<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[XX] ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) of THE SECURITIES
EXCHANGE ACT OF 1934 (Fee Required)
For the Year Ended: September 30, 1996
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) of THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from ______ to ______
Commission File Number 0-28076
PIONEER FINANCIAL CORPORATION
-----------------------------
(Exact name of registrant as specified in its charter)
United States 61-1273657
------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
25 East Hickman Street, Winchester, Kentucky 40391
-------------------------------------------- ------
(Address of principal executive offices) (Zip Code)
(606) 744-3972
--------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: not applicable.
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $1.00
-------------------
par value (Title of Class)
- ---------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports); and (2) has been subject to such filing
requirements for the past 90 days. Yes X No__
-
As of December 19, 1996, the aggregate market value of the shares of common
stock of the registrant outstanding was $8,641,670. This figure is based on the
last known sales price of $41.50 per share, which sale took place during the
week of November 25, 1996. The number of shares of the registrant's common
stock outstanding as of December 19, 1996 was 208,233 shares.
The aggregate market value of the shares of common stock held by non-affiliates
of the registrant was $6,574,597 as of December 19, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
List hereunder the following documents incorporated by reference and the Part of
Form 10K into which the document is incorporated:
(1) Portions of Annual Report to Stockholders for the year ended September 30,
1996, is incorporated into Part II, Items 5-8 and Part III, Item 11 of this
Form 10-K.
(2) Portions of definitive proxy statement for the January 8, 1997 Annual
Meeting of stockholders is incorporated into Part III, Items 10-13 of this
Form 10-K.
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PIONEER FINANCIAL CORPORATION
Pioneer Financial Corporation (herein "Corporation"), a Kentucky
corporation, was organized in 1994 as a thrift holding company. On December 20,
1994, the stockholders of Pioneer Federal Savings Bank (herein "Pioneer Federal"
or "Bank") approved an agreement and Plan of Reorganization dated October 31,
1994, whereby the Bank became a wholly-owned subsidiary of Pioneer Financial
Corporation. In accordance with the Reorganization Plan, the stockholders of the
Bank exchanged their shares of common stock on a one for one basis for common
shares in Pioneer Financial Corporation. Pioneer Federal is the main asset of
Pioneer Financial, and the consolidated financial statements of the Corporation
and of the Bank are attached hereto.
Pioneer Federal Savings Bank, with assets of more than $74.4 million at
September 30, 1996, is the larger of the two thrift institutions in Winchester,
Kentucky. Pioneer Federal is a federally chartered stock savings bank which
conducts business from its corporate headquarters and home office in Winchester,
Clark County, Kentucky, and branch banking offices in Winchester and in Stanton,
Powell County, Kentucky. Pioneer Federal was chartered in 1885 by the
Commonwealth of Kentucky as the Winchester Building and Savings Association. In
1985, Pioneer Federal obtained a federal mutual savings bank charter and changed
its name to Pioneer Federal Savings Bank. As of June 30, 1987, Pioneer Federal
completed its conversion from a federal mutual to a federal stock savings bank.
The Bank is a member of the Federal Home Loan Bank System, and its deposits are
insured by the Savings Association Insurance Fund ("SAIF"), which is
administered by the Federal Deposit Insurance Corporation ("FDIC").
PART I
ITEM 1. BUSINESS
GENERAL
Pioneer Financial Corporation has no significant assets other than the
outstanding capital stock of the Bank. The principal business of Pioneer
Financial Corporation is operating the Bank. Pioneer Federal is primarily
engaged in the business of attracting deposits from the general public and using
such deposits, together with other borrowings and funds, to make residential
mortgage loans, commercial real estate loans, consumer loans (including
automobile and personal loans), and other investments.
The executive offices of the Corporation are located at 25 East Hickman
Street, Winchester, Kentucky 40391, and its telephone number is (606) 744-3972.
The principal sources of funds for the Bank's lending activities are
deposits received from the general public, proceeds from the sale of loans,
principal repayments on loans, mortgage-backed securities and other investments,
as well as funds provided by operations. Another source of funding available to
the Bank is advances from the Federal Home Loan Bank of Cincinnati ("FHLB of
Cincinnati"). The Bank's primary sources of income are interest on loans,
interest on mortgage-backed securities, interest and dividends on investment
securities, commission income and fees charged in connection with its lending
and deposit activities and services. Its principal
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expenses are interest paid on deposits and personnel costs incurred in the
operations of the Bank's offices.
Pioneer Federal has a wholly-owned subsidiary, Pioneer Service Corporation,
which was formed for the purpose of holding stock in Intrieve, Incorporated.
Intrieve provides on line computer processing and inquiry service for Pioneer
Federal and numerous other thrift institutions in the region. Pioneer Federal
invested $16,000 in the stock of Pioneer Service Corporation, which is carried
on its books at cost.
The executive offices of the Bank are located at 25 East Hickman Street,
Winchester, Kentucky 40391, and its telephone number is (606) 744-3972.
MARKET AREA
The Bank's primary market area consists of Clark and Powell Counties,
Kentucky which have populations of 30,000 and 12,000 respectively. This area is
primarily rural with a large amount of agri-business. The primary lending
concentration is in the Bank's market area, an area mainly comprised of the
cities of Winchester and Stanton. Historically, the economy in the Bank's
market area has been dependent on agriculture, agriculture related industries
and manufacturing. The largest employers in the market area are East Kentucky
Power and the Clark County Board of Education.
Economic growth in the Bank's market area remains dependent upon the local
economy. In addition, the deposit and loan activity of the Bank is
significantly affected by economic conditions in its market area.
LENDING ACTIVITIES
Generally, federally chartered thrift institutions may invest up to 10% of
assets in secured or unsecured non-real estate loans for commercial, corporate,
business or agricultural purposes, up to 30% of assets in consumer loans and up
to 10% of assets in tangible personal property in order to engage in equipment
leasing. In addition, commercial real estate loans are not required to be
secured by first liens.
Under FIRREA, the aggregate amount of non-residential real estate loans
which a federal savings institution may make may not exceed 400% of the
institution's capital as determined under the capital standards mandated by
FIRREA. Previously, such loans were permitted up to 40% of a savings
institution's assets. On September 30, 1996, the Bank was permitted to make
non-residential real estate loans aggregating approximately $34 million.
Geographic Lending Area. All real estate mortgage loans originated by
Pioneer Federal are secured by real estate located within an 85 mile radius of
Winchester, Kentucky. The Bank has concentrated its lending activity in the
Clark and Powell Counties area. Within limits, the Bank may originate and
purchase participation or whole loans secured by real estate located in other
parts of the United States.
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General. The principal lending activity of Pioneer Federal historically
has been the origination of single family conventional loans (i.e., loans that
are neither insured nor partially guaranteed by governmental agencies). Second
mortgage loans, construction loans, loans on agricultural property, loans on
multi-family dwellings, and commercial real estate loans are also offered by the
Bank. The vast majority of the Bank's real estate loans are made on existing
property. A limited number of construction loans have been made. The Bank is
not engaged in real estate development activities.
Real Estate Loans. The loan-to-value ratio, maturity and other provisions
of the loans made by Pioneer Federal generally reflect the Bank's policy of
making the maximum loan permissible consistent with applicable regulations,
sound lending practices, market conditions and the Bank's underwriting
standards.
Historically, Pioneer Federal made long-term real estate loans with fixed
rates of interest. Beginning in 1980, Pioneer Federal diversified its loan
portfolio by offering adjustable rate loans and short-term fixed rate loans with
a balloon payment. Adjustable rate loans are those in which the interest rate
may change during the term of the loan. Adjustable rate loans and shorter term,
fixed-rate loans allow the average yield received by the Bank on its total loan
portfolio to more closely reflect prevailing interest rates, so as to keep pace
with changes in interest rates paid on savings accounts. Most fixed rate loans
that are offered and retained by the Bank are secured by one-to-four family
owner-occupied dwellings for terms of no more than 30 years with rates fixed up
to 5 years. The Bank uses the secondary market for the purpose of offering
long-term fixed rate loans to its customers, while retaining the servicing of
these loans. These types of loans are normally pre-sold to the Federal Home
Loan Mortgage Corporation (FHLMC).
Pioneer Federal does not have a minimum loan amount requirement for its
real property loans. Due to the cost of underwriting and originating a loan,
however, the Bank charges a minimum origination fee for all mortgage loans. See
"Loan Origination and Other Fees" on page 10.
All improved real estate which serves as security for a loan from the Bank
must be insured in an amount acceptable to the Bank against fire, extended
coverage, vandalism, malicious mischief and other hazards. Each such policy
contains a standard mortgage clause in favor of the Bank. Where applicable,
flood insurance is also required. Such insurance must be maintained in an
amount not less than the Bank's insurable interest in the security. Borrowers
of loans exceeding 80% of the value of the property given as collateral are
required to have private mortgage insurance in favor of the Bank with a company
acceptable to the Bank.
Residential Real Estate Loans. The Bank extends loans secured by liens on
residential real estate in an amount up to 80% (without private mortgage
insurance) or 95% (with private mortgage insurance) of the appraised value or
sales price of the security, whichever is less. The maximum term of any loan on
a one-to-four family dwelling is 30 years. The maximum loan amount as a
percentage of value and term for multi-family properties is handled on a case-
by-case basis. The maximum term for loans on multi-family property is 30 years.
Generally, second mortgages are taken by the Bank for single-family
residences which have an existing first mortgage held by the Bank. Many second
mortgages are for home improvement
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purposes. More and more frequently, in large part due to current tax laws, the
Bank takes a second mortgage on residential real property in cases where the
residential collateral would not be strictly necessary. These loans are
classified as consumer loans rather than as real estate loans as is consistent
with federal regulations. This is described in a separate paragraph.
