-----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, NsO8a7hQ+Wvn6A6OXWFixdJVlYhgVkhI53yR5nLgm/RJy5suI3crPt6uloaZycA1 Ks0Nr0xk4gx4oK588CyCjA== 0000928385-97-002123.txt : 19971230 0000928385-97-002123.hdr.sgml : 19971230 ACCESSION NUMBER: 0000928385-97-002123 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971229 SROS: NYSE 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-K405 SEC ACT: SEC FILE NUMBER: 000-28076 FILM NUMBER: 97745548 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-K405 1 FORM 10-K405 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, 1997 - ---- 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 16, 1997, the aggregate market value of the shares of common stock of the registrant outstanding was $8,954,019. This figure is based on the last known sales price of $43.00 per share, which sale took place during the week of August 11, 1997. The number of shares of the registrant's common stock outstanding as of December 16, 1997 was 208,233 shares. 1 The aggregate market value of the shares of common stock held by non-affiliates of the registrant was $7,081,842 as of December 16, 1997. 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, 1997, are 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 14, 1998 Annual Meeting of stockholders are incorporated into Part III, Items 10-13, of this Form 10-K. 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 $74.0 million at September 30, 1997, 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"). 2 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 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 3 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 20% 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, 1997, the Bank was permitted to make non- residential real estate loans aggregating approximately $35 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. 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 4 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". 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 5 held by the Bank. Many second mortgages are for home improvement 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 outlets in which to process and 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. The Bank is an approved Rural Housing Services lender and can originate RHS guaranteed loans in any county in the State of Kentucky. The Bank's current policy is to sell any RHS 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, 1997, Pioneer Federal had 11 construction loans outstanding, in the total amount of $1,074,654. 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, 6 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 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 Vice President 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, 1997 staff appraisers are not being used, but staff appraisers are making periodic construction 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 7 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. 8 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, ----------------------------- 1997 1996 ---------- ----------- ------------ ----------- Amount Percent Amount Percent ---------- ----------- ------------ ----------- Type of Loans: (Dollars In Thousands) - ------------------------ Real Estate: One-to-four family residential $20,503 57.26% $21,253 58.63% Multi-family and commercial 2,509 7.01% 3,641 10.05% Agricultural 546 1.52% 565 1.56% Construction 1,075 3.00% 1,808 4.99% Consumer: Commercial 4,397 12.28% 3,283 9.06% Loans secured by deposits 965 2.69% 1,048 2.89% Home equity 2,000 5.59% 1,663 4.59% Other secured 3,563 9.95% 2,711 7.48% Unsecured 251 0.70% 271 0.75% ---------- ---------- ---------- ---------- Total loans receivable 35,809 100.00% 36,243 100.00% ========== ========== ========== ========== Less: Loans in process (731) (403) Allowance for loan losses (391) (382) Deferred loan origination fees (196) (211) ---------- ---------- Loans, receivable net $34,491 $35,247 ========== ==========
Loan Maturity Schedule. The following table sets forth certain information as of September 30, 1997 (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. 9
Multi Family Agricul- 1-4 Family tural and Residential Commercial Construction Consumer Total ------- ------- ------- ------- ------- (In Thousands) Non-performing $ 149 $ --- $ 3 $ 3 $ 155 ------- ------- ------- ------- ------- Amounts Due: Within 3 months 230 1,072 1,713 3,015 3 months to 1 year 8 5 1,561 1,574 ------- ------- ------- ------- ------- Total due within 1 year 238 5 1,072 3,274 4,589 ------- ------- ------- ------- ------- After 1 year: 1 to 3 years 313 227 2,445 2,985 3 to 5 years 1,157 50 3,488 4,695 5 to 10 years 2,749 710 1,058 4,517 10 to 20 years 7,833 1,514 131 9,478 Over 20 years 8,064 549 777 9,390 ------- ------- ------- ------- ------- Total due after 1 year 20,116 3,050 0 7,899 31,065 ------- ------- ------- ------- ------- Total amount due $ 20,503 $ 3,055 $ 1,075 $ 11,176 $ 35,809 ======= ======= ======= ======= Less: Loans in process (731) Provision for loan losses (391) Deferred origination fees (196) ------- Loans receivable, net $ 34,491 =======
10 The following table sets forth the dollar amount (in thousands of dollars) of all loans due after one year from September 30, 1997 (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, 1997 are not included in this table.
Floating or Fixed Rates Adjustable Rates Total ---------------- ---------------- ---------------- (In Thousands) One-to-four family residential $ 6,509 $ 13,607 $ 20,116 Multi-family, agricultural and 559 2,491 3,050 commercial Consumer 3,910 3,989 7,899 Construction 0 0 0 ---------------- ---------------- ---------------- $ 10,978 $ 20,087 $ 31,065 ============== ============== ==============
Interest rates on adjustable-rate loans are adjusted according to one of five 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 and Call 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. 11 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. 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, 1997 Pioneer Federal had $3.9 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, 1997 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. 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, 1997 was $196,000. 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 12 the past. Loan service fees as a percentage of net interest income were 7.5%, 6.5% and 6.0% for fiscal 1997, 1996 and 1995, 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 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, 1997, Pioneer Federal had loans designated special mention of $1,144,000 and classified assets consisting of loans classified as substandard of $106,000, none as doubtful and $2,500 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 13 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 general economic conditions. 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 its fair value, net of selling expenses. 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. 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 14 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. 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, 1997 1996 ------ ------ (Dollars in Thousands) Total loans outstanding $ 35,809 $ 36,243 ======= ======= Average loans outstanding $ 35,059 $ 33,358 ======= ======= Allowance balance (at beginning of period) $ 382 $ 352 Provision (credit): Residential 57 Consumer Net charge-offs (recoveries): Residential 31 Consumer (9) (4) ------- ------- Allowance balance (at end of period) $ 391 $ 382 ======= ======= Allowance for loan losses as a percent of 1.09% 1.05% total loans outstanding Net loans charged off as a percent of (0.03)% 0.08% average loans outstanding
15 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, 1997 1996 ------ ------ Percent of Percent of Loans to Loans to Amount Total Loans Amount Total Loans ------ ------ ------ ------ (Dollars in Thousands) At end of period allocated to: Real estate mortgage: 1-4 family residential $ 224 57.26% $ 224 58.63% Multi-family and commercial 27 7.01% 38 10.05% Agricultural 6 1.52% 6 1.56% Construction (1) 12 3.00% 19 4.99% Consumer (2) 122 31.21% 95 24.77% ----- ------ ----- ------ Total allowances for loan losses $ 391 100.00% $ 382 100.00% ===== ====== ===== ======
(1) Includes $2,500 specific reserve attributable to a particular loan and not available for other loan losses. (2) Includes $2,706 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 16 institutions as part of examinations of such 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. 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. 17
At September 30, 1997 1996 ------ ------ (Dollars in Thousands) Loans accounted for on a non-accrual basis (1): Construction $ 3 $ 3 Consumer 3 15 ----- ----- Total 6 18 ----- ----- Accruing loans which are contractually past due 90 days or more (2): Mortgage loans: Permanent loans secured by 1-4 family dwelling units 149 91 Construction 0 0 All other mortgage loans 114 Consumer ----- ----- Total 149 205 ----- ----- Total non-accrual and accrual loans 155 223 Real estate owned (3) ----- ----- Total non-performing assets $ 155 $ 223 ===== ===== Total non-performing loans to loans 0.44% 0.62% Total non-performing loans to total assets 0.21% 0.30% Total non-performing assets to total assets 0.21% 0.30%
(1) Non-accrual status denotes loans which management believes may have defined weaknesses whereby accrued interest is inadequately protected by the current net worth and paying capacity of the obligor, or of the collateral pledged. (2) Loans more than 90 days past due will continue to accrue interest when there is no well-defined weakness in the loan regarding net worth and paying capacity of the obligor or of the collateral pledged which would cause management to believe that interest accrued will be uncollectible. (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. 18 Non-accrual loans Non-accrual loans at September 30, 1997 consisted of one fixed-rate construction loan on residential property classified as loss and one fixed-rate consumer loan classified as loss. The Savings Bank had no other non-performing assets as of September 30, 1997. 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, 1997, the Bank's investment securities totaled $28.6 million, of which $20.6 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 19 or loss carried as a separate component of stockholders' equity. At September 30, 1997, the unrealized holding gains of $155, less the applicable deferred tax of $53, 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 28 of Exhibit 13 here to). The following table sets forth the carrying value of the Bank's investment securities portfolio at the dates indicated.
At September 30, ---------- ----------- 1997 1996 ---------- ----------- (Dollars In Thousands) Investment securities available-for-sale: Mortgage-backed securities $3,302 $3,076 SBA Pools 2,647 4,525 ---------- ----------- Total 5,949 7,601 ---------- ----------- Investment securities held-to-maturity: Mortgage-backed securities 17,343 22,147 U.S. Government and federal agencies 4,006 500 Federal Home Loan Bank of Cincinnati, capital stock 555 509 Municipal bonds 718 817 ---------- ----------- Total 22,622 23,973 ---------- ----------- Total investment securities $28,571 $31,574 ========== ===========
20 The following table sets forth the scheduled maturities, carrying values, market value and average yields for the Bank's investment portfolio at September 30, 1997.
