,614 ---------- ------------ ------------ -------- ------- Total amount due $21,252 $4,206 $1,808 $8,976 $36,242 ========== ============ ============ ======== ======= Less: Loans in process (403) Provision for loan losses (382) Deferred origination fees (210) ------- Loans receivable, net $35,247 =======
8 The following table sets forth the dollar amount (in thousands of dollars) of all loans due after one year from September 30, 1996 (the end of the most recent audit year reported) which have predetermined (or fixed) interest rates and which have floating or adjustable interest rates. Loans which are contractually due within one year after September 30, 1996 are not included in this table.
Floating or Fixed Rates Adjustable Rates Total ----------- ---------------- -------- (In Thousands) One-to-four family residential $ 7,578 $13,241 $20,819 Multi-family, agricultural and 1,049 3,039 4,088 commercial Consumer 3,484 2,223 5,707 Construction 0 0 0 --------- ------------- -------- $12,111 $18,503 $30,614 ========= ============= ========
Interest rates on adjustable-rate loans are adjusted according to one of four indices: the National Average Contract Interest Rate for Purchase of Previously Occupied Homes, the National Average Cost of Funds to SAIF-Insured Institutions, the weekly average yield on U.S. Treasury bills adjusted to a constant maturity of one year, and the Prime Rate published in the Wall Street Journal. Adjustments on loans are made in accordance with federal regulations. Maximum and minimum interest rates ("ceilings" and "floors") vary as do the amounts by which rates can change at any one time ("caps"). Loan Purchases and Sales. Historically, Pioneer Federal was primarily a portfolio lender. The secondary market, however, has provided Pioneer Federal with a method by which to offer long term, fixed rate mortgages to its customers without incurring additional interest rate risk. Since the Spring of 1986, the Bank has utilized the secondary market to meet its customers' needs and manage the interest rate risk of the Bank. The Bank uses standard FHLMC/FNMA loan documents on all first mortgage residential loans to enable the Bank to make sales in the secondary market when market conditions warrant. Pioneer Federal retains the servicing of nearly all of its loans sold in the secondary market, and collects servicing fees. The fees received from this activity are included in "loan and other service fees, net" in the financial statements incorporated by reference in this filing. See "Loan Origination and Other Fees" below. 9 Loan Commitments. Commitments for approved mortgage loans are made orally or in writing. Loan commitments are made for permanent financing of property under construction, and such commitments are usually outstanding for a period of six to twelve months prior to the closing of the loan. Pioneer exercises virtually all commitments it issues. As of September 30, 1996 Pioneer Federal had $2.3 million in loans approved but not closed; none of these were evidenced by written commitments. The Bank anticipated selling $1.2 million of the loans approved but not closed. As of September 30, 1996 Pioneer Federal had no formal commitments to sell loans. Loan Origination and Other Fees. In addition to interest earned on loans, the Bank receives loan origination fees. Loan fees are a percentage of the principal amount of the mortgage loan which are charged to the borrower for origination of the loan. Beginning in fiscal 1988, under FASB #91, loan origination fees are recognized as an adjustment of the loan's yield over the life of the loan by the interest method to the extent that they exceed costs incurred in the origination of the loan. Pioneer Federal's loan origination fees are charged according to amount, term, loan-to-value, type of loan and market conditions on conventional residential mortgages and commercial real estate loans. The total amount of deferred loan fees at September 30, 1996 was $210,000. Any deferred loan fees not previously accounted for are recognized as income at the time the loan is sold or paid off. Loan origination and commitment fees are volatile sources of income. Such fees vary with the volume and type of loans and commitments made and with competitive conditions in mortgage markets, which in turn respond to the demand for and availability of money. The Bank has experienced a decrease in loan fee income during periods of rising interest rates due to the resulting lack of demand for mortgage loans. The Bank receives other fees and charges relating to existing loans, which include late charges, fees collected in connection with a change in borrower or other loan modifications, and servicing fees for loans collected for others. These fees and charges have not constituted a material source of income in the past. Loan service fees as a percentage of net interest income were 6.5%, 6.0% and 5.3% for fiscal 1996, 1995, and 1994, respectively. Asset Classification, Allowance for Losses and Non-Performing Assets. Pioneer Federal's collection procedures provide that when a loan is 30 or more days delinquent the borrower is contacted by mail and payment is requested (in cases of past delinquent history the borrower is contacted prior to being 30 days delinquent). If the delinquency continues, further efforts are made to contact the borrower and resolve the problem. In certain instances, the Bank may modify the loan or grant a limited moratorium on loan payments to enable the borrower to reorganize his financial affairs. If the loan continues in a delinquent status for 90 days or more, the Bank may initiate foreclosure proceedings. Any property acquired as the result of foreclosure or by deed in lieu of foreclosure is classified as "real estate held for resale" until such time as it is sold or otherwise disposed of by the Bank. Federal regulations require savings institutions to classify their assets on the basis of quality on a regular basis. An asset is classified as substandard if it is determined to be inadequately 10 protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. 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. The regulations also provide for a special mention designation, described as assets which do not currently expose a savings institution to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving management's close attention. Assets classified as substandard or doubtful require a savings institution to establish general allowances for loan losses. If an asset or portion thereof is classified loss, a savings institution must either establish a specific allowance for loss in the amount of the asset classified loss, or charge off such amount. Federal examiners may disagree with a savings institution's classifications. If a savings institution does not agree with an examiner's classification of an asset, it may appeal this determination to the OTS Regional Director. Pioneer Federal regularly reviews its assets to determine whether any assets require classification or re-classification. The Board of Directors reviews and approves all classifications. At September 30, 1996, Pioneer Federal had loans designated special mention of $1,204,000 and classified assets consisting of loans classified as substandard of $284,000, none as doubtful and $18,000 as loss. Management will continue to actively monitor Pioneer Federal's asset quality and will establish loan loss reserves and will charge off loans and properties acquired in settlement of loans against the allowances for losses on such loans and such properties when appropriate, and will provide specific loss allowances when necessary. Although management believes it uses the best information available to make determinations with respect to the allowances for losses, future adjustments may be necessary if economic conditions differ substantially from the economic conditions in the assumptions used in making the initial determinations. Pioneer Federal's methodology for establishing the allowances for losses takes into consideration probable losses that have been identified in connection with specific assets as well as losses that have not been identified but can be expected to occur. Management conducts regular reviews of Pioneer Federal's assets and evaluates the need to establish allowances on the basis of these reviews. Allowances are established by the Board of Directors on a quarterly basis based on an assessment of risk in Pioneer Federal's assets taking into consideration the composition and quality of the portfolio, delinquency trends, current charge-offs and loss experience, the state of the real estate market, regulatory reviews conducted in the regulatory examination process and economic conditions generally. Allowances will be provided for individual assets, or portions of assets, when ultimate collection is considered improbable by management based on the current payment status of the assets and the fair value or net realizable value of the security. At the date of foreclosure or other repossession, Pioneer Federal would transfer the property to real estate acquired in settlement of loans at the lower of cost or fair value. Any portion of the outstanding loan balance in excess of fair value would be charged off against the allowance for loan losses. If, upon ultimate disposition of the property, net sales proceeds exceed the net carrying value of the property, a gain on sale of real estate would be recorded. Any losses realized on sale would be charged to the allowance for loan losses on real estate acquired through foreclosure. Historically, management has emphasized the Bank's loss experience over other factors in establishing a provision for loan losses. 11 In December 1993 the banking regulatory agencies, including the OTS, adopted a policy statement regarding maintenance of an adequate allowance for loan and lease losses and an effective loan review system. This policy includes an arithmetic formula for checking the reasonableness of an institution's allowance for loan loss estimate compared to the average loss experience of the industry as a whole. Examiners will review an institution's allowance for loan losses and compare it against the sum of (i) 50% of the portfolio that is classified doubtful; (ii) 15% of the portfolio that is classified as substandard; and (iii) for the portions of the portfolio that have not been classified (including those loans designated as special mention), estimated credit losses over the upcoming twelve months given the facts and circumstances as of the evaluation date. This amount is considered neither a "floor" nor a "safe harbor" of the level of allowance for loan losses an institution should maintain, but examiners will view a shortfall relative to the amount as an indication that they should review management's policy on allocating these allowances to determine whether it is reasonable based on all relevant factors. 12 The following table sets forth an analysis of the Bank's allowance for possible losses for the periods indicated.
At or For the Year Ended September 30, 1996 1995 -------- -------- (Dollars In Thousands) Total loans outstanding $36,243 $33,444 ======= ======= Average loans outstanding $33,358 $31,622 ======= ======= Allowance balance (at beginning of period) $ 352 $ 348 Provision (credit): Residential 57 19 Consumer Net Charge-offs (recoveries): Residential 31 7 Consumer (4) 8 ------- ------- Allowance balance (at end of period) $ 382 $ 352 ======= ======= Allowance for loan losses as a percent of total loans outstanding 1.05% 1.05% Net loans charged off as a percent of average loans outstanding 0.08% 0.05%
13 The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated. Management believes that the allowance can be allocated by category only on an approximate basis. The allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category.
At September 30, 1996 1995 ----- ----- Percent of Percent of Loans to Loans to Amount Total Loans Amount Total Loans ------ ----------- ------ ----------- At end of period allocated to: (Dollars In Thousands) Real estate mortgage: One-to-four-family residential $224 58.63% $212 60.01% Multi-family and commercial 38 10.05% 34 9.76% Agricultural 6 1.56% 8 2.36% Construction (1) 19 4.99% 22 6.14% Consumer (2) 95 24.77% 76 21.73% ------ ------ ------- -------- Total allowance for loan losses $382 100.00% $353 100.00% ====== ======= ======= ========
(1) Includes $2,500 specific reserve attributable to a particular loan and not available for other loan losses. (2) Includes $15,500 specific reserve attributable to particular loans and not available for other loan losses. Numerous financial institutions throughout the United States have incurred losses in recent years due to significant increases in loss provisions and charge-offs resulting largely from higher levels of loan delinquencies and foreclosures. Depressed real estate market conditions have adversely affected the economies of various regions and have had a severe impact on the financial condition and businesses of many of the financial institutions doing business in these areas. Considerable uncertainty exists as to the future improvement or deterioration of the real estate markets in these regions, or of its ultimate impact on these financial institutions. As a result of declines in real estate market values and significant losses experienced by many financial institutions, there has been a greater level of scrutiny undertaken by regulatory authorities of the loan portfolios of financial institutions as part of examinations of such 14 institutions by the FDIC, OTS or other federal or state regulators. Results of recent examinations indicate that these regulators may be applying more conservative criteria in evaluating real estate acquired in settlement of such loans. While management believes Pioneer Federal has established its existing loan loss allowances in accordance with generally accepted accounting principles, there can be no assurances that regulators, in reviewing Pioneer Federal's assets, will not make Pioneer Federal increase its loan loss allowance, thereby negatively affecting Pioneer Federal's reported financial condition and results of operations. 15 The following table sets forth information with respect to the Bank's non- performing assets for the periods indicated. During the periods shown, the Bank had no restructured loans within the meaning of Statement of Financial Accounting Standards No. 15.
At September 30, 1996 1995 ---------- ---------- (Dollars In Thousands) Loans accounted for on a non-accrual basis (1): Residential $ 3 $ 23 Consumer 15 18 ------- ------- Total 18 41 ------- ------- Accruing loans which are contractually past due 90 days or more (2): Mortgage loans: Permanent loans secured by 1-to-4 family dwelling units 91 151 Construction 0 0 All other mortgage loans 114 0 Consumer ------- ------- Total 205 151 ------- ------- Total non-accrual and accrual loans 223 192 Real estate owned (3) ------- ------- Total non-performing assets $ 223 $ 192 ======= ======= Total non-performing loans to loans 0.62% 0.57% Total non-performing loans to total assets 0.30% 0.24% Total non-performing assets to total assets 0.30% 0.24%
(1) Non-accrual status denotes loans which management believes may have defined weaknesses whereby accrued interest is inadequatel y 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. (3) Other non-performing assets represent property acquired by the Bank through foreclosure, or repossession. This property is carried at the lower of its fair market value or the carrying value of the related loan. 16 NON-ACCRUAL LOANS: Non-accrual loans at September 30, 1996 consist of one fixed-rate construction loan on residential property classified as loss and three fixed- rate consumer loans classified as loss. The Savings Bank had no other non- performing assets as of September 30, 1996. INVESTMENT ACTIVITIES Income from investment in securities provides the second largest source of income for Pioneer Federal after interest on loans. Pioneer Federal is required under federal regulations to maintain a minimum amount of liquid assets (which may be invested in specified short-term securities) and is also permitted to make certain other investments. The balance of investments in excess of regulatory requirements are in a variety of instruments including short-term instruments (such as Municipal Bonds, Federal Home Loan Bank Bonds and Certificates of Deposit) and longer-term, higher rate instruments (such as mortgage-backed securities). Investment decisions are made by authorized officers of the Bank. The Bank invests in investment securities in order to diversify its assets, manage cash flow, obtain yield and maintain the minimum levels of liquid assets required by regulatory authorities. Such investments generally include purchases of mortgage-backed securities, federal government and agency securities and qualified deposits in other financial institutions. At September 30, 1996, the Bank's investment securities totaled $31.6 million, of which $25.2 million were invested in mortgage-backed securities primarily issued by Government agencies. These types of investments are interest rate sensitive, and in addition, are subject to prepayment risk. Prepayment risk is the risk that the principal of the security will be prepaid in advance of the normal maturity, and any remaining premium or discount incurred from the purchase of the investment could have a negative impact on the yield earned on those investments. It is management's intention, and Pioneer Federal has the ability, to hold the majority of its investment security portfolio to maturity. In accordance with SFAS No. 115, effective October 1, 1995, the Bank began classifying securities as either held to maturity, available for sale, or available for trade. Securities classified as held to maturity are carried at their amortized cost. Securities classified as trading securities are carried at fair value with any unrealized gain or loss included in net income. Securities classified as available for sale are carried at fair value, with the net unrealized gain or loss carried as a separate component of stockholders' equity. At September 30, 1996, the unrealized holding gains of $39,092, less the applicable deferred tax of $13,291, is included as a separate component of stockholders' equity pursuant to SFAS No. 115. The balance of investment securities are classified as held to maturity, which are being held at cost, adjusted for amortization of premiums and accretion of discounts over the term of the security using the level yield method. For further information, see Note 2 of Notes to Consolidated Financial Statements (page 32 of Exhibit 13 here to). 17 The following table sets forth the carrying value of the Bank's investment securities portfolio at the dates indicated.
At September 30, ---------------------- 1996 1995 --------- --------- (Dollars In Thousands) Investment securities available-for-sale: Mortgage-backed securities $ 3,076 $ 3,283 SBA Pools 4,525 2,186 --------- --------- Total 7,601 5,469 --------- --------- Investment securities held-to-maturity: Mortgage-backed securities 22,147 27,310 U.S. Government and federal agencies 500 5,043 Federal Home Loan Bank of Cincinnati, capital stock 509 537 Municipal bonds 817 317 --------- --------- Total 23,973 33,207 --------- --------- Total investment securities $31,574 $38,676 ========= =========
18 The following table sets forth the scheduled maturities, carrying values, market value and average yields for the Bank's investment portfolio at September 30, 1996.
-One Year or Less- -One to Five Years- -Five to 10 Years- -More than 10 Years- -Total Investments- Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market Average Value Yield Value Yield Value Yield Value Yield Value Value Yield ------- ------- ------- --------- ------- -------- ------- ------- ------- ------ ------- Securities Available-for-Sale (Dollars in Thousand) Mortgage-backed $ 0 0.00% $ 0 0.00% $ 0 0.00% $ 4,525 7.39% $ 4,525 $ 4,525 7.39% securities SBA Pools 0 0.00% 0 0.00% 0 0.00% 3,076 6.78% 3,076 3,076 6.78% ------- ------ ------- --------- ------- ------- ------- ------ ------- ------ ------ Total 0 0.00% 0 0.00% 0 0.00% 7,601 7.14% 7,601 7,601 7.14% ------- ------ ------- --------- ------- ------- ------- ------ ------- ------ ------ Securities Held-to-Maturity: Mortgage-backed 1,235 6.78% 8,512 6.26% 1,204 8.97% 11,196 6.78% 22,147 21,695 6.70% securities U.S. Govt. and 0 0.00% 500 6.56% 0 0.00% 0 0.00% 500 498 6.56% federal agencies FHLB Stock 0 0.00% 0 0.00% 0 0.00% 509 7.16% 509 509 7.16% Municipal bonds 100 5.20% 599 5.24% 0 0.00% 118 6.20% 817 818 5.37% ------- ------ ------- --------- ------- ------- ------- ------ ------- ------ ------ Total 1,335 6.66% 9,611 6.21% 1,204 8.97% 11,823 6.79% 23,973 23,520 6.66% ------- ------ ------- --------- ------- ------- ------- ------ ------- ------ ------ Total Investment $1,335 6.66% $9,611 6.21% $1,204 8.97% $19,424 6.93% $31,575 $31,121 6.78% Securities ======= ====== ======= ========= ======= ======= ======= ====== ======= ====== ======
19 Pioneer Federal is a member of the Federal Home Loan Bank System. As a member of the System it is required to maintain an investment in capital stock of the Federal Home Loan Bank. No ready market exists for such stock and it has no quoted market value. For disclosure purposes, such stock is assumed to have a market value which is equal to cost, which amounted to $508,800 at September 30, 1996. SOURCES OF FUNDS Deposits are the major source of the Bank's funds for lending and other investment purposes. In addition to deposits, Pioneer Federal derives funds from loan principal repayments. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows are significantly influenced by general interest rates and money market conditions. Borrowings from the Federal Home Loan Bank may be used on a short-term basis to compensate for a reduction in the availability of funds from other sources. They may also be used on a longer term basis for general business purposes. Deposits. Consumer and commercial deposits are attracted principally from within the Bank's primary market area through the offering of a broad selection of deposit instruments including NOW accounts, passbooks, certificates of deposit and retirement savings plans. The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates and competition. Pioneer Federal's policies are designed primarily to attract deposits from local residents through Pioneer Federal's branch network rather than from outside Pioneer Federal's market area. Pioneer Federal does not accept deposits from brokers due to their rate sensitivity. Pioneer Federal's interest rates, maturities, service fees and withdrawal penalties on deposits are established by management on a periodic basis. Management determines deposit interest rates and maturities based on Pioneer Federal's liquidity requirements, the rates paid by Pioneer Federal's competitors, Pioneer Federal's growth goals and applicable regulatory restrictions and requirements. 20 Savings deposits in Pioneer Federal Savings Bank as of September 30, 1996, were represented by the various types of savings programs described below.
Minimum Balance as of Percentage Interest Balance September 30, of Total Category Term Rate(1) Amount 1996 (2) Deposits - --------------------------------- ---------- -------- ------- ------------- --------- NOW Accounts None 1.98% 300 $ 14,008 21.77% Regular Savings None 2.94% 100 9,758 15.16% Money Market Accounts None 2.93% 2,500 1,912 2.97% Certificated of Deposit: Fixed Term, Fixed Rate 7-31 days 4.00% * 10 0.02% Fixed Term, Fixed Rate 91 days 4.08% 1,000 413 0.64% Fixed Term, Fixed Rate 6 month 4.42% 1,000 4,231 6.61% Fixed Term, Fixed Rate 6 month 4.39% 1,000 2,286 3.55% Fixed Term, Fixed Rate 12 months 4.96% 500 7,803 12.12% Fixed Term, Fixed Rate 12 months 4.88% 500 276 0.43% Fixed Term, Fixed Rate 12 months 4.50% * 2 0.01% IRA, Fixed Term, Fixed Rate 18 months 5.80% 100 1,861 2.89% IRA, Fixed Term, Variable Rate 18 months 5.60% 100 3,596 5.59% Fixed Term, Fixed Rate 18 months 5.31% 1,000 7,826 12.16% Fixed Term, Fixed Rate 24 months 5.41% 1,000 5,310 8.25% Fixed Term, Fixed Rate 30 months 5.50% * 32 0.05% Fixed Term, Fixed Rate 36 months 5.66% 1,000 2,866 4.45% Fixed Term, Fixed Rate 48 months 4.82% * 27 0.04% Fixed Term, Fixed Rate 60 months 5.14% 5,000 1,990 3.09% Fixed Term, Fixed Rate 72 months 5.77% * 128 0.20% ------------- --------- $ 64,335 100.00% ============= =========
(1) Represents weighted average interest rates (2) In thousands * This type of certificate was no longer offered at September 30, 1996 21 The following is a description of the types of accounts offered by the Bank. PASSBOOK ACCOUNTS. A minimum deposit of $100 is required to open a Passbook savings account. If the balance falls below $100 a maintenance fee of $3.00 per month is charged (excluding minors' accounts). This account allows for unlimited deposits and three withdrawals per month. If more than nine withdrawals are requested per quarter, a $2 per withdrawal fee is collected. A dormant charge of $5 per quarter is assessed if there has been no activity on the account for 2 years and the balance is under $500 at quarter end. Simple interest is credited quarterly and is calculated from the date of funds being deposited to the date of withdrawal. NOW ACCOUNTS. NOW accounts are checking accounts. Pioneer offers four types of NOW accounts. The SETTLERS account allows up to 50 checks to be written monthly without charge; after that there is a 20 cent charge for each check written. A monthly service fee is not charged if a minimum balance of $300 is maintained; if the account drops below $300 a $5 per month maintenance fee is charged. The SETTLERS account is a non-interest bearing account. The PIONEER account allows unlimited checking. This account pays money market rates when a minimum balance of $1000 is maintained. If the balance drops below $1000 a $7.50 per month maintenance fee is charged. The FOUNDERS account is for customers over age 55. This account pays interest if a balance of $1000 or greater is maintained. A monthly service charge of $3 is assessed if the balance falls below $100. The FOUNDERS account allows unlimited checking. The WINCHESTER account is for non-profit community organizations. This account allows unlimited checking and pays interest when a minimum balance of $1000 is maintained. If the balance falls below $100, a $3 monthly maintenance fee is charged. MONEY MARKET DEPOSIT ACCOUNTS ("MMDAS"). The Garn Act authorized, in late 1982, a new type of money market deposit account intended to have rates that are competitive with money market rates. In accordance with regulatory limitations, the main features of the Bank's MMDA include the following: (1) $2,500 minimum balance (interest reverts to the NOW account rate when the account balance drops below the minimum balance requirement, with $7.50 monthly maintenance fee if balance falls below $1000); (2) no limit on the rate the Bank may pay on the account; (3) six preauthorized or automatic third party transfers in an amount in excess of $500 are permitted, three of which may be by check, with $2.00 per withdrawal over six; (4) no restrictions on the size and frequency of withdrawals by mail or in person; (5) no restriction on additional deposits to the account; and (6) no minimum maturity or early withdrawal penalty. INDIVIDUAL RETIREMENT ACCOUNTS ("IRAS"). The Bank offers tax-deferred Individual Retirement Accounts. Pioneer Federal offers certificates established solely for IRA accounts which have a maturity of 18 months. The Bank currently offers IRAs which have both fixed and floating interest rates. CERTIFICATES OF DEPOSIT ("CDS"). Pioneer Federal offers certificates of deposit with terms ranging from three months to five years. The required minimum investment varies with the different terms of the certificates. Interest on the certificates is simple interest, payable monthly, quarterly, or at maturity. The interest rates on these certificates are set weekly by the Bank and are fixed for the term of the certificate. 22 The following table indicates the amount (in thousands) of the certificates of deposit of $100,000 or more by time remaining until maturity at September 30, 1996.
Three months or less: $ 940 More than three through six months: 1,218 More than six through twelve months: 1,452 Over twelve months: 2,455 ------ $6,065 ======
The following table sets forth the average balances and interest rates based on month-end balances for demand deposits, passbook savings and time deposits as of the dates indicated.