Pioneer Federal has a small number of VA-guaranteed and FHA- approved loans
in its loan portfolio. The Bank has the necessary approvals to originate VA and
FHA loans in any county in the State of Kentucky. The Bank's current policy is
to sell any VA or FHA loan which it originates.
Construction Loans. Pioneer Federal offers construction loans (loans for
the temporary financing of real estate under construction) to individuals and
building contractors for building projects, generally homes and small office or
commercial buildings. Most construction loans are made for terms less than 12
months, have fixed rates of interest and provide for periodic disbursement of
loan funds based on receipts submitted by the builder during construction and
periodic site inspections by Bank personnel. These loans are primarily
refinanced to permanent loans when construction is completed. The application
process is identical to that required for mortgage loans. Additionally, however,
these borrowers are required to submit the lot or land location, the name of the
builder, copies of plans, specifications, and building cost estimates, which are
used by the Bank in determining the lending value of the subject property.
Construction loans are generally made for a single building although small
project, multi-building loans are occasionally made.
Construction loans may be secured by collateral other than or in addition
to the real estate under construction (e.g. other real estate or assignments of
other types). These loans are classified by the Bank as either real estate
loans (in the case of a first lien mortgage) or consumer loans (in the case of a
second lien mortgage or an assignment of another type where the value of the
real estate is not the primary collateral). Pioneer Federal generally makes
construction loans only in those instances where it expects to have the
permanent loan on the property. At September 30, 1996, Pioneer Federal had 14
construction loans outstanding, in the total amount of $1,808,092. All of these
loans were for single-family residences.
Commercial Loans. The Bank offers loans secured by income-producing real
estate, primarily small office buildings, restaurants, and retail complexes.
Depending on the collateral taken for the loan, the Bank has, in the past,
classified loans which are secured by income-producing real estate as either
real estate loans or a type of consumer loan (e.g., second lien mortgage loan or
assignment loan). Most of the loans secured by mortgages on commercial real
estate have terms of 10 to 25 years, with interest adjustable annually. These
mortgage loans are limited to 75% of the value of the real estate, unless the
borrower would qualify for an unsecured loan, in which case a greater loan value
(up to 85%) may be approved. Under FIRREA, the Bank is permitted to make non-
residential real estate loans up to 400% of capital; non-residential real estate
loans in excess of such amount must be approved by the Director of the Office of
Thrift Supervision (OTS).
Consumer and Other Loans. Federal regulations permit federally chartered
thrift institutions to make secured and unsecured consumer loans up to 30% of
the institution's assets. Though
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federal thrift institutions have lending authority above the 30% category for
certain consumer loans, Pioneer Federal's policy is to limit its investment in
consumer loans to 20% of its assets. This limit has never been reached. The
Bank makes both secured and unsecured consumer loans. A loan may be secured by a
lien on real estate but still be classified as a consumer or other loan rather
than as a real estate loan in accordance with federal regulations.
The Bank is active in the origination of secured consumer loans for
automobiles, home improvements and other purposes with a variety of collateral
including automobiles, livestock and equipment. Pioneer Federal offers unsecured
consumer loans only to customers with whom Pioneer has had experience. Consumer
loans are approved by the President or Treasurer and any one of the following:
Loan Officer or Branch Manager of the Bank.
LOAN SOLICITATION AND PROCESSING
The Bank actively solicits mortgage loan applications from existing
customers, customer referrals, and persons making telephone calls and visits to
its offices. Applications are not taken over the telephone although in some
instances a combination of verbal (by telephone) and written (by mail)
applications are received. Upon receipt of a loan application from a prospective
borrower, a credit report and verifications of employment and income are
obtained. An appraisal of the real estate intended to secure the proposed loan
is made by outside appraisers, all of whom have been approved by the Board of
Directors. At September 30, 1996 staff appraisers are not being used, but staff
appraisers are making periodic construction inspections and completion
certification inspections. Approved outside appraisers are used for all loans to
employees. Appraisals are prepared in accordance with regulatory guidelines and
follow accepted and established appraisal practices as reflected by nationally
recognized professional appraisal organizations. All appraisals include a
physical inspection of the property.
All loan applicants are required to meet specified debt-to-income and
stable employment requirements, and possess an acceptable credit history. Loan
applications are presented to the Loan Committee for approval. All loan
applications for loans over $200,000 are presented to the Executive Committee of
the Board of Directors or to the full Board of Directors for approval.
Applicants are promptly notified of approval of a loan application. Written
notice of adverse action is provided as required by current regulations.
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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.
<TABLE>
<CAPTION>
At September 30,
------------------------
1996 1995
---- ----
Amount Percent Amount Percent
------ ------- ------ -------
Type of Loans: (Dollars In Thousands)
- -----------------------------
<S> <C> <C> <C> <C>
REAL ESTATE:
One-to-four family residential $21,253 58.63% $20,069 60.01%
Multi-family and commercial 3,641 10.05% 3,265 9.76%
Agricultural 565 1.56% 789 2.36%
Construction 1,808 4.99% 2,055 6.14%
CONSUMER:
Commercial 3,283 9.06% 2,219 6.64%
Loans secured by deposits 1,048 2.89% 973 2.91%
Home equity 1,663 4.59% 1,175 3.51%
Other secured 2,711 7.48% 2,687 8.03%
Unsecured 271 0.75% 212 0.64%
------- ------ ------- ------
Total loans receivable 36,243 100.00% 33,444 100.00%
====== ======
LESS:
Loans in process (403) (865)
Provisions for loan losses (382) (352)
Deferred loan origination fees (211) (201)
----- ----
Loans, receivable net $35,247 $32,026
======= =======
</TABLE>
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Loan Maturity Schedule. The following table sets forth certain information
as of September 30, 1996 (the end of the most recent audit year reported)
regarding the dollar amount (in thousands of dollars) of loans maturing in the
Bank's portfolio based on contractual terms to maturity for both fixed-rate and
variable-rate instruments.
<TABLE>
<CAPTION>
Multi
Family
Agricultural
1-4 Family and
Residential Commercial Construction Consumer Total
----------- ------------ ------------ -------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Non-performing $ 91 $ 114 $ 3 $ 15 $ 223
---------- ------------ ------------ -------- -------
Amounts Due:
Within 3 months 173 1,805 1,109 3,087
3 months to 1 year 169 4 2,145 2,318
---------- ------------ ------------ -------- -------
Total due within one year 342 4 1,805 3,254 5,405
---------- ------------ ------------ -------- -------
After 1 year:
1 to 3 years 313 16 1,005 1,334
3 to 5 years 852 300 2,923 4,075
5 to 10 years 2,988 884 930 4,802
10 to 20 years 9,153 2,072 11,225
Over 20 year 7,513 816 849 9,178
---------- ------------ ------------ -------- -------
Total due after one year 20,819 4,088 0 5,707 30,614
---------- ------------ ------------ -------- -------
Total amount due $21,252 $4,206 $1,808 $8,976 $36,242
========== ============ ============ ======== =======
Less:
Loans in process (403)
Provision for loan losses (382)
Deferred origination fees (210)
-------
Loans receivable, net $35,247
=======
</TABLE>
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The following table sets forth the dollar amount (in thousands of dollars)
of all loans due after one year from September 30, 1996 (the end of the most
recent audit year reported) which have predetermined (or fixed) interest rates
and which have floating or adjustable interest rates. Loans which are
contractually due within one year after September 30, 1996 are not included in
this table.
<TABLE>
<CAPTION>
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- --------
(In Thousands)
<S> <C> <C> <C>
One-to-four family residential $ 7,578 $13,241 $20,819
Multi-family, agricultural and 1,049 3,039 4,088
commercial
Consumer 3,484 2,223 5,707
Construction 0 0 0
--------- ------------- --------
$12,111 $18,503 $30,614
========= ============= ========
</TABLE>
Interest rates on adjustable-rate loans are adjusted according to one of
four indices: the National Average Contract Interest Rate for Purchase of
Previously Occupied Homes, the National Average Cost of Funds to SAIF-Insured
Institutions, the weekly average yield on U.S. Treasury bills adjusted to a
constant maturity of one year, and the Prime Rate published in the Wall Street
Journal. Adjustments on loans are made in accordance with federal regulations.
Maximum and minimum interest rates ("ceilings" and "floors") vary as do the
amounts by which rates can change at any one time ("caps").
Loan Purchases and Sales. Historically, Pioneer Federal was primarily a
portfolio lender. The secondary market, however, has provided Pioneer Federal
with a method by which to offer long term, fixed rate mortgages to its customers
without incurring additional interest rate risk. Since the Spring of 1986, the
Bank has utilized the secondary market to meet its customers' needs and manage
the interest rate risk of the Bank.
The Bank uses standard FHLMC/FNMA loan documents on all first mortgage
residential loans to enable the Bank to make sales in the secondary market when
market conditions warrant. Pioneer Federal retains the servicing of nearly all
of its loans sold in the secondary market, and collects servicing fees. The
fees received from this activity are included in "loan and other service fees,
net" in the financial statements incorporated by reference in this filing. See
"Loan Origination and Other Fees" below.
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Loan Commitments. Commitments for approved mortgage loans are made orally
or in writing. Loan commitments are made for permanent financing of property
under construction, and such commitments are usually outstanding for a period of
six to twelve months prior to the closing of the loan. Pioneer exercises
virtually all commitments it issues. As of September 30, 1996 Pioneer Federal
had $2.3 million in loans approved but not closed; none of these were evidenced
by written commitments. The Bank anticipated selling $1.2 million of the loans
approved but not closed. As of September 30, 1996 Pioneer Federal had no formal
commitments to sell loans.