-One Year or Less- -One to Five Years- -Five to 10 Years- -More than 10Years- Carrying Average Carrying Average Carrying Average Carrying Average Value Yield Value Yield Value Yield Value Yield -------- -------- -------- -------- -------- -------- -------- -------- Securities Available-for-Sale (Dollars in Thousands) Mortgage-backed securities $0 0.00% $0 0.00% $0 0.00% $3,302 7.62% SBA Pools 0 0.00% 0 0.00% 0 0.00% 2,647 7.00% ------- ------- ------- ------- ------- ------- ------- ------- Total 0 0.00% 0 0.00% 0 0.00% 5,949 7.35% ------- ------- ------- ------- ------- ------- ------- ------- Securities Held-to-Maturity: Mortgage-backed securities 5 9.13% 7,131 6.24% 2,304 7.76% 7,904 6.81% U.S. Govt. and federal agencies 3,006 5.89% 1,000 5.89% 0 0.00% 0 0.00% FHLB Stock 0 0.00% 0 0.00% 0 0.00% 555 7.06% Municipal bonds 100 5.40% 500 5.20% 0 0.00% 118 6.20% ------- ------- ------- ------- ------- ------- ------- ------- Total 3,111 5.87% 8,631 6.14% 2,304 7.76% 8,577 6.82% ------- ------- ------- ------- ------- ------- ------- ------- Total Investment Securities $3,111 5.87% $8,631 6.14% $2,304 7.76% $14,526 7.03% ======= ======= ======= ======= ======= ======= ======= =======
-Total Investments- Carrying Market Average Value Value Yield --------- --------- --------- Securities Available-for-Sale Mortgage-backed securities $3,302 $3,302 7.62% SBA Pools 2,647 2,647 7.00% ------- ------- ------- Total 5,949 5,949 7.35% ------- ------- ------- Securities Held-to-Maturity: Mortgage-backed securities 17,343 17,321 6.70% U.S. Govt. and federal agencies 4,006 4,006 5.89% FHLB Stock 555 555 7.06% Municipal bonds 718 726 5.39% ------- ------- ------- Total Investment Securities 22,622 22,608 6.53% ------- ------- ------- $28,571 $28,557 6.70% ======= ======= =======
21 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 $555,300 at September 30, 1997. 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. Savings deposits in Pioneer Federal Savings Bank as of September 30, 1997, were represented by the various types of savings programs described below. 22
Minimum Balance as of Percentage of Interest balance September 30, Total Category Term Rate (1) Amount 1997 (2) Deposits -------------------------------------- ------------- -------- -------- --------------- ------------ NOW Accounts None 1.93% 300 $14,003 21.68% Regular Savings None 2.92% 100 9,482 14.68% Money Market Accounts None 3.20% 2,500 1,796 2.78% Certificates of Deposit: Fixed Term, Fixed Rate 7-31 days 4.00% 0 10 0.02% Fixed Term, Fixed Rate 91 days 4.00% 1,000 306 0.47% Fixed Term, Fixed Rate 6 month 4.60% 1,000 3,819 5.91% Fixed Term, Fixed Rate 6 month 4.62% 1,000 2,199 3.40% Fixed Term, Fixed Rate 12 months 5.14% 500 9,565 14.81% Fixed Term, Fixed Rate 12 months 4.81% 500 268 0.41% Fixed Term, Fixed Rate 12 months 4.50% * 2 0.01% IRA, Fixed Term, Fixed Rate 18 months 5.67% 100 2,086 3.22% IRA, Fixed Term, Variable Rate 18 months 5.60% 100 4,029 6.25% Fixed Term, Fixed Rate 18 months 5.26% 1,000 6,801 10.53% Fixed Term, Fixed Rate 24 months 5.32% 1,000 5,232 8.10% Fixed Term, Fixed Rate 30 months 4.69% * 30 0.05% Fixed Term, Fixed Rate 36 months 5.82% 1,000 2,857 4.42% Fixed Term, Fixed Rate 48 months 4.86% * 26 0.04% Fixed Term, Fixed Rate 60 months 6.70% 5,000 1,946 3.02% Fixed Term, Fixed Rate 72 months 5.77% * 128 0.20% -------------- ------------ $64,585 100.00% ============== ============
(1) Represents weighted average interest rates (2) In thousands * This type of certificate was no longer offered at September 30, 1997 23 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 quarter 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. 24 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. 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, 1997. Three months or less: $ 1,599 More than three through six months: 1,635 More than six through twelve months: 1,838 Over twelve months: 1,919 ------- $ 6,991 =======
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, 1997 1996 Average Average Average Average Balance Rate Balance Rate ------- ------- ------- ------ (Dollars in Thousands) Deposit Category: Demand Accounts (1) $16,745 2.10% $18,783 2.93% Passbook Accounts 9,583 2.91% 9,838 2.20% Certificates 38,913 5.21% 39,497 5.37% ------- ------- ------- ------ $65,241 4.06% $68,118 4.13% ======= ======= ======= ======
(1) Non-interest bearing deposits are not in excess of 10% of total deposits. 25 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 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, 1997, there were eight other financial institutions located in these counties; one of the eight 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 26 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. Sale of Stanton Branch Deposits and Physical Facility On October 17, 1997, Pioneer Financial Corporation sold the deposits of Pioneer Federal Savings Bank at its Stanton branch, together with the real estate and improvements on which that branch was located, to Peoples Exchange Bank of Beattyville, Kentucky, Inc. The decision to sell the deposits and physical assets was made over a period of time and was not entered into lightly. Pioneer Federal had opened its Stanton branch in 1980. The management of Pioneer Federal wanted to increase its customer base east of Clark County for several reasons. Unfortunately, the Stanton branch never proved as profitable as the rest of the Bank. Management of Pioneer Federal continued to operate this branch due to its commitment to providing service and competition in the Powell County and Eastern Kentucky market. However, in 1997, additional competition moved into that area, which no longer made Pioneer's presence in Powell County as important to those residents. Of course, the presence of additional competition would decrease the likelihood of Pioneer's future profitability in Powell County. When it became apparent that Peoples Exchange Bank was going to move its main office to Powell County, and Peoples Exchange made an offer to purchase Pioneer's physical building, together with its deposit base, the Board of Directors reluctantly decided to make that sale. The price paid by Peoples Exchange Bank was a good price, and the opportunity would likely not be repeated. (See Note 17 of Notes to Consolidated Financial Statements.) 27 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 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, 1997, the Bank had 24 full-time employees, and 9 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. Year 2000 Concerns Many computer programs use two digits to identify the year in a date field. When computations involve the year 2000 and subsequent years, these programs could create erroneous results, or could fail. Pioneer Federal has appointed a committee and instituted an action plan, to address any problems which it might face regarding the year 2000, both in terms of computer hardware and software. At present, Pioneer Federal's management does not consider that the cost of remedying any such problems will be material. However, as the committee progresses through its agenda, should this assessment of the costs of remedy change so that said costs would materially affect the Company's future financial results, then such will be reported. 28 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"). 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 36). 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, 29 or integrity of the acquiring person or the proposed management personnel indicates that it would not be in the interests 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. The Bank is chartered as a federal savings bank under the Home Owners' Loan Act, as amended (the "HOLA") which is implemented by regulations adopted and administered by the OTS. As a federal savings bank, the Bank is subject to regulation, supervision and regular examination by the OTS. The OTS also has extensive enforcement authority over all savings institutions and their holding companies, including the Bank and the Company. Federal banking laws and regulations control, among other things, the Bank's required reserves, investments, loans, mergers and consolidations, payment of dividends and other aspects of the Bank's operations. The deposits of the Bank are insured by the SAIF administered by the FDIC to the maximum extent provided by law ($100,000 for each depositor). In addition, the FDIC has certain regulatory and examination authority over OTS-regulated savings institutions and may recommend enforcement actions against savings institutions to the OTS. The supervision and regulation of the Bank is intended primarily for the protection of the deposit insurance fund and the Bank's depositors rather than for holders of the Company's stock or for the Company as the holder of the stock of the Bank. 30 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. Proposed Legislation. Legislation currently pending before the United States Congress would, if enacted, require all federal savings institutions (such as the Bank) to convert to a national bank or a state bank or savings bank charter. In addition, the proposed legislation would cause the Company to be regulated not as a savings and loan holding company, but rather as a bank holding company or a "financial services" holding company (a new regulatory classification created by the legislation). If the pending legislation were to be adopted in its current form, it would eliminate certain advantages now enjoyed by federal savings institutions, such as unrestricted interstate branching. As consideration of the proposed legislation is in its early stages, the Company cannot predict whether or in what form the legislation will be enacted. However, based upon the provisions of the currently pending legislation, the management of the Company does not believe that the enactment of such legislation would have a material adverse effect on its financial condition or results of operations. Business Activities. The Bank derives its lending and investment powers from the HOLA and the regulations of the OTS thereunder. Under these laws and regulations, the Bank may invest in mortgage loans secured by residential and commercial real estate, commercial and consumer loans, certain types of commercial paper and debt securities, and certain other assets. The Bank may also establish service corporations that may engage in activities not otherwise permissible for the Bank, including certain real estate equity investments and securities and insurance brokerage. These investment powers are subject to various limitations. Branching. Subject to certain limitations, OTS regulations currently permit a federally chartered savings institution like 31 the Bank to establish branches in any state of the United States, provided that the federal savings institution qualifies as a "domestic building and loan association" under the Internal Revenue Code. See "Qualified Thrift Lender Test". The authority for a federal savings institution to establish an interstate branch network would facilitate a geographic diversification of the institutions's activities. However, recently proposed federal legislation could, if enacted, restrict the Bank's ability to open branches in states other than Kentucky. See "Proposed Legislation". 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 provided resolution of the BIF/SAIF premium disparity. Before September 30, 1996, most insured depository institutions holding BIF-assessable deposits paid the statutory minimum of $2,000 for 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, for the year ended September 30, 1996, an insurance premium to the FDIC equal to 0.23% of its total deposits. The BIF/SAIF legislation provided for a one-time assessment to recapitalize the SAIF. The assessment was based upon the amount of SAIF-assessable deposits held by an institution as of March 31, 1995 (with certain exceptions). The assessment was effective on September 30, 1996 and payable on November 27, 1996. 32 The BIF/SAIF legislation did not specify an actual assessment but stated that the total assessment would be equal to the amount necessary to recapitalize the SAIF as of October 1, 1996. Institutions were assessed at the rate of 65.7 basis points per $100 of SAIF-assessable deposits as of March 31, 1995. The BIF/SAIF legislation provided 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 provided that section 172(f) of the Code will not apply to deductions taken under section 162 of the Code for the special assessment. The Bank's assessment amounted to approximately $435,000 before tax benefit, and such amount was accrued in the financial statements as of September 30, 1996. As a result of the recapitalization of the SAIF by the 1996 Act, the FDIC reduced the insurance assessment rate for SAIF-assessable deposits for periods beginning on October 1, 1996. In 1997, the FDIC set the effective insurance assessment rates for SAIF-insured institutions, such as the Bank, at zero to 27 basis points. In addition, SAIF-insured institutions will be required, until December 31, 1999, to pay assessments to the FDIC at an annual rate of between 6.0 and 6.5 basis points to help fund interest payments on certain bonds issued by the Financing Corporation ("FICO"), an agency of the federal government established to recapitalize the predecessor to the SAIF. During this period, BIF member banks will be assessed for payment of the FICO obligations at one-fifth the annual rate applicable to SAIF member institutions. After December 31, 1999, BIF and SAIF members will be assessed at the same rate (currently estimated at approximately 2.4 basis points) to service the FICO obligations. The 1996 Act also provides that the FDIC may not assess regular insurance assessments for the SAIF unless required to maintain or to achieve the designated reserve ratio of 1.25% except for such assessments on those institutions that are not classified as "well-capitalized" or that have been found to have "moderately severe" or "unsatisfactory" financial, operational or compliance weaknesses. The Bank is classified as "well-capitalized" and has not been found by the OTS to have such supervisory weaknesses. 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 33 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 goodwill, 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 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, 1997, the Bank had tangible, core and risk-based capital of $8.6 million, $8.6 million and $9.0 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 34 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 2% 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 (IRR), the purpose of which will be to increase the minimum capital requirements for savings associations with higher credit risks. The OTS has, however, indefinitely deferred enforcement of its IRR requirements. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), the federal banking regulators are required to take prompt corrective action in respect of depository institutions that do not meet certain minimum capital requirements, including a leverage limit and a risk-based capital requirement. All institutions, regardless of their capital levels, are restricted from making any capital distribution or paying any management fees that would cause the institution to become undercapitalized. As required by the FDICIA, banking regulators, including the OTS, have issued regulations that classify insured depository institutions by capital levels and provide that the applicable agency will take various prompt corrective actions to resolve the problems of any institution that fails to satisfy the capital standards. 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 35 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 Owners' Loan Act, as amended ("HOLA"), requires savings institutions to meet a Qualified Thrift Lender (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 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, 1997, the Bank qualified as a QTL. 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 36 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, 1997, the Bank's liquidity ratio was 29.13%. 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 37 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, 1997, the Bank had borrowed $652,225 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, 1997, the Bank had $555,300 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, 1997, dividends paid by the FHLB of Cincinnati to the Bank totaled $46,500. 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, 1997, 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 sources before borrowing from the Federal Reserve System. The Bank had no such borrowings at September 30, 1997. Federal Taxation The Company and the Bank file a consolidated tax return on a fiscal year (September 30) basis. Thrift institutions are subject to the provisions of the Code in the same general manner as other corporations. Prior to recent legislation, institutions such as the Bank which met certain definitional tests and other conditions prescribed by the Code benefitted from certain favorable provisions regarding their deductions from taxable income for annual additions to their bad debt reserve. For 38 purposes of the bad debt reserve deductions, loans were separated into "qualifying real property loans", which generally are loans secured by interests in certain real property, and nonqualifying loans, which are all other loans. The bad debt reserve deduction with respect to nonqualifying loans was based on actual loss experience, although the amount of the bad debt reserve deduction with respect to qualifying real property loans could be based upon actual loss experience (the "experience method") or a percentage of taxable income determined without regard to such deduction (the "percentage of taxable income method"). Legislation recently signed by the President repealed the percentage of taxable income method of calculating the bad debt reserve. The Bank historically has elected to use the percentage method. Earnings appropriated to an institution's bad debt reserve and claimed as a tax deduction are not available for distribution to shareholders (including distributions made on dissolution or liquidation), unless such amount was included in taxable income, along with the amount deemed necessary to pay the resulting federal income tax. For information regarding additions to the tax bad debt reserves, see Note 7 to Financial Statements. 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 of its agencies. For the fiscal year ended September 30, 1997, the amount of such expense for the Bank was $65,545. 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 four teller stations, two drive-in windows (which serve two lanes of traffic), five private offices, a 39 Directors' Conference Room, a kitchen, a large lobby, two restrooms, a walk-in vault, a storage room, and a tellers' work area. There are eleven computer terminals at the main office. As of September 30, 1997 Pioneer Federal still owned a branch office at 17 East Pendleton Street, Stanton, Kentucky. It consisted of a brick-veneer modular building, constructed in 1980. The building had 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 were three computer terminals at the branch office. Its value is included in the table below. The Bank also has a 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, two restrooms, an office, conference room, safety deposit boxes and a walk-in vault. The Bypass branch has eight computer terminals, three drive-in lanes and an automatic teller machine (ATM).