Year Ended September 30, 1996 1995 Average Average Average Average Balance Rate Balance Rate ------- ------- ------- ------- (Dollars in Thousands) Deposit Category: Demand Accounts (1) $18,783 2.93% $18,398 2.15% Passbook Accounts 9,838 2.20% 10,705 2.87% Certificates 39,497 5.37% 38,691 4.88% ------- ------- ------- ------- $68,118 4.13% $67,794 3.79% ======= ======= ======= =======
(1) Non-interest bearing deposits are not in excess of 10% of total deposits. BORROWINGS Savings deposits historically have been the primary source of funds for the Bank's lending and investment activities and for its general business activities. The Bank is authorized, however, to use advances from the FHLB of Cincinnati to supplement its supply of lendable funds and to meet deposit withdrawal requirements. Advances from the FHLB are secured by a portion of the Bank's mortgage loans. The FHLB of Cincinnati functions as a central reserve bank providing credit for savings institutions and certain other member financial institutions. As a member, the Bank is required to 23 own capital stock in the FHLB and is authorized to apply for advances on the security of such stock and certain of its home mortgages and other assets (principally, securities which are obligations of, or guaranteed by, the United States), provided certain standards related to credit worthiness have been met. See "Regulation of the Bank -- Federal Home Loan Bank System." COMPETITION The Bank faces strong competition in the attraction of savings deposits and in the origination of real estate loans. Its most direct competition for savings deposits has historically come from commercial banks and other thrifts located in its primary lending area and Fayette County, Kentucky. The Bank faces additional significant competition for investors' funds from offerors of short-term money market securities and other corporate and government securities. The Bank's competition for real estate loans comes principally from other thrifts, commercial banks and mortgage banking companies. The Bank competes for loans principally through the interest rates and loan fees it charges and the efficiency and quality of the services it provides borrowers. It competes for savings by offering depositors a wide variety of savings accounts, checking accounts, convenient office locations, convenient hours of operation, tax-deferred retirement accounts, and other miscellaneous services. The Bank considers Clark and Powell Counties, Kentucky, to be its primary market area for savings and mortgage loans. As of September 30, 1996, there were six other financial institutions located in these counties; one of the six is a thrift institution. Management believes that Pioneer Federal has good community identification in the area, and feels that local ownership of the Bank is an important factor contributing to the Bank's success. Nonetheless, the Bank competes with much larger financial institutions in Clark County and nearby Lexington, Kentucky. These competitors offer better loan rates and broader customer services than the Bank from time to time due to their size, financial resources and competitive strategy. The Deregulation and Garn Acts and regulations implementing these Acts significantly expanded the range of services which savings and loan associations can offer to the public. These Acts, rate deregulation and high interest rates in the early 1980's caused a dramatic increase in competition (e.g. money market mutual funds, Treasury securities, municipal bonds, etc.) for savings dollars and have increased competition with commercial banks in regard to loans, checking accounts and other types of financial services. In addition, large conglomerates and investment banking firms entered the market for financial services during the past decade. The savings public became increasingly sophisticated. Thus the Bank encountered, and may continue to encounter, increased competition in the financial services offered and Pioneer will have to be innovative and knowledgeable about its market, as well as exert effective controls over its costs, in order to remain competitive. SUBSIDIARIES Pioneer Federal Savings Bank has one service corporation subsidiary, Pioneer Service Corporation ("PSC"). In August, 1978, Pioneer Federal formed PSC and purchased all of its 24 stock for $16,000. PSC was formed by the Bank for the purpose of acquiring stock in Intrieve, Incorporated. Intrieve is a non-profit corporation based in Cincinnati, Ohio, which provides on-line computer processing and inquiry service to Pioneer Federal and other savings and loan institutions in the region. To date, PSC has conducted no business activities. PERSONNEL As of September 30, 1996, the Bank had 25 full-time employees, and 11 part- time employees. The employees are not represented by a collective bargaining unit. The Bank believes its relationship with its employees to be good. 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 changes in relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Bank's operations. Unlike most industrial companies, nearly all the assets and liabilities of the Bank are monetary in nature. As a result, interest rates have greater impact on the Bank'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. ESOP LOAN The Bank has received the approval of the OTS for a special one time capital distribution of $250,000 to the Corporation. The Executive Committee of the Board of Directors of the Bank approved the one time capital distribution on December 12, 1996 and the distribution was made on December 13, 1996. Management's intent is to have the corporation make a $250,000 loan to the Employee Stock Ownership Plan (ESOP) Trust for the purpose of acquiring Company stock. The loan will be repaid from annual contributions made to the ESOP by the Bank. COMPANY REGULATION General. The Corporation is a unitary savings and loan holding company subject to regulatory oversight by the OTS. As such, the Corporation is required to register and file reports with the OTS and is subject to regulation and examination by the OTS. In addition, the OTS will have enforcement authority over the Corporation and its non-savings association subsidiaries, should such subsidiaries be formed, which also permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings association. This regulation and oversight is intended primarily for the protection of the depositors of the Bank and not for the benefit of stockholders of the Corporation. The Corporation is also required to file certain reports with, and otherwise comply with the rules and regulations of, the OTS and the Securities and Exchange Commission ("SEC"). 25 QTL Test. As a unitary savings and loan holding company, the Corporation generally will not be subject to activity restrictions, provided the Bank satisfies the QTL test (See Qualified Thrift Lender Test, page 29). If the Corporation acquires control of another savings association as a separate subsidiary, it would become a multiple savings and loan holding company, and the activities of the Corporation, and any of its subsidiaries (other than the Bank or any other SAIF-insured savings association) would become subject to restrictions applicable to bank holding companies unless such other associations each also qualify as a QTL or were acquired in a supervised acquisition. Restrictions on Acquisitions. The Corporation must obtain approval from the OTS before acquiring control of any other SAIF-insured association. Such acquisitions are generally prohibited if they result in a multiple savings and loan holding company controlling savings associations in more than one state. However, such interstate acquisitions are permitted based on specific state authorization or in a supervisory acquisition of a failing savings association. Federal law generally provides that no "person", acting directly or indirectly or through or in concert with one or more other persons, may acquire "control", as that term is defined in OTS regulations, of a federally insured savings institution without giving at least 60 days written notice to the OTS and providing the OTS an opportunity to disapprove the proposed acquisition. Such an acquisition of control may be disapproved if it is determined, among other things, that: (i) the acquisition would substantially lessen competition; (ii) the financial condition of the acquiring person might jeopardize the financial stability of the savings institution or prejudice the interest of its depositors; or (iii) the competency, experience, or integrity of the acquiring person or the proposed management personnel indicates that it would not be in the interest of the depositors or the public to permit the acquisition of control by such person. The Bank Holding Company Act of 1956 ("BHCA") authorizes the Federal Reserve Board to approve an application by a bank holding company to acquire control of a savings association. Furthermore, a bank holding company that controls a savings association is authorized to merge or consolidate the assets and liabilities of the savings association with, or transfer assets and liabilities to, any subsidiary bank which is a member of the BIF with the approval of the appropriate federal banking agency and the Federal Reserve Board. Generally, federal savings associations can acquire or be acquired by any insured depository institution. Federal Securities Law. The Corporation's Common Stock is registered with the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Corporation is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Exchange Act. The Commission maintains a web site which contains reports, proxy and information statements and other information pertaining to registrants that file electronically with the commission, including the Corporation. The web site address is as follows: (http://www.sec.gov). BANK REGULATION General. As a federally chartered, SAIF-insured savings bank, Pioneer Federal is subject to regulation and examination by the OTS and the FDIC. Lending activities and other investments 26 must comply with various federal statutory and regulatory requirements. The Bank is also subject to certain reserve requirements promulgated by the Federal Reserve Board. The OTS, in conjunction with the FDIC, regularly examines the Bank and prepares reports for the consideration of the Bank's Board of Directors on any deficiencies that they find in the Bank's operations. The Bank's relationship with its depositors and borrowers is also regulated to a great extent by federal law. Pioneer Federal must file reports with the OTS and the FDIC concerning its activities and financial condition, in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with or acquisitions of other savings institutions. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the Savings Association Insurance Fund ("SAIF") and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulations, whether by the OTS, the FDIC or the United States Congress, could have a material adverse impact on the Company and the Bank and their operations. Insurance of Deposit Accounts. The Bank's deposit accounts are insured by the SAIF to a maximum of $100,000 for each insured member (as defined by law and regulation). The FDIC has the authority, should it initiate proceedings to terminate an institution's deposit insurance, to suspend the insurance of any such institution without tangible capital. However, if a savings association has positive capital when it includes qualifying intangible assets, the FDIC cannot suspend deposit insurance unless capital declines materially, the institution fails to enter into and remain in compliance with an approved capital plan, or the institution is operating in an unsafe or unsound manner. Regardless of an institution's capital level, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the institution's primary regulator. The management of the Bank is unaware of any practice, condition or violation that might lead to termination of its deposit insurance. On September 30, 1996, H.R. 1362 was signed into law by the President. Title II of H.R. 1362 is titled the Economic Growth and Paperwork Reduction Act of 1996 (the "Act"). Among its many provisions, the Act provides for resolving the BIF/SAIF premium disparity. Before September 30, 1996, most insured depository institutions holding BIF-assessable deposits pay the statutory minimum of $2,000 for deposits insurance on these deposits while most insured depository institutions with SAIF-assessable deposits paid 23 basis points per $100 of these deposits for deposit insurance. The Bank paid, as of September 30, 1996, an insurance premium to the FDIC equal to 0.23% of its total deposits. 27 The BIF/SAIF legislation provides for a one-time assessment to recapitalize the SAIF. The assessment will be based upon the amount of SAIF-assessable deposits held by an institution as of March 31, 1995 (with certain exceptions). The assessment is effective on September 30, 1996 and is payable on November 27, 1996. The BIF/SAIF legislation does not specify an actual assessment but states that the total assessment will be equal to the amount necessary to recapitalize the SAIF as of October 1, 1996. A recent report of the America's Community Bankers estimated the assessment at approximately 65.7 basis points per $100 of SAIF-assessable deposits as of March 31, 1995. The BIF/SAIF legislation provides that the amount of the special assessment is deductible under Section 162 of the Internal Revenue Code (the "Code") in the year the assessment is paid. The BIF/SAIF legislation also provides section 172(f) of the Code will not apply to deductions taken under section 162 of the Code for the special assessment. The Bank estimated the amount of the assessment to be approximately $435,000 before tax benefit, and such amount was accrued on September 30, 1996. Regulatory Capital Requirements. OTS capital regulations require savings institutions to meet three capital standards: (1) tangible capital equal to 1.5% of total adjusted assets, (2) a leverage ratio (core capital) equal to at least 3% of total adjusted assets, and (3) a risk-based capital requirement equal to 8.0% of total risk-weighted assets. Tangible capital is defined as core capital less all intangible assets (including supervisory goodwill), plus purchased mortgage servicing rights valued at the lower of the maximum percentage established by the OTS or the amount includable in core capital. Core capital is defined as common stockholders' equity (including retained earnings), noncumulative perpetual preferred stock and majority interests in the equity accounts of consolidated subsidiaries, and qualifying supervisory good will, less nonqualifying intangible assets. The OTS leverage ratio regulation establishes a core capital ratio of at least 3% for those savings associations in the strongest financial and managerial condition based on the "CAMEL" rating system currently in use by the OTS. Those savings associations receiving a CAMEL rating of "1", the best possible rating on a scale of 1 to 5, will be required to maintain a ratio of core capital to adjusted total assets of 3%. All other savings associations will be required to maintain minimum core capital of at least 4% of total adjusted assets, with a maximum core capital ratio requirement of 5%. In determining the required minimum core capital ratio, the OTS would assess the quality of risk management and the level of risk in each savings association on a case-by-case basis. The OTS has not indicated the standards it will use in establishing the appropriate core capital requirement for savings associations not rated "1" under the CAMEL rating system. The risk-based capital standard for savings institutions requires the maintenance of total risk-based capital (which is defined as core capital plus supplementary capital) of 8.0% of risk-weighted assets. The components of supplementary capital include, among other items, cumulative perpetual preferred stock, perpetual subordinated debt, mandatory convertible subordinated debt, intermediate-term preferred stock and the portion of the allowance for loan losses not designated for specific loan losses. The portion of the allowances for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted 28 assets. Overall, supplementary capital is limited to 100% of core capital. A savings association must calculate its risk-weighted assets by multiplying each asset and off-balance sheet item by various risk factors as determined by the OTS, which range from 0% for cash to 100% for delinquent loans, property acquired through foreclosure, commercial loans and other assets. As of September 30, 1996, the Bank had tangible, core and risk-based capital of $8.1 million, $8.1 million and $8.5 million, respectively, which amounts significantly exceed all applicable fully phased-in regulatory capital requirements of the OTS. OTS regulations set forth the methodology for calculating an Interest Rate Risk (IRR) component which is added to the risk-based capital requirements for OTS regulated thrift institutions. Generally, savings associations with a greater than "normal" level of interest rate exposure will be subject to a deduction from total capital for purposes of calculating their risk-based capital requirement. Specifically, interest rate exposure will be measured as the decline in net portfolio value due to a 200 basis point change in market interest rates. The IRR component to be deducted from total capital is equal to one-half the difference between an institution's measured exposure and the "normal" level of exposure (which is defined as two percent of the estimated economic value of its assets). Institutions, such as the Bank, with less than $300 million in assets and a risk-based capital ratio in excess of 12% are exempt from deducting the IRR component. In addition, pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), the OTS must revise the risk-based capital regulations to include a credit risk component and a nontraditional activities component, the purpose of which will be to increase the minimum capital requirements for savings associations with higher credit risks. Dividend and Other Capital Distribution Limitations. OTS regulations impose limitations upon all capital distributions by savings institutions, such as cash dividends, payments to repurchase or otherwise acquire its shares, payments to shareholders of another institution in a cash-out merger, and other distributions charged against capital. The rule establishes three tiers of institutions, based primarily on an institution's capital level. OTS regulations require the Bank to give the OTS 30 days advance notice of any proposed declaration of dividends to the Corporation, and the OTS has the authority under its supervisory powers to prohibit the payment of dividends to the Corporation. In addition, the Bank may not declare or pay a cash dividend on its capital stock if the effect thereof would be to reduce the regulatory capital of the Bank below the amount required for the liquidation account established pursuant to the Bank's conversion. Finally, under the FDICIA, a savings association is prohibited from making a capital distribution if, after making the distribution, the savings association would be undercapitalized (not meet any one of its minimum regulatory capital requirements). Qualified Thrift Lender Test. The Home Owner's Loan Act, as amended ("HOLA"), requires savings institutions to meet a QTL test. If the Bank maintains an appropriate level of Qualified Thrift Investments ("QTIs") (primarily residential mortgages and related investments, including certain mortgage-related securities ) and otherwise qualifies as a QTL, it will continue to enjoy full borrowing privileges from the FHLB of Cincinnati. The required percentage of QTIs is 65% of portfolio assets (defined as all assets minus intangible assets, property used by the institution in 29 conducting its business and liquid assets equal to 10% of total assets). Certain assets are subject to a percentage limitation of 20% of portfolio assets. In addition, savings associations may include shares of stock of the FHLBs, Federal National Mortgage Association ("FNMA"), and FHLMC as qualifying QTIs. Compliance with the QTL test is determined on a monthly basis in nine out of every 12 months. As of September 30, 1996, the Bank was in compliance with its QTL requirement with 85.73% of its assets invested in QTIs. A savings association that does not meet a QTL test must either convert to a bank charter or comply with the following restrictions on its operations: (i) the savings association may not engage in any new activity or make any new investment, directly or indirectly, unless such activity or investment is permissible for a national bank; (ii) the branching powers of the savings association shall be restricted to those of a national bank; (iii) the savings association shall not be eligible to obtain any advances from its FHLB; and (iv) payment of dividends by the savings association shall be subject to the rules regarding payment of dividends by a national bank. Upon the expiration of three years from the date the savings association ceases to be a QTL, it must cease any activity and not retain any investment not permissible for a national bank and immediately repay any outstanding FHLB advances (subject to safety and soundness considerations.) Transactions With Affiliates. Generally, restrictions on transactions with affiliates require that transactions between a savings association or its subsidiaries and its affiliates be on terms as favorable to the Bank as comparable transactions with non-affiliates. In addition, certain of these transactions are restricted to an aggregate percentage of the Bank's capital, and collateral in a specified amount must usually be provided by affiliates to receive loans from the Bank. Affiliates of the Bank include the Corporation and any company which would be under common control with the Bank. In addition, a savings association may not lend to any affiliate engaged in activities not permissible for a bank holding company or acquire the securities of any affiliate which is not a subsidiary. The OTS has the discretion to treat subsidiaries of the savings association as affiliates on a case-by-case basis. The Bank's authority to extend credit to its officers, directors, and 10% stockholders as well as entities that such persons control is currently governed by Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O promulgated by the Federal Reserve Board. Among other things, these regulations require such loans to be made on terms substantially similar to those offered to unaffiliated individuals, place limits on the amounts of loans the Bank may make to such persons based, in part, on the Bank's capital position, and require certain approval procedures to be followed. OTS regulations, with minor variation, apply Regulation O to savings associations. Liquidity Requirements. All savings associations are required to maintain an average daily balance of liquid assets equal to a certain percentage of the sum of its average daily balance of net withdrawable deposit accounts and borrowings payable in one year or less. The liquidity requirement may vary from time to time (between 4% and 10%) depending upon economic conditions and savings flows of all savings associations. As of September 30, 1996, the Bank's liquidity ratio was 24.81%. 30 Liquid assets for purposes of this ratio include specific short term assets (e.g., cash, certain time deposits, certain banker's acceptances, and short term U.S. Government obligations), and long term assets (e.g., U.S. Government obligations of more than one and less than five years, and state agency obligations with a maximum remaining term of 24 months). The regulations governing liquidity requirements include as liquid assets: debt securities hedged with forward commitments obtained from, or debt securities subject to repurchase agreements with, members of the Bank of Primary Dealers in United States Government Securities or banks whose accounts are insured by the FDIC; debt securities directly hedged with a short financial future position; and debt securities that provide the holder with a right to redeem the security at par value, regardless of the stated maturities of the securities. The OTS is also authorized to designate as liquid assets certain mortgage-related securities with less than one year to maturity. Short term liquid assets currently must constitute at least 1% of an association's average daily balance of net withdrawable deposit accounts and current borrowings. Monetary penalties may be imposed upon associations for violations of liquidity requirements. Federal Home Loan Bank System. The Bank is a member of the FHLB of Cincinnati, which is one of 12 regional FHLBs that administer the home financing credit function of savings associations. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the Board of Directors of the FHLB. As of September 30, 1996, the Bank had borrowed $698,798 from the FHLB of Cincinnati to fund operations; there can be no assurances that additional borrowings will not be made in the future. As a member, the Bank is required to purchase and maintain stock in the FHLB of Cincinnati in an amount equal to at least 1% of its aggregate unpaid residential mortgage loans, home purchase contracts, or similar obligations at the beginning of each year. As of September 30, 1996, the Bank had $508,800 in FHLB stock, which was in compliance with this requirement. The FHLBs are required to provide funds for the resolution of troubled savings associations and to contribute to affordable housing programs through direct loans or interest subsidies on advances targeted for community investment and low-and moderate-income housing projects. These contributions have adversely affected the level of FHLB dividends paid and could continue to do so in the future. For the fiscal year ended September 30, 1996, dividends paid by the FHLB of Cincinnati to the Bank totaled $27,400. Federal Reserve System. The Federal Reserve Board requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts (primarily checking, NOW, and Super NOW checking accounts) and non-personal time deposits. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy the liquidity requirements that are imposed by the OTS. As of September 30, 1996, the Bank was in compliance with its Federal Reserve Board minimum reserve requirements. Savings associations have authority to borrow from the Federal Reserve Bank "discount window", but Federal Reserve policy generally requires savings associations to exhaust all OTS 31 sources before borrowing from the Federal Reserve System. The Bank had no such borrowings at September 30, 1996. FEDERAL TAXATION. The Company and the Bank file a consolidated tax return on a fiscal year (September 30) basis. Savings associations are subject to the provisions of the Internal Revenue Code in the same general manner as other corporations. However, savings associations such as the Bank, which meet certain definitional tests and other conditions prescribed by the Code, may benefit from certain favorable provisions regarding their deductions from taxable income for annual additions to their bad debt reserve. For purposes of the bad debt reserve deduction, loans are separated into "qualifying real property loans", which generally are loans secured by interests in real property, and nonqualifying real property loans, which are all other loans. The bad debt reserve deduction with respect to nonqualifying loans must be based on actual loss experience. The amount of the bad debt reserve deduction with respect to qualifying real property loans may be based upon actual loss experience (the "experience method") or a percentage of taxable income determined without regard to such actual experience (the "percentage of taxable income method"). The Bank used the percentage of taxable income method for the years ended September 30, 1995, 1994 and 1993. The Bank is expected to use the percentage of taxable income method for the year ending September 30, 1996. The Bank determines the most favorable way to calculate the deduction attributable to an addition to its bad debt reserve on an annual basis. Under the experience method, the bad debt deduction may be based on (i) a six-year moving average of actual losses on qualifying and non-qualifying loans or (ii) a fill-up to the institution's base year reserve amount, which is the tax bad debt reserve determined as of September 30, 1988. The percentage of specially computed taxable income that is used to compute a savings association's bad debt reserve deduction under the percentage of taxable income method (the "percentage bad debt deduction") is 8%. The percentage of bad debt deduction thus computed is reduced by the amount permitted as a deduction for non-qualifying loans under the experience method. If an association's qualifying assets (generally, loans secured by residential real estate or deposits, educational loans, cash and certain government obligations) constitute less than 60% of its total assets, the association may not deduct any addition to a bad debt reserve and generally must include existing reserves in income over a four year period. As of September 30, 1996, at least 60% of the Bank's assets were qualifying assets as defined in the Code. No assurance can be given that the Bank will meet the 60% test for subsequent tax years. Earnings appropriated to the Bank's bad debt reserve and claimed as a tax deduction will not be available for the payment of cash dividends or for distribution to stockholders (including distributions made on dissolution or liquidation), unless the Bank includes the amount in income, along with the amount deemed necessary to pay the resulting federal income tax. As of September 30, 1996, the Bank had approximately $1.6 million of accumulated earnings for which federal income taxes have not been provided. If such amount is used for any purpose other than 32 bad debt losses it will be subject to federal income tax at the then current rate. On August 20, 1996, the President signed into law the Small Business Jobs Protection Act. Included within this act were provisions repealing the percentage of taxable income method of calculating a thrift's bad debt reserve for tax purposes. This method had permitted thrift institutions, such as the Bank, who satisfied certain definitional tests and other conditions prescribed by the Internal Revenue Code, to deduct an annual addition to their bad debt reserve calculated as a percentage of taxable income. Other financial institutions generally were required to calculate their bad debt deduction based upon actual loss experience (the "experience method"). As a result of the elimination of the percentage of taxable income method, institutions that have utilized such method will be required to recapture into taxable income post-1987 reserves in excess of the reserves calculated under the experience method, over period of six years commencing in the first taxable year beginning after December 31, 1995. An institution will be able to defer recapture until up to the third taxable year after December 31, 1995 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 originations 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 refinancings and home equity loans. Beginning with the first taxable year beginning after December 31, 1995, savings institutions, such as the Bank, will be treated the same as commercial banks. Institutions with $500 million or more in assets will only be able to take a tax deduction when a loan is actually charged off. Institutions with less than $500 million in assets will still be permitted to make deductible bad debt additions to reserves, but only using the experience method. The Bank has provided deferred taxes on its post-1987 additions to the bad debt reserve and, as a result, management does not expect that the recapture of the Bank's post- 1987 reserves will have a material adverse effect on the Bank's operations. Generally, for taxable years beginning after 1986, the Code also requires most corporations, including savings associations, to utilize the accrual method of accounting for tax purposes. Further, for taxable years ending after 1986, the Code disallows 100% of a savings association's interest expense allocated to certain tax-exempt obligations acquired after August 7, 1986. Interest expense allocable to (i) tax-exempt obligations acquired after August 7, 1986 which are not subject to this rule, and (ii) tax-exempt obligations issued after 1982 but before August 8, 1986, are subject to the rule which applied prior to the Code disallowing the deductibility of 20% of the interest expense. The federal income tax returns of the Company and the Bank have not been examined by the IRS during the past 10 years. STATE TAXATION The Commonwealth of Kentucky imposes no income or franchise taxes on savings institutions. Pioneer Federal is subject to an annual Kentucky ad valorem tax. This tax is .1% of the Bank's savings accounts, common stock, capital and retained income with certain deductions allowed for amounts borrowed by depositors and for securities guaranteed by the U.S. Government or certain 33 of its agencies. For the fiscal year ended September 30, 1996, the amount of such expense for the Bank was $64,790. The Corporation is subject to an annual license fee on capital employed and income tax on its operations by the Commonwealth of Kentucky. The annual license fee is based on $2.10 per $1,000 of capital employed and the tax on income ranges from 4% on the first $25,000 of taxable income to 8.25% on taxable income in excess of $250,000. ITEM 2. PROPERTIES Pioneer Financial's and Pioneer Federal's main office is located at 25 East Hickman Street, Winchester, Kentucky. The building is a one story building of contemporary design constructed in 1975 and expanded in 1978. The building has 5,670 square feet, with six teller stations, one drive-in window (which serves two lanes of traffic), five private offices, a Directors' Conference Room, a kitchen, a large lobby, two restrooms, a walk-in vault, a storage room, and a tellers' work area. There are thirteen computer terminals at the main office. Pioneer Federal has a branch office at 17 East Pendleton Street, Stanton, Kentucky. It consists of a brick-veneer modular building, constructed in 1980. The building has 1,120 square feet, with two teller stations, one drive-in window, one large private office, a kitchen, two restrooms, and a tellers' work area. There are three computer terminals at the branch office. The Bank has a second branch in Winchester, Kentucky, at the corner of the Bypass, (Kentucky Highway 1958) and Fulton Road. This building is of a contemporary design, with a concrete exterior. The branch has a small kitchen, 2 restrooms, an office, conference room, safety deposit boxes and a walk-in vault. The Bypass branch has 7 computer terminals, 3 drive-in lanes and an automatic teller machine (ATM).