Loan Origination and Other Fees. In addition to interest earned on loans,
the Bank receives loan origination fees. Loan fees are a percentage of the
principal amount of the mortgage loan which are charged to the borrower for
origination of the loan. Beginning in fiscal 1988, under FASB #91, loan
origination fees are recognized as an adjustment of the loan's yield over the
life of the loan by the interest method to the extent that they exceed costs
incurred in the origination of the loan.
Pioneer Federal's loan origination fees are charged according to amount,
term, loan-to-value, type of loan and market conditions on conventional
residential mortgages and commercial real estate loans. The total amount of
deferred loan fees at September 30, 1996 was $210,000. Any deferred loan fees
not previously accounted for are recognized as income at the time the loan is
sold or paid off.
Loan origination and commitment fees are volatile sources of income. Such
fees vary with the volume and type of loans and commitments made and with
competitive conditions in mortgage markets, which in turn respond to the demand
for and availability of money. The Bank has experienced a decrease in loan fee
income during periods of rising interest rates due to the resulting lack of
demand for mortgage loans.
The Bank receives other fees and charges relating to existing loans, which
include late charges, fees collected in connection with a change in borrower or
other loan modifications, and servicing fees for loans collected for others.
These fees and charges have not constituted a material source of income in the
past. Loan service fees as a percentage of net interest income were 6.5%, 6.0%
and 5.3% for fiscal 1996, 1995, and 1994, respectively.
Asset Classification, Allowance for Losses and Non-Performing Assets.
Pioneer Federal's collection procedures provide that when a loan is 30 or more
days delinquent the borrower is contacted by mail and payment is requested (in
cases of past delinquent history the borrower is contacted prior to being 30
days delinquent). If the delinquency continues, further efforts are made to
contact the borrower and resolve the problem. In certain instances, the Bank
may modify the loan or grant a limited moratorium on loan payments to enable the
borrower to reorganize his financial affairs. If the loan continues in a
delinquent status for 90 days or more, the Bank may initiate foreclosure
proceedings. Any property acquired as the result of foreclosure or by deed in
lieu of foreclosure is classified as "real estate held for resale" until such
time as it is sold or otherwise disposed of by the Bank.
Federal regulations require savings institutions to classify their assets
on the basis of quality on a regular basis. An asset is classified as
substandard if it is determined to be inadequately
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protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. An asset is classified as doubtful if full
collection is highly questionable or improbable. An asset is classified as loss
if it is considered uncollectible, even if a partial recovery could be expected
in the future. The regulations also provide for a special mention designation,
described as assets which do not currently expose a savings institution to a
sufficient degree of risk to warrant classification but do possess credit
deficiencies or potential weaknesses deserving management's close attention.
Assets classified as substandard or doubtful require a savings institution to
establish general allowances for loan losses. If an asset or portion thereof is
classified loss, a savings institution must either establish a specific
allowance for loss in the amount of the asset classified loss, or charge off
such amount. Federal examiners may disagree with a savings institution's
classifications. If a savings institution does not agree with an examiner's
classification of an asset, it may appeal this determination to the OTS Regional
Director. Pioneer Federal regularly reviews its assets to determine whether any
assets require classification or re-classification. The Board of Directors
reviews and approves all classifications. At September 30, 1996, Pioneer Federal
had loans designated special mention of $1,204,000 and classified assets
consisting of loans classified as substandard of $284,000, none as doubtful and
$18,000 as loss.
Management will continue to actively monitor Pioneer Federal's asset
quality and will establish loan loss reserves and will charge off loans and
properties acquired in settlement of loans against the allowances for losses on
such loans and such properties when appropriate, and will provide specific loss
allowances when necessary. Although management believes it uses the best
information available to make determinations with respect to the allowances for
losses, future adjustments may be necessary if economic conditions differ
substantially from the economic conditions in the assumptions used in making the
initial determinations.
Pioneer Federal's methodology for establishing the allowances for losses
takes into consideration probable losses that have been identified in connection
with specific assets as well as losses that have not been identified but can be
expected to occur. Management conducts regular reviews of Pioneer Federal's
assets and evaluates the need to establish allowances on the basis of these
reviews. Allowances are established by the Board of Directors on a quarterly
basis based on an assessment of risk in Pioneer Federal's assets taking into
consideration the composition and quality of the portfolio, delinquency trends,
current charge-offs and loss experience, the state of the real estate market,
regulatory reviews conducted in the regulatory examination process and economic
conditions generally. Allowances will be provided for individual assets, or
portions of assets, when ultimate collection is considered improbable by
management based on the current payment status of the assets and the fair value
or net realizable value of the security. At the date of foreclosure or other
repossession, Pioneer Federal would transfer the property to real estate
acquired in settlement of loans at the lower of cost or fair value. Any portion
of the outstanding loan balance in excess of fair value would be charged off
against the allowance for loan losses. If, upon ultimate disposition of the
property, net sales proceeds exceed the net carrying value of the property, a
gain on sale of real estate would be recorded. Any losses realized on sale
would be charged to the allowance for loan losses on real estate acquired
through foreclosure. Historically, management has emphasized the Bank's loss
experience over other factors in establishing a provision for loan losses.
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In December 1993 the banking regulatory agencies, including the OTS,
adopted a policy statement regarding maintenance of an adequate allowance for
loan and lease losses and an effective loan review system. This policy includes
an arithmetic formula for checking the reasonableness of an institution's
allowance for loan loss estimate compared to the average loss experience of the
industry as a whole. Examiners will review an institution's allowance for loan
losses and compare it against the sum of (i) 50% of the portfolio that is
classified doubtful; (ii) 15% of the portfolio that is classified as
substandard; and (iii) for the portions of the portfolio that have not been
classified (including those loans designated as special mention), estimated
credit losses over the upcoming twelve months given the facts and circumstances
as of the evaluation date. This amount is considered neither a "floor" nor a
"safe harbor" of the level of allowance for loan losses an institution should
maintain, but examiners will view a shortfall relative to the amount as an
indication that they should review management's policy on allocating these
allowances to determine whether it is reasonable based on all relevant factors.
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The following table sets forth an analysis of the Bank's allowance for
possible losses for the periods indicated.
<TABLE>
<CAPTION>
At or For the Year
Ended September 30,
1996 1995
-------- --------
(Dollars In Thousands)
<S> <C> <C>
Total loans outstanding $36,243 $33,444
======= =======
Average loans outstanding $33,358 $31,622
======= =======
Allowance balance (at beginning of period) $ 352 $ 348
Provision (credit):
Residential 57 19
Consumer
Net Charge-offs (recoveries):
Residential 31 7
Consumer (4) 8
------- -------
Allowance balance (at end of period) $ 382 $ 352
======= =======
Allowance for loan losses as a percent
of total loans outstanding 1.05% 1.05%
Net loans charged off as a percent of
average loans outstanding 0.08% 0.05%
</TABLE>
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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.
<TABLE>
<CAPTION>
At September 30,
1996 1995
----- -----
Percent of Percent of
Loans to Loans to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
At end of period allocated to: (Dollars In Thousands)
<S> <C> <C> <C> <C>
Real estate mortgage:
One-to-four-family residential $224 58.63% $212 60.01%
Multi-family and commercial 38 10.05% 34 9.76%
Agricultural 6 1.56% 8 2.36%
Construction (1) 19 4.99% 22 6.14%
Consumer (2) 95 24.77% 76 21.73%
------ ------ ------- --------
Total allowance for loan losses $382 100.00% $353 100.00%
====== ======= ======= ========
</TABLE>
(1) Includes $2,500 specific reserve attributable to a particular loan and not
available for other loan losses.
(2) Includes $15,500 specific reserve attributable to particular loans and not
available for other loan losses.
Numerous financial institutions throughout the United States have incurred
losses in recent years due to significant increases in loss provisions and
charge-offs resulting largely from higher levels of loan delinquencies and
foreclosures. Depressed real estate market conditions have adversely affected
the economies of various regions and have had a severe impact on the financial
condition and businesses of many of the financial institutions doing business in
these areas. Considerable uncertainty exists as to the future improvement or
deterioration of the real estate markets in these regions, or of its ultimate
impact on these financial institutions.
As a result of declines in real estate market values and significant losses
experienced by many financial institutions, there has been a greater level of
scrutiny undertaken by regulatory authorities of the loan portfolios of
financial institutions as part of examinations of such
14
<PAGE>
institutions by the FDIC, OTS or other federal or state regulators. Results of
recent examinations indicate that these regulators may be applying more
conservative criteria in evaluating real estate acquired in settlement of such
loans. While management believes Pioneer Federal has established its existing
loan loss allowances in accordance with generally accepted accounting
principles, there can be no assurances that regulators, in reviewing Pioneer
Federal's assets, will not make Pioneer Federal increase its loan loss
allowance, thereby negatively affecting Pioneer Federal's reported financial
condition and results of operations.
15
<PAGE>
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.
<TABLE>
<CAPTION>
At September 30,
1996 1995
---------- ----------
(Dollars In Thousands)
<S> <C> <C>
Loans accounted for on a non-accrual basis (1):
Residential $ 3 $ 23
Consumer 15 18
------- -------
Total 18 41
------- -------
Accruing loans which are contractually past due 90 days or more (2):
Mortgage loans:
Permanent loans secured by 1-to-4 family dwelling units 91 151
Construction 0 0
All other mortgage loans 114 0
Consumer
------- -------
Total 205 151
------- -------
Total non-accrual and accrual loans 223 192
Real estate owned (3)
------- -------
Total non-performing assets $ 223 $ 192
======= =======
Total non-performing loans to loans 0.62% 0.57%
Total non-performing loans to total assets 0.30% 0.24%
Total non-performing assets to total assets 0.30% 0.24%
</TABLE>
(1) Non-accrual status denotes loans which management believes may have defined
weaknesses whereby accrued interest is inadequatel y protected by the current
net worth and paying capacity of the obligor, or of the collateral pledged.