September 30, 1997 1996 ---------------------- Land, buildings and improvements....... $1,850,235 $1,637,310 Furniture, fixtures and equipment...... 790,987 720,748 --------- --------- Total, at cost....... 2,641,222 2,358,058 Less accumulated depreciation....... 1,228,958 1,182,071 --------- --------- $1,412,264 $1,175,987 ========= =========
Item 3. Legal Proceedings Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. 40 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 August 11, 1997, with the price per share being $43.00. (b) Holders. As of December 1, 1997, there were approximately 285 holders of shares of Pioneer Financial's common stock, par value $1 per share. (c) Dividends. During fiscal year 1997, Pioneer Financial's Board of Directors declared quarterly dividends of 35 cents per share payable on December 16, 1996, and 40 cents per share payable on March 15, 1997, June 16, 1997 and September 15, 1997 to shareholders of record as of December 2, 1996, March 1, 1997, June 1, 1997 and September 1, 1997, respectively. Total dividends paid in fiscal 1997 amounted to $322,761. 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 page 36 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 16 of the Corporation's Annual Report to Shareholders (Exhibit 13) is incorporated herein by reference. 41 Item 8. Financial Statement and Supplementary Data The financial statements and supplemental data contained on pages 17 through 46 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 7 of the Proxy Statement for the January, 1998 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, 1996, all filing requirements applicable to its executive officers, directors and greater than ten-percent beneficial owners were complied with. Item 11. Executive Compensation (a) Cash Compensation. Reference is made to "Remuneration of Officers" on pages 12 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 12 and 13 of the 42 Proxy Statement (Exhibit 28(b) hereto) and Note 10 on page 38 of 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 an 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 $38,488 and $30,512 for the years ended September 30, 1997 and 1996 respectively. (d) Other Compensation. Not applicable. (e) Compensation of Directors. Reference is made to "Directors' Fees" on page 11 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. Item 12. Security Ownership of Certain Beneficial Owners and Management Reference is made to "Voting Securities" on pages 2 through 4 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 14 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 $90,948. Of 43 this sum, $85,588 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 14 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 17 Exhibit 28(a) Consolidated Statements of Financial Condition at September 30, 1997 and 1996 Exhibit 13, page 18 Consolidated Statements of Income for the years ended September 30, 1997, 1996 and 1995 Exhibit 13, page 19 Consolidated Statements of Stockholders' Equity for the years ended September 30, 1997, 1996 and 1995 Exhibit 13, page 20 Consolidated Statements of Cash Flows for the years ended September 30, 1997, 1996 and 1995 Exhibit 13, pages 21 and 22 44 Notes to Consolidated Financial Statements Exhibit 13, pages 23 through 46 (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 Exhibit 28(b) Proxy Statement for Annual Meeting to be held January 14, 1998 (b) No Form 8-K was filed in the fourth quarter of fiscal 1997. (c) See (a) (3) above for all exhibits filed. (d) Separate financial statements are not applicable. 45 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 16, 1997 BY /s/Janet W. Prewitt ------------------------------- Janet W. Prewitt, Director and Chairman of the Board Date: December 16, 1997 BY /s/Carl C. Norton ------------------------------- Carl C. Norton, Director and President Date: December 16, 1997 BY /s/Nancy M. Lawwill ------------------------------- Nancy M. Lawwill, Director, and Treasurer 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 16, 1997 BY /s/William Cress ------------------------------- William Cress, Director Date: December 16, 1997 BY /s/Ewart W. Johnson ------------------------------- Ewart W. Johnson, Director Date: December 16, 1997 BY /s/Nora M. Linville ------------------------------- Nora M. Linville, Director Date: December 16, 1997 BY /s/Wayne M. Martin ------------------------------- Wayne M. Martin, Director Date: December 16, 1997 BY /s/Thomas D. Muncie ------------------------------- Thomas D. Muncie, Director Date: December 16, 1997 BY /s/Andrew J. Ryan ------------------------------- Andrew J. Ryan, Director Date: December 16, 1997 BY /s/Robert G. Strode ------------------------------- Robert G. Strode, Director EX-13 2 ANNUAL REPORT EXHIBIT 13 PIONEER FINANCIAL CORPORATION ANNUAL REPORT TO SHAREHOLDERS Fiscal Year Ending September 30, 1997 PIONEER FINANCIAL CORPORATION ANNUAL REPORT TO SHAREHOLDERS FISCAL YEAR ENDED SEPTEMBER 30, 1997 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 ....................................................... 17 Letter from Auditors .............................................. 17 Consolidated Balance Sheets ...................................... 18 Consolidated Statements of Income ................................. 19 Consolidated Statements of Stockholders' Equity ................... 20 Consolidated Statements of Cash Flows ............................. 21 Notes to Consolidated Financial Statements ........................ 23 Corporate Information ...................................................... 47 Form 10-K ................................................................. 48 PIONEER FINANCIAL CORPORATION Corporate Profile Pioneer Financial Corporation (herein "the Company"), 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 Company and of the Bank are included herein. Pioneer Federal Savings Bank (herein "the Bank"), with assets of more than $74 million at September 30, 1997, is the larger of the two thrift institutions in Winchester, Kentucky. It currently ranks third in deposits among the eight financial institutions located in Winchester. 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 Company and of the Bank are located at 25 East Hickman Street, Winchester, Kentucky 40391, telephone number (606) 744-3972. Consolidated Financial Highlights
September 30, --------------------------------- 1997 1996 - -------------------------------------------------------------------------------- For the Year Net interest income $ 2,691,733 $ 2,797,403 Net income 1,066,945 706,982 At Year End Total assets $74,825,464 $74,401,137 Loans receivable, net 34,490,871 35,247,421 Savings deposits 64,585,148 64,335,165 Stockholders' equity 8,738,198 8,244,635 Stockholders' equity to total liabilities 13.2% 12.5% - --------------------------------------------------------------------------------
Capital Stock At the present time, there is no established market in which shares of the Company'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 $43.00 per share. During fiscal year 1997, the Company paid quarterly dividends of 35(cent) per share on December 16, 1996, and 40(cent) per share on March 15, 1997, June 16, 1997 and September 15, 1997 to shareholders of record as of December 2, 1996, March 1, 1997, June 1, 1997 and September 1, 1997, respectively. As of November 5, 1997, Pioneer Financial Corporation had approximately 285 stockholders. 2 [LETTERHEAD OF PIONEER FINANCIAL CORPORATION APPEARS HERE] December 16, 1997 Dear Shareholder: As you can see from the enclosed Annual Report to Shareholders for our fiscal year ending September 30, 1997, the most recent fiscal year was another excellent year for Pioneer Federal. It was comparable to 1994 and 1995. You may remember that the net income for fiscal year ended September 30, 1996 was significantly lower than 1994, 1995 or 1997 due to a special assessment to financial institutions who, like Pioneer Federal, were insured by the SAIF portion of the FDIC. Without the special assessment, Pioneer Federal's net income for fiscal year 1996 would have been just under $1,000,000. Although it happened after the end of the fiscal year, I want to mention Pioneer Federal's ceasing to operate a branch in Stanton, Kentucky. As most all of you are aware, this occurred on October 17, 1997. People's Exchange Bank of Beattyville, Kentucky, Inc., which had earlier given notice of its intention to move its main bank office to Stanton, Kentucky, made an offer for our Stanton branch bank building and real estate and Stanton deposits. We valued our Powell County customers and relationships - many of which had existed before we ever had a branch office in Powell County. However, acceptance of the offer was determined to be in the best interests of our shareholders. We did not sell our Powell County loans other than loans secured by savings accounts (commonly called "share loans"). We have finally completed our much-needed renovations at the main office on Hickman Street this year. I know that it was an inconvenience to our customers as well as our staff, but we feel that we are more efficiently using our space and able to provide better service in the renovated space. Thank you for your indulgence during our reconstruction work. As I'm sure you have observed, we have more banking competitors in Clark County this year than when I wrote you in December, 1996. We are excited about the challenges and opportunities of the coming year. As always, we are very grateful for the loyalty and support of our shareholders, customers and employees. 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, --------------------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- Balance Sheet Data Total amount of: Loans receivable, net...................... $34,491 $35,247 $32,214 $29,384 $34,290 Investments................................ 28,571 31,574 38,676 41,104 36,720 Cash....................................... 1,189 733 790 633 462 Interest bearing deposits/1/............... 8,289 4,935 5,162 6,271 4,605 Assets..................................... 74,825 74,401 78,836 79,648 78,432 Deposits................................... 64,585 64,335 67,088 68,686 68,198 Borrowings................................. 652 699 742 757 795 Stockholders' equity....................... 8,738 8,245 10,540 9,806 9,087 Other Data Number of: Loans outstanding.......................... 2,346 2,409 2,418 2,344 2,412 Savings accounts........................... 8,652 9,117 9,207 9,253 9,766 Full customer service offices open......... 3 3 3 3 3 Year ended September 30, --------------------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- Operations Data Total amount of: Interest income............................ $ 5,393 $ 5,659 $ 5,656 $ 5,210 $ 5,819 Interest expense........................... (2,701) (2,862) (2,619) (2,293) (2,517) Provision for loan losses.................. (57) (19) (5) (178) -------- -------- -------- -------- -------- Net interest income after provision for loan losses................ 2,692 2,740 3,018 2,913 3,123 Non-interest income........................ 489 445 404 389 432 Non-interest expense....................... 1,572 2,092 1,776 1,718 1,614 -------- -------- -------- -------- -------- Net income before income taxes and cumulative effect of change in accounting principles.................... 1,609 1,093 1,646 1,584 1,941 Income tax expense......................... 542 386 568 534 670 Cumulative effect of change in accounting principle/2/............... (18) -------- -------- -------- -------- -------- Net income................................. $ 1,067 $ 707 $ 1,078 $ 1,032 $ 1,271 ======== ======== ======== ======== ========
- ------------------------------------ /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:
As of and for the years ended September 30, ---------------------------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- Performance Ratios: Return on average assets/1/....... 1.42% 0.89% 1.36% 1.30% 1.61% Return on average equity/1/....... 12.86% 6.97% 10.52% 10.83% 14.78% Average equity to average assets1................. 11.07% 12.72% 12.91% 12.05% 10.91% Interest rate spread.............. 3.36% 3.18% 3.51% 3.43% 3.96% Net interest margin............... 3.72% 3.63% 3.94% 3.78% 4.30% Dividend payout................... 30.25% 50.00% 32.7% 30.30% 20.30% Asset Quality Ratios: Nonperforming assets to total assets at end of year........... 0.21% 0.30% 0.24% 0.13% 0.26% Allowance for loan losses to total assets at end of year..... 0.52% 0.51% 0.45% 0.44% 0.51% Allowance for loan losses to nonperforming loans at end of year......................... 252.26% 171.30% 183.33% 334.62% 193.20% Allowance for loan losses to total loans receivable, net..... 1.13% 1.06% 1.05% 1.15% 1.17% Capital Ratios: Equity to total assets at end of year..................... 11.68% 11.08% 13.27% 12.31% 11.58% Average equity to average assets/1/............... 11.07% 12.72% 12.91% 12.05% 10.91% Ratio of average interest earning assets to average interest bearing liabilities/1/.................. 109.64% 112.01% 112.55% 111.74% 110.30%