September 30, 1996 1995 ------------------------- Land, buildings and improvements....... $1,637,310 $1,599,420 Furniture, fixtures and equipment...... 720,748 705,062 ---------- ---------- Total, at cost....... 2,358,058 2,304,482 Less accumulated depreciation....... 1,182,071 1,127,070 ---------- ----------
$1,175,987 $1,177,412 ========== ========== 34 ITEM 3. LEGAL PROCEEDINGS Four shareholders combined to form East Kentucky Holdings, a general partnership, in 1994. On July 24, 1994, the Savings 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 alleged 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 their tender offer activities, to comply with applicable laws and to restrict their activities with respect to the Bank. The EKH Group filed a Counterclaim which sought to enjoin an alleged tender offer by the Savings Bank, its officers, directors, agents and others acting in concert with them. The Counterclaim also requested the Court to order the Savings 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 to fully disclose and address any conflicts of interest of the Bank's directors. Pioneer and the members of the EKH group entered into a Mutual Release and Agreed Order of Dismissal of the civil matter. The Savings Bank redeemed the EKH stock at a price per share of $41.50 in July, 1996, following confirmation from the Office of Thrift Supervision (OTS) that the redemption was consistent with all statutes, rules, regulations, policies, directives or orders of the OTS. The redemption included the 58,069 shares of stock of the EKH group and 6,175 shares of stock owned by the Corporation's chairman, Janet W. Prewitt, and certain of those persons presumed to be acting in concert with her. The redemption of the shares of Ms. Prewitt, etc., is necessitated by the EKH redemption 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 her undergoing the personal expense and time involved in a control filing with the OTS. ITEM 4. Submission of Matters to a Vote of Security Holders Not applicable. PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholders Matters (a) Market Information. As of the date hereof, there is no established public trading market for Pioneer Financial's common stock. The most recent sale of Pioneer Financial's stock for which Pioneer Financial is aware of the purchase price occurred during the week of November 25, 1996, with the price share being $41.50. 35 (b) HOLDERS. As of December 1, 1996, there were approximately 301 holders of Shares of Pioneer Financial's common stock, par value $1 per share. (c) DIVIDENDS. During fiscal year 1996, Pioneer Financial's Board of Directors declared quarterly dividends of 33 cents per share payable on December 15, 1995, and 35 cents per share payable on March 15, 1996, June 15, 1996 and September 15, 1996 to shareholders of record as of December 1, 1995, March 1, 1996, June 1, 1996 and September 1, 1996, respectively. Total dividends paid in fiscal 1996 amounted to $353,533. The Corporation may not declare or pay cash dividends on any of its stock if the effect thereof would cause the Bank's net worth to be reduced below (1) the amount required for the liquidation account established in connection with its stock conversion, or (2) the net worth and capital distribution requirements imposed by the OTS and FDIC. (see Note 8 to consolidated Financial Statements, on pages 40 and 41 of the Corporation's Annual Report to Shareholders, Exhibit 13 hereto). ITEM 6. Selected Financial Data The information contained under the section captioned "Selected Consolidated Financial and Other Data" on pages 4 and 5 of the Corporation's Annual Report to Shareholders (Exhibit 13 hereto) is incorporated herein by reference. ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operation The information contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 6 through 20 of the Corporation's Annual Report to Shareholders (Exhibit 13) is incorporated herein by reference. ITEM 8. Financial Statement and Supplementary Data The financial statements and supplemental data contained on pages 21 through 47 of the Corporation's Annual Report to Shareholders (attached hereto as Exhibit 13) as listed in Item 14, are incorporated herein by reference. ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure (a) Changes in Registrant's Certifying Accountant. Not applicable. (b) Disagreements with Accountants. Not applicable. PART III ITEM 10. Directors and Executive Officers of Pioneer Federal Reference is made to "Election of Directors" from pages 5 through 8 of the Proxy Statement 36 for the January 1997 annual meeting of stockholders (Exhibit 28(b) hereto). Pursuant to Section 16(a) of the Securities Exchange Act of 1934, as amended, the Corporation's executive officers and directors, and persons who own more than ten percent of registered class of the Corporation's equity securities are required to file reports of ownership with the OTS and the National Association of Securities Dealers, Inc. Executive officers, directors and greater than ten-percent shareholders are required by SEC regulation to furnish the Corporation with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such forms received by it, or written representations from certain reporting persons that no Forms 4 or 5 were required for those persons, the Corporation believes that, since September 30, 1995, all filing requirements applicable to its executive officers, directors and greater than ten-percent beneficial owners were complied with except that: Mrs. Prewitt had, prior to the death of her father in August, 1996, reported his 6,000 shares as being beneficially owned by her (she having had the power to vote those shares pursuant to Power of Attorney). Following Mr. White's death, she failed to timely file the report reducing the number of shares beneficially owned by her, but she has filed that report in the interim. ITEM 11. Executive Compensation (a) Cash Compensation. Reference is made to "Remuneration of Officers" on pages 11 through 13 of the Proxy Statement (Exhibit 28(b) hereto, which is incorporated herein by reference) for information with respect to the cash compensation of the registrant's executive and other officers as a group. (b) Compensation Pursuant to Plans. The registrant has instituted a "401(k)" retirement plan as of December 1, 1985. With respect to this plan, reference is made to the section captioned "Remuneration of Officers" on pages 11 and 12 of the Proxy Statement (Exhibit 28(b) hereto) and Note 10 on page 41of the financial statements included in the Annual Report to Shareholders (Exhibit 13 hereto) for details concerning this retirement plan. There is no contractual obligation for the registrant to contribute sums to this plan. To date, Pioneer Federal has contributed $242,420 to this 401(k) plan. (c) Employee Stock Ownership Plan. On October 31, 1994, the registrant approved the establishment of a Employee Stock Ownership Plan (ESOP) in which employees meeting age and service requirements are eligible to participate. The ESOP is effective beginning January 1, 1994. The Board of Directors authorized the funding of the ESOP with contributions of $30,512 and $24,425 for the years ended September 30, 1996 and 1995 respectively. (d) Other Compensation. Not applicable. (e) Compensation of Directors. Reference is made to "Directors' Fees" on page 10 and "Election of Directors" on pages 5 to 8 of the Proxy Statement (Exhibit 28(b) hereto) for the description of the remuneration paid to the registrant's directors. (f) Termination of Employment and Change of Control Arrangement. Not applicable. 37 ITEM 12. Security Ownership of certain Beneficial Owners and Management Reference is made to "Voting Securities" on pages 3 through 5 of the Proxy Statement (Exhibit 28(b) hereto, incorporated herein by reference) for information pertaining to the security ownership of certain beneficial owners and management. ITEM 13. Certain Relationships and Related Transactions (a) Transactions with management and others. Reference is made to "Transactions Involving Directors and Officers" on page 13 of the Proxy Statement (Exhibit 28(b) hereto, incorporated herein by reference) for information with respect to transactions involving directors or executive officers or members of their immediate families. (b) Certain business relationships. The registrant's Chairman of the Board, Janet W. Prewitt, is an equity partner in the law firm of White, McCann & Stewart, a general practice law firm located in Winchester, Kentucky, which serves as general counsel to Pioneer Federal Savings Bank. Payments to that law firm have not exceeded 5% of the registrant's consolidated gross revenues for its last full fiscal year or any earlier year end. The dollar amount of fees paid to the law firm for legal services provided in Pioneer Federal's last fiscal year was $103,969. Of this sum, $102,939 represented fees earned in connection with title examinations for real estate loans, while the balance represented fees in foreclosure actions and fees for quarterly and annual reports. Director Prewitt's compensation from Pioneer Federal plus her share in the gross fees paid to the law firm has never exceeded $60,000 in any fiscal year. (c) Indebtedness of management. Reference is made to "Transactions Involving Directors and Officers" on page 13 of the Proxy Statement for information with respect to loans made to executive officers and directors. (d) Transactions with promoters. Not applicable. PART IV ITEM 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K (a)(1) and (2) The following is a list of financial statements filed as a part of this annual report and incorporated herein by reference, which financial statements are contained in the Annual Report to Shareholders filed herewith as Exhibit 13, and the pages on which those financial statements may be found. Reports of Independent Certified Public Accountants Exhibit 13, page 21 Exhibit 28(a) Consolidated Statements of Financial Condition at September 30, 1996 and 1995 Exhibit 13, page 22 38 Consolidated Statements of Income for the years ended September 30, 1996, 1995 and 1994 Exhibit 13, page 23 Consolidated Statements of Stockholders' Equity for the years ended September 30,1996, 1995 and 1994 Exhibit 13, page 24 Consolidated Statements of Cash Flows for the years ended September 30, 1996, 1995 and 1994 Exhibit 13, pages 25 and 26 Notes to Consolidated Financial Statements Exhibit 13, pages 27 through 47 (a)(3) The following exhibits are filed as a part of this report: Exhibit (13) Annual Report to Stockholders Exhibit (28)(a) Manually signed Report of Miller, Mayer, Sullivan & Stevens LLP, and York, Neel & Company, LLP, joint venturers Exhibit (28)(b) Proxy Statement for Annual Meeting to be held January 8, 1997 (b) No Form 8-K was filed in the fourth quarter of Fiscal 1996. (c) See (a)(3) above for all exhibits filed. (d) Separate financial statements are not applicable. 39 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, WINCHESTER, KENTUCKY Date: December 17, 1996 BY___________________________ Janet W. Prewitt, Director and Chairman of the Board Date: December 17, 1996 BY___________________________ Carl C. Norton, Director and President Date: December 17, 1996 BY___________________________ Nancy M. Lawwill, Director, and Vice-President Date: December 17, 1996 BY__________________________ Anthony D. Parrish, Treasurer (Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: December 17, 1996 BY_________________________ George Billings, Jr., Director Date: December 17, 1996 BY__________________________ William Cress, Director Date: December 17, 1996 BY__________________________ Ewart W. Johnson, Director Date: December 17, 1996 BY___________________________ Nora M. Linville, Director
40 Date: December 17, 1996 BY__________________________ Wayne M. Martin, Director Date: December 17, 1996 BY___________________________ Thomas D. Muncie, Director Date: December 17, 1996 BY__________________________ Andrew J. Ryan, Director Date: December 17, 1996 BY___________________________ Robert G. Strode, Director
41 Index to Exhibits Exhibit No. Description Exhibit (13) Annual Report to Stockholders Exhibit (28)(a) Manually signed Report of Miller, Mayer, Sullivan & Stevens LLP, and York, Neel & Company, LLP, joint venturers Exhibit (28)(b) Proxy Statement for Annual Meeting to be held January 8, 1997 EX-13 2 EXHIBIT 13 PIONEER FINANCIAL CORPORATION ANNUAL REPORT TO SHAREHOLDERS FISCAL YEAR ENDING SEPTEMBER 30, 1996 PIONEER FINANCIAL CORPORATION ANNUAL REPORT TO SHAREHOLDERS FISCAL YEAR ENDED SEPTEMBER 30, 1996 Table of Contents
Page ---- Corporate Profile ......................................... 1 Consolidated Financial Highlights ......................... 2 Letter to Shareholders ................................... 3 Selected Consolidated Financial and Other Data ............ 4 Management's Discussion and Analysis of Financial Condition and Results of Operations ................. 6 Financial Statements ...................................... 21 Letter from Auditors ................................. 21 Consolidated Balance Sheets .......................... 22 Consolidated Statement of Income ..................... 23 Consolidated Statement of Stockholders' Equity ....... 24 Consolidated Statement of Cash Flows ................. 25 Notes to Consolidated Financial Statements ........... 27 Corporate Information ..................................... 48 Form 10-K ................................................. 49
PIONEER FINANCIAL CORPORATION Corporate Profile Pioneer Financial Corporation (herein "Corporation"), a Kentucky corporation, was organized in 1994 as a thrift holding company. On December 20, 1994, the shareholders of Pioneer Federal Savings Bank approved an agreement and plan of reorganization dated October 31, 1994, whereby the Savings Bank became a wholly-owned subsidiary of Pioneer Financial Corporation. In accordance with the Reorganization Plan, the shareholders of Pioneer Federal exchanged their shares of common stock on a one-for-one basis for common shares in Pioneer Financial Corporation. Pioneer Federal is the main asset of Pioneer Financial, and the consolidated financial statements of the Corporation and of the Savings Bank are included herein. Pioneer Federal Savings Bank (herein "Savings Bank"), with assets of more than $74 million at September 30, 1996, is the larger of the two thrift institutions in Winchester, Kentucky. It currently ranks third in deposits among the six financial institutions located in Winchester. In addition, Pioneer has a branch office located in Stanton, Kentucky, where it is one of only two financial institutions with full service offices (and the only thrift institution) in that community. The business of Pioneer Federal consists primarily of attracting deposits from the general public and using such deposits, together with other borrowings and funds, to make residential mortgage loans, commercial real estate loans (primarily permanent loans), consumer loans (including automobile and personal loans) and to invest in mortgage-backed securities and other investments. Pioneer Federal Savings Bank has been in existence since 1885, when the Commonwealth of Kentucky granted a charter to its predecessor, Winchester Building & Savings Association. It became a federally-chartered association in 1978, under the name of Pioneer Federal Savings and Loan Association. In 1985, the Association obtained a federal savings bank charter and changed its name to Pioneer Federal Savings Bank. Pioneer Federal was issued a federal stock savings bank charter on July 15, 1987, upon successful completion of its conversion from mutual to a stock form. Pioneer Financial Corporation is subject to regulation by the Securities and Exchange Commission and the Office of Thrift Supervision. Pioneer Federal Savings Bank is subject to regulation by the Office of Thrift Supervision and the Federal Deposit Insurance Corporation, which administers the Savings Association Insurance Fund, that insures Pioneer Federal's deposits. Pioneer Federal owns stock in the Federal Home Loan Bank of Cincinnati and is a member of the Federal Home Loan Bank system. Pioneer Federal has a wholly-owned subsidiary, Pioneer Service Corporation, which holds stock in Intrieve, Inc. Intrieve provides on line computer processing and inquiry service to Pioneer Federal and other thrift institutions. The principal executive offices of the Corporation and of the Savings Bank are located at 25 East Hickman Street, Winchester, Kentucky 40391, telephone number (606) 744-3972. Consolidated Financial Highlights
September 30, ---------------------------- 1996 1995 - ----------------------------------------------------------- For the Year Net interest income ..... $ 2,797,403 $ 3,036,789 Net income .............. 706,982 1,077,503 At Year End Total assets ............ $74,401,137 $78,835,918 Loans receivable, net ... 35,247,421 32,213,705 Savings deposits ........ 64,335,165 67,087,921 Stockholders' equity .... 8,244,635 10,539,778 Stockholders' equity to total liabilities .. 12.5% 15.4% - -----------------------------------------------------------
Capital Stock At the present time, there is no established market in which shares of the Corporation's capital stock are regularly traded, nor are there any uniformly quoted prices for such shares. However, Hilliard-Lyons in Lexington, Kentucky is maintaining a "work-out market" in the stock, with the most recent price being $41.50 per share. During fiscal year 1996, the Corporation paid quarterly dividends of 33c per share on December 15, 1995, and 35c per share on March 15, 1996, June 15, 1996 and September 15, 1996 to shareholders of record as of December 1, 1995, March 1, 1996, June 1, 1996 and September 1, 1996, respectively. As of November 13, 1996, Pioneer Financial Corporation had approximately 301 stockholders. 2 [LETTERHEAD OF PIONEER FINANCIAL CORPORATION APPEARS HERE] December 16, 1996 Dear Shareholder: Pioneer Federal Savings Bank and its Holding Company, Pioneer Financial Corporation, had another great year for the fiscal year which ended September 30, 1996. The financial statements contained in the enclosed materials show a reduced net income which is the result of the special assessment to those institutions insured by the SAIF portion of the FDIC. Without the special assessment, Pioneer's net income for the fiscal year just ended would have been $994,000. Even though our net income was reduced by the special assessment, it was good news for Pioneer and all other SAIF insured institutions. Our annual SAIF premium before the special assessment was 23c per $1,000 of deposits. That was much higher than the premium paid by well capitalized BIF insured institutions. We, like the other extremely strong SAIF insured institutions (and there are many like us) were paying the price of the savings and loan debacle of the 1980's. The special assessment has recapitalized the Savings Association Insurance Fund (SAIF) and our assessment for the coming year will be 4c per $1,000 of deposits. Therefore, we will make up the sums paid in this special assessment fairly quickly. Historically, bank stocks have sold at a higher premium to book value than have thrift stocks. One of the main reasons for this has been the great disparity between the insurance assessment for BIF institutions (most banks) and SAIF institutions (most thrifts, like Pioneer). Even though the special assessment was very painful to those of us who had done nothing to cause the SAIF losses, the result will be good for all banking institutions. The resolution of the BIF/SAIF premium disparity will be real good for Pioneer. When I wrote you last year, I told you that we expected to do a "face lift" for the Hickman Street office in 1996. Carl Norton, his fine staff and your Board of Directors have worked hard to determine the best way to do the renovation without crippling our ability to serve our customers. We do hope to begin work very soon. As always, we are very grateful for the support of our shareholders, customers, and employees. We look forward to the challenges and opportunities of the coming year. Sincerely, /s/ Janet W. Prewitt ----------------------------- Janet W. Prewitt Chairman, Board of Directors 3 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA (in Thousands of Dollars)
As of September 30, ----------------------------------------------- 1886 1995 1994 1993 1992 ------- ------- ------- ------- ------- BALANCE SHEET DATA Total amount of: Loans receivable, net.......... $35,247 $32,214 $29,384 $34,290 $35,149 Investments.................... 31,574 38,676 41,104 36,720 35,386 Cash........................... 733 790 633 462 626 Interest bearing deposits /1/.. 4,935 5,162 6,271 4,605 3,594 Assets......................... 74,401 78,836 79,648 78,432 77,578 Deposits....................... 64,335 67,088 68,686 68,198 67,989 Borrowings..................... 699 742 757 795 941 Stockholders' equity........... 8,245 10,540 9,806 9,087 8,074 OTHER DATA Number of: Loans outstanding.............. 2,409 2,418 2,344 2,412 2,402 Savings accounts............... 9,117 9,207 9,253 9,766 10,732 Full customer service offices open.................. 3 3 3 3 3
Year ended September 30, ----------------------------------------------- 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- OPERATIONS DATA Total Amount of: Interest income................ $ 5,659 $ 5,656 $ 5,210 $ 5,819 $ 6,032 Interest expense............... (2,862) (2,619) (2,293) (2,517) (3,229) Provision for loan losses (57) (19) (5) (178) (218) ------- ------- ------- ------- ------- Net interest income after provision for loan losses.................. 2,740 3,018 2,913 3,123 2,585 Non-interest income............ 445 404 389 432 289 Non-interest expense........... 2,092 1,776 1,718 1,614 1,460 ------- ------- ------- ------- ------- Net income before income taxes and cumulative effect of change in accounting principles................... 1,093 1,646 1,584 1,941 1,414 Income tax expense............. 386 568 534 670 514 Cumulative effect of change in accounting principle /2/................. (18) ------- ------- ------- ------- ------- Net Income..................... $ 707 $1,078 $ 1,032 $ 1,271 $ 900 ======= ======= ======= ======= =======
- -------------------- /1/ Includes Federal funds sold. /2/ Reflects adoption of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". 4
KEY OPERATING RATIOS: At or for the Years Ended September 30, -------------------------------------------------- 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- Performance Ratios: - ------------------- Return on average assets /1/ .................... 0.89% 1.36% 1.30% 1.61% 1.25% Return on average equity /1/ .................... 6.97% 10.52% 10.83% 14.78% 11.56% Average equity to average assets /1/ ............ 12.72% 12.91% 12.05% 10.91% 10.55% Interest rate spread ........... 3.18% 3.51% 3.43% 3.96% 3.43% Net interest margin ............ 3.63% 3.94% 3.78% 4.30% 3.88% Dividend payout ................ 50.0% 32.7 % 30.3 % 20.3 % 22.7 % Asset Quality Ratios: - --------------------- Nonperforming assets to total assets at end of year ................... 0.30% 0.24% 0.13% 0.26% 0.28% Allowance for loan losses to total assets at end of year ......... 0.51% 0.45% 0.44% 0.51% 0.33% Allowance for loan losses to nonper- forming loans at end of year........................ 171.30% 183.33% 334.62% 193.20% 118.72% Allowance for loan losses to total loans receivable, net............................ 1.06% 1.05% 1.15% 1.17% 0.74% Capital Ratios: - --------------- Equity to total assets at end of year................. 11.08% 13.27% 12.31% 11.58% 10.41% Average equity to average assets /1/ ........... 12.72% 12.91% 12.05% 10.91% 10.55% Ratio of average interest earning assets to average interest bearing liabilities /1/ ............... 112.01% 112.55% 1 111.74% 110.30% 110.30%
- ---------------------- /1/Average balances are based upon month-end balances. 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL In accordance with an agreement and plan of reorganization dated October 31, 1994 and approved by shareholders on December 20, 1994, Pioneer Federal Savings Bank became a wholly-owned subsidiary of Pioneer Financial Corporation. The principal assets of the corporation is the outstanding capital stock of the Savings Bank, and the operations of the Corporation consist solely of the operations of the Savings Bank. Therefore this discussion relates primarily to the Savings Bank. Historically, the Savings Bank has functioned as a financial intermediary, attracting deposits from the general public and using such deposits to make mortgage loans and, to a lesser extent, consumer loans, and to purchase investment securities with a significant concentration in mortgage-backed securities. As such, its earnings have depended primarily on its net interest income, or "spread", which is the difference between the amount it receives from interest earned on loans and investments ("interest-earning assets") and the amount it pays in interest on its deposits ("interest-bearing liabilities"). Results of operations are also dependent upon the level of the Savings Bank's non-interest income, including fee income and service charges and by the level of its non-interest expenses, the most significant component of which is salaries and employee benefits. The operations of the Savings Bank are significantly affected by prevailing economic conditions and the monetary, fiscal and regulatory policies of government agencies. Lending activities are influenced by the demand for and supply of housing, competition among lenders, the level of interest rates and the availability of funds. Deposit flows and costs of funds are likewise heavily influenced by prevailing market rates of interest on competing investment alternatives, account maturities and the levels of personal income and savings in the Savings Bank's market areas. Historically, Pioneer Federal made long-term real estate loans with fixed rates of interest. Beginning in 1980, Pioneer Federal diversified its loan portfolio by offering adjustable rate loans and short-term fixed rate loans with a balloon payment. Adjustable rate loans are those in which the interest rate may change during the term of the loan. Adjustable rate loans and shorter term, fixed-rate loans allow the average yield received by the Savings Bank on its total loan portfolio to more closely reflect prevailing interest rates, so as to keep pace with changes in interest rates paid on savings accounts. 6 ASSET/LIABILITY MANAGEMENT Net interest income, the primary component of the Savings Bank's net earnings, is derived from the difference or "spread" between the yield on interest-earning assets and the cost of the interest-bearing liabilities. The Savings Bank has sought to reduce its exposure to changes in interest rates by matching more closely the effective maturities or repricing characteristics of its interest-earning assets and interest-bearing liabilities. The matching of the Savings Bank's assets and liabilities may be analyzed by examining the extent to which its assets and liabilities are interest rate sensitive and by monitoring the expected effects of interest rate changes on an institution's net interest income and net portfolio value. An asset or liability is interest rate sensitive within a specific time period if it will mature or reprice within that time period. If the Savings Bank's assets mature or reprice more quickly or to a greater extent than its liabilities, the Savings Bank's net portfolio value and net interest income would tend to increase during periods of rising interest rates but decrease during periods of falling interest rates. If the Savings Bank's assets mature or reprice more slowly or to a lesser extent than its liabilities, the Savings Bank's net portfolio value and net interest income would tend to decrease during periods of rising interest rates but increase during periods of falling interest rates. The Savings Bank's policy has been to mitigate the interest rate risk inherent in the historical savings institution business of originating long-term loans funded by short-term deposits by pursuing certain strategies designed to decrease the vulnerability of its earnings to material and prolonged changes in interest rates. Management's principal strategy in managing the Savings Bank's interest rate risk has been to maintain short and intermediate term assets in the portfolio, including locally originated adjustable rate mortgage loans. The Savings Bank does not actively offer long-term fixed rate loans. All fixed rate loans that are offered and retained by the Savings Bank are secured by one to four-family owner-occupied dwellings for terms of no more than 15 years. Likewise, the interest rate charged on the Savings Bank's adjustable rate loans typically reprice after one, three or five years with maximum periodic interest rate adjustment limits ("caps"). At September 30, 1996, the Savings Bank had no loans that reprice after five years from that date. In managing its portfolio investment and mortgage-backed and related securities, the Savings Bank seeks to purchase investment and mortgage-backed and related securities that mature on a basis that approximates the estimated maturities of the Savings Bank's liabilities. 7 Management has attempted to lengthen the average maturity of its liabilities by adopting a tiered pricing program for its certificates of deposit. The Savings Bank offers higher rates of interest on its longer term certificates in order to encourage depositors to invest in certificates with longer maturities. INTEREST RATE SENSITIVITY ANALYSIS The Savings Bank's future financial performance depends to a large extent on how successful it is in limiting the sensitivity of earnings and net asset value to changes in interest rates. Such sensitivity may be analyzed by examining the amount by which the market value of the Savings Bank's portfolio equity changes given an immediate and sustained change in interest rates. Based on the latest information available, it is estimated that the Savings Bank's market value of portfolio equity at September 30, 1996 would decrease by approximately $1.0 million or 7% given a 200 basis point immediate and sustained increase in interest rates. It is estimated that the Savings Bank's market value of portfolio equity at September 30, 1996 would decrease by approximately $100,000 or 1% given a 200 basis point immediate and sustained decrease in interest rates. AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS The Savings Bank's earnings depend primarily on its net interest income, the difference between the income it receives on its loan portfolio and other investments and its cost of money, consisting primarily of interest paid on savings deposits. Net interest income is affected by (i) the difference between rates of interest earned on its interest-earning assets and rates paid on its interest-bearing liabilities (commonly known as "the spread"); and (ii) the relative amounts of its interest-earning assets and interest-bearing liabilities. When interest-earning assets approximate or exceed interest- bearing liabilities, any positive spread will generate net interest income. Thrift institutions have traditionally used interest rate spreads as a measure of net interest income. Another indicator of an institution's net interest income is its "net yield on interest-earning assets", which is net interest income divided by average interest-earning assets. The following table sets forth certain information relating to the Savings Bank's average interest-earning assets and interest-bearing liabilities and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average monthly balance of assets or liabilities, respectively, for the periods presented. During the periods indicated, nonaccruing loans are included in the net loan category. Average balances are derived from month-end average balances. Management does not believe that the use of month-end balances instead of average daily balances has caused any material difference in the information presented. 8 AVERAGE BALANCES AND YIELD/RATES (In thousands of dollars)
Year ended September 30, -------------------------------------------------------------------------------------------------- 1996 1995 1994 -------------------------------- ------------------------------- ------------------------------- Average Average Average Average Yield/ Average Yield/ Average Yield/ Balance /1/ Interest Rate Balance /1/ Interest Average Balance /1/ Interest Rate ------------ -------- ------- ----------- -------- -------- ----------- -------- --------- Interest Earning Assets: Loans /2/....................... $33,358 $3,057 9.16% $31,622 $2,813 8.90% $31,089 $2,717 8.74 Investment Securities........... 5,352 384 7.17 7,872 474 6.02 4,076 238 5.84 Mortgage-Backed Securities...... 30,064 1,783 5.93 31,280 2,019 6.45 36,382 2,063 5.67 Other Investments............... 8,333 435 5.22 6,368 350 5.50 5,563 192 3.45 ------------ -------- ------- ----------- -------- -------- ----------- -------- --------- Total Interest Earning Assets........................ 77,107 5,659 7.34 77,142 5,656 7.33 77,110 5,210 6.76 -------- -------- -------- Non Interest Earning Assets...... 2,704 2,275 1,979 ------------ ----------- ----------- Total Assets.................. 79,811 79,417 79,089 ============ =========== =========== Interest Bearing Liabilities: Savings Deposits................ 68,118 2,816 4.13 67,794 2,569 3.79 68,236 2,241 3.28 FHLB Advances................... 719 46 6.40 744 50 6.72 775 52 6.71 ------------ -------- ------- ----------- -------- -------- ----------- -------- --------- Total Interest Bearing Liabilities................... 68,837 2,862 4.16 68,538 2,619 3.82 69,011 2,293 3.32 -------- -------- -------- Non Interest Bearing Liabilities..................... 825 630 545 Stockholders' Equity............. 10,149 10,249 9,533 ------------ ----------- ----------- Total Liabilities and Stockholders' Equity........... $79,811 $79,417 $79,089 ============ =========== =========== Net Interest Income.............. $2,797 $3,037 $2,917 ======== ======== ======== Interest Rate Spread /3/......... 3.18% 3.51% 3.44% ======== ========= ========== Net Interest Margin /4/.......... 3.63% 3.94% 3.78% ======== ========= ========== Ratio of Average Interest Bearing Assets to Average Interest Bearing Liabilities 112.01% 112.55% 111.74% ======= ======== =========
- --------------------------------- /1/ Average Balances are based on month-end balances. /2/ Includes loans held for sale. /3/ Represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. /4/ Represents net interest income as a percentage of the average balance of interest-earning assets for the same period. 9 Rate/Volume Analysis The following table sets forth certain information regarding changes in interest income and interest expense of the Savings Bank for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to (1) changes in volume (changes in volume multiplied by old rate); (2) changes in rate (change in rate multiplied by old volume); (3) changes in rate-volume (changes in rate multiplied by the change in volume).