(2) Loans more than 90 days past due will continue to accrue interest when
there is no well-defined weakness in the loan regarding net worth and paying
capacity of the obligor or of the collateral pledged which would cause
management to believe that interest accrued will be uncollectible.
(3) Other non-performing assets represent property acquired by the Bank through
foreclosure, or repossession. This property is carried at the lower of its
fair market value or the carrying value of the related loan.
16
<PAGE>
NON-ACCRUAL LOANS:
Non-accrual loans at September 30, 1996 consist of one fixed-rate
construction loan on residential property classified as loss and three fixed-
rate consumer loans classified as loss. The Savings Bank had no other non-
performing assets as of September 30, 1996.
INVESTMENT ACTIVITIES
Income from investment in securities provides the second largest source of
income for Pioneer Federal after interest on loans. Pioneer Federal is required
under federal regulations to maintain a minimum amount of liquid assets (which
may be invested in specified short-term securities) and is also permitted to
make certain other investments. The balance of investments in excess of
regulatory requirements are in a variety of instruments including short-term
instruments (such as Municipal Bonds, Federal Home Loan Bank Bonds and
Certificates of Deposit) and longer-term, higher rate instruments (such as
mortgage-backed securities). Investment decisions are made by authorized
officers of the Bank.
The Bank invests in investment securities in order to diversify its assets,
manage cash flow, obtain yield and maintain the minimum levels of liquid assets
required by regulatory authorities. Such investments generally include purchases
of mortgage-backed securities, federal government and agency securities and
qualified deposits in other financial institutions.
At September 30, 1996, the Bank's investment securities totaled $31.6
million, of which $25.2 million were invested in mortgage-backed securities
primarily issued by Government agencies. These types of investments are
interest rate sensitive, and in addition, are subject to prepayment risk.
Prepayment risk is the risk that the principal of the security will be prepaid
in advance of the normal maturity, and any remaining premium or discount
incurred from the purchase of the investment could have a negative impact on the
yield earned on those investments.
It is management's intention, and Pioneer Federal has the ability, to hold
the majority of its investment security portfolio to maturity. In accordance
with SFAS No. 115, effective October 1, 1995, the Bank began classifying
securities as either held to maturity, available for sale, or available for
trade. Securities classified as held to maturity are carried at their amortized
cost. Securities classified as trading securities are carried at fair value with
any unrealized gain or loss included in net income. Securities classified as
available for sale are carried at fair value, with the net unrealized gain or
loss carried as a separate component of stockholders' equity. At September 30,
1996, the unrealized holding gains of $39,092, less the applicable deferred tax
of $13,291, is included as a separate component of stockholders' equity pursuant
to SFAS No. 115. The balance of investment securities are classified as held to
maturity, which are being held at cost, adjusted for amortization of premiums
and accretion of discounts over the term of the security using the level yield
method. For further information, see Note 2 of Notes to Consolidated Financial
Statements (page 32 of Exhibit 13 here to).
17
<PAGE>
The following table sets forth the carrying value of the Bank's investment
securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
----------------------
1996 1995
--------- ---------
(Dollars In Thousands)
<S> <C> <C>
Investment securities available-for-sale:
Mortgage-backed securities $ 3,076 $ 3,283
SBA Pools 4,525 2,186
--------- ---------
Total 7,601 5,469
--------- ---------
Investment securities held-to-maturity:
Mortgage-backed securities 22,147 27,310
U.S. Government and federal agencies 500 5,043
Federal Home Loan Bank of Cincinnati,
capital stock 509 537
Municipal bonds 817 317
--------- ---------
Total 23,973 33,207
--------- ---------
Total investment securities $31,574 $38,676
========= =========
</TABLE>
18
<PAGE>
The following table sets forth the scheduled maturities, carrying values, market
value and average yields for the Bank's investment portfolio at September 30,
1996.
<TABLE>
<CAPTION>
-One Year or Less- -One to Five Years- -Five to 10 Years- -More than 10 Years- -Total Investments-
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market Average
Value Yield Value Yield Value Yield Value Yield Value Value Yield
------- ------- ------- --------- ------- -------- ------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities
Available-for-Sale (Dollars in Thousand)
Mortgage-backed $ 0 0.00% $ 0 0.00% $ 0 0.00% $ 4,525 7.39% $ 4,525 $ 4,525 7.39%
securities
SBA Pools 0 0.00% 0 0.00% 0 0.00% 3,076 6.78% 3,076 3,076 6.78%
------- ------ ------- --------- ------- ------- ------- ------ ------- ------ ------
Total 0 0.00% 0 0.00% 0 0.00% 7,601 7.14% 7,601 7,601 7.14%
------- ------ ------- --------- ------- ------- ------- ------ ------- ------ ------
Securities
Held-to-Maturity:
Mortgage-backed 1,235 6.78% 8,512 6.26% 1,204 8.97% 11,196 6.78% 22,147 21,695 6.70%
securities
U.S. Govt. and 0 0.00% 500 6.56% 0 0.00% 0 0.00% 500 498 6.56%
federal agencies
FHLB Stock 0 0.00% 0 0.00% 0 0.00% 509 7.16% 509 509 7.16%
Municipal bonds 100 5.20% 599 5.24% 0 0.00% 118 6.20% 817 818 5.37%
------- ------ ------- --------- ------- ------- ------- ------ ------- ------ ------
Total 1,335 6.66% 9,611 6.21% 1,204 8.97% 11,823 6.79% 23,973 23,520 6.66%
------- ------ ------- --------- ------- ------- ------- ------ ------- ------ ------
Total Investment $1,335 6.66% $9,611 6.21% $1,204 8.97% $19,424 6.93% $31,575 $31,121 6.78%
Securities ======= ====== ======= ========= ======= ======= ======= ====== ======= ====== ======
</TABLE>
19
<PAGE>
Pioneer Federal is a member of the Federal Home Loan Bank System. As a
member of the System it is required to maintain an investment in capital stock
of the Federal Home Loan Bank. No ready market exists for such stock and it has
no quoted market value. For disclosure purposes, such stock is assumed to have
a market value which is equal to cost, which amounted to $508,800 at September
30, 1996.
SOURCES OF FUNDS
Deposits are the major source of the Bank's funds for lending and other
investment purposes. In addition to deposits, Pioneer Federal derives funds from
loan principal repayments. Loan repayments are a relatively stable source of
funds, while deposit inflows and outflows are significantly influenced by
general interest rates and money market conditions. Borrowings from the Federal
Home Loan Bank may be used on a short-term basis to compensate for a reduction
in the availability of funds from other sources. They may also be used on a
longer term basis for general business purposes.
Deposits. Consumer and commercial deposits are attracted principally
from within the Bank's primary market area through the offering of a broad
selection of deposit instruments including NOW accounts, passbooks, certificates
of deposit and retirement savings plans. The flow of deposits is influenced
significantly by general economic conditions, changes in money market and
prevailing interest rates and competition.
Pioneer Federal's policies are designed primarily to attract deposits from
local residents through Pioneer Federal's branch network rather than from
outside Pioneer Federal's market area. Pioneer Federal does not accept deposits
from brokers due to their rate sensitivity. Pioneer Federal's interest rates,
maturities, service fees and withdrawal penalties on deposits are established by
management on a periodic basis. Management determines deposit interest rates
and maturities based on Pioneer Federal's liquidity requirements, the rates paid
by Pioneer Federal's competitors, Pioneer Federal's growth goals and applicable
regulatory restrictions and requirements.
20
<PAGE>
Savings deposits in Pioneer Federal Savings Bank as of September 30,
1996, were represented by the various types of savings programs described
below.
<TABLE>
<CAPTION>
Minimum Balance as of Percentage
Interest Balance September 30, of Total
Category Term Rate(1) Amount 1996 (2) Deposits
- --------------------------------- ---------- -------- ------- ------------- ---------
<S> <C> <C> <C> <C> <C>
NOW Accounts None 1.98% 300 $ 14,008 21.77%
Regular Savings None 2.94% 100 9,758 15.16%
Money Market Accounts None 2.93% 2,500 1,912 2.97%
Certificated of Deposit:
Fixed Term, Fixed Rate 7-31 days 4.00% * 10 0.02%
Fixed Term, Fixed Rate 91 days 4.08% 1,000 413 0.64%
Fixed Term, Fixed Rate 6 month 4.42% 1,000 4,231 6.61%
Fixed Term, Fixed Rate 6 month 4.39% 1,000 2,286 3.55%
Fixed Term, Fixed Rate 12 months 4.96% 500 7,803 12.12%
Fixed Term, Fixed Rate 12 months 4.88% 500 276 0.43%
Fixed Term, Fixed Rate 12 months 4.50% * 2 0.01%
IRA, Fixed Term, Fixed Rate 18 months 5.80% 100 1,861 2.89%
IRA, Fixed Term, Variable Rate 18 months 5.60% 100 3,596 5.59%
Fixed Term, Fixed Rate 18 months 5.31% 1,000 7,826 12.16%
Fixed Term, Fixed Rate 24 months 5.41% 1,000 5,310 8.25%
Fixed Term, Fixed Rate 30 months 5.50% * 32 0.05%
Fixed Term, Fixed Rate 36 months 5.66% 1,000 2,866 4.45%
Fixed Term, Fixed Rate 48 months 4.82% * 27 0.04%
Fixed Term, Fixed Rate 60 months 5.14% 5,000 1,990 3.09%
Fixed Term, Fixed Rate 72 months 5.77% * 128 0.20%
------------- ---------
$ 64,335 100.00%
============= =========
</TABLE>
(1) Represents weighted average interest rates
(2) In thousands
* This type of certificate was no longer offered at September 30, 1996
21
<PAGE>
The following is a description of the types of accounts offered by the
Bank.