- -------------------- /1/Average balances are based upon month-end balances. 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 (Pioneer Federal or Bank) became a wholly-owned subsidiary of Pioneer Financial Corporation (Company). The purpose of the discussion that follows is to provide insight into the consolidated financial condition and results of operation of Pioneer Financial Corporation and its subsidiary, Pioneer Federal Savings Bank. The primary business of the Company is the operation of the Bank. The assets of the Company consist of all of the outstanding capital stock of the Bank, and a note receivable from the Company's Employee Stock Ownership Plan (ESOP). Therefore, this discussion relates primarily to the Bank. Historically, the 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 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 Bank and the entire thrift industry 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 Bank's market areas. The Bank's interest earning assets have been historically concentrated in real estate - collateralized instruments, principally single-family residential loans, and to a lesser extent, loans secured by multi-family residential and commercial properties, construction loans, home equity lines of credit, second mortgages on single-family residences and consumer loans, both secured and unsecured including loans secured by savings accounts. In addition, the Bank invests in mortgage-backed securities, which are secured by single-family residential loans and guaranteed by government agencies. The Bank also invests in U.S. Government Treasury and Agency securities, Federal funds, and interest- bearing deposits, primarily with the Federal Home Loan Bank of Cincinnati. The Bank's source of funding for these investments has principally been deposits placed with the Bank by consumers in the market area it serves. Asset/Liability Management Net interest income, the primary component of the 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 Bank has sought to reduce its exposure to changes in interest rates by matching more closely the effective maturities 6 or repricing characteristics of its interest-earning assets and interest-bearing liabilities. The matching of the 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 Bank's assets mature or reprice more quickly or to a greater extent than its liabilities, the 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 Bank's assets mature or reprice more slowly or to a lesser extent than its liabilities, the Bank's net portfolio value and net interest income would tend to decrease during periods of rising interest rates. The 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 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 Bank's policy is to not actively offer long-term fixed rate loans. Fixed rate loans that are offered and retained by the Bank are secured by one to four-family owner-occupied dwellings, primarily for terms of no more than 15 years. Likewise, the interest rate charged on the Bank's adjustable rate loans typically reprice after one, three, or five years with maximum periodic interest rate adjustment limits ("caps"). At September 30, 1997, the Bank had no loans that reprice after five years from that date. In managing its portfolio investment and mortgage-backed and related securities, the Bank seeks to purchase investment and mortgage-backed and related securities that mature on a basis that approximates the estimated maturities of the Bank's liabilities. Management has attempted to lengthen the average maturity of its liabilities by adopting a tiered pricing program for its certificates of deposit. The 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 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 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 Bank's market value of portfolio equity at June 30, 1997 would decrease by approximately $1.0 million or 8% 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 June 30, 1997 would decrease by approximately $25,000 or 0% given a 200-basis point immediate and sustained decrease in interest rates. There has been no material change in the Company's consolidated net assets since June 30, 1997. Average Balances, Interest, and Average Yields The 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 7 (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 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, ---------------------------------------------------------------------- 1997 1996 --------------------------------- ----------------------------------- Average Average Average Average Balance/1/ Interest Yield/Rate Balance/1/ Interest Yield/Rate ---------- -------- ---------- ---------- -------- ---------- Interest Earning Assets: Loans/2/...................................... $ 35,059 $ 3,111 8.87% $ 33,358 $ 3,057 9.16% Investment securities......................... 2,588 117 4.52 5,352 384 7.17 Mortgage-backed securities.................... 25,856 1,704 6.59 30,064 1,783 5.93 Other investments............................. 8,763 461 5.26 8,333 435 5.22 -------- -------- -------- -------- -------- -------- Total interest earning assets............... 72,266 5,393 7.46 77,107 5,659 7.34 -------- -------- Non interest earning assets................... 2,715 2,704 -------- -------- Total assets................................ $ 74,981 $ 79,811 ======== -------- Interest-bearing Liabilities: Savings deposits.............................. $ 65,241 2,652 4.06 $ 68,118 2,816 4.13 FHLB advances 672 49 7.29 719 46 6.40 -------- -------- -------- -------- Total interest bearing liabilities 65,913 2,701 4.10 68,837 2,862 4.16 -------- -------- Non interest bearing liabilities.............. 769 825 Stockholders' equity.......................... 8,299 10,149 -------- -------- Total liabilities and stockholders' equity.. $ 74,981 $ 79,811 ======== ======== Net interest income.............................. $ 2,692 $ 2,797 ======== ======== Interest rate spread/3/.......................... 3.36% 3.18% ======== ======== Net interest margin/4/........................... 3.72% 3.63% ======== ======== Ratio of average interest-bearing assets to average interest-bearing liabilities 109.64% 112.01% ======== ======== Year ended September 30, --------------------------------------- 1995 --------------------------------------- Average Average Balance/1/ Interest Yield/Rate ---------- -------- ---------- Interest Earning Assets: Loans/2/...................................... $ 31,622 $ 2,813 8.90% Investment securities......................... 7,872 474 6.02 Mortgage-backed securities.................... 31,280 2,019 6.45 Other investments............................. 6,368 350 5.50 --------- -------- -------- Total interest earning assets............... 77,142 5,656 7.33 Non interest earning assets................... 2,275 -------- --------- Total assets................................ $ 79,417 ========= Interest-bearing Liabilities: Savings deposits.............................. $ 67,794 2,569 3.79 FHLB advances 744 50 6.72 --------- -------- -------- Total interest bearing liabilities 68,538 2,619 3.82 Non interest bearing liabilities.............. 630 -------- Stockholders' equity.......................... 10,249 --------- Total liabilities and stockholders' equity.. $ 79,417 ========= Net interest income.............................. $ 3,037 ======== Interest rate spread/3/.......................... 3.51% ======== Net interest margin/4/........................... 3.94% ======== Ratio of average interest-bearing assets to average interest-bearing liabilities 112.56% ========
- ------------------------- /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-earnings 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 (change in rate multiplied by the change in volume).
Year ended September 30, ---------------------------------------------------------------------------------------------------- 1997 vs. 1996 1996 vs. 1995 1995 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 .............. 155.8 (96.7) (4.9) 54.1 157.5 82.2 4.5 244.2 46.6 48.0 0.8 95.4 Investments ................. (197.4) (142.8) 73.2 (267.0) (151.7) 90.5 (29.0) (90.2) 235.2 0.5 0.4 236.1 Mortgage-backed securities .. (249.9) 198.4 (27.8) (79.3) (78.4) (164.7) 6.3 (236.8) (289.3) 285.2 (40.0) (44.1) Other interest income ....... 22.4 3.3 0.2 26.0 109.1 (17.8) (5.5) 85.8 30.7 111.4 16.1 158.2 ------ ------ ---- ------ ------ ----- ----- ----- ----- ----- ---- ----- Total interest-earning assets (269.1) (37.8) 40.7 (266.2) 36.5 (9.7) (23.7) (3.0) 23.2 445.1 (22.7) 445.6 ====== ====== ==== ====== ====== ===== ===== ===== ===== ===== ==== ===== Interest expense: Savings deposit ............. (117.8) (47.7) 2.0 (163.5) 12.3 233.5 1.1 246.9 (14.5) 345.3 (2.2) 328.6 Borrowings and Federal Home Loan Bank Advances .. (3.0) 6.4 (0.4) 3.0 (1.7) (2.4) 0.1 (4.0) (2.1) (0.2) 0.0 (2.3) ------ ------ ---- ------ ------ ----- ----- ----- ----- ----- ---- ----- Total interest-bearing liabilities................ (120.8) (41.3) 1.6 (160.5) 10.6 231.1 1.2 242.9 (16.6) 345.1 (2.2) 326.3 ====== ====== ==== ====== ====== ===== ===== ===== ===== ===== ==== ===== Net change in net interest income (expense) ............ (148.3) 3.5 39.1 (105.7) 25.9 (240.9) (24.9) (239.9) 39.8 100.0 (20.5) 119.3 ====== ====== ==== ====== ====== ===== ===== ===== ===== ===== ==== =====
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, 1997 and 1996 The Company's consolidated assets increased by $400,000 to $74.8 million at September 30, 1997 compared to $74.4 million at September 30, 1996. Short-term investments consisting of interest-bearing deposits and Federal funds sold increased a total of $3.4 million or 40.4% to $8.3 million at September 30, 1997. This increase was funded primarily by principal repayments on mortgage-backed securities, and the maturity of other investment securities. Investment securities, including both securities available-for-sale and securities held-to-maturity totaled $28.6 million at September 30, 1997 compared to $31.6 million at September 30, 1996. The net loan portfolio decreased $700,000 or 2% to $34.5 million at September 30, 1997 compared to $35.2 million at September 30, 1996. The allowance for loan losses totaled $391,000 and $382,000 at September 30, 1997 and 1996, respectively. At September 30, 1997, the ratio of the allowance for loan losses to loans was 1.13% compared to 1.06% at September 30, 1996. The Bank's non-performing loans were $155,000 at September 30, 1997. The Bank's ratio of allowance for loan losses to non-performing loans was 252.6% at September 30, 1997 compared to 171.3% at September 30, 1996. The determination of the allowance for loan losses is based on management's analysis, which is done at a minimum on a quarterly basis. Various factors are considered, including the market value of the underlying collateral, growth and composition of the loan portfolio, the relationship of the allowance for loan losses to outstanding loans, historical loss experience, delinquency trends and prevailing economic conditions. Although management believes its allowance for loan losses is adequate, there can be no assurance that additional allowances will not be required or that losses on loans will not be incurred. Premises and equipment increased $200,000 to $1.4 million compared to $1.2 million. The increase was due to remodeling of the Bank's main office. Deposits totaled $64.6 million at September 30, 1997 compared to $64.3 million at September 30, 1996. In October of 1997 the Bank finalized the sale of its Branch bank located in Stanton, Kentucky, which resulted in the transfer of $4.9 million in deposits to the purchaser. The Bank realized a net gain on the sale of the Branch of approximately $600,000. The sale will allow management to concentrate efforts and resources in their primary market area of Winchester, Kentucky. Stockholders' equity increased $500,000 to $8.7 million at September 30, 1997 compared to $8.2 million at September 30, 1996. The increase was due to net income for fiscal year 1997 of $1.1 million less dividend payments of $300,000 and the net reduction of $225,000 from unallocated stock in the Employee Stock Ownership Plan (ESOP). In fiscal year 1997, the Company made a loan of $250,000 to the ESOP Trust for the purpose of acquiring outstanding stock of the Company. The ESOP Trust used the proceeds of the loan to acquire 6,022 shares of the Company's common stock, which is collateral for the loan. The stock is released from collateral in proportion to the principal repayments made on the loan and allocated to the participants in the Plan. Under generally accepted accounting principles, the stock is earned by participants over the expected amortization period of the loan balance. Comparison of Results of Operations for the Years Ended September 30, 1997 and 1996 Net Income. The Company's consolidated net income for the year ended September 30, 1997 was $1,067,000, compared to $707,000 for the year ended September 30, 1996. In comparing 1997 to 1996, the increase of $360,000 in net income resulted from a reduction in non-interest expense of $520,000, a decrease 11 in the provision for loan losses of $57,000 plus an increase in non-interest income of $44,000 offset by a reduction in net interest income of $105,000 and an increase in income tax expense of $156,000. Net Interest Income. Net interest income for the year ended September 30, 1997 was $2.7 million, compared to $2.8 million for the year ended September 30, 1996. The decrease of $105,000 in net interest income for the year ended September 30, 1997 was due primarily to a decrease in the average balances of interest earning assets offset in part by a decrease in the average balance of interest-bearing liabilities for 1997 compared to 1996. The average balance of interest earning assets in 1997 was $72.3 million with an average yield of 7.46%, compared to average balances of $77.1 million with an average yield of 7.34% for 1996. The average balance of interest-bearing liabilities in 1997 was $66.0 million with an average cost of funds of 4.10% compared to average balances of $68.9 million with an average cost of funds of 4.16% for 1996. The decrease in the average balances of interest earning assets was due primarily to a decrease in the last quarter of 1996 from the repurchase of stock for $2.7 million, plus a decrease in deposits of approximately $2.7 million, due to the rotation of the local school board deposits. Interest Income. Interest income decreased $266,000 from $5.7 million to $5.4 million, or by 4.7% during 1997 compared to 1996. This decrease resulted primarily from the decrease in the average balance of interest earning assets from $77.1 million in 1996 compared to $72.3 million in 1997. The average yield on interest earning assets increased to 7.46% from 7.34% due to an increase in the average balance of loans from $33.4 million to $35.1 million in 1997 compared to 1996. The increase in loans was funded by repayments of mortgage-backed securities and the maturity of other investment securities as part of management's strategy to obtain higher investment yields. Interest Expense. Interest expense decreased $161,000 from $2.9 million to $2.7 million or by 5.6% during 1997 compared to 1996. This decrease resulted primarily from a decrease in the average balance of interest-bearing liabilities from $68.9 million in 1996 compared to $66.0 million in 1997. Provision for Loan Losses. Bank management determined that no additional provision for loan losses was required in 1997. The provision for loan losses in 1996 was $57,000. The decision to not provide an additional provision for loan losses was based on the various factors management uses to evaluate the adequacy of the allowance for loan losses, with the more significant factors being the similar composition and size of the loan portfolio in 1997 and 1996, and favorable delinquency trends, with relatively stable economic conditions. Non-Interest Income. Non-interest income increased $44,000 for the year ended September 30, 1997 compared to the same period in 1996. The increase is due to the recognition in 1997 of the fair market value of mortgage servicing rights for loans sold in the secondary market, which resulted in additional gains on the sale of these loans totaling $100,000. The Bank began recognizing mortgage servicing rights as the result of adopting Statement of Financial Accounting Standards (SFAS) No. 122 Accounting for Mortgage Servicing Rights in 1997, which was subsequently superseded by SFAS No. 125 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This increase of $100,000 was offset in part by a decrease in loan fees of approximately $22,000 and a decrease in the gain on the sale of securities of $33,000 in 1997 compared to 1996. Non-Interest Expense. Non-interest expense decreased $500,000 from 2.1 million in 1996 to $1.6 million in 1997. The decrease of $500,000 was primarily due to a $522,000 decrease in Federal or other insurance premiums. This decrease was due to a special SAIF premium assessment in 1996 of $435,000, plus a reduction in the insurance rate paid on deposits in 1997 to approximately .06% as compared to .23% in 1996. 