Year ended September 30, --------------------------------------------------------------------------------------------------------- 1995 vs. 1996 1994 vs. 1995 1993 vs. 1994 Increase/(Decrease) Increase/(Decrease) Increase/(Decrease) Due to Due to Due to ---------------------------------- --------------------------------- ---------------------------------- Volume Rate R/V Total Volume Rate R/V Total Volume Rate R/V Total ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Interest Income: Loan Portfolio......... 157.5 82.2 4.5 244.2 46.6 48.0 0.8 95.4 (308.0) (301.0) 28.1 (580.9) Investments............ (151.7) 90.5 (29.0) (90.2) 235.2 0.5 0.4 236.1 164.3 (55.5) (55.2) 53.6 Mortgage Backed Securities............ (78.4) (164.7) 6.3 (236.8) (289.3) 285.2 (40.0) (44.1) 107.0 (207.5) (10.2) (110.7) Other Interest Income.. 109.1 (17.8) (5.5) 85.8 30.7 111.4 16.1 158.2 42.0 (10.9) (1.5) 29.6 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Total Interest-earning Assets................ 36.5 (9.7) (23.7) (3.0) 23.2 445.1 (22.7) 445.6 5.3 (574.9) (38.8) (608.4) ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= Interest Expense: Savings Deposits....... 12.3 233.5 1.1 246.9 (14.5) 345.3 (2.2) 328.6 1.4 (220.0) (0.1) (218.7) Borrowings and Federal Home Loan Bank Advances.............. (1.7) (2.4) .1 (4.0) (2.1) (0.2) 0.0 (2.3) (1.5) (4.8) 0.1 (6.2) ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Total Interest-bearing liabilities........... 10.6 231.1 1.2 242.9 (16.6) 345.1 (2.2) 326.3 (0.1) (224.8) 0.0 (224.9) ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= Net change in net interest income (expense).............. 25.9 (240.9) (24.9) (239.9) 39.8 100.0 (20.5) 119.3 5.4 (350.1) (38.8) (383.5) ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Note: The total rate and volume variances have been allocated to rate and volume changes depending on the degree of variance in each category for the year in question. Changes in both rate and volume are allocated proportionately between changes in rate and changes in volume. Average balances are derived from month-end balances. Management does not believe that the use of month-end balances instead of average daily balances has caused any material difference in the information presented. 10 COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1996 AND 1995 The Company's consolidated assets decreased $4.4 million, or 5.6% to $74.4 million, at September 30, 1996 compared to 78.8 million at September 30, 1995. Securities available-for-sale increased $2.1 million, securities held-to- maturity decreased $9.2 million, loans increased $3.0 million, cash and cash equivalents plus certificates of deposit decreased $285,000, and other non- interest earning assets decreased by $81,000. Securities available-for-sale increased $2.1 million due to a $3.6 million purchase of two mortgage-backed securities offset by $1.5 million in principal repayments received on mortgage-backed securities and amortization of premiums. Securities held-to-maturity decreased $9.2 million due to the call and maturity of two U.S. Treasury instruments and three bonds totaling $14.6 million, the redemption of $55,000 of FHLB stock, and principal repayments received on mortgage backed securities and amortization of premiums totalling $5.0 million offset by the purchase of $10.5 million in U.S. Government obligations and debt securities of U.S. Government agencies. Securities classified as held-to- maturity at September 30, 1996 reflected unrealized losses of $528,000. Management considers these unrealized losses as temporary declines in the fair value and does not consider any of the securities permanently impaired. Liabilities of the Company decreased $2.1 million or 3.1% to $66.2 million at September 30, 1996 compared to $68.3 million at September 30, 1995. The decrease in liabilities was primarily due to the decrease in deposits of $2.7 million, reflecting the strong competition within the local market area and expiration of the Savings Bank's term for rotated community deposits (Clark County School Board). Stockholders' equity decreased by $2.3 million to $8.2 million at September 30, 1996 compared to $10.5 million at September 30, 1995. The decrease was due to the $2.7 million repurchase of 64,244 shares pursuant to an agreement approved by the Board of Directors of the Company on October 17, 1995 and payment of dividends totaling $354,000 offset by net income of $707,000 plus an increase of $18,000 in the net unrealized appreciation of securities available- for-sale. COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995 Net Income Income before the cumulative effect of a change in accounting principle decreased by $371,000 or 34.4% to $707,000 for the year ended September 30, 1996 as compared to $1,078,000 for the same period in 1995. The net decrease was due to a decrease of $239,000 in net interest income, an increase of $39,000 in the provision for loan losses and an increase of $316,000 in non-interest expense offset by an increase of $41,000 in non-interest income and a decrease of $182,000 in income tax expense. 11 Interest Income Interest income was $5.7 million for the years ended September 30, 1996 and 1995. For the year ended September 30, 1996, interest income was 7.34% of average interest earning assets as compared to 7.33% for the year ended September 30, 1995. Interest Expense Interest expense was $2.9 million, or 4.16% of average interest bearing liabilities for the year ended September 30, 1996 as compared to $2.6 million, or 3.82% of average interest bearing liabilities for the corresponding period in 1995. The increase in interest expense was primarily the result of an increase of 34 basis points in the average rate paid on deposits and an increase of approximately $300,000 in average interest bearing deposits in 1996 compared to 1995. Provision for Loan Losses The provision for loan losses was approximately $57,000 and $19,000 for the years ended September 30, 1996 and 1995, respectively. Management considers many factors in determining the necessary levels 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. At September 30, 1996, the allowance for loan losses represented 1.06% of total loans compared to 1.05% at September 30, 1995. Non-Interest Income Non-interest income amounted to $445,000 and $404,000 for the years ended September 30, 1996 and 1995, respectively. Non-interest income increased $41,000 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 $26,000 plus an increase of $15,000 in service fees on loans and deposits for the year ended September 30, 1996 as compared to the corresponding period in 1995. Non-Interest Expense Non-interest expenses increased $316,000 or 17.8% to $2.1 million for the year ended September 30, 1996 compared to $1.8 million for the same period in 1995. Non-interest expense was 2.6% and 2.2% of average assets for the years ended September 30, 1996 and 1995, respectively. The increase of $316,000 was primarily due to an increase of $444,000 in federal insurance premiums offset by $101,000 decrease in legal fees and a $30,000 decrease in other operating expenses. The increase of $444,000 12 in federal insurance premiums was primarily due to a special assessment of $435,000 assessed by the FDIC to recapitalize the Savings Association Insurance Fund (SAIF), pursuant to legislation signed by the President on September 30, 1996. The decrease of $101,000 in legal expenses was due to special services provided during 1995 which was not a recurring expense, plus reimbursement of $44,000 in legal fees pursuant to a legal settlement in fiscal year 1996. The decrease of $30,000 in other operating expenses was primarily due to a $23,000 decrease in loan related expenses net of reimbursements. Income Tax Expense The provision for income tax expense amounted to approximately $386,000 and $568,000 for the years ended September 30, 1996 and 1995, respectively. The provision for income tax expense as a percentage of income before income tax expense and cumulative effect of the change in accounting principle amounted to 35.3% and 34.5% for 1996 and 1995, respectively. COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1995 AND 1994 Net Income Income before the cumulative effect of a change in accounting principle increased by $27,000 or 2.6% to $1,078,000 for the year ended September 30, 1995 as compared to $1,050,000 for the same period in 1995. The net increase was due to an increase of $119,000 in net interest income, plus an increase of $14,000 in non-interest income offset by increases of $14,000 in the provision for loan losses, $58,000 in non-interest expense and $34,000 in income tax expense. The Company changed its method of accounting for federal income taxes in Fiscal Year 1994, which resulted in additional expense of $18,000, reducing net income to $1,032,000 for 1994. Interest Income Interest income was $5.7 million, or 7.33% of average interest earning assets for the year ended September 30, 1995 as compared to $5.2 million, or 6.76% of average interest earning assets for the year ended September 30, 1994. The increase in interest income was primarily the result of an increase of 57 basis points in the average rate earned on interest earning assets. Interest Expense Interest expense was $2.6 million, or 3.82% of average interest bearing liabilities for the year ended September 30, 1995 as compared to $2.3 million, or 3.32% of average interest bearing liabilities for the corresponding period in 1994. The increase in interest expense was primarily the result of an increase of 50 basis points in the average rate paid on deposits 13 partially offset by the decrease of approximately $473,000 in average interest bearing deposits in 1995 compared to 1994. Provision for Loan Losses The provision for loan losses was $19,000 and $5,000 for the years ended September 30, 1995 and 1994, respectively. Management considers many factors in determining the necessary levels 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. At September 30, 1995, the allowance for loan losses represented 1.05% of total loans compared to 1.15% at September 30, 1994. Non-Interest Income Non-interest income amounted to $404,000 and $388,000 for the years ended September 30, 1995 and 1994, respectively. Non-interest income increased $14,000 in fiscal year 1995 compared to the same period in 1994. The increase was due to an increase of $49,000 in service fees on loans and deposits offset by a decrease of $35,000 in the net gain on the sale of securities and loans for the year ended September 30, 1995 as compared to the corresponding period in 1994. Non-Interest Expense Non-interest expenses increased $58,000 or 3.4% to $1.8 million for the year ended September 30, 1995 compared to $1.7 million for the same period in 1994. Non-interest expense was 2.2% of average assets for both years ended September 30, 1995 and 1994. The increase of $58,000 was primarily due to an increase of $61,000 in compensation and benefits and an increase of $50,000 in other operating expenses offset by a $40,000 decrease in legal expenses and a $13,000 decrease in various other non-interest expense accounts. Compensation and benefits increased $61,000 due to normal salary increases and a bonus paid in 1995 that was not paid in 1994. The decrease of $40,000 in legal expenses was due to special services provided in 1994 which was not a recurring expense. The increase of $50,000 in other operating expense was caused primarily by an increase of $22,000 related to loan expenses, an increase of $12,000 in expenditures related to the new holding company and a net increase of $16,000 in various other expenditures. Income Tax Expense The provision for income tax expense amounted to approximately $568,000 and $534,000 for the years ended September 30, 1995 and 1994, respectively. The provision for income tax expense as a percentage of income before income tax expense and 14 cumulative effect of the change in accounting principle amounted to 34.5% and 33.7% for 1995 and 1994, respectively. MORTGAGE BANKING ACTIVITY Net loans increased from $32.0 million at September 30, 1995 to $35.2 million at September 30, 1996, an increase of 10.1%. The Savings Bank's portfolio of loans owned by others but serviced by the Savings Bank increased .4% from $50.1 million at September 30, 1995 to $50.3 million at September 30, 1996. The Savings Bank originated all of the loans which it services. LIQUIDITY AND COMMITTED RESOURCES The Corporation's primary source of liquidity is dividends paid by the Savings Bank. The Savings Bank is subject to certain regulatory limitations with respect to the payment of dividends to the Corporation. The Savings Bank's primary sources of funds are deposits and proceeds from principal and interest payments on loans and mortgage-backed securities. Additional sources of liquidity are advances from the FHLB of Cincinnati and other borrowings. At September 30, 1996, the Savings Bank had outstanding advances from the FHLB of Cincinnati totalling $698,798. OTS regulations require that the Savings Bank maintain specified levels of liquidity. Liquidity is measured as a ratio of cash and certain investments to withdrawable savings. The minimum level of liquidity required by the regulations is presently 5.0%. As of September 30, 1996, the Savings Bank's liquidity ratio under applicable federal regulations was 24.8% as compared to 26.7% at September 30, 1995. At September 30, 1996, the Savings Bank had $25.7 million in certificates of deposit maturing within one year, and $11.7 million maturing between one and three years. Management believes, based on past experience, that the Savings Bank will retain much of the deposits or replace them with new deposits. As of September 30, 1996, the Savings Bank had $2.3 million in loans approved but not closed; none of these were evidenced by written commitments. The Savings Bank anticipated selling $1.2 million of the loans approved but not closed. As of September 30, 1996, Pioneer Federal had four formal commitments to sell loans, totalling $138,000. The Savings Bank is required to maintain specified amounts of capital pursuant to federal law and regulations promulgated by OTS. The capital standards generally require the maintenance of regulatory capital sufficient to meet a tangible capital requirement, a core capital requirement and a risk-based capital requirement. At September 30, 1996, the Savings Bank's tangible and core capital totalled $8.1 million. This amount exceeded the tangible capital requirement of $1.1 million by $7.0 million, and the core capital requirement of $2.2 million by $5.9 million on 15 that date. At September 30, 1996, the Savings Bank's risk-based capital totalled $8.5 million, which exceeded its risk-based capital requirement of $2.5 million by $6.0 million. Impact of Inflation and Changing Prices The consolidated financial statements of the Company and notes thereto, presented elsewhere 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. As a result, interest rates have a greater impact on the Company's performance than do the effects of general level of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. Impact of Recent Accounting Pronouncements Disclosures of Fair Value of Financial Instruments. In December, 1991, the --------------------------------------------------- Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures about Fair Value of Financial Instruments." SFAS No. 107 requires the Company to disclose the fair value of its financial instruments, which will include the majority of its balance sheet accounts in addition to selected off-balance sheet items. SFAS No. 107 became effective for the Company in fiscal 1996 because the Company has less than $150 million in total assets. Earlier adoption was required for entities with assets in excess of $150 million. SFAS No. 107 focuses only on disclosure of fair values in the financial statements and,therefore, has no effect on consolidated financial position and results of operations. Accounting for Impaired Loans. In September, 1993, the FASB issued SFAS ------------------------------ No. 114, "Accounting by Creditors for Impairment of a Loan." SFAS No. 114 specifies that allowances for loan losses on impaired loans should be determined using the present value of estimated future cash flows of the loan, discounted at the loans' effective interest rate. A loan is impaired when it is probable that all principal and interest amounts will not be collected according to the loan contract. SFAS No. 114 is effective for fiscal years beginning after December 15, 1994, which for the Company is the 1996 fiscal year. Management adopted SFAS No. 114 on October 1, 1995, without material impact on consolidated financial position or results of operations. In October, 1994, the FASB amended certain of the revenue recognition provisions of SFAS No. 114 by the issuance of SFAS No. 118. Such revisions similarly had no material effect on the consolidated financial condition or results of operations of the Company. 16 Derivative Financial Instruments. In October, 1994, the FASB issued SFAS --------------------------------- No. 119, "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments." SFAS No. 119 requires financial statement disclosure of certain derivative financial instruments, defined as futures, forwards, swaps, option contracts, or other financial instruments with similar characteristics. In the opinion of management, the disclosure requirements of SFAS No. 119 will not have a material effect on the Company's consolidated financial condition or results of operations, as the Company does not invest in derivative financial instruments, as defined in SFAS No. 119. As a result, the applicability of SFAS No. 119 relates solely to disclosure requirements pertaining to fixed-rate and adjustable-rate loan commitments. Accounting for ESOP. The Accounting Standards Executive Committee of the -------------------- American Institute of Certified Public Accountants ("AcSEC") has issued Statement of Position ("SOP 93-6") on "Employers' Accounting for Employee Stock Ownership Plans" ("ESOP"). SOP 93-6, among other things, changes the measure of compensation expense recorded by employers from the cost of ESOP shares to the fair value of ESOP shares. To the extent that fair value of the Company's ESOP shares differs from the costs of such shares, compensation expense must be recorded in the Company's financial statements for the fair value of ESOP shares allocated to participants for a reporting period. SOP 93-6 was adopted by the Company during fiscal 1995, without material financial statement effect. Accounting for Mortgage Servicing. In May, 1995, the FASB issued SFAS No. ---------------------------------- 122, "Accounting for Mortgage Servicing Rights." SFAS No. 122 requires that the Company recognizes as separate assets rights to service mortgage loans for others, regardless of how those servicing rights were acquired. An institution that acquires mortgage servicing rights through either the purchase or origination of mortgage loans and sells those loans with servicing rights retained would allocate some of the cost of the loans to the mortgage servicing rights. SFAS No. 122 also requires that an enterprise allocate the cost of purchasing or originating the mortgage loans between the mortgage servicing rights and the loans when mortgage loans are securitized, if it is practicable to estimate the fair value of mortgage servicing rights. Additionally, SFAS No. 122 requires that capitalized mortgage servicing rights and capitalized excess servicing receivables be assessed for impairment. Impairment would be measured based on fair value. SFAS No. 122 is to be applied prospectively in the Company's fiscal year beginning October 1, 1996, to transactions in which an entity acquires mortgage servicing rights and to impairment evaluations of all capitalized mortgage servicing rights and capitalized excess servicing receivables whenever acquired. Retroactive application is prohibited. Management adopted SFAS No. 122 on October 1, 1996, as required, without material effect on the Company's consolidated financial position or results of operations. 17 Accounting for Stock-Based Compensation. In October, 1994, the FASB issued ---------------------------------------- SFAS No. 123 entitled "Accounting for Stock-Based Compensation." SFAS no. 123 establishes a fair value based method of accounting for stock-based compensation paid to employees. SFAS No. 123 recognizes the fair value of an award of stock or stock options on the grant date and is effective for transactions occurring after December, 1995. Companies are allowed to continue to measure compensation cost for those plans using the intrinsic value based method of accounting, which generally does not result in compensation expense recognition for most plans. Companies that elect to remain with the existing accounting are required to disclose in a footnote to the financial statements pro forma net earnings and, if presented, earnings per share, as if SFAS No. 123 had been adopted. The Company does not currently have any outstanding stock options and therefore adoption of SFAS No. 123 will not have a material effect on the Company's consolidated financial condition or results of operations. Accounting for Transfers of Financial Assets. In June, 1996, the FASB --------------------------------------------- issued SFAS No. 125, "Accounting for Transfers of Financial Assets, Servicing Rights, and Extinguishment of Liabilities," that provides accounting guidance on transfers of financial assets, servicing of financial assets, and extinguishment of liabilities. SFAS No. 125 introduces an approach to accounting for transfers of financial assets that provides a means of dealing with more complex transactions in which the seller disposes of only a partial interest in the assets, retains rights or obligations, makes use of special purpose entities in the transaction, or otherwise has continuing involvement with the transferred assets. The new accounting method, the financial components approach, provides that the carrying amount of the financial assets transferred be allocated to components of the transaction based on their relative fair values. SFAS No. 125 provides criteria for determining whether control of assets has been relinquished and whether a sale has occurred. If the transfer does not quality as a sale, it is accounted for as a secured borrowing. Transactions subject to the provisions of SFAS No. 125 include, among others, transfers involving repurchase agreements, securitizations of financial assets, loan participations, factoring arrangements, and transfers of receivables with recourse. An entity that undertakes an obligation to service financial assets recognizes either a servicing asset or liability for the servicing contract (unless related to a securitization of assets, and all the securitized assets are retained and classified as held-to-maturity). A servicing asset or liability that is purchased or assumed is initially recognized at its fair value. Servicing assets and liabilities are amortized in proportion to and over the period of estimated net servicing income or net servicing loss and are subject to subsequent assessments for impairment based on fair value. 18 SFAS No. 125 provides that a liability is removed from the balance sheet only if the debtor either pays the creditor and is relieved of its obligation for the liability or is legally released from being the primary obligor. SFAS No. 125 is effective for transfer and servicing of financial assets and extinguishment of liabilities occurring after December 31, 1996, and is to be applied prospectively. Earlier or retroactive application is not permitted. Management does not believe that adoption of SFAS No. 125 will have a material adverse effect on the Company's consolidated financial position or results of operations. Other Developments - BIF-SAIF Premium Disparity; Deposit Insurance Assessment; Bad Debt Reserve Recapture The Bank's savings deposits are insured by the Savings Associations Insurance Fund ("SAIF"), which is administered by the Federal Deposit Insurance Corporation ("FDIC"). The assessment rate currently ranges from 0.23% of deposits for well capitalized institutions to 0.31% of deposits for undercapitalized institutions. The FDIC also administers the Bank Insurance Fund ("BIF"), which has the same designated reserve ratio as the SAIF. On August 8, 1995, the FDIC adopted an amendment to the BIF risk-based assessment schedule which lowered the deposit insurance assessment rate for most commercial banks and other depository institutions with deposits insured by the BIF to a range of 0.31% of insured deposits for undercapitalized BIF-insured institutions to 0.04% of deposits for well-capitalized institutions, which constitute over 90% of BIF-insured institutions. The FDIC amendment became effective September 30, 1995. On November 14, 1995, the BIF assessment rate schedule was further revised to a statutory minimum of $2,000 annually for well capitalized institutions to 0.27% for deposits for undercapitalized institutions. These revisions to the BIF assessment rate schedule created a substantial disparity in the deposit insurance premiums paid by BIF and SAIF members and placed SAIF-insured savings institutions such as the Bank at a significant competitive disadvantage to BIF- insured institutions. On September 30, 1996, the President signed legislation which among other things, recapitalized the Savings Associations Insurance Fund through a special assessment on most savings financial institutions, such as the Savings Bank. The special assessment amounted to 65.7 basis points applied to the Savings Bank's insured deposits as of March 31, 1995, and amounted to $435,000. The expense was recognized in the consolidated financial statements for the year ended September 30, 1996 and the after tax impact was to reduce net income by $287,000 or $1.12 per share of common stock. As a result of this special assessment, the insurance assessment rate on the Bank's deposits will be reduced to the same rates assessed banks insured by BIF beginning January 1, 1997. 19 In addition, the legislation repealed the bad debt deduction under the percentage of taxable income method of the Internal Revenue Code for savings banks. Savings banks, like the Bank, which have previously used the percentage of taxable income method in computing its bad debt deduction for tax purposes will be required to recapture into taxable income post-1987 reserves over a six- year period beginning with the 1996 taxable year (fiscal year 1997 for the Bank). The start of such recapture may be delayed until the 1998 taxable year if the dollar amount of the institutions's residential loan originations in each year is not less than the average dollar amount of residential loans originated in each of the nine 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 impact of this legislation will not have a material impact on the financial statements of the Company. DIVIDENDS ON AND PRICE RANGE OF COMMON STOCK During fiscal year 1996, the Corporation declared dividends in the following amounts: December 15, 1995 33c per share March 15, 1996 35c per share June 15, 1996 35c per share September 15, 1996 35c per share Under OTS regulations, the Savings Bank may not pay cash dividends on its Common Stock if, as a result thereof, its regulatory capital would be reduced below its regulatory requirement. The Savings Bank exceeded all of the minimum regulatory capital requirements during the entire fiscal year. The Savings Bank's stock sold for $41.50 per share at the beginning of the fiscal year; the Corporation's stock sold for up to $40.00 per share at mid- year, and the last sale during the fiscal year was at $41.50 per share. CERTIFYING ACCOUNTANT Miller, Mayer, Sullivan & Stevens LLP, and York, Neel & Company, LLP, joint venturers, have been appointed as the Corporation's independent auditor for the fiscal year ending September 30, 1996 pursuant to the recommendation of the Audit Committee of the Board of Directors. A representative of Miller, Mayer, Sullivan & Stevens LLP is expected to be present at the annual meeting with an opportunity to make a statement if he desires to do so and to answer appropriate questions with respect to that firm's examination of the Corporation's financial statements and records for the fiscal year ended September 30, 1996. 20 [LETTERHEAD OF YORK, NEEL & COMPANY APPEARS HERE] MILLER, MAYER, SULLIVAN & STEVENS LLP CERTIFIED PUBLIC ACCOUNTANTS "INNOVATORS OF SOLUTION TECHNOLOGY" INDEPENDENT AUDITORS' REPORT Board of Directors Pioneer Financial Corporation Winchester, Kentucky We have audited the accompanying consolidated balance sheets of Pioneer Financial Corporation and Subsidiary as of September 30, 1996 and 1995 and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three year period ended September 30, 1996. These consolidated financial statements are the responsibility of the management of Pioneer Financial Corporation (Company). Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pioneer Financial Corporation and Subsidiary as of September 30, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three year period ended September 30, 1996 in conformity with generally accepted accounting principles. /s/ Miller, Mayer, Sullivan & Stevens /s/ York, Neel & Company, LLP Lexington, Kentucky Owensboro, Kentucky November 11, 1996 November 11, 1996