PASSBOOK ACCOUNTS. A minimum deposit of $100 is required to open a
Passbook savings account. If the balance falls below $100 a maintenance fee of
$3.00 per month is charged (excluding minors' accounts). This account allows
for unlimited deposits and three withdrawals per month. If more than nine
withdrawals are requested per quarter, a $2 per withdrawal fee is collected. A
dormant charge of $5 per quarter is assessed if there has been no activity on
the account for 2 years and the balance is under $500 at quarter end. Simple
interest is credited quarterly and is calculated from the date of funds being
deposited to the date of withdrawal.
NOW ACCOUNTS. NOW accounts are checking accounts. Pioneer offers four
types of NOW accounts. The SETTLERS account allows up to 50 checks to be
written monthly without charge; after that there is a 20 cent charge for each
check written. A monthly service fee is not charged if a minimum balance of
$300 is maintained; if the account drops below $300 a $5 per month maintenance
fee is charged. The SETTLERS account is a non-interest bearing account. The
PIONEER account allows unlimited checking. This account pays money market rates
when a minimum balance of $1000 is maintained. If the balance drops below $1000
a $7.50 per month maintenance fee is charged. The FOUNDERS account is for
customers over age 55. This account pays interest if a balance of $1000 or
greater is maintained. A monthly service charge of $3 is assessed if the balance
falls below $100. The FOUNDERS account allows unlimited checking. The WINCHESTER
account is for non-profit community organizations. This account allows unlimited
checking and pays interest when a minimum balance of $1000 is maintained. If the
balance falls below $100, a $3 monthly maintenance fee is charged.
MONEY MARKET DEPOSIT ACCOUNTS ("MMDAS"). The Garn Act authorized, in late
1982, a new type of money market deposit account intended to have rates that are
competitive with money market rates. In accordance with regulatory limitations,
the main features of the Bank's MMDA include the following: (1) $2,500 minimum
balance (interest reverts to the NOW account rate when the account balance drops
below the minimum balance requirement, with $7.50 monthly maintenance fee if
balance falls below $1000); (2) no limit on the rate the Bank may pay on the
account; (3) six preauthorized or automatic third party transfers in an amount
in excess of $500 are permitted, three of which may be by check, with $2.00 per
withdrawal over six; (4) no restrictions on the size and frequency of
withdrawals by mail or in person; (5) no restriction on additional deposits to
the account; and (6) no minimum maturity or early withdrawal penalty.
INDIVIDUAL RETIREMENT ACCOUNTS ("IRAS"). The Bank offers tax-deferred
Individual Retirement Accounts. Pioneer Federal offers certificates established
solely for IRA accounts which have a maturity of 18 months.
The Bank currently offers IRAs which have both fixed and floating interest
rates.
CERTIFICATES OF DEPOSIT ("CDS"). Pioneer Federal offers certificates of
deposit with terms ranging from three months to five years. The required
minimum investment varies with the different terms of the certificates. Interest
on the certificates is simple interest, payable monthly, quarterly, or at
maturity. The interest rates on these certificates are set weekly by the Bank
and are fixed for the term of the certificate.
22
<PAGE>
The following table indicates the amount (in thousands) of the certificates
of deposit of $100,000 or more by time remaining until maturity at September 30,
1996.
<TABLE>
<CAPTION>
<S> <C>
Three months or less: $ 940
More than three through six months: 1,218
More than six through twelve months: 1,452
Over twelve months: 2,455
------
$6,065
======
</TABLE>
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.
<TABLE>
<CAPTION>
Year Ended September 30,
1996 1995
Average Average Average Average
Balance Rate Balance Rate
------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Deposit Category:
Demand Accounts (1) $18,783 2.93% $18,398 2.15%
Passbook Accounts 9,838 2.20% 10,705 2.87%
Certificates 39,497 5.37% 38,691 4.88%
------- ------- ------- -------
$68,118 4.13% $67,794 3.79%
======= ======= ======= =======
</TABLE>
(1) Non-interest bearing deposits are not in excess of 10% of total deposits.
BORROWINGS
Savings deposits historically have been the primary source of funds for the
Bank's lending and investment activities and for its general business
activities. The Bank is authorized, however, to use advances from the FHLB of
Cincinnati to supplement its supply of lendable funds and to meet deposit
withdrawal requirements. Advances from the FHLB are secured by a portion of the
Bank's mortgage loans.
The FHLB of Cincinnati functions as a central reserve bank providing credit
for savings institutions and certain other member financial institutions. As a
member, the Bank is required to
23
<PAGE>
own capital stock in the FHLB and is authorized to apply for advances on the
security of such stock and certain of its home mortgages and other assets
(principally, securities which are obligations of, or guaranteed by, the United
States), provided certain standards related to credit worthiness have been met.
See "Regulation of the Bank -- Federal Home Loan Bank System."
COMPETITION
The Bank faces strong competition in the attraction of savings deposits and
in the origination of real estate loans. Its most direct competition for
savings deposits has historically come from commercial banks and other thrifts
located in its primary lending area and Fayette County, Kentucky. The Bank
faces additional significant competition for investors' funds from offerors of
short-term money market securities and other corporate and government
securities. The Bank's competition for real estate loans comes principally from
other thrifts, commercial banks and mortgage banking companies.
The Bank competes for loans principally through the interest rates and loan
fees it charges and the efficiency and quality of the services it provides
borrowers. It competes for savings by offering depositors a wide variety of
savings accounts, checking accounts, convenient office locations, convenient
hours of operation, tax-deferred retirement accounts, and other miscellaneous
services.
The Bank considers Clark and Powell Counties, Kentucky, to be its primary
market area for savings and mortgage loans. As of September 30, 1996, there
were six other financial institutions located in these counties; one of the six
is a thrift institution. Management believes that Pioneer Federal has good
community identification in the area, and feels that local ownership of the Bank
is an important factor contributing to the Bank's success. Nonetheless, the
Bank competes with much larger financial institutions in Clark County and nearby
Lexington, Kentucky. These competitors offer better loan rates and broader
customer services than the Bank from time to time due to their size, financial
resources and competitive strategy.
The Deregulation and Garn Acts and regulations implementing these Acts
significantly expanded the range of services which savings and loan associations
can offer to the public. These Acts, rate deregulation and high interest rates
in the early 1980's caused a dramatic increase in competition (e.g. money market
mutual funds, Treasury securities, municipal bonds, etc.) for savings dollars
and have increased competition with commercial banks in regard to loans,
checking accounts and other types of financial services. In addition, large
conglomerates and investment banking firms entered the market for financial
services during the past decade. The savings public became increasingly
sophisticated. Thus the Bank encountered, and may continue to encounter,
increased competition in the financial services offered and Pioneer will have to
be innovative and knowledgeable about its market, as well as exert effective
controls over its costs, in order to remain competitive.
SUBSIDIARIES
Pioneer Federal Savings Bank has one service corporation subsidiary,
Pioneer Service Corporation ("PSC"). In August, 1978, Pioneer Federal formed
PSC and purchased all of its
24
<PAGE>
stock for $16,000. PSC was formed by the Bank for the purpose of acquiring
stock in Intrieve, Incorporated. Intrieve is a non-profit corporation based in
Cincinnati, Ohio, which provides on-line computer processing and inquiry service
to Pioneer Federal and other savings and loan institutions in the region. To
date, PSC has conducted no business activities.
PERSONNEL
As of September 30, 1996, the Bank had 25 full-time employees, and 11 part-
time employees. The employees are not represented by a collective bargaining
unit. The Bank believes its relationship with its employees to be good.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements, and Notes thereto, presented herein
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars without considering the changes in relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of the Bank's operations. Unlike most industrial
companies, nearly all the assets and liabilities of the Bank are monetary in
nature. As a result, interest rates have greater impact on the Bank's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the price
of goods and services.
ESOP LOAN
The Bank has received the approval of the OTS for a special one time
capital distribution of $250,000 to the Corporation. The Executive Committee of
the Board of Directors of the Bank approved the one time capital distribution on
December 12, 1996 and the distribution was made on December 13, 1996.
Management's intent is to have the corporation make a $250,000 loan to the
Employee Stock Ownership Plan (ESOP) Trust for the purpose of acquiring Company
stock. The loan will be repaid from annual contributions made to the ESOP by the
Bank.
COMPANY REGULATION
General. The Corporation is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Corporation is
required to register and file reports with the OTS and is subject to regulation
and examination by the OTS. In addition, the OTS will have enforcement
authority over the Corporation and its non-savings association subsidiaries,
should such subsidiaries be formed, which also permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings association. This regulation and oversight is intended primarily for
the protection of the depositors of the Bank and not for the benefit of
stockholders of the Corporation. The Corporation is also required to file
certain reports with, and otherwise comply with the rules and regulations of,
the OTS and the Securities and Exchange Commission ("SEC").
25
<PAGE>
QTL Test. As a unitary savings and loan holding company, the Corporation
generally will not be subject to activity restrictions, provided the Bank
satisfies the QTL test (See Qualified Thrift Lender Test, page 29). If the
Corporation acquires control of another savings association as a separate
subsidiary, it would become a multiple savings and loan holding company, and the
activities of the Corporation, and any of its subsidiaries (other than the Bank
or any other SAIF-insured savings association) would become subject to
restrictions applicable to bank holding companies unless such other associations
each also qualify as a QTL or were acquired in a supervised acquisition.
Restrictions on Acquisitions. The Corporation must obtain approval from
the OTS before acquiring control of any other SAIF-insured association. Such
acquisitions are generally prohibited if they result in a multiple savings and
loan holding company controlling savings associations in more than one state.
However, such interstate acquisitions are permitted based on specific state
authorization or in a supervisory acquisition of a failing savings association.
Federal law generally provides that no "person", acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control", as that term is defined in OTS regulations, of a federally insured
savings institution without giving at least 60 days written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition.