12 Income Taxes. The Bank's effective income tax rate was 34.0% in 1997 and 35.3% in 1996. The increase in income tax expense of $156,000 is due to the increase in income for 1997 as compared to 1996. Comparison of Results of Operations for the Years Ended September 30, 1996 and 1995 Net Income. Net income 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. Net Interest Income. Net interest income for the year ended September 30, 1996 was $2.8 million, compared to $3.0 million for the year ended September 30, 1995. The decrease of $240,000 for the year ended September 30, 1996 was primarily due to a higher cost of funds in 1996 compared to 1995. Average interest-bearing liabilities in 1996 amounted to $68.9 million, with the average interest rate paid amounting to 4.16%, compared to the average balance of interest-bearing liabilities in 1995 of $68.5 million with an average interest rate paid of 3.82%. Interest expense for 1996 was $2.9 million compared to $2.6 million in 1995. Interest income was $5.7 million in 1996 and 1995. 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 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 expense 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 13 decrease in legal fees and a $30,000 decrease in other operating expenses. The increase of $444,000 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 amounted to 35.3% and 34.5% for 1996 and 1995, respectively. Mortgage Banking Activity Net loans decreased from $35.2 million at September 30, 1996 to $34.5 million at September 30, 1997. The Bank's portfolio of loans, owned by others but serviced by the Bank, increased 3.8% from $50.3 million at September 30, 1996 to $52.2 million at September 30, 1997. The Bank originated all of the loans which it services. Liquidity and Committed Resources The Company's primary source of liquidity is dividends paid by the Bank. The Bank is subject to certain regulatory limitations with respect to the payment of dividends to the Company. The 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, 1997, the Bank had outstanding advances from the FHLB of Cincinnati totaling $652,000. OTS regulations require that the 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, 1997, the Bank's liquidity ratio under applicable federal regulations was 29.13% as compared to 24.8% at September 30, 1996. At September 30, 1997, the Bank had $29.8 million in certificates of deposit maturing within one year, and $8.9 million maturing between one and three years. Management believes, based on past experience, that the Bank will retain much of the deposits or replace them with new deposits. As of September 30, 1997, the Bank had $2.6 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. The 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, 1997, the Bank's tangible and core capital totaled $8.6 million. This amount exceeded the tangible capital requirement of $1.1 million by $7.5 million, and the core capital requirement of $2.2 million 14 by $6.4 million on that date. At September 30, 1997, the Bank's risk-based capital totaled $9.0 million, which exceeded its risk-based capital requirement by $6.6 million. Impact of Inflation and Changing Prices The financial statements and notes thereto presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time and due to inflation. The impact of inflation is reflected in the increased cost of the Bank's operations. Unlike most industrial companies, nearly all the assets and liabilities of the Bank are monetary in nature. As a result, changes in interest rates have a 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. Impact of New Accounting Standards Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. In June 1996, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities ("SFAS 125"). SFAS 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial-components approach that focuses on control. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996, and is to be applied prospectively. Earlier or retroactive application is not permitted. The Bank adopted the provisions of SFAS 125 in January 1997. The impact of the Bank adopting this statement amounted to an increase in net income of $66,000 for the year ended September 30, 1997. Accounting for Earnings Per Share. In February 1997, the FASB issued Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS 128 establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. This statement simplifies the standards for computing earnings per share previously found in APB Opinion No. 15, Earnings Per Share, and makes them comparable to international EPS standards. It replaces the presentation of primary EPS with a presentation of basic EPS and requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods; earlier application is not permitted. This statement requires restatement of all prior-period EPS data presented. The Company will adopt the statement at the end of the first quarter in fiscal year 1998. Basic and diluted earnings per share under SFAS 128 would be identical to earnings per share as presented in the financial statements, and therefore, will not have any material effect on the Company. 15 Reporting of Comprehensive Income. In June 1997, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 130, Reporting of Comprehensive Income ("SFAS 130"), which establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of financial statements. This statement also requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. This statement is effective for fiscal years beginning after December 15, 1997. Earlier application is permitted. Reclassification of financial statements for earlier periods provided for comparative purposes is required. The Company does not anticipate that adoption of SFAS 130 will have a material effect on the Company. Disclosure about Segments and Related Information. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("SFAS 131"), which establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to stockholders. This statement also establishes standards for related disclosures about products and services, geographic areas, and major customers. This statement requires the reporting of financial and descriptive information about an enterprise's reportable operating segments. This statement is effective for financial statements for periods beginning after December 15, 1997. In the initial year of application, comparative information for earlier years is to be restated. The Company does not anticipate that the adoption of SFAS 131 will have a material effect on the Company. Dividends on and Price Range of Common Stock. During fiscal year 1997, the Company declared dividends in the following amounts: December 15, 1996............................................35(cent) per share March 15, 1997...............................................40(cent) per share June 16, 1997................................................40(cent) per share September 15, 1997...........................................40(cent) per share
Under OTS regulations, the 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 Bank exceeded all of the minimum regulatory capital requirements during the entire fiscal year. The Company's stock sold for $41.50 per share at the beginning of the fiscal year; the Company's stock sold for up to $41.50 per share at midyear, and the last sale during the fiscal year was at $43.00 per share. Certifying Accountant. Miller, Mayer, Sullivan, & Stevens, LLP has been appointed as the Company'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 annual meeting with an opportunity to make a statement if he desires to do so and to answer appropriate questions with respect to the firm's audit of the Company's consolidated financial statements and records for the fiscal year ended September 30, 1997. 16 [LETTERHEAD OF MILLER, MAYER, SULLIVAN & STEVENS LLP APPEARS HERE] 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, 1997 and 1996 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, 1997. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three year period ended September 30, 1997 in conformity with generally accepted accounting principles. /s/ Miller, Mayer, Sullivan, & Stevens, LLP Lexington, Kentucky October 31, 1997 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS September 30, 1997 and 1996 ---------------
ASSETS 1997 1996 ----------- ---------- Cash and due from banks $ 1,188,974 $ 732,573 Interest bearing deposits 1,138,456 1,529,881 Federal funds sold 7,151,000 3,211,000 Certificates of deposit 194,000 Securities available-for-sale, at fair value 5,949,386 7,601,611 Securities held-to-maturity, fair value of $22,608,182 and $23,520,598 for 1997 and 1996, respectively 22,621,995 23,972,497 Loans receivable, net 34,490,871 35,247,421 Loans held for sale 152,750 Accrued interest receivable 455,824 535,269 Premises and equipment, net 1,412,264 1,175,987 Other assets 263,944 200,898 ----------- ----------- Total assets $74,825,464 $74,401,137 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $64,585,148 $64,335,165 Advances from Federal Home Loan Bank 652,225 698,798 Advance payments by borrowers for taxes and insurance 39,607 26,788 Other liabilities 810,286 1,095,751 ----------- ----------- Total liabilities 66,087,266 66,156,502 ----------- ----------- Stockholders' equity Common stock, $1 par value, 500,000 shares authorized; 208,233 shares, issued and outstanding for 1997 and 1996, respectively 208,233 208,233 Additional paid-in capital 1,797,432 1,797,432 Retained earnings, substantially restricted 6,957,353 6,213,169 Unallocated Employee Stock Ownership Plan (ESOP) stock (224,922) Net unrealized appreciation on securities available-for-sale, net of tax of $53 in 1997 and $13,292 in 1996 102 25,801 ----------- ----------- Total stockholders' equity 8,738,198 8,244,635 ----------- ----------- Total liabilities and stockholders' equity $74,825,464 $74,401,137 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. 18 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME for the years ended September 30, 1997, 1996, and 1995 ---------------
1997 1996 1995 ---------- ---------- ---------- Interest income: Interest on loans $3,110,644 $3,057,393 $2,812,782 Interest and dividends on securities 1,821,596 2,167,280 2,493,348 Other interest income 460,739 434,493 349,560 ---------- ---------- ---------- Total interest income 5,392,979 5,659,166 5,655,690 ---------- ---------- ---------- Interest expense: Interest on deposits 2,652,734 2,815,403 2,569,375 Interest on borrowings 48,512 46,360 49,526 ---------- ---------- ---------- Total interest expense 2,701,246 2,861,763 2,618,901 ---------- ---------- ---------- Net interest income 2,691,733 2,797,403 3,036,789 Provision for loan losses 57,433 19,000 ---------- ---------- ---------- Net interest income after provision for loan losses 2,691,733 2,739,970 3,017,789 ---------- ---------- ---------- Non-interest income: Loan and other service fees, net 381,132 409,519 394,470 Gain (loss) on sale of securities 33,310 1,822 Gain on sale of loans 108,494 2,698 7,546 ---------- ---------- ---------- 489,626 445,527 403,838 ---------- ---------- ---------- Non-interest expense: Compensation and benefits 892,855 863,508 848,817 Occupancy expenses, net 172,074 190,194 203,789 Office supplies and expenses 97,386 110,441 103,926 Federal and other insurance premiums 94,633 616,705 172,036 Legal expenses 7,634 3,827 104,953 Data processing expenses 143,000 136,616 141,176 State franchise tax 65,545 64,790 64,409 Other operating expenses 98,907 106,117 136,875 ---------- ---------- ---------- 1,572,034 2,092,198 1,775,981 ---------- ---------- ---------- Income before income tax expense 1,609,325 1,093,299 1,645,646 Income tax expense 542,380 386,317 568,143 ---------- ---------- ---------- Net income $1,066,945 $ 706,982 $1,077,503 ========== ========== ========== Earnings per share $ 5.12 $ 2.76 $ 3.95 ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. 19 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY for the years ended September 30, 1997, 1996, and 1995 ---------------
Net Unrealized Unallocated Appreciation Employee Additional on Securities Stock Total Common Paid-In Retained Available- Ownership Stockholders' Stock Capital Earnings for-Sale Plan Stock Equity --------- ----------- ----------- ------------- ---------- ------------ 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 64,189 64,189 change in accounting for securities Change in net unrealized gain on (55,922) (55,922) securities available-for-sale, net of deferred income taxes --------- ----------- ----------- --------- ---------- ----------- 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 Net income 1,066,945 Declaration of dividend (322,761) Unallocated ESOP stock (249,913) ESOP shares earned in 1997 24,991 Change in net unrealized gain on securities available-for-sale, net of deferred income taxes 25,699 --------- ----------- ----------- --------- ---------- ----------- Balance, September 30, 1997 $ 208,233 $ 1,797,432 $ 6,957,353 $ 102 $ (224,922) $ 8,738,198 ========= =========== =========== ========= ========== ===========
The accompanying notes are an integral part of the consolidated financial statements. 20 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended September 30, 1997, 1996, and 1995 ---------------