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1996 AND 1995 --------------------------- ASSETS 1996 1995 ------------ ----------- Cash and due from banks $ 732,573 $ 790,037 Interest bearing deposits 1,529,881 4,874,490 Federal funds sold 3,211,000 Certificates of deposit 194,000 288,000 Securities available-for-sale, at fair value 7,601,611 5,468,682 Securities held-to-maturity, fair value of $23,520,598 and $32,898,797 for 1996 and 1995, respectively 23,972,497 33,207,364 Loans receivable, net 35,247,421 32,026,342 Loans held for sale 187,363 Accrued interest receivable 535,269 675,154 Premises and equipment, net 1,175,987 1,177,412 Prepaid federal income taxes 119,357 Other assets 81,541 141,074 ----------- ----------- Total assets $74,401,137 $78,835,918 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $64,335,165 $67,087,921 Advances from Federal Home Loan Bank 698,798 742,430 Advance payments by borrowers for taxes and insurance 26,788 23,396 Deferred federal income taxes 138,040 120,420 Federal income taxes payable 7,614 Other liabilities 957,711 314,359 ----------- ----------- Total liabilities 66,156,502 68,296,140 ----------- ----------- Stockholders' equity Common stock, $1 par value, 500,000 shares authorized; 208,233 and 208,233 272,477 272,477 shares, issued and outstanding for 1996 and 1995, respectively Additional paid-in capital 1,797,432 2,351,858 Retained earnings, substantially restricted 6,213,169 7,907,176 Net unrealized appreciation on securities available-for-sale, net of deferred income taxes 25,801 8,267 ----------- ----------- Total stockholders' equity 8,244,635 10,539,778 ----------- ----------- Total liabilities and stockholders' equity $74,401,137 $78,835,918 =========== =========== The accompanying notes are an integral part of the consolidated financial statements.
22 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995, AND 1994 ----------------------------------
1996 1995 1994 ---------- ---------- ---------- INTEREST INCOME: Interest on loans $3,057,393 $2,812,782 $2,717,427 Interest and dividends on securities 2,167,280 2,493,348 2,300,702 Other interest income 434,493 349,560 192,087 ---------- ---------- ---------- Total interest income 5,659,166 5,655,690 5,210,216 ---------- ---------- ---------- INTEREST EXPENSE: Interest on deposits 2,815,403 2,569,375 2,240,756 Interest on borrowings 46,360 49,526 51,781 ---------- ---------- ---------- Total interest expense 2,861,763 2,618,901 2,292,537 ---------- ---------- ---------- Net interest income 2,797,403 3,036,789 2,917,679 Provision for loan losses 57,433 19,000 5,000 ---------- ---------- ---------- Net interest income after provision for loan losses 2,739,970 3,017,789 2,912,679 ---------- ---------- ---------- NON-INTEREST INCOME: Loan and other service fees, net 409,519 394,470 344,683 Gain on matured security 33,310 Gain (loss) on sale of securities 1,822 (6,083) Gain on sale of loans 2,698 7,546 50,533 ---------- ---------- ---------- 445,527 403,838 389,133 ---------- ---------- ---------- NON-INTEREST EXPENSE: Compensation and benefits 863,508 848,817 787,870 Occupancy expenses, net 190,194 203,789 204,357 Office supplies and expenses 110,441 103,926 106,578 Federal and other insurance premiums 616,705 172,036 177,736 Legal expenses 3,827 104,953 144,637 Data processing expenses 136,616 141,176 140,157 State franchise tax 64,790 64,409 69,496 Other operating expenses 106,117 136,875 87,003 ---------- ---------- ---------- 2,092,198 1,775,981 1,717,834 ---------- ---------- ---------- Income before income tax expense and cumulative effect of change in accounting principle 1,093,299 1,645,646 1,583,978 Income tax expense 386,317 568,143 533,755 ---------- ---------- ---------- Income before cumulative effect of change in accounting principle 706,982 1,077,503 1,050,223 Cumulative effect of change in accounting principle (17,881) ---------- ---------- ---------- Net income $ 706,982 $1,077,503 $1,032,342 ========== ========== ========== Earnings per share $2.76 $3.95 $3.79 ========== ========== ========== The accompanying notes are an integral part of the consolidated financial statements.
23 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995, AND 1994
NET UNREALIZED APPRECIATION ON ADDITIONAL SECURITIES TOTAL COMMON PAID-IN RETAINED AVAILABLE-FOR- STOCKHOLDERS' STOCK CAPITAL EARNINGS SALE EQUITY -------- ---------- ----------- --------------- --------------- Balance, September 30, 1993 $272,477 $2,351,858 $ 6,462,175 $ $ 9,086,510 Net Income 1,032,342 1,032,342 Declaration of dividend (313,349) (313,349) -------- ---------- ----------- --------------- --------------- Balance, September 30, 1994 272,477 2,351,858 7,181,168 9,805,503 Net Income 1,077,503 1,077,503 Declaration of dividend (351,495) (351,495) Cumulative effect October 1, 1994 of change in accounting for securities 64,189 64,189 Change in net unrealized gain on securities available-for-sale, net of deferred income taxes (55,922) (55,922) -------- ---------- ----------- --------------- --------------- Balance, September 30, 1995 272,477 2,351,858 7,907,176 8,267 10,539,778 Net Income 706,982 706,982 Declaration of dividend (353,533) (353,533) Stock repurchase (64,244 shares) (64,244) (554,426) (2,047,456) (2,666,126) Change in net unrealized gain on securities available-for-sale, net of deferred income taxes 17,534 17,534 -------- ---------- ----------- -------------- --------------- Balance, September 30, 1996 $208,233 $1,797,432 $ 6,213,169 $ 25,801 $ 8,244,635 ======== ========== =========== ============== =============== The accompanying notes are an integral part of the consolidated financial statements.
24 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995, AND 1994 ------------------
1996 1995 1994 ------------ ----------- ------------ OPERATING ACTIVITIES Net income $ 706,982 $ 1,077,503 $ 1,032,342 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 57,433 19,000 5,000 Amortization of investment premium (discount) 168,615 108,179 359,511 Amortization of organizational cost 13,507 12,382 Provision for depreciation 53,365 79,900 77,132 Amortization of loan fees (92,303) (48,617) (64,067) FHLB stock dividend (27,400) (36,900) (28,400) Securities (gain)loss, net (33,310) (1,822) 6,083 Loans originated for sale (10,162,642) (7,457,985) (17,868,395) Proceeds from loans held for sale 10,165,340 7,465,531 17,918,928 Gain on sale of loans (2,698) (7,546) (50,533) Change in: Prepaid expense 46,028 (57,523) (8,088) Interest receivable 139,885 (58,475) 42,931 Interest payable 15,914 5,886 (15,741) Accrued liabilities 627,438 55,866 29,843 Income taxes payable (118,385) 11,364 46,935 ------------ ----------- ------------ Net cash provided by operating activities 1,557,769 1,166,743 1,483,481 ------------ ----------- ------------ INVESTING ACTIVITIES Net (increase) decrease in loans (2,998,846) (2,800,413) 5,012,344 Investment securities, matured 895,000 Purchase of investment securities (4,195,075) Purchase of mortgage-backed securities (21,160,745) Sale of mortgage-backed securities 8,217,951 Principal repayments, mortgage-backed securities 6,486,307 3,995,015 11,590,282 Purchase of premises and equipment (51,941) (18,494) (61,380) Purchase of FHLB stock (68,400) Redemption of FHLB stock 55,200 91,800 Proceeds from sale of securities available-for-sale 4,488,932 Purchase of securities available-for-sale (3,614,506) (5,679,519) Purchase of securities held-to-maturity (10,484,665) (8,074,208) Maturity of securities held-to-maturity 14,578,264 7,548,430 Maturity of certificates of deposit 94,000 ------------ ----------- ------------ Net cash provided (used) by investing activities 4,063,813 (448,457) 229,977 ------------ ----------- ------------ (Continued) The accompanying notes are an integral part of the consolidated financial statements.
25
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995, AND 1994 ---------------------------------- 1996 1995 1994 ----------- ----------- ----------- FINANCING ACTIVITIES Net increase (decrease) in demand deposits, NOW accounts and savings accounts (1,678,188) (4,229,812) 3,577,821 Net increase (decrease) in certificates of deposit (1,074,568) 2,632,198 (3,089,972) Cash dividends (353,533) (351,495) (313,349) Federal Home Loan Bank Advance, repayments (43,632) (14,606) (37,887) Net increase (decrease) in custodial accounts 3,392 5,492 (13,247) Stock repurchase (2,666,126) ----------- ----------- ----------- Net cash provided (used) by financing activities (5,812,655) (1,958,223) 123,366 ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents (191,073) (1,239,937) 1,836,824 Cash and cash equivalents, beginning of year 5,664,527 6,904,464 5,067,640 ----------- ----------- ----------- Cash and cash equivalents, end of year $ 5,473,454 $ 5,664,527 $ 6,904,464 =========== =========== =========== SUPPLEMENTAL DISCLOSURES Cash payments for: Interest on deposits $ 2,811,085 $ 2,563,490 $ 2,256,496 Income taxes $ 505,000 $ 627,000 $ 505,000 Mortgage loans originated to finance sale of foreclosed real estate $ 46,500 Transfers from loans to real estate acquired through foreclosures $ 78,414 The accompanying notes are an integral part of the consolidated financial statements.
26 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES On December 20, 1994, the stockholders of Pioneer Federal Savings Bank (Bank) approved an agreement and Plan of Reorganization dated October 31, 1994, whereby the Bank through a reverse merger became a wholly owned subsidiary of Pioneer Financial Corporation (Company), a unitary savings and loan holding company. In accordance with the Reorganization Plan, stockholders of the Bank exchanged their shares of common stock on a one for one basis for common shares in the Company's common stock, which represented 100% of the outstanding stock of the Company. The Company is a corporation organized under the laws of Kentucky. The Company is a savings and loan holding company whose activities are primarily limited to holding the stock of the Bank. The Bank is a federally chartered stock savings bank and a member of the Federal Home Loan Bank System. As a member of this system, the Bank is required to maintain an investment in capital stock of the Federal Home Loan Bank of Cincinnati (FHLB) in an amount equal to at least the greater of 1% of its outstanding loan and mortgage-backed securities or .3% of total assets as of December 31 of each year. The Bank conducts a general banking business in central Kentucky which primarily consists of attracting deposits from the general public and applying those funds to the origination of loans for residential, consumer, and nonresidential purposes. The Bank's profitability is significantly dependent on net interest income which is the difference between interest income generated from interest-earning assets (i.e. loans and investments) and the interest expense paid on interest-bearing liabilities (i.e. customer deposits and borrowed funds). Net interest income is affected by the relative amount of interest-earning assets and interest-bearing liabilities and the interest received or paid on these balances. The level of interest rates paid or received by the Bank can be significantly influenced by a number of environmental factors, such as governmental monetary policy, that are outside of management's control. The consolidated financial information presented herein has been prepared in accordance with generally accepted accounting principles (GAAP) and general accounting practices within the financial services industry. In preparing consolidated financial statements in accordance with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from such estimates. The following is a summary of the Company's significant accounting policies which have been consistently applied in the preparation of the accompanying consolidated financial statements. PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of the Company and the Bank. All significant intercompany accounts and transactions have been eliminated. 27 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ----------------- LOAN ORIGINATION FEES. The Bank accounts for loan origination fees in accordance with SFAS No. 91 "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Cost of Leases." Pursuant to the provisions of SFAS No. 91, origination fees received from loans, net of direct origination costs, are deferred and amortized to interest income using the level-yield method, giving effect to actual loan prepayments. Additionally, SFAS No. 91 generally limits the definition of loan origination costs to the direct costs attributable to originating a loan, i.e., principally actual personnel costs. Fees received for loan commitments that are expected to be drawn upon, based on the Bank's experience with similar commitments, are deferred and amortized over the life of the loan using the level-yield method. Fees for other loan commitments are deferred and amortized over the loan commitment period on a straight-line basis. INVESTMENT SECURITIES. On October 1, 1994, the Bank adopted Statement of Financial Accounting Standards(SFAS) No. 115 "Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115 requires that all investments in debt securities and all investments in equity securities that have readily determinable fair values be classified into three categories. Securities that management has positive intent and ability to hold until maturity are classified as held-to-maturity. Securities that are bought and held specifically for the purpose of selling them in the near term are classified as trading securities. All other securities are classified as available-for-sale. Securities classified as trading and available-for-sale are carried at market value. Unrealized holding gains and losses for trading securities are included in current income. Unrealized holding gains and losses for available-for-sale securities are reported as a net amount in a separate component of stockholders' equity until realized. Investments classified as held-to-maturity will be carried at amortized cost. The cumulative effect of this change was to increase stockholders' equity by $97,256, net of deferred taxes of $33,067, as of October 1, 1994. Securities that management has the intent and ability to hold to maturity are classified as held-to-maturity, and carried at cost, adjusted for amortization of premium or accretion of discount over the term of the security, using the level yield method. Included in this category of investments is the FHLB stock which is a restricted stock carried at cost. Securities available-for-sale are carried at market value. Adjustments from amortized cost to market value are recorded in stockholders' equity net of deferred income tax until realized. The identified security method is used to determine gains or losses on sales of securities. Prior to October 1, 1994, investment securities were carried at cost, adjusted for amortization of premiums and accretion of discounts. The investment securities were carried at cost, as it was management's intent and the Bank had the ability to hold the securities until maturity. Investment securities held for indefinite periods of time, or which management utilized as part of its asset/liability management strategy, or that would be sold in response to changes in interest rates, prepayment risk, or the perceived need to increase regulatory capital were classified as held-for-sale at the point of purchase and carried at the lower of cost or market. Regulations require the Bank to maintain an amount of cash and U.S. government and other approved securities equal to a prescribed percentage (5% at September 30, 1996 and 1995) of (Continued) 28 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --------------- deposit accounts (net of loans secured by deposits) plus short-term borrowings. At September 30, 1996 and 1995, the Bank met these requirements. OFFICE PROPERTIES AND EQUIPMENT. Office properties and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight line method and the double declining balance method over the estimated useful lives of the related assets. The gain or loss on the sales of property and equipment is recorded in the year of disposition. REAL ESTATE OWNED. Real estate owned is generally comprised of property acquired through foreclosure or deed in lieu of foreclosure. Foreclosed real estate is recorded at the lower of cost or fair value, net of selling expenses, which subsequently becomes the cost, at the date of foreclosure. Expenses relating to holding property, including interest expense, are not capitalized. These expenses are charged to operations as incurred. Gains on the sale of real estate are recognized upon the ultimate disposal of the property. Valuations are periodically performed by management, and an allowance for losses is established by a charge to operations if the carrying value of a property exceeds its net realizable value. LOANS RECEIVABLE. Mortgage loans held for sale are valued at the lower of cost or market, as calculated on an aggregate loan basis. All other loans are stated at the principal amount outstanding. The Bank has adequate liquidity and capital, and it is generally management's intention to hold such assets to maturity. The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries). Management's periodic evaluation of the adequacy of the allowance is based on the Bank's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to pay, estimated value of any underlying collateral, and current economic conditions. While management uses the best information available, future adjustments may be necessary if conditions differ substantially from assumptions used in management's evaluation. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and may require additions to the allowances based on their judgment about information available to them at the time of their examination. Interest earned on loans receivable is recorded in the period earned. Uncollectible interest on loans that are contractually past due is charged off or an allowance is established based on management's periodic evaluation. The allowance is established by a charge to interest income equal to all interest previously accrued, and income is subsequently recognized only to the extent cash payments are received until, in management's judgment, the borrower's ability to make periodic interest and principal payments is back to normal, in which case the loan is returned to accrual status. In June 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." This promulgation, which was amended by SFAS No. 118 as to certain income recognition and disclosure provisions, became effective as to the Company in fiscal 1996. The new accounting standards require that impaired loans be measured based upon the present value of expected future (Continued) 29 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------------- cash flows discounted at the loan's effective interest rate, or as an alternative, at the loan's observable market price or fair value of the collateral. The Bank's current procedures for evaluating impaired loans result in carrying such loans at the lower of cost or fair value. The Bank adopted SFAS No. 114, as subsequently amended, on October 1, 1995, without material effect on consolidated financial condition or results of operations. A loan is defined under SFAS No. 114 as impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. In applying the provisions of SFAS No. 114, the Bank considers its investment in one-to-four family residential loans and consumer installment loans to be homogenous and therefore excluded from separate identification for evaluation of impairment. With respect to the Bank's investment in impaired multi-family and nonresidential loans, such loans are collateral dependent, and as a result, are carried as a practical expedient at the lower of cost or fair value. Collateral dependent loans when put in non-accrual status are considered to constitute more than a minimum delay in repayment and are evaluated for impairment under SFAS No. 114 at that time. DEPOSITS. The Bank's deposits are insured by the Savings Association Insurance Fund ("SAIF"), which is administered by the Federal Deposit Insurance Corporation ("FDIC"). The Bank currently pays an assessment rate of 23% on customer deposits under $100,000. On September 30, 1996, the President signed legislation, which among other things, recapitalized the Savings Association Insurance Fund through a special assessment on savings financial institutions, such as the Bank. The special assessment amounted to $435,000 for the Bank and is included in the Federal and other insurance premium expense for the year ended September 30, 1996. As a result of the recapitalization of the SAIF, the Bank's assessment rate for insurance on deposits, beginning in 1997, is expected to be reduced to approximately 4% on deposits under $100,000. INCOME TAXES. The Company accounts for federal income taxes in accordance with the provisions of SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 established financial accounting and reporting standards for the effects of income taxes that result from the Company's activities within the current and previous years. Pursuant to the provisions of SFAS No. 109, a deferred tax liability or deferred tax asset is computed by applying the current statutory tax rates to net taxable or deductible differences between the tax basis of an asset or liability and its reported amount in the financial statements that will result in taxable or deductible amounts in future periods. Deferred tax assets are recorded only to the extent that the amount of net deductible temporary differences or carryforward attributes may be utilized against current period earnings, carried back against prior years earnings, offset against taxable temporary differences reversing in future periods, or utilized to the extent of management's estimate of future taxable income. A valuation allowance is provided for deferred tax assets to the extent that the value of net deductible temporary differences and carryforward attributes exceeds management's estimates of taxes payable on future taxable income. Deferred tax liabilities are provided on the total amount of net temporary differences taxable in the future. (Continued) 30 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------------- The Company files a consolidated federal income tax return with the Bank. The current income tax expense or benefit is allocated to each Corporation included in the consolidated tax return based on their tax expense or benefit computed on a separate return basis. EFFECT OF IMPLEMENTING NEW ACCOUNTING STANDARDS. In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets to be held and used, and for long-lived assets and certain identifiable intangible assets to be dispose of. The Standard requires an impairment loss to be recognized when the carrying amount of the asset exceeds the fair value of the asset. Management does not anticipate the implementation of this standard having a material adverse impact on the financial statements. In May 1995, the FASB issued SFAS No. 122 "Accounting for Mortgage Servicing Rights," which amended SFAS No. 65 "Accounting for Certain Mortgage Banking Activities." SFAS No. 122 requires a mortgage banking enterprise to recognize as separate assets rights to service mortgage loans for others; however, these servicing rights are acquired. This statement applies prospectively in fiscal years beginning after December 15, 1995. The Company is not required to adopt the standard for the periods presented in these financial statements, and as such, has not determined the impact on the consolidated financial statements of adopting this standard. CASH AND CASH EQUIVALENTS. For purposes of reporting consolidated cash flows, the Bank considers cash, balances with banks, federal funds sold, and interest bearing deposits in other financial institutions with original maturities of three months or less to be cash equivalents. Cash and cash equivalents includes approximately $4.5 million on deposit with other banks which is not covered by FDIC insurance. RECLASSIFICATION. Certain presentations of accounts previously reported have been reclassified in these consolidated financial statements. Such reclassifications had no effect on net income or retained income as previously reported. (Continued) 31 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------------- 2. INVESTMENT SECURITIES The cost and estimated fair value of securities held by the Bank as of September 30, 1996 and 1995 are summarized as follows:
1996 -------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED COST GAINS LOSSES FAIR VALUE ----------- ----------- ---------- ----------- Securities, available-for-sale: SBA Pools $ 3,068,229 $ 8,043 $ $ 3,076,272 Mortgage-Backed Securities 4,494,290 44,614 13,565 4,525,339 ----------- ----------- ----------- ----------- $ 7,562,519 $52,657 $ 13,565 $ 7,601,611 =========== =========== =========== =========== Securities, held-to-maturity: Debt Securities: U.S. Government and Federal Agencies $ 500,000 $ $ 1,565 $ 498,435 Municipal Bonds 817,221 1,024 818,245 ----------- ----------- ----------- ----------- 1,317,221 1,024 1,565 1,316,680 ----------- ----------- ----------- ----------- Mortgage-Backed Securities 22,146,476 74,622 525,980 21,695,118 ----------- ----------- ----------- ----------- Federal Home Loan Bank of Cincinnati, capital stock - 5,088 shares 508,800 508,800 ----------- ----------- ----------- ----------- $23,972,497 $75,646 $527,545 $23,520,598 =========== =========== =========== ===========
1995 -------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED COST GAINS LOSSES FAIR VALUE ----------- ----------- ---------- ------------ Securities, available-for-sale: SBA Pools $ 3,263,731 $18,951 $ $ 3,282,682 Mortgage-Backed Securities 2,192,425 6,425 2,186,000 ----------- ----------- ----------- ----------- $ 5,456,156 $18,951 $ 6,425 $ 5,468,682 =========== =========== =========== =========== Securities, held-to-maturity: Debt Securities: U.S. Government and Federal Agencies $ 5,043,343 $44,570 $ $ 5,087,913 Municipal Bonds 316,901 900 317,801 ----------- ----------- ----------- ----------- 5,360,244 45,470 5,405,714 ----------- ----------- ----------- ----------- Mortgage-Backed Securities 27,310,520 354,037 26,956,483 ----------- ----------- ----------- ----------- Federal Home Loan Bank of Cincinnati, capital stock - 5,366 shares 536,600 536,600 ----------- ----------- ----------- ----------- $33,207,364 $45,470 $354,037 $32,898,797 =========== =========== =========== ===========
(Continued) 32 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------------- The amortized cost and estimated market value of debt securities at September 30, 1996, by contractual maturity, are as follows:
ESTIMATED AMORTIZED MARKET COST VALUE ------------- ------------- Due in one year or less $ 100,000 $ 100,000 Due after one year through five years 1,099,258 1,091,591 Due after five years through ten years Due after ten years 117,963 125,089 ----------- ----------- $ 1,317,221 $ 1,316,680 =========== ===========