Such an acquisition of control may be disapproved if it is determined, among
other things, that: (i) the acquisition would substantially lessen competition;
(ii) the financial condition of the acquiring person might jeopardize the
financial stability of the savings institution or prejudice the interest of its
depositors; or (iii) the competency, experience, or integrity of the acquiring
person or the proposed management personnel indicates that it would not be in
the interest of the depositors or the public to permit the acquisition of
control by such person.
The Bank Holding Company Act of 1956 ("BHCA") authorizes the Federal
Reserve Board to approve an application by a bank holding company to acquire
control of a savings association. Furthermore, a bank holding company that
controls a savings association is authorized to merge or consolidate the assets
and liabilities of the savings association with, or transfer assets and
liabilities to, any subsidiary bank which is a member of the BIF with the
approval of the appropriate federal banking agency and the Federal Reserve
Board. Generally, federal savings associations can acquire or be acquired by
any insured depository institution.
Federal Securities Law. The Corporation's Common Stock is registered with
the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The Corporation is subject to the information, proxy solicitation,
insider trading restrictions and other requirements under the Exchange Act. The
Commission maintains a web site which contains reports, proxy and information
statements and other information pertaining to registrants that file
electronically with the commission, including the Corporation. The web site
address is as follows: (http://www.sec.gov).
BANK REGULATION
General. As a federally chartered, SAIF-insured savings bank, Pioneer
Federal is subject to regulation and examination by the OTS and the FDIC.
Lending activities and other investments
26
<PAGE>
must comply with various federal statutory and regulatory requirements. The
Bank is also subject to certain reserve requirements promulgated by the Federal
Reserve Board.
The OTS, in conjunction with the FDIC, regularly examines the Bank and
prepares reports for the consideration of the Bank's Board of Directors on any
deficiencies that they find in the Bank's operations. The Bank's relationship
with its depositors and borrowers is also regulated to a great extent by federal
law.
Pioneer Federal must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the Savings Association
Insurance Fund ("SAIF") and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such regulations, whether
by the OTS, the FDIC or the United States Congress, could have a material
adverse impact on the Company and the Bank and their operations.
Insurance of Deposit Accounts. The Bank's deposit accounts are insured by
the SAIF to a maximum of $100,000 for each insured member (as defined by law and
regulation). The FDIC has the authority, should it initiate proceedings to
terminate an institution's deposit insurance, to suspend the insurance of any
such institution without tangible capital. However, if a savings association
has positive capital when it includes qualifying intangible assets, the FDIC
cannot suspend deposit insurance unless capital declines materially, the
institution fails to enter into and remain in compliance with an approved
capital plan, or the institution is operating in an unsafe or unsound manner.
Regardless of an institution's capital level, insurance of deposits may be
terminated by the FDIC upon a finding that the institution has engaged in unsafe
or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC or the institution's primary regulator. The
management of the Bank is unaware of any practice, condition or violation that
might lead to termination of its deposit insurance.
On September 30, 1996, H.R. 1362 was signed into law by the President.
Title II of H.R. 1362 is titled the Economic Growth and Paperwork Reduction Act
of 1996 (the "Act"). Among its many provisions, the Act provides for resolving
the BIF/SAIF premium disparity. Before September 30, 1996, most insured
depository institutions holding BIF-assessable deposits pay the statutory
minimum of $2,000 for deposits insurance on these deposits while most insured
depository institutions with SAIF-assessable deposits paid 23 basis points per
$100 of these deposits for deposit insurance. The Bank paid, as of September
30, 1996, an insurance premium to the FDIC equal to 0.23% of its total
deposits.
27
<PAGE>
The BIF/SAIF legislation provides for a one-time assessment to recapitalize
the SAIF. The assessment will be based upon the amount of SAIF-assessable
deposits held by an institution as of March 31, 1995 (with certain exceptions).
The assessment is effective on September 30, 1996 and is payable on November 27,
1996.
The BIF/SAIF legislation does not specify an actual assessment but states
that the total assessment will be equal to the amount necessary to recapitalize
the SAIF as of October 1, 1996. A recent report of the America's Community
Bankers estimated the assessment at approximately 65.7 basis points per $100 of
SAIF-assessable deposits as of March 31, 1995. The BIF/SAIF legislation
provides that the amount of the special assessment is deductible under Section
162 of the Internal Revenue Code (the "Code") in the year the assessment is
paid. The BIF/SAIF legislation also provides section 172(f) of the Code will
not apply to deductions taken under section 162 of the Code for the special
assessment. The Bank estimated the amount of the assessment to be approximately
$435,000 before tax benefit, and such amount was accrued on September 30, 1996.
Regulatory Capital Requirements. OTS capital regulations require savings
institutions to meet three capital standards: (1) tangible capital equal to 1.5%
of total adjusted assets, (2) a leverage ratio (core capital) equal to at least
3% of total adjusted assets, and (3) a risk-based capital requirement equal to
8.0% of total risk-weighted assets.
Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), plus purchased mortgage servicing rights
valued at the lower of the maximum percentage established by the OTS or the
amount includable in core capital. Core capital is defined as common
stockholders' equity (including retained earnings), noncumulative perpetual
preferred stock and majority interests in the equity accounts of consolidated
subsidiaries, and qualifying supervisory good will, less nonqualifying
intangible assets.
The OTS leverage ratio regulation establishes a core capital ratio of at
least 3% for those savings associations in the strongest financial and
managerial condition based on the "CAMEL" rating system currently in use by the
OTS. Those savings associations receiving a CAMEL rating of "1", the best
possible rating on a scale of 1 to 5, will be required to maintain a ratio of
core capital to adjusted total assets of 3%. All other savings associations
will be required to maintain minimum core capital of at least 4% of total
adjusted assets, with a maximum core capital ratio requirement of 5%. In
determining the required minimum core capital ratio, the OTS would assess the
quality of risk management and the level of risk in each savings association on
a case-by-case basis. The OTS has not indicated the standards it will use in
establishing the appropriate core capital requirement for savings associations
not rated "1" under the CAMEL rating system.
The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital (which is defined as core capital plus
supplementary capital) of 8.0% of risk-weighted assets. The components of
supplementary capital include, among other items, cumulative perpetual preferred
stock, perpetual subordinated debt, mandatory convertible subordinated debt,
intermediate-term preferred stock and the portion of the allowance for loan
losses not designated for specific loan losses. The portion of the allowances
for loan and lease losses includable in supplementary capital is limited to a
maximum of 1.25% of risk-weighted
28
<PAGE>
assets. Overall, supplementary capital is limited to 100% of core capital. A
savings association must calculate its risk-weighted assets by multiplying each
asset and off-balance sheet item by various risk factors as determined by the
OTS, which range from 0% for cash to 100% for delinquent loans, property
acquired through foreclosure, commercial loans and other assets.
As of September 30, 1996, the Bank had tangible, core and risk-based
capital of $8.1 million, $8.1 million and $8.5 million, respectively, which
amounts significantly exceed all applicable fully phased-in regulatory capital
requirements of the OTS.
OTS regulations set forth the methodology for calculating an Interest Rate
Risk (IRR) component which is added to the risk-based capital requirements for
OTS regulated thrift institutions. Generally, savings associations with a
greater than "normal" level of interest rate exposure will be subject to a
deduction from total capital for purposes of calculating their risk-based
capital requirement. Specifically, interest rate exposure will be measured as
the decline in net portfolio value due to a 200 basis point change in market
interest rates. The IRR component to be deducted from total capital is equal to
one-half the difference between an institution's measured exposure and the
"normal" level of exposure (which is defined as two percent of the estimated
economic value of its assets). Institutions, such as the Bank, with less than
$300 million in assets and a risk-based capital ratio in excess of 12% are
exempt from deducting the IRR component.
In addition, pursuant to the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), the OTS must revise the risk-based capital
regulations to include a credit risk component and a nontraditional activities
component, the purpose of which will be to increase the minimum capital
requirements for savings associations with higher credit risks.
Dividend and Other Capital Distribution Limitations. OTS regulations
impose limitations upon all capital distributions by savings institutions, such
as cash dividends, payments to repurchase or otherwise acquire its shares,
payments to shareholders of another institution in a cash-out merger, and other
distributions charged against capital. The rule establishes three tiers of
institutions, based primarily on an institution's capital level. OTS
regulations require the Bank to give the OTS 30 days advance notice of any
proposed declaration of dividends to the Corporation, and the OTS has the
authority under its supervisory powers to prohibit the payment of dividends to
the Corporation. In addition, the Bank may not declare or pay a cash dividend
on its capital stock if the effect thereof would be to reduce the regulatory
capital of the Bank below the amount required for the liquidation account
established pursuant to the Bank's conversion. Finally, under the FDICIA, a
savings association is prohibited from making a capital distribution if, after
making the distribution, the savings association would be undercapitalized (not
meet any one of its minimum regulatory capital requirements).
Qualified Thrift Lender Test. The Home Owner's Loan Act, as amended
("HOLA"), requires savings institutions to meet a QTL test. If the Bank
maintains an appropriate level of Qualified Thrift Investments ("QTIs")
(primarily residential mortgages and related investments, including certain
mortgage-related securities ) and otherwise qualifies as a QTL, it will continue
to enjoy full borrowing privileges from the FHLB of Cincinnati. The required
percentage of QTIs is 65% of portfolio assets (defined as all assets minus
intangible assets, property used by the institution in
29
<PAGE>
conducting its business and liquid assets equal to 10% of total assets).
Certain assets are subject to a percentage limitation of 20% of portfolio
assets. In addition, savings associations may include shares of stock of the
FHLBs, Federal National Mortgage Association ("FNMA"), and FHLMC as qualifying
QTIs. Compliance with the QTL test is determined on a monthly basis in nine out
of every 12 months. As of September 30, 1996, the Bank was in compliance with
its QTL requirement with 85.73% of its assets invested in QTIs.