1997 1996 1995 ------------- ------------- ------------ Operating activities Net income $ 1,066,945 $ 706,982 $ 1,077,503 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 57,433 19,000 Amortization of investment premium (discount) 77,724 168,615 108,179 Amortization of organizational cost 13,507 13,507 12,382 Provision for depreciation 48,522 53,365 79,900 ESOP benefit expense 24,991 Amortization of loan fees (95,694) (92,303) (48,617) FHLB stock dividend (46,500) (27,400) (36,900) Securities (gain)loss, net (33,310) (1,822) Loans originated for sale (10,554,724) (10,162,642) (7,457,985) Proceeds from loans held for sale 10,663,218 10,165,340 7,465,531 Gain on sale of loans (108,494) (2,698) (7,546) Change in: Prepaid expense (122,060) 46,028 (57,523) Interest receivable 79,444 139,885 (58,475) Interest payable 12,497 15,914 5,886 Accrued liabilities (376,592) 627,438 55,866 Income taxes payable 137,381 (118,385) 11,364 ------------ ------------ ----------- Net cash provided by operating activities 820,165 1,557,769 1,166,743 ------------ ------------ ----------- Investing activities Net (increase) decrease in loans 699,494 (2,998,846) (2,800,413) Principal repayments, mortgage-backed securities 5,288,984 6,486,307 3,995,015 Purchase of premises and equipment (284,799) (51,941) (18,494) 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 (8,991,996) (10,484,665) (8,074,208) Maturity of securities held-to-maturity 6,635,575 14,578,264 7,548,430 Maturity of certificates of deposit 194,000 94,000 ------------ ------------ ----------- Net cash provided (used) by investing activities 3,541,258 4,063,813 (448,457) ------------ ------------ -----------
Continued The accompanying notes are an integral part of the consolidated financial statements. 21 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued for the years ended September 30, 1997, 1996, and 1995 ---------------
1997 1996 1995 ---------- ---------- ---------- Financing activities Net increase (decrease) in demand deposits, (365,680) (1,678,188) (4,229,812) NOW accounts and savings accounts Net increase (decrease) in certificates of deposit 615,663 (1,074,568) 2,632,198 Cash dividends (322,762) (353,533) (351,495) Federal Home Loan Bank Advance, repayments (46,573) (43,632) (14,606) Net increase (decrease) in custodial accounts 12,818 3,392 5,492 Stock repurchase (2,666,126) ESOP stock purchase (249,913) ---------- ---------- ---------- Net cash provided (used) by financing activities (356,447) (5,812,655) (1,958,223) ---------- ---------- ---------- Increase (decrease) in cash and cash equivalents 4,004,976 (191,073) (1,239,937) Cash and cash equivalents, beginning of year 5,473,454 5,664,527 6,904,464 ---------- ---------- ---------- Cash and cash equivalents, end of year $9,478,430 $5,473,454 $5,664,527 ========== ========== ========== Supplemental Disclosures Cash payments for: Interest on deposits $2,688,749 $2,811,085 $2,563,490 Income taxes $ 405,000 $ 505,000 $ 627,000
The accompanying notes are an integral part of the consolidated financial statements. 22 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. 23 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO 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. Loan Origination Fees. The Bank accounts for loan origination fees in accordance with Statement of Accounting Standards (SFAS) 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 are 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. 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, 1997 and 1996) of (Continued) 24 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, 1997 and 1996, 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 initially recorded at fair value, net of selling expenses, establishing a new cost basis. Expenses relating to holding property, including interest expense, are not capitalized. These expenses are charged to operations as incurred. 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. (Continued) 25 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --------------- 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 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"). 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, was reduced from 23% to approximately 6% 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, (Continued) 26 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --------------- 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. 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 June of 1996, the FASB issued SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which superseded SFAS No. 122, "Accounting for Mortgage Servicing Rights," and amended SFAS No. 65 "Accounting for Certain Mortgage Baning Activities." SFAS No. 125 requires the Company to recognize, as separate assets, rights to service mortgage loans for others; however, these servicing rights are acquired. SFAS No. 125 was effective for the Company on January 1, 1997, and applied prospectively to mortgage banking transactions occurring after that date. The Company recognized mortgage servicing rights of $105,716 for the year ended September 30, 1997. Amortization of the mortgage servicing rights totaled $6,087 for the same period. The Bank sells certain residential loans, primarily fixed rate loans secured by single family residences in the secondary market. The fair value of the mortgage servicing rights was determined by quoted prices in the secondary market. The mortgage servicing rights on the loans sold in the secondary market are grouped by their primary risk characteristics, which is the interest rate. The mortgage servicing rights are being amortized in proportion to and over the period of net servicing income earned on the related loans being serviced. At September 30, 1997, there was no allowance recognized for impairment of the recorded balance of mortgage servicing rights. 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 $8.2 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) 27 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, 1997 and 1996 are summarized as follows:
1997 ------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value ------------ ----------- ----------- ------------ Securities, available-for-sale: SBA Pools $ 2,657,013 $ 9,608 $ 2,647,405 Mortgage-Backed Securities 3,292,217 9,764 3,301,981 ----------- ----------- ----------- ------------ $ 5,949,230 $ 9,764 $ 9,608 $ 5,949,386 =========== =========== =========== ============ Securities, held to maturity: Debt Securities: U.S. Government and Federal Agencies $ 4,000,625 $ 615 $ $ 4,006,240 Municipals Bonds 717,536 8,771 726,307 ----------- ----------- ----------- ------------ 4,723,161 9,386 4,732,547 ----------- ----------- ----------- ------------ Mortgage-Backed Securities 17,343,534 10,629 33,828 17,320,335 ----------- ----------- ----------- ------------ Federal Home Loan Bank of Cincinnati, capital stock - 5,553 555,300 555,300 ----------- ----------- ----------- ------------ $22,621,995 $ 20,015 $ 33,828 $ 22,608,182 =========== =========== =========== ============
(Continued) 28 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------------
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 =========== =========== =========== ===========
The amortized cost and estimated market value of debt securities at September 30, 1997, by contractual maturity, are as follows:
Estimated Amortized Market Cost Value ---------- ----------- Due in one year or less $3,105,937 $3,105,930 Due after one year through five years 1,499,190 1,498,828 Due after five years through ten years Due after ten years 118,034 127,789 ---------- ---------- $4,723,161 $4,732,547 ========== ==========
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 $155 net of deferred income taxes of $53 has been recorded as a separate component of stockholders' equity as of September 30, 1997. For the year ended September 30, 1997, the Bank received $6,635,575 from the maturity and call of U.S. Government instruments, debt securities backed by U.S. Government agencies, and mortgage-backed securities, all of which were classified as securities held-to-maturity. (Continued) 29 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------- 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. The Bank has pledged mortgage-backed securities totaling $3,605,000 to secure certain municipal deposits as of September 30, 1997. 3. Loans Receivable Loans receivable, net at September 30, 1997 and 1996 consists of the following:
1997 1996 ------------ ------------ Loans secured by first lien mortgages on real estate: Residential, one-to-four family properties $ 20,503,214 $ 21,252,055 Multi-family and commercial properties 1,088,140 2,127,870 Agricultural loans 545,793 565,313 Construction loans 1,074,654 1,808,092 Other loans: Commercial loans 5,818,338 4,796,056 Loans secured by deposits 964,993 1,048,311 Home equity loans 2,000,421 1,662,736 Other secured loans 3,562,910 2,710,992 Signature loans, unsecured 250,893 271,109 ------------ ------------ 35,809,356 36,242,534 Loans in process (731,545) (403,128) Allowance for loan losses (391,341) (382,469) Deferred loan origination fees (195,599) (209,516) ------------ ------------ Loans receivable, net $ 34,490,871 $ 35,247,421 ============ ============
The Bank services loans sold to other associations or governmental agencies of approximately $52,235,331, $50,317,000, and $50,138,000, as of September 30, 1997, 1996, and 1995, respectively. (Continued) 30 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------- 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, ------------------------------------------ 1997 1996 1995 -------- -------- -------- Balance at beginning or period $382,469 $352,244 $347,618 Additions charged to operations 57,433 19,000 Charge-offs (4,069) (36,901) (18,433) Recoveries 12,941 9,693 4,059 -------- -------- -------- Balance at end of period $391,341 $382,469 $352,244 ======== ======== ========
At September 30, 1997, the Bank had identified impaired loans totaling $5,206. The allowance for loan losses included $5,206 related to these impaired loans. At September 30, 1996, the Bank had identified impaired loans totaling $18,000. The allowance for loan losses at September 30, 1996 included $18,000 related to those impaired loans. The average amount of impaired loans for the year ended September 30, 1997 and 1996 was $11,600 and $34,800, respectively. Interest income received and recognized on impaired loans totaled $599 and $2,324 for the year ended September 30, 1997 and 1996, respectively. The following is a summary of non-performing loans (in thousands) for the years ended September 30, 1997, 1996, and 1995, respectively:
September 30, ---------------------------------------- 1997 1996 1995 ------ ------ ------ Non-accrual loans $6 $18 $41 Loans past due 90 days or more 149 205 151 ------ ------ ------ Total non-performing loan balances $ 155 $ 223 $ 192 ====== ====== ======
If interest on non-accrual loans had been accrued, such income would have been approximately $4,436, $5,035, and $2,391 for 1997, 1996, and 1995, 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, 1997 and 1996 are summarized as follows:
September 30, ------------------------- 1997 1996 -------- -------- Balance at beginning or period $203,576 $132,127 Additions during year 247,373 222,827 Repayments (135,159) (151,378) -------- -------- Balance at end of period $315,790 $203,576 ======== ========
(Continued) 31 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------- 4. Premises and Equipment Office premises and equipment at September 30, 1997 and 1996 includes the following:
Useful Description Life 1997 1996 ----------- ----------- ---------- ---------- Land, buildings, and improvements 30-45 years $1,850,235 $1,637,310 Furniture, fixtures, and equipment 5-10 years 790,986 720,748 ----------- ---------- ---------- Balance at end of period 2,641,221 2,358,058 Less accumulated depreciation (1,228,957) (1,182,071) ---------- ---------- $1,412,264 $1,175,987 ========== ==========
Depreciation expense for the years ended September 30, 1997, 1996, and 1995 amounted to $48,522, $53,365, and $79,900, respectively. 5. Deposits Deposit accounts at September 30, 1997 and 1996 are summarized as follows:
September 30, ------------------------- 1997 1996 ----------- ----------- Demand deposit accounts, non-interest bearing $ 2,889,357 $ 2,463,426 Passbook accounts with a weighted average rate of 2.95% and 2.94% at 9,482,320 9,757,570 September 30, 1997 and 1996, respectively NOW and MMDA deposits with a weighted average rate of 2.55% and 2.48% 12,907,666 13,424,027 at September 30, 1997 and 1996, respectively ----------- ----------- 25,279,343 25,645,023 Certificate of deposits with a weighted average interest rate of 39,305,805 38,690,142 5.30% and 5.24% at September 30, 1997 and 1996, respectively ----------- ----------- Total Deposits $64,585,148 $64,335,165 =========== =========== Jumbo certificates of deposit (minimum denomination of $100,000) $ 6,991,246 $ 6,064,944 =========== ===========
(Continued) 32 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------- Certificates of deposit by maturity at September 30, 1997 and 1996 (in thousands) are as follows:
September 30, ----------------- 1997 1996 ------- ------- Less than 1 year $29,823 $25,659 1-2 years 7,477 10,291 2-3 years 1,511 1,421 Maturing in years thereafter 495 1,319 ------- ------- $39,306 $38,690 ======= =======
Certificates of deposit by maturity and interest rate category at September 30, 1997 (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% $ 317 $ $ $ $ 317 4.01--6.00% 27,858 6,482 697 205 35,242 6.01--8.00% 1,648 995 814 290 3,747 ------- ------ ------ ---- ------- $29,823 $7,477 $1,511 $495 $39,306 ======= ====== ====== ==== =======
Interest expense on deposits for the periods indicated are as follows:
Years Ended September 30, ------------------------------------ 1997 1996 1995 ---------- ---------- ---------- Money market and NOW account $ 348,167 $ 415,846 $ 395,111 Savings Accounts 276,786 288,054 307,751 Certificates 2,027,781 2,111,503 1,866,513 ---------- ---------- ---------- $2,652,734 $2,815,403 $2,569,375 ========== ========== ==========
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, 1997 and 1996. (Continued) 33 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------- 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 1997 1996 ------------- ------------- -------- -------- 1/1/2006 6.80% $173,573 $186,460 2/1/2007 6.35% 337,153 362,467 4/1/2007 7.50% 116,283 124,282 7/1/2025 5.50% 25,216 25,589 -------- -------- $652,225 $698,798 ======== ========
The following summarizes the amounts due on FHLB advances by year for each of the next five fiscal years and thereafter.