Effective October 1, 1994, the Bank changed its policy in accounting for debt and equity securities to conform with the requirements of SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities." The unrealized gain on securities available-for-sale of $39,093 net of deferred income taxes of $13,292 has been recorded as a separate component of stockholders' equity as of September 30, 1996. For the year ended September 30, 1996, the Bank received $14,578,264 from the maturity and call of U.S. Government instruments and debt securities backed by U.S. Government agencies, all of which were classified as securities held- to-maturity. The Bank recognized a gain of $33,310 on the call of a Federal National Mortgage Association (FNMA) bond. For the year ended September 30, 1995, the Bank received $548,050 from the sale of equity securities and $3,940,882 from the sale of mortgage-backed securities, all of which were classified as securities available-for-sale. The Bank recognized a gain of $506,267 on the sale of the equity securities and a $504,445 loss on the sale of the mortgage-backed securities. For the year ended September 30, 1994, the Bank received $8,217,951 from the sale of mortgage-backed securities recognizing a loss of $6,083. The Bank has pledged mortgage-backed securities totaling $2,855,000 to secure certain municipal deposits as of September 30, 1996. (Continued) 33 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------------- 3. LOANS RECEIVABLE
Loans receivable, net at September 30, 1996 and 1995 consists of the following: 1996 1995 ------------ ----------- Loans secured by first lien mortgages on real estate: Residential, one-to-four family properties $21,252,055 $20,068,885 Multi-family and commercial properties 2,127,870 1,557,696 Agricultural loans 565,313 789,132 Construction loans 1,808,092 2,054,728 Other loans: Commercial loans 4,796,056 3,925,614 Loans secured by deposits 1,048,311 973,157 Home equity loans 1,662,736 1,175,119 Other secured loans 2,710,992 2,686,983 Signature loans, unsecured 271,109 212,431 ------------ ----------- 36,242,534 33,443,745 Loans in process (403,128) (863,886) Provisions for loan losses (382,469) (352,244) Deferred loan origination fees (209,516) (201,273) ------------ ----------- Loans receivable, net $35,247,421 $32,026,342 ============ ===========
The Bank services loans sold to other associations or governmental agencies of approximately $50,317,000, $50,138,000, and $48,468,000, as of September 30, 1996, 1995 and 1994, respectively. The Bank provides an allowance to the extent considered necessary to provide for losses that may be incurred upon the ultimate realization of loans. The changes in the allowance for loss on loans is analyzed as follows:
YEAR ENDED SEPTEMBER 30, ------------------------------ 1996 1995 1994 -------- -------- -------- Balance at beginning or period $352,244 $347,618 $397,512 Additions charged to operations 57,433 19,000 5,000 Charge-offs (36,901) (18,433) (71,038) Recoveries 9,693 4,059 16,144 -------- -------- -------- Balance at end of period $382,469 $352,244 $347,618 ======== ======== ========
At September 30, 1996, the Bank had identified impaired loans totaling $18,000. The allowance for loan losses included $18,000 related to these impaired loans. The average amount of impaired loans for the year ended September 30, 1996 was $34,800. Interest income received and recognized on impaired loans totaled $2,324 for the year ended September 30, 1996. (Continued) 34 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------------- The following is a summary of non-performing loans (in thousands) for the years ended September 30, 1996, 1995, and 1994, respectively:
SEPTEMBER 30, -------------------------- 1996 1995 1994 -------- -------- -------- Non-accrual loans $ 18 $ 41 $ 32 Loans past due 90 days or more 205 151 72 -------- -------- -------- Total non-performing loan balances $223 $192 $104 ======== ======== ========
If interest on non-accrual loans had been accrued, such income would have been approximately $5,035, $2,391, and $7,072, for 1996, 1995, and 1994, respectively. Loans to executive officers and directors, including loans to affiliated companies of which executive officers and directors are principal owners, and loans to members of the immediate family of such persons at September 30, 1996 and 1995 are summarized as follows:
SEPTEMBER 30, -------------------- 1996 1995 --------- -------- Balance at beginning or period $ 132,127 $126,435 Additions during year 222,827 20,032 Repayments (151,378) (14,340) --------- -------- Balance at end of period $ 203,576 $132,127 ========= ========
4. PREMISES AND EQUIPMENT
Office premises and equipment at September 30, 1996 and 1995 includes the following: USEFUL DESCRIPTION LIFE 1996 1995 ----------- ----------- ------------ ------------ Land, buildings, and improvements 30-45 years $ 1,637,310 $ 1,599,420 Furniture, fixtures, and equipment 5-10 years 720,748 705,062 ----------- ----------- ------------ Balance at end of period 2,358,058 2,304,482 Less accumulated depreciation (1,182,071) (1,127,070) ----------- ----------- $ 1,175,987 $ 1,177,412 =========== =========== Depreciation expense for the years ended September 30, 1996, 1995 and 1994 amounted to $53,365, $79,900, and $77,132, respectively.
(Continued) 35 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------------- 5. DEPOSITS Deposit accounts at September 30, 1996 and 1995 are summarized as follows:
SEPTEMBER 30, ------------------------- 1996 1995 ------------ ----------- Demand deposit accounts, non-interest bearing $ 2,463,426 $ 2,521,436 Passbook accounts with a weighted average rate of 2.94% and 3.00% at September 30, 1996 and 1995, respectively 9,757,570 9,939,079 NOW and MMDA deposits with a weighted average rate of 2.48% and 2.43% at September 30, 1996 and 1995, respectively 13,424,027 14,862,696 ------------ ----------- 25,645,023 27,323,211 Certificate of deposits with a weighted average interest rate of 5.24% and 5.37% at September 30, 1996 and 1995, respectively 38,690,142 39,764,710 ------------ ----------- Total Deposits $64,335,165 $67,087,921 ============ =========== Jumbo certificates of deposit (minimum denomination of $100,000) $ 6,064,944 $ 6,742,571 ============ ===========
Certificates of deposit by maturity at September 30, 1996 and 1995 (in thousands) are as follows: SEPTEMBER 30, ------------------------- 1996 1995 ------------ ----------- Less than 1 year $ 25,659 $ 29,949 1-2 years 10,291 6,403 2-3 years 1,421 1,514 Maturing in years thereafter 1,319 1,899 ------------ ----------- $ 38,690 $ 39,765 ============ ===========
Certificates of deposit by maturity and interest rate category at September 30, 1996 (in thousands) are as follows: AMOUNT DUE -------------------------------------------------------------- LESS THAN AFTER 3 ONE YEAR 1-2 YEARS 2-3 YEARS YEARS TOTAL --------- ----------- ----------- --------- --------- 2.01--4.00% $ 384 $ $ $ $ 384 4.01--6.00% 23,767 9,378 1,198 201 34,544 6.01--8.00% 1,508 913 223 1,118 3,762 --------- ---------- ----------- --------- --------- $25,659 $10,291 $1,421 $1,319 $38,690 ========= ========== =========== ========= =========
(Continued) 36 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ----------------
Interest expense on deposits for the periods indicated are as follows: YEARS ENDED SEPTEMBER 30, --------------------------------------- 1996 1995 1994 ----------- ---------- ----------- Money market and NOW account $ 415,846 $ 395,111 $ 367,268 Savings Accounts 288,054 307,751 358,322 Certificates 2,111,503 1,866,513 1,515,166 ----------- ---------- ----------- $2,815,403 $2,569,375 $2,240,756 =========== ========== ===========
The Bank maintains arrangements for clearing NOW and MMDA accounts with the Federal Home Loan Bank of Cincinnati. The Bank is required to maintain adequate collected funds in its Demand Account to cover average daily clearings. The Bank was in compliance with this requirement at September 30, 1996 and 1995. 6. ADVANCES FROM FEDERAL HOME LOAN BANK The advances from the Federal Home Loan Bank consist of the following:
SEPTEMBER 30, ---------------------------- MATURITY DATE INTEREST RATE 1996 1995 ------------- ------------- -------- -------- 1/1/2006 6.80% $186,460 $198,502 2/1/2007 6.35% 362,467 386,337 4/1/2007 7.50% 124,282 131,705 7/1/2025 5.50% 25,589 25,886 -------- -------- $698,798 $742,430 ======== ========
The following summarizes the amounts due on FHLB advances by year for each of the next five fiscal years and thereafter. FISCAL YEAR AMOUNT ----------- -------- 1997 $ 46,629 1998 49,835 1999 53,261 2000 56,923 2001 60,839 Subsequent to 2001 431,311 -------- $698,798 ========
(Continued) 37 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------------- At September 30, 1996 and 1995, the Bank had a cash management advance line of credit with the Federal Home Loan Bank of Cincinnati that allows the Bank to borrow up to $4,000,000 for a maximum thirty day period at a fixed rate or for a maximum of ninety days at a variable rate. No commitment fees are paid under the agreement. There were no borrowings against this line of credit at September 30, 1996. These advances are collateralized by Federal Home Loan Bank stock and a blanket agreement against certain real estate loans. 7. INCOME TAXES Effective January 1, 1993, the Bank adopted SFAS No. 109 "Accounting for Income Taxes" which requires an asset and liability approach to accounting for income taxes. The cumulative effect of adopting SFAS No. 109 was to decrease net income for the year ended September 30, 1994 by $17,881. The provision for income taxes for the periods indicated consist of the following:
YEAR ENDED SEPTEMBER 30, ---------------------------- 1996 1995 1994 -------- -------- -------- Federal income tax expense: Current expense $377,730 $526,821 $488,740 Deferred expense 8,587 41,322 45,015 -------- -------- -------- $386,317 $568,143 $533,755 ======== ======== ========
Deferred income taxes result from temporary differences in the recognition of income and expenses for tax and financial statement purposes. The source of these temporary differences and the tax effect of each are as follows:
YEAR ENDED SEPTEMBER 30, ---------------------------- 1996 1995 1994 -------- -------- -------- FHLB stock $ 3,598 $ (878) $ 9,656 Allowance for loan losses 12,153 44,860 36,626 Other, net (7,164) (2,660) (1,267) -------- -------- -------- Net deferred tax expense $ 8,587 $41,322 $45,015 ======== ======== ========
(Continued) 38 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------------- For the periods indicated, total income tax expense differed from the amounts computed by applying the U.S. Federal income tax rate of 34% to income before income taxes as follows:
YEAR ENDED SEPTEMBER 30, ------------------------------ 1996 1995 1994 -------- -------- -------- Expected income tax expense at federal tax rate $371,722 $559,520 $538,552 Other, net 14,595 8,623 (4,797) -------- -------- -------- Total income tax expense $386,317 $568,143 $533,755 ======== ======== ======== Effective income tax rate 35.3% 34.5% 33.7% ======== ======== ======== Deferred tax assets and liabilities as of September 30, 1996 and 1995 consisted of the following: 1996 1995 -------- -------- Deferred tax assets: Deferred loan fee income $ 71,235 $ 66,360 -------- -------- Deferred tax liabilities: FHLB stock 86,886 83,288 Allowance for loan losses 106,089 93,937 Other, net 3,008 5,296 -------- -------- 195,983 182,521 -------- -------- Net deferred taxes payable $124,748 $116,161 ======== ========
In addition to the net deferred tax liabilities outlined in the preceding table, the financial statements include a deferred tax liability of $13,292 and $4,259 on the unrealized gain on securities available-for-sale as of September 30, 1996 and 1995, respectively. These amounts have been charged against the unrealized gain on securities available-for-sale with the net amount of $25,801 and $8,267 recorded as a separate component of stockholders' equity at September 30, 1996 and 1995, respectively. The Internal Revenue Code allows savings institutions a special bad debt deduction, subject to certain limitations, based on the greater of actual experience or a percentage of taxable income method before such deduction. The effective bad debt deduction under the percentage of taxable income method is equal to approximately 8% of taxable income. In September of 1996, legislation was passed by Congress, which repealed the bad debt deduction under the percentage of taxable income method of the Internal Revenue Code for savings banks. Savings banks, like the Bank, which have previously used the percentage of taxable income method in computing its bad debt deduction for tax purposes will be required to recapture into taxable income post 1987 tax reserves over a six-year period, effective in fiscal year 1997 for the Bank. The impact of this legislation will not have a material impact on the financial statements of the Company. (Continued) 39 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------------- 8. STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL REGULATORY CAPITAL. The Bank is subject to minimum regulatory capital requirements promulgated by the Office of Thrift Supervision (OTS). Such minimum capital standards generally require the maintenance of regulatory capital sufficient to meet each of three tests, hereinafter described as the tangible capital requirement, the core capital requirement and the risk-based capital requirement. The tangible capital requirement provides for minimum tangible capital (defined as stockholders' equity less all intangible assets) equal to 1.5% of adjusted total assets. The core capital requirement provides for minimum core capital (tangible capital plus certain forms of supervisory goodwill and other qualifying intangible assets such as capitalized mortgage servicing rights) equal to 3.0% of adjusted total assets. A recent OTS proposal, if adopted in present form, would increase the core capital requirement to a range of 4%-5% of adjusted total assets for substantially all savings institutions. Management anticipates no material change to the Bank's present excess regulatory capital position as a result of this change in the regulatory capital requirement. The risk-based capital requirement provides for the maintenance of core capital plus general loss allowances equal to 8.0% of risk-weighted assets. In computing risk-weighted assets, the Savings Bank multiplies the value of each asset on its statement of financial condition by a defined risk-weighting factor, e.g., one-to-four family residential loans carry a risk-weighted factor of 50%. As of September 30, 1996, the Bank's regulatory capital exceeded all minimum regulatory capital requirements as shown in the following table:
REGULATORY CAPITAL ------------------------------------------------------------- TANGIBLE CORE RISK-BASED CAPITAL PERCENT CAPITAL PERCENT CAPITAL PERCENT -------- ------- ------- ------- ---------- ------- (IN THOUSANDS) ------------------------------------------------------------- Capital under generally $8,169 % $8,169 % $8,169 % accepted accounting principles Adjusments: Net unrealized appreciation on securities available-for- sale (26) (26) (26) General valuation allowances 364 -------- ------- ---------- Regulatory capital computed 8,143 10.9 8,143 10.9 8,507 26.8 Minimum capital requirement 1,117 1.5 2,234 3.0 2,498 8.0 -------- ------- ------- ------- ---------- ------- Regulatory capital-excess $7,026 9.4% $5,909 7.9% $6,009 18.8% ======== ======= ======= ======= ========== =======
RETAINED EARNINGS RESTRICTION. The Bank is allowed a special bad debt deduction limited generally to eight percent (8%) of otherwise taxable income and subject to certain limitations based on aggregate loans and savings account balances at the end of the year. If the amount qualifying as deductions under (Continued) 40 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------------- the Internal Revenue Code are later used for purposes other than for bad debt losses, they will be subject to Federal income tax at the then current corporation rate. Retained earnings at September 30, 1996 includes approximately $1,596,000, for which Federal income tax has not been provided nor has been required to be provided (see Note 7). LIQUIDATION ACCOUNT. Upon conversion to a capital stock savings bank, eligible account holders who continued to maintain their deposit accounts in the Bank were granted priority in the event of the future liquidation of the Bank through the establishment of a special "Liquidation Account" in an amount equal to the consolidated net worth of the Bank at September 30, 1986. The Liquidation Account was $2,531,513 at September 30, 1986 and will be reduced in proportion to reductions in the balance of eligible account holders as determined on each subsequent fiscal year end. The existence of the Liquidation Account will not restrict the use or application of net worth except with respect to the cash payment of dividends. DIVIDEND RESTRICTIONS: The payment of cash dividends by the Bank on its Common Stock is limited by regulations of the OTS. Interest on savings accounts will be paid prior to payments of dividends on common stock. The Bank may not declare or pay a cash dividend to the Company in excess of 100% of its net income to date during the current calendar year plus the amount that would reduce by one-half the Bank's capital ratio at the beginning of the year without prior OTS approval. Additional limitation on dividends declared or paid, or repurchases of the Bank stock are tied to the Bank's level of compliance with its regulatory capital requirements. 9. STOCK REPURCHASE Pursuant to a Stock Purchase Agreement approved by the Board of Directors and the Office of Thrift Supervision, the Company purchased 64,244 shares of the Company's outstanding stock, of which 58,069 shares were owned by a group of stockholders collectively known as the "EKH Group." The 64,244 shares of common stock were purchased in July of 1996 at a total cost of $2,666,126. 10. RETIREMENT BENEFITS PROFIT SHARING PLAN: On December 17, 1985, the Board of Directors of the Bank adopted an employee pension benefit plan (referred to as a "401K Profit Sharing Plan") as described under the Employees' Retirement Income Security Act of 1974. The Plan became effective December 19, 1985. The Plan covers all full time employees who have been employed six months prior to the anniversary date of the Plan. Under the Plan, the Bank makes discretionary contributions based on profits, in accordance with Section 401(k) of the Internal Revenue Code. The Bank did not make any contributions to the Plan for the year ended September 30, 1996 and 1995, and contributed $27,514 to the Plan for the year ended September 30, 1994. On October 31, 1994, the Board of Directors of the Bank established an Employee Stock Ownership Plan (the "ESOP") in which employees meeting age and service requirements are eligible to participate. The ESOP is effective beginning January 1, 1994. The ESOP Plan covers all employees (Continued) 41 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --------------- who have attained the age of 18 and completed at least 1,000 hours of service annually. Contributions to the Plan are determined by the Board of Directors for each plan year and can be made in the form of company stock, cash, or other consideration. The amount of the Company's contribution for each plan year shall at a minimum be the amount necessary to service any debt incurred by the Trustee on behalf of the Trust for the purchase of Company stock. At September 30, 1996 the Trust had not incurred any debt for the purchase of Company stock. The Company accounts for the ESOP transactions in accordance with Statement of Position 93-6 "Employers Accounting for Employee Stock Ownership Plans." As a nonleveraged ESOP the compensation cost for the periods included in these financial statements is based on the Company's contribution approved by the Board of Directors for the periods presented. Contributions to the ESOP Trust amounted to $30,512 and $24,425 for the years ended September 30, 1996 and 1995, respectively. 11. RELATED PARTIES Mrs. Janet White Prewitt serves the Company as Chairman of the Board of Directors. Mrs. Prewitt is an equity partner in the law firm of White, MCCann, and Stewart that serves as general counsel to Pioneer Federal Savings Bank. The fees paid to the Law Firm for fiscal years 1996, 1995, and 1994 were $103,969, $77,385, and $107,951, respectively. (See Note 4 for a summary of loans to officers and directors). In addition, White, MCCann, and Stewart receives commissions on title insurance premiums related to real estate mortgages originated by the Bank. These commissions amounted to $29,889, $14,915, and $21,960 for the years ended September 30, 1996, 1995, and 1994, respectively. 12. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include mortgage commitments outstanding which amounted to approximately $1,107,600 and $774,500 for the year ended September 30, 1996 and 1995, respectively plus unused lines of credit granted to customers totaling $1,689,376 and $2,366,602 at September 30, 1996 and 1995, respectively. In addition, at September 30, 1996 and 1995, respectively, the Bank had made loan commitments for real estate loans secured by first mortgages totaling $1,169,350 and $1,032,375, which it anticipated selling in the secondary market. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments and consumer lines of credit are represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Since many of the loan commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on (Continued) 42 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --------------- management's credit evaluation of the counterparty. Collateral held varies, but primarily includes residential real estate. The Bank has concentrated its lending activity within a 90 mile radius of Winchester, Kentucky. Therefore, a substantial portion of its debtors' ability to honor their contracts is dependent on the economy of this area. 13. EARNINGS PER SHARE Earnings per share for the year ended September 30, 1996, 1995, and 1994 was calculated by dividing net income $706,982, $1,077,503, and $1,032,342 by the weighted average number of shares of common stock outstanding during the year, which was 256,416 for the year ended September 30, 1996 and 272,477 for the years ended September 30, 1995 and 1994. 14. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS In December 1991, the FASB issued SFAS No. 107, "Disclosures About Fair Value of Financial Instruments." This statement extends the existing fair value disclosure practices for some instruments by requiring all entities to disclose the fair value of financial instruments (as defined), both assets and liabilities recognized and not recognized in the statements of financial condition, for which it is practicable to estimate fair value. There are inherent limitations in determining fair value estimates, as they relate only to specific data based on relevant information at that time. As a significant percentage of the Bank's financial instruments do not have an active trading market, fair value estimates are necessarily based on future expected cash flows, credit losses, and other related factors. Such estimates are accordingly, subjective in nature, judgmental and involve imprecision. Future events will occur at levels different from that in the assumptions, and such differences may significantly affect the estimates. The statement excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. Additionally, the tax impact of the unrealized gains or losses has not been presented or included in the estimates of fair value. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments. CASH AND CASH EQUIVALENTS. The carrying amounts reported in the statement of financial condition for cash and short-term instruments approximate those assets' fair values. INVESTMENT SECURITIES. Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. No active market exists for the Federal Home Loan Bank capital stock. The (Continued) 43 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --------------- carrying value is estimated to be fair value since if the Bank withdraws membership in the Federal Home Loan Bank, the stock must be redeemed for face value. LOANS RECEIVABLE. The fair value of loans was estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. DEPOSITS. The fair value of savings deposits and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. LOAN COMMITMENTS AND UNUSED HOME EQUITY LINES OF CREDIT. The fair value of loan commitments and unused home equity lines of credit is estimated by taking into account the remaining terms of the agreements and the present credit-worthiness of the counterparties. The estimated fair value of the Company's financial instruments at September 30, 1996 are as follows:
CARRYING FAIR AMOUNT VALUE ----------- ----------- ASSETS Cash and cash equivalents $ 5,733,454 $ 5,733,454 Securities available-for-sale 7,601,611 7,601,611 Securities held-to-maturity 23,972,497 23,520,598 Loans receivable, net 35,247,421 35,330,761 LIABILITIES Deposits 64,335,165 64,393,038 FHLB advances 698,798 500,093 UNRECOGNIZED FINANCIAL INSTRUMENTS Loan commitments 1,107,600 Unused lines of credit 1,689,376
(Continued) 44 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------------- 15. PIONEER FINANCIAL CORPORATION FINANCIAL INFORMATION (PARENT COMPANY ONLY) The parent company's principal assets are its investment in the Bank and cash balances on deposit with the Bank. The following are condensed financial statements for the parent company as of and for the year ended September 30, 1996. PIONEER FINANCIAL CORPORATION CONDENSED STATEMENT OF FINANCIAL CONDITION SEPTEMBER 30, 1996
ASSETS: Cash and due from banks $ 26,773 Investment in subsidiary 8,167,641 Organizational cost, net 41,648 Other assets 8,573 ---------- Total assets $8,244,635 ========== LIABILITIES AND STOCKHOLDERS' EQUITY: Stockholders' equity: Common stock $ 208,233 Additional paid-in capital 1,797,432 Retained earnings 6,213,169 Net unrealized appreciation on securities available-for-sale 25,801 ---------- Total liabilities and stockholders' equity $8,244,635 ==========
PIONEER FINANCIAL CORPORATION CONDENSED STATEMENT OF INCOME YEAR ENDED SEPTEMBER 30, 1996
INCOME: Cash dividends from Bank $3,019,659 ---------- EXPENSE: Amortization of organizational expense 13,507 Other operating 5,689 ---------- 19,196 ---------- Income before income tax benefit 3,000,463 Income tax benefit 6,512 ---------- Net income $3,006,975 ==========
(Continued) 45 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --------------- PIONEER FINANCIAL CORPORATION CONDENSED STATEMENT OF CASH FLOWS YEAR ENDED SEPTEMBER 30, 1996
OPERATING ACTIVITIES: Net income $3,006,975 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of organizational cost 13,507 Increase in receivables (6,468) ---------- Net cash provided by operating activities 3,014,014 ---------- INVESTING ACTIVITIES: Net cash provided (used) by investing activities ---------- FINANCING ACTIVITIES: Dividends paid (353,533) Stock repurchase (2,666,126) ---------- Net cash used by financing activities (3,019,659) ---------- Decrease in cash and cash equivalents (5,645) Cash and cash equivalents at beginning of period 32,418 ---------- Cash and cash equivalents at end of period $ 26,773 ==========
(Continued) 46 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --------------- 16. PIONEER SERVICE CORPORATION On August 30, 1978, the Savings Bank formed Pioneer Service Corporation, a wholly owned subsidiary, by purchasing its stock for $16,000. The Subsidiary was created to hold stock in a not for profit corporation that provides on line computer processing and inquiry service for the Bank and other savings and loan institutions. Summary balance sheets for the wholly owned subsidiary, Pioneer Service Corporation are as follows:
PIONEER SERVICE CORPORATION BALANCE SHEETS, SEPTEMBER 30, 1996 AND 1995 -------------- ASSETS 1996 1995 ---------- ---------- Cash $ 653 $ 683 Investments 15,000 15,000 ---------- ---------- $15,653 $15,683 ========== ========== STOCKHOLDERS' EQUITY Common stock $16,000 $16,000 Paid-in capital 1,000 1,000 Deficit (1,347) (1,317) ---------- ---------- $15,653 $15,683 ========== ========== The Service Corporation incurred expenses of $30 and $45 for the years ended September 30, 1996 and 1995, respectively.