A savings association that does not meet a QTL test must either convert to
a bank charter or comply with the following restrictions on its operations: (i)
the savings association may not engage in any new activity or make any new
investment, directly or indirectly, unless such activity or investment is
permissible for a national bank; (ii) the branching powers of the savings
association shall be restricted to those of a national bank; (iii) the savings
association shall not be eligible to obtain any advances from its FHLB; and (iv)
payment of dividends by the savings association shall be subject to the rules
regarding payment of dividends by a national bank. Upon the expiration of three
years from the date the savings association ceases to be a QTL, it must cease
any activity and not retain any investment not permissible for a national bank
and immediately repay any outstanding FHLB advances (subject to safety and
soundness considerations.)
Transactions With Affiliates. Generally, restrictions on transactions with
affiliates require that transactions between a savings association or its
subsidiaries and its affiliates be on terms as favorable to the Bank as
comparable transactions with non-affiliates. In addition, certain of these
transactions are restricted to an aggregate percentage of the Bank's capital,
and collateral in a specified amount must usually be provided by affiliates to
receive loans from the Bank. Affiliates of the Bank include the Corporation and
any company which would be under common control with the Bank. In addition, a
savings association may not lend to any affiliate engaged in activities not
permissible for a bank holding company or acquire the securities of any
affiliate which is not a subsidiary. The OTS has the discretion to treat
subsidiaries of the savings association as affiliates on a case-by-case basis.
The Bank's authority to extend credit to its officers, directors, and
10% stockholders as well as entities that such persons control is currently
governed by Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O
promulgated by the Federal Reserve Board. Among other things, these regulations
require such loans to be made on terms substantially similar to those offered to
unaffiliated individuals, place limits on the amounts of loans the Bank may make
to such persons based, in part, on the Bank's capital position, and require
certain approval procedures to be followed. OTS regulations, with minor
variation, apply Regulation O to savings associations.
Liquidity Requirements. All savings associations are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. As of September 30, 1996, the Bank's
liquidity ratio was 24.81%.
30
<PAGE>
Liquid assets for purposes of this ratio include specific short term assets
(e.g., cash, certain time deposits, certain banker's acceptances, and short term
U.S. Government obligations), and long term assets (e.g., U.S. Government
obligations of more than one and less than five years, and state agency
obligations with a maximum remaining term of 24 months). The regulations
governing liquidity requirements include as liquid assets: debt securities
hedged with forward commitments obtained from, or debt securities subject to
repurchase agreements with, members of the Bank of Primary Dealers in United
States Government Securities or banks whose accounts are insured by the FDIC;
debt securities directly hedged with a short financial future position; and debt
securities that provide the holder with a right to redeem the security at par
value, regardless of the stated maturities of the securities. The OTS is also
authorized to designate as liquid assets certain mortgage-related securities
with less than one year to maturity. Short term liquid assets currently must
constitute at least 1% of an association's average daily balance of net
withdrawable deposit accounts and current borrowings. Monetary penalties may be
imposed upon associations for violations of liquidity requirements.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Cincinnati, which is one of 12 regional FHLBs that administer the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB. As of
September 30, 1996, the Bank had borrowed $698,798 from the FHLB of Cincinnati
to fund operations; there can be no assurances that additional borrowings will
not be made in the future.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Cincinnati in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts, or similar obligations at
the beginning of each year. As of September 30, 1996, the Bank had $508,800 in
FHLB stock, which was in compliance with this requirement.
The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low-and moderate-income housing projects. These contributions have adversely
affected the level of FHLB dividends paid and could continue to do so in the
future. For the fiscal year ended September 30, 1996, dividends paid by the
FHLB of Cincinnati to the Bank totaled $27,400.
Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW, and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve Board may be used
to satisfy the liquidity requirements that are imposed by the OTS. As of
September 30, 1996, the Bank was in compliance with its Federal Reserve Board
minimum reserve requirements.
Savings associations have authority to borrow from the Federal Reserve Bank
"discount window", but Federal Reserve policy generally requires savings
associations to exhaust all OTS
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<PAGE>
sources before borrowing from the Federal Reserve System. The Bank had no such
borrowings at September 30, 1996.
FEDERAL TAXATION.
The Company and the Bank file a consolidated tax return on a fiscal year
(September 30) basis. Savings associations are subject to the provisions of the
Internal Revenue Code in the same general manner as other corporations.
However, savings associations such as the Bank, which meet certain definitional
tests and other conditions prescribed by the Code, may benefit from certain
favorable provisions regarding their deductions from taxable income for annual
additions to their bad debt reserve. For purposes of the bad debt reserve
deduction, loans are separated into "qualifying real property loans", which
generally are loans secured by interests in real property, and nonqualifying
real property loans, which are all other loans. The bad debt reserve deduction
with respect to nonqualifying loans must be based on actual loss experience.
The amount of the bad debt reserve deduction with respect to qualifying real
property loans may be based upon actual loss experience (the "experience
method") or a percentage of taxable income determined without regard to such
actual experience (the "percentage of taxable income method"). The Bank used
the percentage of taxable income method for the years ended September 30, 1995,
1994 and 1993. The Bank is expected to use the percentage of taxable income
method for the year ending September 30, 1996. The Bank determines the most
favorable way to calculate the deduction attributable to an addition to its bad
debt reserve on an annual basis.
Under the experience method, the bad debt deduction may be based on (i) a
six-year moving average of actual losses on qualifying and non-qualifying loans
or (ii) a fill-up to the institution's base year reserve amount, which is the
tax bad debt reserve determined as of September 30, 1988.
The percentage of specially computed taxable income that is used to compute
a savings association's bad debt reserve deduction under the percentage of
taxable income method (the "percentage bad debt deduction") is 8%. The
percentage of bad debt deduction thus computed is reduced by the amount
permitted as a deduction for non-qualifying loans under the experience method.
If an association's qualifying assets (generally, loans secured by
residential real estate or deposits, educational loans, cash and certain
government obligations) constitute less than 60% of its total assets, the
association may not deduct any addition to a bad debt reserve and generally must
include existing reserves in income over a four year period. As of September
30, 1996, at least 60% of the Bank's assets were qualifying assets as defined in
the Code. No assurance can be given that the Bank will meet the 60% test for
subsequent tax years.
Earnings appropriated to the Bank's bad debt reserve and claimed as a tax
deduction will not be available for the payment of cash dividends or for
distribution to stockholders (including distributions made on dissolution or
liquidation), unless the Bank includes the amount in income, along with the
amount deemed necessary to pay the resulting federal income tax. As of
September 30, 1996, the Bank had approximately $1.6 million of accumulated
earnings for which federal income taxes have not been provided. If such amount
is used for any purpose other than
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<PAGE>
bad debt losses it will be subject to federal income tax at the then current
rate.
On August 20, 1996, the President signed into law the Small Business Jobs
Protection Act. Included within this act were provisions repealing the
percentage of taxable income method of calculating a thrift's bad debt reserve
for tax purposes. This method had permitted thrift institutions, such as the
Bank, who satisfied certain definitional tests and other conditions prescribed
by the Internal Revenue Code, to deduct an annual addition to their bad debt
reserve calculated as a percentage of taxable income. Other financial
institutions generally were required to calculate their bad debt deduction based
upon actual loss experience (the "experience method"). As a result of the
elimination of the percentage of taxable income method, institutions that have
utilized such method will be required to recapture into taxable income post-1987
reserves in excess of the reserves calculated under the experience method, over
period of six years commencing in the first taxable year beginning after
December 31, 1995. An institution will be able to defer recapture until up to
the third taxable year after December 31, 1995 if the dollar amount of the
institution's residential loan originations in each year is not less than the
average dollar amount of residential loan originations originated in each of the
six most recent years, disregarding the years with the highest and lowest
originations during such period. For purposes of this test, residential loan
originations would not include refinancings and home equity loans.
Beginning with the first taxable year beginning after December 31, 1995,
savings institutions, such as the Bank, will be treated the same as commercial
banks. Institutions with $500 million or more in assets will only be able to
take a tax deduction when a loan is actually charged off. Institutions with less
than $500 million in assets will still be permitted to make deductible bad debt
additions to reserves, but only using the experience method. The Bank has
provided deferred taxes on its post-1987 additions to the bad debt reserve and,
as a result, management does not expect that the recapture of the Bank's post-
1987 reserves will have a material adverse effect on the Bank's operations.
Generally, for taxable years beginning after 1986, the Code also requires
most corporations, including savings associations, to utilize the accrual method
of accounting for tax purposes. Further, for taxable years ending after 1986,
the Code disallows 100% of a savings association's interest expense allocated to
certain tax-exempt obligations acquired after August 7, 1986. Interest expense
allocable to (i) tax-exempt obligations acquired after August 7, 1986 which are
not subject to this rule, and (ii) tax-exempt obligations issued after 1982 but
before August 8, 1986, are subject to the rule which applied prior to the Code
disallowing the deductibility of 20% of the interest expense.
The federal income tax returns of the Company and the Bank have not been
examined by the IRS during the past 10 years.
STATE TAXATION
The Commonwealth of Kentucky imposes no income or franchise taxes on
savings institutions. Pioneer Federal is subject to an annual Kentucky ad
valorem tax. This tax is .1% of the Bank's savings accounts, common stock,
capital and retained income with certain deductions allowed for amounts borrowed
by depositors and for securities guaranteed by the U.S. Government or certain
33
<PAGE>
of its agencies. For the fiscal year ended September 30, 1996, the amount of
such expense for the Bank was $64,790.
The Corporation is subject to an annual license fee on capital employed and
income tax on its operations by the Commonwealth of Kentucky. The annual
license fee is based on $2.10 per $1,000 of capital employed and the tax on
income ranges from 4% on the first $25,000 of taxable income to 8.25% on taxable
income in excess of $250,000.