Fiscal Year Amount ----------- ------ 1998 $49,835 1999 53,261 2000 56,923 2001 60,839 2002 65,026 Subsequent to 2002 366,341 -------- $652,225 ========
At September 30, 1997 and 1996, 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, 1997. These advances are collateralized by Federal Home Loan Bank stock totaling $555,300 and a blanket agreement against certain real estate loans amounting to $978,338. 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. (Continued) 34 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------------- The provision for income taxes for the periods indicated consist of the following:
Year Ended September 30, ------------------------------------------ 1997 1996 1995 ---------- ---------- ---------- Federal income tax expense: Current expense $ 741,031 $ 377,730 $ 526,821 Deferred tax benefit (198,651) 8,587 41,322 ---------- ---------- ---------- $ 542,380 $ 386,317 $ 568,143 ========== ========== ==========
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, ------------------------------------------ 1997 1996 1995 ---------- ---------- ---------- FHLB stock $ 12,784 $ 3,598 $ (878) Allowance for loan losses (230,498) 12,153 44,860 Other, net 19,063 (7,164) (2,660) ---------- ---------- ---------- Net deferred tax (benefit) expense $(198,651) $ 8,587 $ 41,322 ========== ========== ==========
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, ------------------------------------------ 1997 1996 1995 ---------- ---------- ---------- Expected income tax expense at federal tax rate $ 547,171 $ 371,722 $ 559,520 Other, net (4,791) 14,595 8,623 ---------- ---------- ---------- Total income tax expense $ 542,380 $ 386,317 $ 568,143 ========== ========== ========== Effective income tax rate 33.7% 35.3% 34.5% ========== ========== ==========
(Continued) 35 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------------- Net deferred tax assets included in other assets at September 30, 1997 and net deferred tax liabilities included in other liabilities at September 30, 1996 consisted of the following:
1997 1996 ---------- ---------- Deferred tax assets: Allowance for loan losses $ 124,409 $ Deferred loan fee income 61,057 71,235 ---------- ---------- 185,466 71,235 ---------- ---------- Deferred tax liabilities: FHLB stock 99,670 86,886 Allowance for loan losses 106,089 Other, net 11,946 16,300 ---------- ---------- 111,616 209,275 ---------- ---------- Net deferred taxes (asset) payable $ 73,850 $(138,040) ========== ==========
For the years ended September 30, 1996 and 1995, the Bank was 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 amounts qualifying as deductions under the Internal Revenue Code provision were later used for purposes other than bad debt losses, they would be subject to Federal income tax at the then current corporation rate. In 1996, the Internal Revenue Service repealed this special provision for thrift institutions, such as the Bank, for determining the allowable tax bad debt reserves. Effective for tax years ending December 31, 1996 or after, fiscal year September 30, 1997 for the Bank, all thrift institutions are taxed as other banking institutions. Institutions under $500 million in assets are allowed to use the reserve method of determining their bad debt deduction based on their actual experience while larger institutions (over $500 million) must use the specific charge off method in determining their deduction. Tax bad debt reserves accumulated since December 31, 1987 must be included in taxable income of the Bank prorated over a six year period, beginning in the tax year effected by the change. This change did not have a material impact on the Bank as a deferred tax liability was provided for these accumulated reserves. The accumulated tax bad debt reserves as of December 31, 1987, which amounts to approximately $1,598,000 is only subject to being taxed at a later date under certain circumstances, such as the Bank converting to a type of institution that is not considered a bank for tax purposes. These financial statements do not include any deferred tax liability related to the accumulated tax bad debt reserves as of December 31, 1987. 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 (Continued) 36 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------------- 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. 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, 1997, 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 $ 8,638 % $ 8,638 % $ 8,638 % accepted accounting principles Adjustments: -0- -0- -0- Net unrealized appreciation on securities available-for-sale General valuation allowances 378 Regulatory capital computed 8,638 11.5 8,638 11.5 9,016 29.8 Minimum capital requirement 1,123 1.5 2,245 3.0 2,419 8.0 ----------- ------------ ------------ ------------ ------------- ----------- Regulatory capital-excess $ 7,515 10.0% $ 6,393 8.5% $ 6,597 21.8% =========== ============ ============ ============ ============= ===========
Retained Earnings Restriction. Retained earnings includes tax bad debt reserves of $1,598,000 accumulated prior to December 31, 1987 for which no Federal income tax has been provided. These tax bad debt reserves are only taxable in certain circumstances, such as if the Bank converted to an institution that did not qualify as a bank for tax purposes (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 is reduced in proportion to reductions in the balance of eligible account holders as determined on each subsequent fiscal year end. The existence (Continued) 37 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------------- 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 During the fiscal year ended September 30, 1996, 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 attained the age of 20 1/2 years and 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 years ended September 30, 1997, 1996, and 1995. Employee Stock Ownership Plan. 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 who have attained the age of 20 1/2 with six months service prior to the entry date. 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. On April 11, 1997 the Board of Directors of the Company authorized a loan to the ESOP Trust in the amount of $249,913. The ESOP Trust used the proceeds of the loan to acquire 6,022 shares of the Company's outstanding stock from persons affiliated with the Bank. The loan is to be repaid in ten annual installments, beginning December 1, 1997. Interest is based on the prime rate published (Continued) 38 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------------- in the Wall Street Journal and is adjusted annually. The stock is pledged as collateral on the loan. The Bank is expected to make annual contributions sufficient to meet the debt service requirements. As the debt is repaid, ESOP shares which were initially pledged as collateral are released from collateral, based on the proportion of debt service paid in that year, and allocated to Plan participants. The Company accounts for its ESOP in accordance with the Statement of Position 93-6, "Employers Accounting for Employee Stock Ownership Plans" (Statement). The Statement prescribes the accounting treatment for initially leveraged ESOPs, which requires among other things that: a. For ESOP shares committed to be released in a period to compensate employees directly, employers should recognize compensation costs equal to the average fair value (as determined on a monthly basis) of the shares committed to be released; b. Dividends on unallocated shares used to repay ESOP loans are not considered dividends for financial reporting purposes; c. For an internally leveraged ESOP, the Company loan receivable and the ESOP note payable as well as the related income/expense are not reflected in the consolidated financial statements; d. For earnings per share computations, ESOP shares that have been committed to be released should be considered outstanding. ESOP shares that have not been committed to be released should not be considered outstanding. ESOP compensation was $24,991, $30,512, and $24,425 for the years ended September 30, 1997, 1996, and 1995, respectively. For 1997, 602 shares were committed to be released from collateral. At September 30, 1997, there were 5,420 unallocated ESOP shares having a fair value of $224,922. 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 1997, 1996, and 1995, were $90,948, $103,969, and $77,385, 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 $10,858, $29,889, and $14,915 for the years ended September 30, 1997, 1996, and 1995, respectively. (Continued) 39 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------------- 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 $2,634,854 and $1,107,600 for the year ended September 30, 1997 and 1996, respectively plus unused lines of credit granted to customers totaling $2,242,683 and $1,689,376 at September 30, 1997 and 1996, respectively. The mortgage loan committments at September 30, 1997 and 1996 included fixed rate loan commitments of $610,955 and $370,000, respectively. In addition, at September 30, 1997 and 1996, respectively, the Bank had made loan commitments for real estate loans secured by first mortgages totaling $1,235,202 and $1,169,350, 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 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, 1997, 1996, and 1995 was calculated by dividing net income $1,066,945, $706,982, and $1,077,503 by the weighted average number of shares of common stock outstanding during the year, which were 208,233, 256,417, and 272,477 shares for the years ended September 30, 1997, 1996, and 1995, respectively. 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), (Continued) 40 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------- 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 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. (Continued) 41 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------- The estimated fair value of the Company's financial instruments at September 30, 1997 are as follows:
Carrying Fair Amount Value ----------- ----------- Assets Cash and cash equivalents $ 9,478,430 $ 9,478,430 Securities available-for-sale 5,949,386 5,949,386 Securities held-to-maturity 22,621,995 22,608,182 Loans receivable, net 34,490,871 34,932,118 Liabilities Deposits 64,585,148 64,916,792 FHLB advances 652,225 443,565 Unrecognized Financial Instruments Loan commitments 2,634,854 Unused lines of credit 2,242,683
(Continued) 42 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, 1997. Pioneer Financial Corporation Condensed Statement of Financial Condition September 30, 1997 Assets: Cash and due from banks $ 24,679 Investment in subsidiary 8,636,473 Organizational cost, net 28,140 Other assets 48,906 -------------- Total assets $ 8,738,198 ============== Liabilities and Stockholders' Equity: Liabilities $ -------------- Stockholders' equity: Common stock 208,233 Additional paid-in capital 1,797,432 Retained earnings 6,957,353 Unallocated Employee Stock Ownership Plan (ESOP) stock (224,922) Net unrealized appreciation on securities available-for-sale 102 -------------- Total liabilities and stockholders' equity $ 8,738,198 ==============
(Continued) 43 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------- Pioneer Financial Corporation Condensed Statement of Income year ended September 30, 1997 Income: Cash dividends from Bank $ 572,762 -------------- Expense: Amortization of organizational expense 13,508 Other operating 2,181 -------------- 15,689 -------------- Income before income tax benefit 557,073 Income tax benefit 5,334 -------------- Net income before equity in undistributed net income of subsidiary 562,407 Equity in undistributed net income of subsidiary 1,077,300 -------------- Net income $ 1,639,707 ==============
(Continued) 44 PIONEER FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------- Pioneer Financial Corporation Condensed Statement of Cash Flows year ended September 30, 1997 Operating activities: Net income $ 1,639,707 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiary (1,077,300) Amortization of organizational cost 13,508 Increase in receivables (5,334) -------------- Net cash provided by operating activities 570,581 -------------- Investing activities: Net cash provided (used) by investing activities Financing activities: Dividends paid (322,762) Loan to Employee Stock Ownership Plan (ESOP) (249,913) -------------- Net cash used by financing activities (572,675) -------------- Decrease in cash and cash equivalents (2,094) Cash and cash equivalents at beginning of period 26,773 -------------- Cash and cash equivalents at end of period $ 24,679 ==============
(Continued) 45 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, 1997 and 1996 --------------------
1997 1996 -------- -------- ASSETS Cash $ 653 $ 653 Investments 15,000 15,000 -------- -------- $ 15,653 $ 15,653 ======== ======== STOCKHOLDERS' EQUITY Common stock $ 16,000 $ 16,000 Paid-in capital 1,000 1,000 Deficit (1,347) (1,347) -------- -------- $ 15,653 $ 15,653 ======== ========
The Service Corporation incurred expenses of $-0- and $30 for the years ended September 30, 1997 and 1996, respectively. 17. Subsequent Events On May 23, 1997, the Bank entered into a purchase and assumption agreement with People's Exchange Bank of Beattyville, Kentucky, Inc. to sell and assign certain assets and certain deposit liabilities of its branch office in Stanton, Kentucky. This agreement was finalized and settled on October 29, 1997. Deposit accounts transferred to the purchaser amounted to $4,930,683. In addition, the Bank sold loans totaling $34,370, which were secured by deposits transferred in the Agreement, plus property and equipment having a book value of $50,000. The transaction resulted in a net gain to the Bank of approximately $575,000. 46 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 (Branch closed 10/97) DIRECTORS William M. Cress Robert G. Strode Exec. Vice President, Retired Vice President, Hinkle Contracting Corporation, Ag-Gro Fertilizer Company 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 ADVISORY DIRECTORS Clifford R. Langley Beckner Shimfessel Winchester, KY Retired Clark County Clerk Willard M. Martin Retired Housing Authority Executive Director
47 OTHER OFFICERS AND SIGNIFICANT EMPLOYEES Janet R. Tutt Lisa Earlywine Assistant Treasurer Loan Officer Doris Estes Bobby R. Trent Branch Manager/ Compliance/Security Loan Officer Dianna Davis Vicki Rupard Branch Manager/Loan Officer, Loan Officer Stanton Branch (now closed) 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 14, 1998, 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. 48 EX-27 3 FINANCIAL DATA SCHEDULE
9 1,000 YEAR SEP-30-1997 OCT-01-1996 SEP-30-1997 1,189 1,138 7,151 0 5,949 22,622 22,608 34,882 391 74,825 64,585 50 850 602 0 0 208 8,530 74,825 3,111 1,822 460 5,393 2,653 2,701 2,692 0 0 1,572 1,609 0 0 0 1,067 5.12 5.12 3.72 6 149 0 0 382 4 13 391 391 0 0
EX-28.A 4 REPORT OF MILLER, MAYER, SULLIVAN EXHIBIT 28(a) MILLER, MAYER, SULLIVAN & STEVENS LLP CERTIFIED PUBLIC ACCOUNTANTS "INNOVATORS OF SOLUTION TECHNOLOGY"/SM/ 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, 1997 and 1996 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, 1997. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three year period ended September 30, 1997 in conformity with generally accepted accounting principles. /s/ Miller, Mayer, Sullivan, & Stevens, LLP MILLER, MAYER, SULLIVAN, & STEVENS, LLP Lexington, Kentucky October 31, 1997 EX-28.B 5 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS EXHIBIT 28(b) 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 14, 1998 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 14, 1998 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 1998, to serve for a term of three years, and to elect one Director of the class whose term expires in 1998, to serve for a term of two years. 2. To ratify the appointment of Miller, Mayer, Sullivan & Stevens LLP to serve as the auditor of the Savings Bank for fiscal year 1998; 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 1, 1997 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 CARL C. NORTON, PRESIDENT Dated this 16th day of December, 1997 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 CORPORATION 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 14, 1998 The Proxy and Solicitation This Proxy Statement is being mailed on December 16, 1997 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 14, 1998, 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 four Directors of the class whose term of office expires in 1998 (three of whom will serve until January, 2001, and one of whom will serve until January, 2000); and (2) ratifying the appointment of Miller, Mayer, Sullivan & Stevens LLP, as auditor for the fiscal year 1998. 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 6 and 7. 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, has been appointed by the Board of Directors as auditor of the Corporation for the fiscal year ending September 30, 1998. 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 four 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 four 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. 1999 Shareholder Proposals The deadline for shareholders to submit proposals to be considered for inclusion in the Proxy Statement for the 1999 Annual Meeting of Shareholders is expected to be September 1, 1998. Voting Securities The Board of Directors has fixed the close of business on December 1, 1997 as the record date for determining shareholders 2 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 TERMS OF OFFICE EXPIRING IN 2000 AND 2001. 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, 1997).