47 CORPORATE INFORMATION OFFICES Executive offices: Branch offices: 25 East Hickman Street Pioneer Drive Pendleton Street Winchester, KY 40391 Winchester, KY 40391 Stanton, KY 40380 (606) 744-3972 (606) 744-3896 (606) 663-4104 DIRECTORS George W. Billings, Jr. William M. Cress Retired U.S. Postmaster, Exec. Vice President, Proprietor of Billings Hinkle Contracting Tax Service, Stanton, KY Corporation, Stanton, KY Ewart W. Johnson Nancy M. Lawwill Retired, Lexington, KY Vice President, Treasurer and Assistant Secretary, Pioneer Federal Nora M. Linville Wayne M. Martin Secretary, Pioneer Federal President and General and Retired Executive Manager, WKYT-TV, Vice President Lexington, KY Thomas D. Muncie Carl C. Norton President, Muncie Buick-GMC President and Secretary, Truck, Inc. Pioneer Financial; President, Pioneer Federal Janet W. Prewitt Andrew James Ryan Board Chair, Pioneer Financial President, Andy Ryan and Pioneer Federal; Asst. Pontiac-Nissan, Inc. Secretary, Pioneer Financial; and Attorney, White, McCann & Stewart Robert G. Strode Retired Vice President Ag-Gro Fertilizer Company ADVISORY DIRECTORS John D. Harrison Roger Davis Retired; Stanton, KY Clay City, KY Martha W. Hampton Clifford R. Langley Stanton, KY Winchester, KY Nellie K. Meadows Willard M. Martin Clay City, KY Retired Housing Authority Executive Director Beckner Shimfessel Retired Clark County Clerk 48 OTHER OFFICERS AND SIGNIFICANT EMPLOYEES Anthony Parrish Janet R. Tutt Rob Agee Chief Financial Assistant Treasurer Loan Officer Officer Dianna Davis Doris Estes Bobby R. Trent Branch Manager/ Branch Manager/ Compliance/Security Loan Officer Loan Officer Vicki Rupard Loan Officer AUDITORS LEGAL COUNSEL Miller, Mayer, Sullivan & Stevens LLP White, McCann & Stewart 2365 Harrodsburg Road 125 S. Main Street Lexington, KY 40504 Winchester, KY 40391 ANNUAL MEETING The Annual Meeting of the shareholders of Pioneer Financial Corporation will be held on Wednesday, January 8, 1997, at 10:00 a.m. at the main office, 25 East Hickman Street, Winchester, Kentucky. FORM 10-K A COPY OF THE CORPORATION'S FORM 10-K AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION WILL BE FURNISHED WITHOUT CHARGE TO STOCKHOLDERS AS OF THE RECORD DATE UPON WRITTEN REQUEST TO THE SECRETARY, PIONEER FINANCIAL CORPORATION, 25 EAST HICKMAN STREET, WINCHESTER, KENTUCKY 40391. 49 EX-27 3 EXHIBIT 27
9 1,000 YEAR SEP-30-1996 OCT-01-1996 SEP-30-1996 733 1,724 3,211 0 7,602 23,972 23,521 35,629 382 74,401 64,335 0 1,123 699 0 0 208 8,036 74,401 3,057 2,167 435 5,659 2,816 46 2,797 57 33 2,092 1,093 1,093 0 0 386 2.76 0 3.63 18 205 0 0 352 37 10 382 382 0 0
EX-28.A 4 EXHIBIT 28.A [LETTERHEAD OF YORK, NEEL & COMPANY APPEARS HERE] MILLER, MAYER, SULLIVAN & STEVENS LLP CERTIFIED PUBLIC ACCOUNTANTS "INNOVATORS OF SOLUTION TECHNOLOGY" INDEPENDENT AUDITORS' REPORT Board of Directors Pioneer Financial Corporation Winchester, Kentucky We have audited the accompanying consolidated balance sheets of Pioneer Financial Corporation and Subsidiary as of September 30, 1996 and 1995 and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three year period ended September 30, 1996. These consolidated financial statements are the responsibility of the management of Pioneer Financial Corporation (Company). Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pioneer Financial Corporation and Subsidiary as of September 30, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three year period ended September 30, 1996 in conformity with generally accepted accounting principles. /s/ Miller, Mayer, Sullivan & Stevens /s/ York, Neel & Company, LLP Lexington, Kentucky Owensboro, Kentucky November 11, 1996 November 11, 1996 EX-28.B 5 EXHIBIT 28.B December 16, 1996 Dear Shareholder: Our 1997 Annual Meeting of Shareholders will be held at 10:00 a.m. on Wednesday, January 8, 1997, at the main office at 25 E. Hickman Street, Winchester, Kentucky. At the meeting action will be taken to elect three Direc- tors to serve for a term of three years. In addition, we will ratify the appointment by the Board of Directors of Miller, Mayer, Sullivan & Stevens LLP, to prepare the fiscal year 1997 audit. At the meeting I will report on the business outlook for the fiscal year. I urge you to attend the meeting. The formal notice of the meeting and the Proxy Statement containing information relative to the meeting follow this letter. Please be sure to sign and return the enclosed proxy card whether or not you plan to attend the meeting so that your shares will be voted. If you do attend the meeting, you will have an opportunity to revoke your proxy and vote in person if you prefer. If you have any questions about the meeting or proxy, please visit our main office at 25 E. Hickman Street, Winchester, Kentucky, or call us at (606) 744-3972. The Board of Directors appreciates your interest in Pioneer. Your Board of Directors has declared a quarterly dividend of $0.35 per share payable this date to shareholders of record on December 1, 1996; your dividend check is enclosed. As of March 15, 1996, the annual dividend was increased to $1.40 per share, which is payable quarterly rather than annually. Sincerely, /s/ Carl C. Norton --------------------------------- Carl C. Norton, President PIONEER FINANCIAL CORPORATION WINCHESTER, KENTUCKY 25 E. Hickman Street Winchester, Kentucky 40391 (606) 744-3972 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON JANUARY 8, 1997 Notice is hereby given that the annual meeting of shareholders of Pioneer Financial Corporation (the "Corporation") will be held at 10:00 a.m. on January 8, 1997 at the home office of the Corporation's wholly-owned subsidiary, Pioneer Federal Savings Bank, at 25 E. Hickman Street, Winchester, Kentucky, for the following purposes: 1. To elect three Directors of the class whose term of office expires in 1997, to serve for a term of three years; 2. To ratify the appointment of Miller, Mayer, Sullivan & Stevens LLP to serve as the auditors of the Savings Bank for fiscal year 1997; and 3. To receive the reports of officers and transact such other business as may properly come before the meeting. Management is not aware of any such other business. The Board of Directors has fixed the close of business on December 2, 1996 as the record date for determining shareholders entitled to notice of and to vote at the annual meeting. The Proxy Statement accompanies this Notice. By Order of the Board of Directors /s/ Carl C. Norton CARL C. NORTON, PRESIDENT Dated this 16th day of December, 1996 Winchester, Kentucky YOUR BOARD OF DIRECTORS URGES YOU TO CONSIDER THIS PROXY MATERIAL CAREFULLY AND TO FILL IN, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD AS SOON AS POSSIBLE TO ASSURE THAT YOUR VOTES WILL BE COUNTED. YOU MAY REVOKE YOUR PROXY AT ANY TIME BEFORE IT IS VOTED BY DELIVERING TO THE SECRETARY OF PIONEER FINANCIAL CORPOR ATION EITHER A WRITTEN REVOCATION OF THE PROXY OR A DULY EXECUTED PROXY BEARING A LATER DATE, OR BY APPEARING AT THE ANNUAL MEETING AND VOTING IN PERSON. A RETURN ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. PIONEER FINANCIAL CORPORATION 25 E. Hickman Street Winchester, Kentucky 40391 (606) 744-3972 PROXY STATEMENT ANNUAL MEETING, JANUARY 8, 1997 THE PROXY AND SOLICITATION This Proxy Statement is being mailed on December 16, 1996 to the shareholders of Pioneer Financial Corporation in connection with the solicitation, by the Board of Directors, of the enclosed form of Proxy for the Annual Meeting of Shareholders to be held at 10:00 a.m. on Wednesday, January 8, 1997, at the main office, 25 East Hickman Street, Winchester, Kentucky. A shareholder may revoke a writing appointing a Proxy either by giving notice to the Corporation in writing, by executing a later-dated Proxy, or by appearing at the meeting and voting in person. The cost of soliciting the Proxy will be borne by Pioneer Financial Corporation. PURPOSES OF ANNUAL MEETING The Annual Meeting has been called for the purposes of: (1) electing three Directors of the class whose term of office expires in 1997; and (2) ratifying the appointment of Miller, Mayer, Sullivan & Stevens LLP, as auditors for the fiscal year 1997. In addition, the shareholders may receive reports of officers, and transact such other business as may properly come before the meeting. The persons named in the enclosed Proxy have been selected by the Board of Directors and will vote shares represented by valid Proxies. They have indicated that, unless otherwise specified in the Proxy, they intend to vote to elect as Directors the nominees listed on pages 5 and 6. All of the nominees are presently members of the Corporation's Board of Directors. The Board of Directors has no reason to believe that any of the nominees will be unable to serve as a Director. Each of the nominees has agreed to serve as a Director, if elected, and has heretofore served as a Director. In the event, however, of the death or unavailability of any nominee or nominees, the Proxy to that extent will be voted for such other person or persons as the Board of Directors may recommend. Miller, Mayer, Sullivan & Stevens LLP and York, Neel & Company, LLP, under a joint venture agreement, were the auditors of record for the Corporation for fiscal year 1996. The joint venture of Miller, Mayer, Sullivan & Stevens LLP and York, Neel & Company, LLP has been dissolved. Miller, Mayer, Sullivan & Stevens LLP, have been appointed by the Board of Directors as auditors of the Corporation for the fiscal year ending September 30, 1997. If no contrary directions are indicated, Proxies will be voted in favor of ratification of the appointment of auditors. The Corporation has no knowledge of any other matters to be presented to the meeting. In the event other matters do properly come before the meeting, the persons named in the Proxy will vote in accordance with their judgment on such matters. Shares may be voted at the meeting in person or by proxy. The accompanying proxy is solicited by the Board of Directors of Pioneer Financial Corporation and is intended to permit each shareholder as of the record date to vote. All valid proxies received prior to the meeting will be voted. Unless marked to the contrary, such proxies will be voted for the election of three directors, and for the ratification of the appointment of independent auditors. If any other business is brought before the meeting, the proxies will be voted in accordance with the judgment of the persons voting the proxies. A shareholder who has given a proxy may revoke it at any time prior to such proxy being voted at the meeting by filing with Pioneer Federal an instrument revoking it, or a duly executed proxy bearing a later date, or by attending the meeting and giving notice of such revocation. Attendance at the meeting does not by itself constitute revocation of a proxy. The owners of a majority of the outstanding shares of the Corporation must be present, in person or by proxy, at the Annual Meeting to constitute a quorum. The three nominees for directors receiving a plurality of the votes cast at the meeting in person or by proxy shall be elected. All other matters require for approval the favorable vote of a majority of shares voted at the meeting in person or by proxy. In addition to the use of the mails, proxies may be solicited by the directors, officers and employees of Pioneer Federal Savings Bank, the wholly- owned subsidiary of the Corporation, without additional compensation, by personal interview, telephone, telegraph or otherwise. Arrangements may also be made with brokerage firms and other custodians, nominees and fiduciaries who hold the voting securities of record for the forwarding of solicitation material to the beneficial owners thereof. Pioneer Financial Corporation will reimburse such brokers, custodians, nominees and fiduciaries for the reasonable out-of- pocket expenses incurred by them in connection therewith. 1998 SHAREHOLDER PROPOSALS The deadline for shareholders to submit proposals to be considered for inclusion in the Proxy Statement for the 1998 Annual Meeting of Shareholders is expected to be September 1, 1997. 2 VOTING SECURITIES The Board of Directors has fixed the close of business on December 2, 1996 as the record date for determining shareholders entitled to notice of the meeting and to vote. The Corporation has outstanding and entitled to vote at the meeting 208,233 shares of common stock. Shareholders are entitled to one vote for each share held on the record date on all matters presented to the shareholders at the Annual Meeting except that, in the election of directors, cumulative voting rules will apply. Under cumulative voting, each shareholder is entitled to cast as many votes in the aggregate as shall equal the number of shares of common stock owned by him or her multiplied by the number of directors to be elected. Each shareholder, or his or her Proxy, may cast all of his or her votes (as thus determined) for a single nominee for director or may distribute them among two or more nominees, in the shareholder's discretion. As to the authority of the persons named as Proxies in the accompanying Proxy card to cumulate votes, see the section entitled ITEM ONE -NOMINEES FOR ELECTION AS DIRECTORS FOR TERM OF OFFICE EXPIRING IN 2000. The following table sets forth information furnished to the Corporation with respect to persons known by the Corporation to be the beneficial owners of more than 5% of the Corporation's common stock (as of September 30, 1996).