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 26 East Broadway Winchester, Kentucky
In addition, Cede & Company holds 29,199 shares (14.02%) 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, 1997, 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 or her 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: William M. Cress (55) 1991 1998 1,050 .50% Engineer; Director Carl C. Norton (41) 1993 1998 2,644 1.27% Banker; President and Director Janet W. Prewitt (50) 1972 1998 7,350 3.53% Attorney; Director and Chairman of the Board Robert G. Strode (58) 1974 1998 6,785 3.26% General Contractor; Director Continuing Directors: Thomas D. Muncie (60) 1974 2000 2,850 1.37% President, Muncie Buick-GMC Truck, Inc.; Director Andrew James Ryan (38) 1995 1999 70 .03% President, Andy Ryan Pontiac Nissan, Inc.; Director Nancy M. Lawwill (61) 1981 1999 2,000 .96% Banker; Director, Vice President, Treasurer and Assistant Secretary Wayne M. Martin (51) 1991 1999 600 .29% President, WKYT-TV 27; Director Retiring Directors, who will become Advisory Directors Ewart W. Johnson (75) 1989(4) 2000 5,275 2.53% Retired; Director Nora M. Linville (75) 1976 2000 2,400 1.15% Retired; Director and Secretary to the Board Advisory Directors to Pioneer Federal Savings Bank: Clifford R. Langley 5,000 2.40% Willard M. Martin 5,015 2.41% Beckner Shimfessel 2,500 1.20% All Directors and executive 31,024 14.89% officers as a group, excluding Advisory Directors (10 persons) All Directors and executive 43,539 20.91% officers as a group, including Advisory Directors (13 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. 4 (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 $101,805.59 during fiscal year ended September 30, 1997, including $10,858.02 of commissions from title insurance written in connection with loans made at the Savings Bank. Ms. Prewitt's share of the gross fees was $24,433.34. (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. 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 and 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 1997. Changes in Directorship Ewart W. Johnson and Nora M. Linville having attained the age for mandatory retirement as Director of Pioneer Financial Corporation are now retiring as of the Annual Meeting. They will continue to serve, however, as Advisory Directors to Pioneer Federal Savings Bank. Further, George W. Billings, Jr. formerly served as a Director of the Corporation. However, he resigned as Director effective November 1, 1997 due to ill health. The effect of the resignation of Mr. Billings and the mandatory retirement of Ms. Linville and Mr. Johnson was considered by the Board of Directors of Pioneer Financial Corporation at its meeting on September 16, 1997. The Board voted to amend the Bylaws of the Corporation, to reduce the number of Directors of Pioneer Financial Corporation to ten effective November 1, 1997, and to eight effective after the Annual Meeting on January 14, 1998. The amendment to the Bylaws is stated as follows: ARTICLE III - BOARD OF DIRECTORS Section 2. Number and term. The Board of Directors shall consist of ten members from November 1, 1997 and eight members from the date of the next shareholders meeting thereafter. The Board shall be divided into three classes as nearly equal in number as possible. One member of the next class to be elected after November 1, 1997 shall be elected for a term of two years to equalize the size of the classes; all other members of 5 each class shall be elected for a term of three years until their successors are elected and qualified. One class shall be elected by ballot annually. Nominees and Directors Whose Terms of Office will Continue Pioneer Financial Corporation is governed by a Board of Directors to consist of eight members effective January 14, 1998, as set forth in Pioneer's Bylaws, above. The Board is divided into three classes, with the members of each class to serve for three year terms (except as stated above). 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, 1997, are as follows: ITEM NO. ONE - NOMINEE FOR ELECTION AS DIRECTOR FOR TERM OF OFFICE EXPIRING IN 2000 Janet W. Prewitt (age 50) 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. Ms. Prewitt is 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 (Ms. Prewitt's sister) of the firm, who are not otherwise associated with the Corporation nor the Savings Bank. In fiscal 1997, Pioneer Federal paid White, McCann & Stewart $101,805.59 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, $96,445.68 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. ITEM NO. TWO - NOMINEES FOR ELECTION AS DIRECTORS FOR TERMS OF OFFICE EXPIRING IN 2001 Carl C. Norton (age 41) 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, Director of the Winchester- Clark County Chamber of Commerce and the Winchester-Clark County Industrial Development Authority. Mr. Norton holds a Bachelors 6 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 seventeen 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. William M. Cress (age 55) 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 58) 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. 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 Ms. Prewitt to serve as Director until 2000, and Messrs. Norton, Strode and Cress to serve as Directors until 2001, 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, 1997, are as follows: 7 PRESENT DIRECTORS WHOSE TERMS OF OFFICE EXPIRE IN 1999 Nancy M. Lawwill (age 61) 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. Wayne M. Martin (age 51) 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 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 Hospital, is Chairman of the Lexington Area Sports Authority, Director and 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 38) 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 past 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. PRESENT DIRECTOR WHOSE TERM OF OFFICE WILL EXPIRE IN 2000 Thomas D. Muncie (age 60) 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. RETIRING DIRECTORS WHO WILL BECOME ADVISORY DIRECTORS Ewart W. Johnson (age 75) 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 8 remaining unexpired term then held by Clifford R. Langley. Mr. Johnson serves on the Operations/Business Plan Committee. Mr. Johnson, having attained the mandatory retirement age, will be retiring from the Board of Directors of Pioneer Financial Corporation at its meeting on January 14, 1998. It is anticipated that Mr. Johnson will be elected an Advisory Director of Pioneer Federal Savings Bank, as stated below. Nora M. Linville (age 75) 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. Ms. Linville, having attained the mandatory retirement age, will be retiring from the Board of Directors of Pioneer Financial Corporation at its meeting on January 14, 1998. It is anticipated that Ms. Linville will be elected an Advisory Director of Pioneer Federal Savings Bank, as stated below. Advisory Directors Pioneer Federal Savings Bank, Pioneer Financial's wholly-owned subsidiary, currently has three Advisory/Emeritus Directors. Advisory Directors 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/Emeritus Directors to the Savings Bank: Clifford R. Langley, 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 and Nellie K. Meadows formerly served as Advisory Directors to Pioneer Federal Savings Bank; however, when Pioneer Federal ceased operation of a branch office in Stanton, effective October 17, 1997, Ms. Hampton, Ms. Meadows and Mr. Davis resigned as Advisory Directors. It is anticipated that Nora M. Linville and Ewart W. Johnson will be elected as Advisory/Emeritus Directors to Pioneer Federal Savings Bank, following their retirement as Directors of Pioneer Financial Corporation. Family Associations Among Directors and Officers Wayne M. Martin, Director, is the son of Willard M. Martin, a Director Emeritus of the Savings Bank. 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 9 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, 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 Ms. Prewitt, Mrs. Lawwill and Mrs. Vermillion. 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 Ms. Prewitt, Mrs. Lawwill, and Messrs. Norton, Wayne Martin, Trent and Ryan. 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 committee include Mrs. Linville, and Messrs. 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 10 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 16, 1997 meeting, nominated Ms. Prewitt and Messrs. Norton, Strode and Cress for election as Directors for the above-listed term. During the fiscal year ended September 30, 1997, the Savings Bank's Board of Directors held 12 regular meetings and 4 special meeting. The Savings Bank's Loan Committee met 52 times, while the Salary Committee met once during fiscal 1997. 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 1997. The CRA Committee met 3 times; the Asset/Liability Committee held 3 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 11 meetings during fiscal 1997. During fiscal 1997, the Corporation's Board of Directors held 4 regular meetings and 2 special meetings, and no 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 Ewart W. Johnson, who was out of the state for a significant period of time. 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. When the Bank has had Advisory Directors who are not Directors Emeritus, they were paid $200 per month. Directors who are officers of the Corpo-ration receive no fees for serving on the Board of Directors or for attending Board meetings or committee meetings. Officers Who Are Not Directors The following information is supplied with respect to officers and significant employees of Pioneer Federal Savings Bank, the Corporation=s 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. 11
Name Age Positions Currently Held With Pioneer Federal Janet Tutt 55 Assistant Treasurer since 1980; employee of Pioneer since 1974 Doris Estes 50 Bypass Branch Manager and Loan Officer since August, 1993; Employee of Pioneer since 1984 Bobby R. Trent 48 Compliance/Security since June, 1995; was previously Chief Operations Officer/Compliance Officer with Salt Lick Deposit Bank Vicki Rupard 37 Loan Officer since September, 1995; was previously Mortgage Administrative Assistant with Peoples Commercial Bank Lisa Earlywine 26 Loan officer since February, 1997; was previously a Loan Processor with Pioneer Federal Savings Bank Dianna Davis 48 Stanton Branch Manager/Loan Officer since October, 1995, and an employee of the Bank since 1985
Remuneration of Officers The following table sets forth for the fiscal year ended September 30, 1997, 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 1997 was $90,000.00. 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 1997 or any prior year.
- -------------------------------------------------------------------------------- Number of Persons Capacities in Cash in Group Which Served Compensation (1) - -------------------------------------------------------------------------------- All Executive Officers Executive Officers $ 217,545 as a Group (4 persons, (including Chief 4 positions) Financial Officer) Other Significant Employees Branch Managers, $ 172,226 as a group (6 persons, Asst. Treas., Loan 4 positions) Officers, Compliance/ Security
12 (1) In addition to cash compensation, all executive officers of the Savings Bank, except Ms. Prewitt, 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 1997 the Savings Bank made no contributions to the "401(k)" plan on behalf of the Executive Officers or Other Significant Employees. Ms. Prewitt participates in the life insurance and 401(k) plans only. 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 contribution to the ESOP of $38,487.56 for fiscal year 1997; of this sum, $11,365.19 was contributed to the ESOP on behalf of the Executive Officers and $13,167.82 was contributed to the ESOP on behalf of the Other Significant Employees. 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, 1997 $ 90,000.00 $ -0- $ 10,741.83 President and 1996 $ 83,892.34 $ 2,500.00 $ 10,656.35 Chief Managing 1995 $ 79,999.92 $ 2,500.00 $ 9,374.60 Officer 1994 $ 72,115.84 $ 2,700.00 $ 8,993.84
13 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, 1997. Loans which were originated by the Savings Bank but have been sold on the secondary market are not included.
- ---------------------------------------------------------------------------------------------- Borrower and Original Original Current Type of When Loan Interest Interest 9/30/97 Loan Originated Amount Rate Rate Balance - ---------------------------------------------------------------------------------------------- Wayne Martin, 8/29/96 $51,375.00 9% 9% $ 45,616.64 Director: residential/ real estate Chris Martin, son of 5/30/96 52,700.00 6% 8% $ 50,747.17 Director Martin: ---------- residential/ real estate (first mortgage, home) Total: $ 96,363.81
During the year ended September 30, 1997, 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. ITEM NO. THREE - 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, 1998 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 14 firm's audit of the Corporation's consolidated financial statements and records for the fiscal year ended September 30, 1997. 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. FOUR - 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, 1997 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 CARL C. NORTON, PRESIDENT Dated this 16th day of December, 1997, 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 -----END PRIVACY-ENHANCED MESSAGE-----