Name and Address of Number of Shares Percent Beneficial Owner Beneficially Owned of Stock - ----------------------- ------------------ --------- Lee Ricketts 10,736 5.16% c/o Corner Drug Store 2 N. Main Street Winchester, Kentucky
In addition, Cede & Company holds 25,226 shares (12.11%) as nominal owner for other persons and entities. We are assured by members of that firm that none of the parties for whom it holds Pioneer Financial stock would be the beneficial owner of more than 5% of the Corporation's stock. The following table sets forth, as of December 1, 1996, information furnished to the Corporation with respect to the beneficial ownership by each Director and nominee, and by all present Directors and officers as a group, of the Corporation's common stock. This table further provides, for each Director, the age, period from which each has served as a Director of Pioneer Federal Savings Bank (the Corporation's wholly-owned subsidiary), his principal occupation or employment, and information with respect to the beneficial ownership, as such term is defined under Rules and Regulations of the Securities and Exchange Commission, of the outstanding shares of the Corporation's Common Stock by each director and by all directors and officers as a group. 3
Amount & Nature Name, Age, Principal (1) Current of Beneficial Occupation, Directorship Director Term Ownership of Percent & Business Experiences Since Expires Common Shares of Stock - ---------------------------- ----------- ----------- --------------- ---------- Nominees for Director: Ewart W. Johnson (74) 1989(4) 1997 5,275 2.53% Retired; Director Nora M. Linville (74) 1976 1997 2,400 1.15% Retired; Director and Secretary to the Board Thomas D. Muncie (59) 1974 1997 2,850 1.37% President, Muncie Buick-GMC Truck, Inc.; Director Continuing Directors: William M. Cress (54) 1991 1998 1,050 .50% Engineer; Director Carl C. Norton (40) 1993 1998 5,666 2.72% Banker; President and Director Janet W. Prewitt (49) 1972 1998 5,850 2.81% Attorney; Director and Chairman of the Board Robert G. Strode (57) 1974 1998 6,785 3.26% General Contractor; Director George W. Billings, Jr. (72) 1980 1999 618 .30% Retired; Director Andrew James Ryan (37) 1995 1999 President, Andy Ryan Pontiac Nissan, Inc.; Director Nancy M. Lawwill (60) 1981 1999 2,000 .96% Banker; Director, Vice President, Treasurer and Assistant Secretary Wayne M. Martin (50) 1991 1999 500 .24% President, WKYT-TV 27; Director Advisory Directors to Pioneer Federal Savings Bank: Roger Davis 400 .19% Martha W. Hampton 2,400 1.15% John D. Harrison 500 .24% Clifford R. Langley 5,000 2.40% Willard M. Martin 5,015 2.41% Nellie K. Meadows 1,000 .48% Beckner Shimfessel 2,500 1.20% All directors and executive 32,994 15.84% officers as a group, excluding advisory directors (12 persons) All directors and executive 49,809 23.92% officers as a group, including advisory directors (19 persons)
- ------------------------ (1) All members of the Board of Directors have held the positions set forth above for at least five years, unless otherwise indicated. (2) Includes all shares of Corporation Common Stock owned by each director's spouse, or as custodian or trustee over which shares such individuals effectively exercise sole voting and investment power. (3) Ms. Prewitt is an equity partner in the law firm of White, McCann & Stewart. Her law firm received gross fees from Pioneer Federal of $143,191.47 during fiscal year ended September 30, 1996, including $29,888.92 of commissions from title insurance written in connection with loans made at the Savings Bank. Ms. Prewitt's share of the gross fees was $34,365.95. (4) Mr. Johnson was elected director of the Bank on May 28, 1965 and served in that position until his resignation on October 17, 1972. He served as a Director Emeritus of the Savings Bank from 1972 until the January, 1989 Annual Meeting of Shareholders, when he was elected to serve the remaining unexpired term then held by Clifford R. Langley. 4 Each officer, director and beneficial owner of more than 10% of any class of equity securities of Pioneer Financial Corporation is required to file a report with the Securities Exchange Commission and/or Office of Thrift Supervision initially reporting securities beneficially owned by him or her, and then reporting any change in ownership of securities. These reports must be filed by the 10th day of the calendar month following the date on which such a transaction occurred. All of the statements of changes in beneficial ownership of securities to be filed by officers and directors of Pioneer Financial Corporation have been timely filed in fiscal year 1996, except that: Mrs. Prewitt had, prior to the death of her father in August, 1996, reported his 6,000 shares as being beneficially owned by her (she having had the power to vote those shares pursuant to Power of Attorney). Following Mr. White's death, she failed to timely file the report reducing the number of shares beneficially owned by her, but she has filed that report in the interim. NOMINEES AND DIRECTORS WHOSE TERMS OF OFFICE WILL CONTINUE Pioneer Financial Corporation is governed by a Board of Directors consisting of eleven members, as set forth in Pioneer's Bylaws. The Board is divided into three classes, with the members of each class serving for three year terms. Information as to each of the nominees and continuing Directors is given below. Unless stated to the contrary, the Directors have been engaged in their current occupations for at least the five preceding years. One class of the Board is due for election at this Annual Meeting (Item No. One, below). The nominees for election as members of the Board of Directors, with information furnished to the Corporation by them as of December 1, 1996, are as follows: ITEM NO. ONE - NOMINEES FOR ELECTION AS DIRECTORS FOR TERM OF OFFICE EXPIRING IN 2000 EWART W. JOHNSON (age 74) is a retired businessman and former Kentucky State Parks Commissioner. He was elected a Director of Pioneer Federal on May 28, 1965 and served in that position until his resignation on October 17, 1972. He served as a Director Emeritus of the Savings Bank from 1972 until the January, 1989 Annual Meeting of Shareholders, when he was elected to serve the remaining unexpired term then held by Clifford R. Langley. Mr. Johnson serves on the Operations/Business Plan Committee. NORA M. LINVILLE (age 74) has been a Director of the Savings Bank since 1976. She retired from Pioneer Federal as Executive Vice President in 1992, having been with Pioneer Federal since 1952. She serves as Secretary to the Board and on the Executive, Salary and Audit Committees. 5 THOMAS D. MUNCIE (age 59) has been a Director of Pioneer Federal since 1974. He is President of Muncie Buick-GMC Truck, Inc., an automobile dealership located in Winchester. Mr. Muncie currently serves on the Executive and Operations/Business Plan Committees. If any person or persons other than the aforesaid nominees are nominated as directors, then the Proxies named in the enclosed Proxy card, or their substitutes, or a majority of them, shall have the right in their discretion to vote for some number less than all the aforesaid nominees or for less than all of the aforesaid nominees equally. If any of the aforesaid nominees becomes unwilling or unable to accept nomination or election, then the Proxies shall have the right to vote for any substitute nominee in place of the nominee who has become unwilling or unable to accept nomination or election. The Board of Directors has nominated Mrs. Linville and Messrs. Johnson and Muncie to serve as Directors until 2000, or until their respective successors shall have been elected and shall qualify. Election of the nominees requires the affirmative vote of a plurality of the votes actually cast at the Annual Meeting. THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE ELECTION OF THESE NOMINEES AS DIRECTORS. CONTINUING DIRECTORS Present Directors whose term of office will continue after the meeting, with information furnished to the Savings Bank by them as of December 1, 1996, are as follows: PRESENT DIRECTORS WHOSE TERMS OF OFFICE EXPIRE IN 1998 CARL C. NORTON (age 40) is President of Pioneer Financial Corporation and Pioneer Federal Savings Bank, and as such is Chairman of all committees of the Board of Directors. He is a Winchester native, a past president of the Central Kentucky League of Savings Institutions and a director of the Winchester Clark County Chamber of Commerce and the Winchester-Clark County Industrial Developmental Authority. Mr. Norton holds a Bachelors degree in accounting from the University of Kentucky and he is a graduate of the Kentucky School of Banking and the School of Banking of the South. Mr. Norton has over sixteen years of banking experience. He has served as a director of Pioneer Federal since January, 1993, and has been employed by Pioneer since February, 1992. Prior to coming to Pioneer Federal, Mr. Norton was Executive Vice-President and Chief Managing Officer of First Security Bank of Clark County. JANET W. PREWITT (age 49) has been a Director of Pioneer Federal since 1972. She served as the Savings Bank's President from 1976 until 1993, and is currently Chairperson of the Board of Directors of both Pioneer Financial Corporation and its wholly-owned subsidiary, Pioneer Federal Savings Bank. Mrs. Prewitt is 6 an equity partner in the law firm of White, McCann & Stewart, a general practice law firm located in Winchester, which serves as general counsel to Pioneer Federal and Pioneer Financial. Legal services performed by the law firm are attended by Mr. John H. Rompf, Jr., and Mrs. Beverly Ann Shea (Mrs. Prewitt's sister) of the firm, who are not otherwise associated with the Corporation nor the Savings Bank. In fiscal 1996, Pioneer Federal paid White, McCann & Stewart $143,191.47 in legal fees (including the law firm's percentage of commissions paid on title insurance premiums paid by Pioneer Federal during fiscal 1996 and some prior years). Of this sum, $137,703.73 represented fees earned in connection with title examinations and title insurance for real estate loans, while the balance represented fees in foreclosure actions and fees for quarterly and annual reports. WILLIAM M. CRESS (age 54) is Executive Vice President of Hinkle Contracting Corporation in Paris, Kentucky. He has been employed by Hinkle since 1972, having spent 12 years with the Kentucky Department of Highways prior to that. He majored in Civil Engineering at the University of Kentucky and is a Registered Professional Engineer. He is a native of Powell County and currently resides in Stanton. He is Director of Beech Fork Golf Club and past President of the Plant-Mix Asphalt Industry of Kentucky, Powell County Education Foundation, and Powell County Alumni Association. Mr. Cress was an Advisory Director of the Savings Bank from June 17, 1980 until January 9, 1991, when he was elected to serve the remaining unexpired term then held by John D. Harrison. Mr. Cress serves on the Salary and Operations/Business Plan Committees. ROBERT G. STRODE (age 57) has been a Director of Pioneer Federal since 1974. Mr. Strode retired in June, 1990 as Vice President of Ag-Gro Fertilizer Company, a fertilizer processing company located in Winchester. Mr. Strode currently serves on the Audit and Executive Committees. PRESENT DIRECTORS WHOSE TERMS OF OFFICE EXPIRE IN 1999 GEORGE W. BILLINGS, JR. (age 72) has been a Director of Pioneer Federal since 1980. He retired as Postmaster for the United States Postal Service in Stanton, Kentucky in January, 1989. Mr. Billings currently serves on the Audit, Salary and Asset/Liability Committees. NANCY M. LAWWILL (age 60) has been a Director of Pioneer Federal since 1981. She has served as Pioneer Federal's Treasurer since 1973, as Assistant Secretary since 1974 and as Vice President since 1994. She has been with the Savings Bank since 1966, and is the Savings Bank's data processing and computer coordinator and is in charge of operations, as well as serving as a Loan Officer. Mrs. Lawwill serves on the Loan, Asset/Liability and CRA Committees. 7 WAYNE M. MARTIN (age 50) was elected to Pioneer Federal's Board of Directors on January 9, 1991, to serve the remainder of Mr. Beckner Shimfessel's term. He is President and General Manager for WKYT-TV 27 in Lexington, and has been with WKYT since March, 1987. He is a Winchester native, and is President-elect of the Kentucky Broadcasters Association. Mr. Martin holds a Bachelors degree in Business Administration, a Masters degree in Education and a Rank I Administrative certification - all from Morehead State University. He also serves on the Board of Trustees of Cardinal Hill, is Chairman of the Greater Lexington United marketing Committee, Director and Vice President of the Child Advocacy Center of the Bluegrass, and is an Elder of First Christian Church, Winchester, Kentucky. Mr. Martin currently serves on the Salary, CRA and Executive Committees. ANDREW JAMES RYAN (age 37) was elected a Director of Pioneer Federal and Pioneer Financial on December 1, 1995 to fill the remainder of the term of Michael S. Houlihan, who died suddenly on November 28, 1995. Mr. Ryan is President of Andy Ryan Pontiac Nissan, Inc, an automobile dealership in Winchester. He was General Manager of White Chevrolet and Pontiac of Manchester from 1982 until moving to Winchester in November, 1991 to assume his current duties. He is President of the Winchester New Car Dealers Association, a member of the Winchester Rotary and Kiwanis Clubs, and is a deacon of First Christian Church, Winchester, Kentucky. Mr. Ryan currently serves on the Operations/Business Plan Committee. ADVISORY DIRECTORS Pioneer Federal Savings Bank, Pioneer Financial's wholly-owned subsidiary, has seven Advisory Directors who are elected to that position by the Board of Directors when, in the opinion of the Board of Directors, the Savings Bank would benefit from the particular expertise of such persons. These Directors are assigned to the various committees of the Bank's Board of Directors. Advisory Directors do not have voting or other authority at the Board and committee meetings. Advisory Directors who have served as Directors of the Savings Bank carry the honorary title of Director Emeritus. Directors are routinely asked to serve as Advisory Directors upon retirement as Directors. The following persons currently serve as Advisory Directors to the Savings Bank: Clifford R. Langley, John D. Harrison, Beckner Shimfessel and Willard M. Martin (all of whom were appointed Directors Emeritus upon retirement from the Board of Directors); Roger Davis, Martha W. Hampton, Nellie K. Meadows (all of whom are residents of Powell County, Kentucky, where a branch office of the Savings Bank is located). FAMILY ASSOCIATIONS AMONG DIRECTORS AND OFFICERS Wayne M. Martin, Director, is the son of Willard M. Martin, a Director Emeritus of the Savings Bank. 8 COMMITTEES OF THE BOARD OF DIRECTORS The Board of Directors of the Corporation and of Pioneer Federal Savings Bank, its principal subsidiary, have established the following committees, the members of which are designated annually by the Board of Directors of the Corporation and of the Savings Bank. The President serves as Chairman of all committee meetings (except Salary Committee), and the Chairman of Pioneer Financial's Board serves as an ex-officio member of all committees. Loan Committee. The Loan Committee meets at least weekly, and makes decisions on all mortgage loan applications. All loans approved are presented to the Board of Directors for ratification, except that loans to a borrower who owes or would owe the Savings Bank more than $200,000 are presented to the Board of Directors for approval. Regular members of the Loan Committee include the Executive Officers of the Savings Bank and its Loan Officers. Audit Committee. The Audit Committee meets on an as-needed basis. The committee nominates the independent auditor, discusses accounting changes, and analyzes the financial position of the Savings Bank. Members of the Audit Committee include Messrs. Strode, Billings, Willard Martin and Mrs. Linville. Asset/Liability Committee. The Asset/Liability Committee meets quarterly to analyze the Savings Bank past and present performance and the risks inherent in future strategies, which may be employed by the Bank. Members of the Asset/Liability Committee are Mrs. Prewitt, Mrs. Lawwill, Mr. Billings and Mr. Tony Parrish, the Savings Bank's Chief Financial Officer. Operations/Business Plan Committee. The Operations/Business Plan Committee meets on an as-needed basis, to discuss, analyze, and monitor operation systems and procedures of the Corporation and of the Savings Bank. Members of the committee include Messrs. Cress, Johnson, Muncie, Shimfessel, and Ryan. CRA (Community Reinvestment Act) Committee. This Committee meets periodically to review HMDA (Home Mortgage Disclosure Act) data and CRA activities conducted by the Savings Bank. This Committee also sets CRA policy and direction for the upcoming months. Members of the CRA Committee include Mrs. Hampton, Mrs. Prewitt, Mrs. Lawwill, and Messrs. Norton, Wayne Martin, and Trent. Executive Committee. The Executive Committee acts for the Board of Directors between Board meetings. Committee members include Mrs. Linville, and Messrs. Norton, Wayne Martin, Strode and Muncie. The committee meets on an as- needed basis. Salary Committee. The Salary Committee meets on an as-needed basis to review salaries of employees. Members of this 9 committee include Mrs. Linville, and Messrs. Billings, Cress and Wayne Martin. Nominating Committee. Pursuant to the Corporation's By-laws, the Board of Directors as a whole acts as a Nominating Committee for selecting the management's nominees for election as Directors. The Nominating Committee must deliver its written nominations to its secretary at least 20 days prior to the Annual Meeting. No other nominations for Directors shall be voted upon at the Annual Meeting, except those made by shareholders in writing delivered to the secretary at least 10 days prior to the Annual Meeting. If the Nominating Committee does not act prior to 20 days before the Annual Meeting, then nominations may be made at the meeting by any shareholder entitled to vote. The Board, at its September 17, 1996 meeting, nominated Mrs. Linville and Messrs. Johnson and Muncie for election as Directors for the above-listed term. During the fiscal year ended September 30, 1996, the Savings Bank's Board of Directors held 12 regular meetings and 1 special meeting. The Savings Bank's Loan Committee met 52 times, while the Salary Committee met once during fiscal 1996. The Operations/Business Plan Committee met once; the Executive Committee met 9 times during the fiscal year. The Audit Committee held 1 formal meeting, to receive the report of the Corporation's auditors for fiscal year 1996. The CRA Committee met once; the Asset/Liability Committee held 2 meetings. A Powell County Branch Committee (consisting of Directors and Advisory Directors from Powell County) meets on a regular basis to discuss procedures and issues particularly pertinent to the operation of the Powell County Branch. This Committee held 8 meetings during fiscal 1996. During Fiscal 1996, the Corporation's Board of Directors held 4 regular meetings and 3 special meetings, and 1 unanimous consents without meeting. No Director of the Corporation attended fewer than 75% of the total meetings of the Board of Directors and committees on which such Board member served during this period, except for Mr. Johnson, who was out of the state for a significant period of time. Further, Mr. Beverly White, a Director Emeritus of the Savings Bank, became ill during fiscal 1996, and eventually resigned. He missed three regular meetings of the Savings Bank's Board of Directors prior to his resignation, but did not accept a Director's fee for those months. DIRECTORS' FEES Directors are paid by Pioneer Federal Savings Bank a fee of $400 per month, plus $25 for each committee meeting attended. Directors Emeritus are paid $400 per month; other Advisory Directors are paid $200 per month. Directors who are officers of the Corporation receive no fees for serving on the Board of Directors or for attending Board meetings or committee meetings. 10 OFFICERS WHO ARE NOT DIRECTORS The following information is supplied with respect to officers and significant employees of Pioneer Federal Savings Bank, the Corporations principal subsidiary, who do not serve on the Corporation's nor the Savings Bank's Board of Directors. No arrangements or understandings exist between the Corporation or Pioneer Federal and any person listed below pursuant to which such person was elected as an officer.
POSITIONS CURRENTLY HELD NAME AGE WITH PIONEER FEDERAL Janet Tutt 54 Assistant Treasurer since 1980; employee of Pioneer since 1974 Doris Estes 48 Bypass Branch Manager and Loan Officer since August, 1993; Employee of Pioneer since 1984 Dianna Davis 47 Stanton Branch Manager/Loan Officer since October, 1995 and an employee of the Bank since 1985 Bobby R. Trent 47 Compliance/Security since June, 1995; was previously Chief Operations Officer/Compliance Officer with Salt Lick Deposit Bank Vicki Rupard 36 Loan Officer since September, 1995; Was previously Mortgage Administrative Assistant with Peoples Commercial Bank Anthony Parrish 30 Chief Financial Officer since April, 1996; was previously employed as Sr. Vice-President and Chief Financial Officer at Peoples Commercial Bank Rob Agee 29 Loan officer since June, 1996; was previously a Mortgage Loan Officer with Pikeville National Bank
REMUNERATION OF OFFICERS The following table sets forth for the fiscal year ended September 30, 1996, certain information as to compensation received by all executive officers of the Corporation as a group for services in all capacities to the Corporation. During such period, only one executive officer of the Corporation or of Pioneer Federal received total cash compensation in excess of $60,000.00, that being President Carl C. Norton. Mr. Norton's cash compensation by Pioneer Federal during fiscal 1996 was 11 $86,402.34. Ms. Prewitt's compensation as Chairman of the Board of Pioneer Federal and of the Corporation, when added to her equity portion of the fees paid by Pioneer to White, McCann & Stewart, did not exceed $60,000.00 during fiscal 1996 or any prior year.
NUMBER OF PERSONS CAPACITIES IN CASH IN GROUP WHICH SERVED COMPENSATION (1) - -------------------------- ------------------ ---------------- All Executive Officers Executive Officers $185,262.79 as a Group (4 persons, (including Chief 4 positions) Financial Officer) Other Significant Employees Controller, Branch $188,380.02 as a group (7 persons, Manager, Asst. Treas., 5 positions) Loan Officers, Compliance/ Security
(1) In addition to cash compensation, all executive officers of the Savings Bank are participants in the Savings Bank's group life insurance and Blue Cross/Blue Shield major medical insurance plans, the costs of which are paid by the Savings Bank. The Savings Bank maintains a "401(k)" employee profit sharing plan as described under the Employees' Retirement Income Security Act of 1974. The Plan became effective December 19, 1985. Under the Plan, the Savings Bank may make contributions in accordance with Section 401(k) of the Internal Revenue Code. The Savings Bank's contributions are allocated to each participant based on the ratio the participant's compensation bears to the total compensation. Employees may also contribute to the Plan. The Plan covers all full-time employees who have attained the age of 20 1/2 years once they have completed 6 months of service at an anniversary date of the Plan. The participant's account balance vests at 20% after completing 2 years of service; this vesting is increased by 20% for each year thereafter, with 100% vesting after 6 years of service. Upon retirement, the employee may withdraw all or parts of his vested portion of the Plan at his discretion (in accordance with Section 401(k)). The Board Chairperson of the Savings Bank participates in the "401(k)" plan. During fiscal 1996 the Savings Bank made no contributions to the "401(k)" plan on behalf of the Executive Officers or Other Significant Employees. In addition, Pioneer Federal Savings Bank established an Employee Stock Ownership Plan on October 31, 1994. Under the Plan, the Savings Bank may make contributions in accordance with Section 401(a) of the Internal Revenue code in the form of cash or stock for employees of the Savings Bank who are eligible on attainment of age 20 1/2 and completion of at least a six-month period of service are eligible to participate. The Savings Bank made a cash contribution to the ESOP of $30,512.44 made during fiscal 1996; of this sum, $10,796.00 was contributed to the ESOP on behalf of the Executive Officers and $4,312.74 was contributed to the ESOP on behalf of the Other Significant Employees. 12 The following chart shows annual compensation (there being no long-term compensation) of the Corporation's President and Chief Managing Officer for the last three fiscal years (including his compensation by Pioneer Federal Savings Bank): SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION NAME AND PRINCIPAL FISCAL YEAR ----------------------------------------------- POSITION ENDED 9/30 SALARY BONUS OTHER (BENEFITS) - -------------------- ----------- ---------------- ----------- ---------------- Carl C. Norton, 1996 $83,892.34 $ 2,500.00 $10,656.35 President and 1995 $79,999.92 $ 2,500.00 $ 9,374.60 Chief Managing 1994 $72,115.84 $ 2,700.00 $ 8,993.84 Officer
TRANSACTIONS INVOLVING DIRECTORS AND OFFICERS Pioneer Federal currently offers loans to its officers and Directors for various purposes consistent with the Corporation's and the Savings Bank's regular lending policies as limited by applicable law and regulation. These loans are made in the ordinary course of business, are made on the same terms and conditions as those prevailing at the time for comparable transactions with non- affiliated persons, and, in the judgment of management, do not involve more than normal risk of collectibility or present other unfavorable features. Set forth below is certain information relating to loans made to Pioneer Federal executive officers and Directors (and their affiliates and immediate family members) whose total aggregate loan balances exceeded $60,000.00 at any time during the year ended September 30, 1996. Loans which were originated by the Savings Bank but have been sold on the secondary market are note included.
- -------------------------------------------------------------------------------- Borrower and Original Original Current Type of When Loan Interest Interest 9/30/96 Loan Originated Amount Rate Rate Balance - -------------------------------------------------------------------------------- Wayne Martin, 8/29/96 $51,375.00 9% 9% $ 51,375.00 Director: residential/ real estate Chris Martin, son of 5/30/96 52,700.00 6% 6% $ 52,439.20 Director Martin residential/ real estate (first mortgage, home) Andrew James Ryan, 6/28/96 196,000.00 9% 9% $ 53,455.00 Director: residential/ real estate, (construction loan - in process) ----------- $157,269.20
13 During the year ended September 30, 1996, there were no loans made to Pioneer Federal officers (who are not considered principal officers for the purposes of the annual audit) whose total aggregate loan balances exceeded $60,000 at any time during the fiscal year. Loans which were originated by the Savings Bank but have been sold on the secondary market are not included. LEGAL PROCEEDINGS Four shareholders combined to form East Kentucky Holdings, a general partnership, in 1994. On July 24, 1994, the Savings 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 alleged 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 their tender offer activities, to comply with applicable laws and to restrict their activities with respect to the Bank. The EKH Group filed a Counterclaim which sought to enjoin an alleged tender offer by the Savings Bank, its officers, directors, agents and others acting in concert with them. The Counterclaim also requested the Court to order the Savings 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 to fully disclose and address any conflicts of interest of the Bank's directors. Pioneer and the members of the EKH group entered into a Mutual Release and Agreed Order of Dismissal of the civil matter. The Savings Bank redeemed the EKH stock at a price per share of $41.50 in July, 1996, following confirmation from the Office of Thrift Supervision (OTS) that the redemption was consistent with all statutes, rules, regulations, policies, directives or orders of the OTS. The redemption included the 58,069 shares of stock of the EKH group and 6,175 shares of stock owned by the Corporation's chairman, Janet W. Prewitt, and certain of those persons presumed to be acting in concert with her. The redemption of the shares of Ms. Prewitt, etc., is necessitated by the EKH redemption 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 her undergoing the personal expense and time involved in a control filing with the OTS. 14 ITEM NO. TWO - SELECTION OF INDEPENDENT AUDITOR Miller, Mayer, Sullivan & Stevens LLP, have been appointed as the Corporation's independent auditor for the fiscal year ending September 30, 1997 pursuant to the recommendation of the Audit Committee of the Board of Directors. A representative of Miller, Mayer, Sullivan & Stevens LLP is expected to be present at the meeting with an opportunity to make a statement if he desires to do so and to answer appropriate questions with respect to that firm's examination of the Corporation's financial statements and records for the fiscal year ended September 30, 1996. The appointment of the auditors must be approved by a majority of the votes cast by the stockholders of the Corporation at the Meeting. THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE APPROVAL OF THE APPOINTMENT OF AUDITORS. ITEM NO. THREE - OTHER MATTERS The Board of Directors is not aware of any business to come before the Meeting other than those matters described above in this Proxy Statement. However, if any other matters should properly come before the Meeting, it is intended that Proxies in the accompanying form will be voted in respect thereof in accordance with the judgment of the person or persons holding the Proxies. ANNUAL REPORT The Annual Report of the Corporation for the fiscal year ended September 30, 1996 is enclosed herewith. The consolidated financial statements of the Corporation and its subsidiary and the accompanying notes and report of independent auditors, the quarterly data and supplementary information on the effects of inflation, the selected financial data for each of the last five fiscal years, and management's discussion and analysis of the summary of operations contained in the Annual Report are incorporated by reference in this Proxy Statement. By Order of the Board of Directors /s/ Carl C. Norton CARL C. NORTON, PRESIDENT Dated this 16th day of December, 1996, Winchester, Kentucky - ---------------------------------------------------------------- FORM 10-K - ---------------------------------------------------------------- A COPY OF THE CORPORATION'S FORM 10-K AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION WILL BE FURNISHED WITHOUT CHARGE TO STOCKHOLDERS AS OF THE RECORD DATE UPON WRITTEN REQUEST TO THE SECRETARY, PIONEER FINANCIAL CORPORATION, 25 EAST HICKMAN STREET, WINCHESTER, KENTUCKY 40391. 15 REVOCABLE PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS PIONEER FINANCIAL CORPORATION The undersigned shareholder hereby appoints the Board of Directors of Pioneer Financial Corporation, with full power of substitution, to act as proxy for and to vote the stock of the undersigned at the annual meeting of Shareholders of Pioneer Financial Corporation, Winchester, Kentucky, to be held at its registered office, 25 East Hickman Street, Winchester, Kentucky, on Wednesday, January 8, 1997, at 10:00 A.M., Eastern Standard time, or any adjournment thereof, for the purposes stated in the Notice of Annual Meeting. The undersigned hereby directs this proxy to be voted as follows: 1. Election of the following as Directors to serve until the Annual Meeting in January, 2000, or until their successors are elected and qualified (this proxy will be voted for each nominee listed unless: (a) the box labelled "AGAINST" is marked, or (b) the nominee's name is marked out by striking through, in which event another name may be substituted): Ewart W. Johnson FOR [ ] AGAINST [ ] ------------------------- Nora M. Linville FOR [ ] AGAINST [ ] ------------------------- Thomas D. Muncie FOR [ ] AGAINST [ ] ------------------------- 2. Ratification of the appointment of Miller, Mayer, Sullivan & Stevens LLP, to serve as the independent auditors of the Corporation for fiscal year 1997; FOR [ ] AGAINST [ ] ABSTAIN [ ] 3. The undersigned further authorizes my/our proxies to vote this proxy for or against any other business as may properly come before the meeting, in the discretion of the above-named proxies: FOR [ ] AGAINST [ ] ABSTAIN [ ] THIS PROXY WILL BE VOTED AS DIRECTED. IF NO CONTRARY DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED FOR THE ABOVE PROPOSITIONS. Dated:____________________________ __________________________________ (Stockholder) __________________________________ (Stockholder) (Please sign and date this proxy. Please sign exactly as indicated above.) -----END PRIVACY-ENHANCED MESSAGE-----