ITEM 2. PROPERTIES
Pioneer Financial's and Pioneer Federal's main office is located at 25 East
Hickman Street, Winchester, Kentucky. The building is a one story building of
contemporary design constructed in 1975 and expanded in 1978. The building has
5,670 square feet, with six teller stations, one drive-in window (which serves
two lanes of traffic), five private offices, a Directors' Conference Room, a
kitchen, a large lobby, two restrooms, a walk-in vault, a storage room, and a
tellers' work area. There are thirteen computer terminals at the main office.
Pioneer Federal has a branch office at 17 East Pendleton Street, Stanton,
Kentucky. It consists of a brick-veneer modular building, constructed in 1980.
The building has 1,120 square feet, with two teller stations, one drive-in
window, one large private office, a kitchen, two restrooms, and a tellers' work
area. There are three computer terminals at the branch office.
The Bank has a second branch in Winchester, Kentucky, at the corner of the
Bypass, (Kentucky Highway 1958) and Fulton Road. This building is of a
contemporary design, with a concrete exterior. The branch has a small kitchen,
2 restrooms, an office, conference room, safety deposit boxes and a walk-in
vault. The Bypass branch has 7 computer terminals, 3 drive-in lanes and an
automatic teller machine (ATM).
<TABLE>
<CAPTION>
September 30,
1996 1995
-------------------------
<S> <C> <C>
Land, buildings and
improvements....... $1,637,310 $1,599,420
Furniture, fixtures
and equipment...... 720,748 705,062
---------- ----------
Total, at cost....... 2,358,058 2,304,482
Less accumulated
depreciation....... 1,182,071 1,127,070
---------- ----------
</TABLE>
$1,175,987 $1,177,412
========== ==========
34
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Four shareholders combined to form East Kentucky Holdings, a general
partnership, in 1994. On July 24, 1994, the Savings Bank filed a lawsuit styled
Pioneer Federal Savings Bank v. Fred M. Higgins, Catherine H. Howard, Charles
- -----------------------------------------------------------------------------
Lester Key, Phillip R. Perry, individually and d/b/a East Kentucky Holdings, a
- ------------------------------------------------------------------------------
Kentucky general partnership, (collectively, the "EKH Group") in the United
- ----------------------------
States District Court, Eastern District of Kentucky, Civil Action No. 94-232.
The Complaint alleged that the EKH Group, acting in concert, engaged in a tender
offer with respect to the Bank's stock without complying with the disclosure and
filing requirements of Sections 14(d) and 14(e) of the Williams Act, the Change
in Bank Control Act and the applicable regulations. Through that lawsuit, the
Bank sought an injunction requiring the EKH Group to cease their tender offer
activities, to comply with applicable laws and to restrict their activities with
respect to the Bank.
The EKH Group filed a Counterclaim which sought to enjoin an alleged tender
offer by the Savings Bank, its officers, directors, agents and others acting in
concert with them. The Counterclaim also requested the Court to order the
Savings Bank to declare a dividend to its shareholders, to seek competitive
bids for its legal services, to evaluate and disclose bona fide offers to
purchase the Bank, and to fully disclose and address any conflicts of interest
of the Bank's directors.
Pioneer and the members of the EKH group entered into a Mutual Release and
Agreed Order of Dismissal of the civil matter. The Savings Bank redeemed the
EKH stock at a price per share of $41.50 in July, 1996, following confirmation
from the Office of Thrift Supervision (OTS) that the redemption was consistent
with all statutes, rules, regulations, policies, directives or orders of the
OTS.
The redemption included the 58,069 shares of stock of the EKH group and
6,175 shares of stock owned by the Corporation's chairman, Janet W. Prewitt, and
certain of those persons presumed to be acting in concert with her. The
redemption of the shares of Ms. Prewitt, etc., is necessitated by the EKH
redemption to keep the ownership of the Corporation's stock by Ms. Prewitt and
those presumed to be acting in concert with her below 10% and thus avoid her
undergoing the personal expense and time involved in a control filing with the
OTS.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholders Matters
(a) Market Information. As of the date hereof, there is no established
public trading market for Pioneer Financial's common stock. The most recent sale
of Pioneer Financial's stock for which Pioneer Financial is aware of the
purchase price occurred during the week of November 25, 1996, with the price
share being $41.50.
35
<PAGE>
(b) HOLDERS. As of December 1, 1996, there were approximately 301 holders
of Shares of Pioneer Financial's common stock, par value $1 per share.
(c) DIVIDENDS. During fiscal year 1996, Pioneer Financial's Board of
Directors declared quarterly dividends of 33 cents per share payable on December
15, 1995, and 35 cents per share payable on March 15, 1996, June 15, 1996 and
September 15, 1996 to shareholders of record as of December 1, 1995, March 1,
1996, June 1, 1996 and September 1, 1996, respectively. Total dividends paid in
fiscal 1996 amounted to $353,533.
The Corporation may not declare or pay cash dividends on any of its stock
if the effect thereof would cause the Bank's net worth to be reduced below (1)
the amount required for the liquidation account established in connection with
its stock conversion, or (2) the net worth and capital distribution requirements
imposed by the OTS and FDIC. (see Note 8 to consolidated Financial Statements,
on pages 40 and 41 of the Corporation's Annual Report to Shareholders, Exhibit
13 hereto).
ITEM 6. Selected Financial Data
The information contained under the section captioned "Selected
Consolidated Financial and Other Data" on pages 4 and 5 of the Corporation's
Annual Report to Shareholders (Exhibit 13 hereto) is incorporated herein by
reference.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation
The information contained in the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations" on pages 6
through 20 of the Corporation's Annual Report to Shareholders (Exhibit 13) is
incorporated herein by reference.
ITEM 8. Financial Statement and Supplementary Data
The financial statements and supplemental data contained on pages 21
through 47 of the Corporation's Annual Report to Shareholders (attached hereto
as Exhibit 13) as listed in Item 14, are incorporated herein by reference.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
(a) Changes in Registrant's Certifying Accountant. Not applicable.
(b) Disagreements with Accountants. Not applicable.
PART III
ITEM 10. Directors and Executive Officers of Pioneer Federal
Reference is made to "Election of Directors" from pages 5 through 8 of the
Proxy Statement
36
<PAGE>
for the January 1997 annual meeting of stockholders (Exhibit 28(b) hereto).
Pursuant to Section 16(a) of the Securities Exchange Act of 1934, as
amended, the Corporation's executive officers and directors, and persons who own
more than ten percent of registered class of the Corporation's equity securities
are required to file reports of ownership with the OTS and the National
Association of Securities Dealers, Inc. Executive officers, directors and
greater than ten-percent shareholders are required by SEC regulation to furnish
the Corporation with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 4 or 5 were
required for those persons, the Corporation believes that, since September 30,
1995, all filing requirements applicable to its executive officers, directors
and greater than ten-percent beneficial owners were complied with except that:
Mrs. Prewitt had, prior to the death of her father in August, 1996, reported his
6,000 shares as being beneficially owned by her (she having had the power to
vote those shares pursuant to Power of Attorney). Following Mr. White's death,
she failed to timely file the report reducing the number of shares beneficially
owned by her, but she has filed that report in the interim.
ITEM 11. Executive Compensation
(a) Cash Compensation. Reference is made to "Remuneration of Officers" on
pages 11 through 13 of the Proxy Statement (Exhibit 28(b) hereto, which is
incorporated herein by reference) for information with respect to the cash
compensation of the registrant's executive and other officers as a group.
(b) Compensation Pursuant to Plans. The registrant has instituted a
"401(k)" retirement plan as of December 1, 1985. With respect to this plan,
reference is made to the section captioned "Remuneration of Officers" on pages
11 and 12 of the Proxy Statement (Exhibit 28(b) hereto) and Note 10 on page 41of
the financial statements included in the Annual Report to Shareholders (Exhibit
13 hereto) for details concerning this retirement plan. There is no contractual
obligation for the registrant to contribute sums to this plan. To date, Pioneer
Federal has contributed $242,420 to this 401(k) plan.
(c) Employee Stock Ownership Plan. On October 31, 1994, the registrant
approved the establishment of a Employee Stock Ownership Plan (ESOP) in which
employees meeting age and service requirements are eligible to participate. The
ESOP is effective beginning January 1, 1994. The Board of Directors authorized
the funding of the ESOP with contributions of $30,512 and $24,425 for the years
ended September 30, 1996 and 1995 respectively.
(d) Other Compensation. Not applicable.
(e) Compensation of Directors. Reference is made to "Directors' Fees" on
page 10 and "Election of Directors" on pages 5 to 8 of the Proxy Statement
(Exhibit 28(b) hereto) for the description of the remuneration paid to the
registrant's directors.
(f) Termination of Employment and Change of Control Arrangement. Not
applicable.
37
<PAGE>
ITEM 12. Security Ownership of certain Beneficial Owners and Management
Reference is made to "Voting Securities" on pages 3 through 5 of the Proxy
Statement (Exhibit 28(b) hereto, incorporated herein by reference) for
information pertaining to the security ownership of certain beneficial owners
and management.
ITEM 13. Certain Relationships and Related Transactions
(a) Transactions with management and others. Reference is made to
"Transactions Involving Directors and Officers" on page 13 of the Proxy
Statement (Exhibit 28(b) hereto, incorporated herein by reference) for
information with respect to transactions involving directors or executive
officers or members of their immediate families.
(b) Certain business relationships. The registrant's Chairman of the Board,
Janet W. Prewitt, is an equity partner in the law firm of White, McCann &
Stewart, a general practice law firm located in Winchester, Kentucky, which
serves as general counsel to Pioneer Federal Savings Bank. Payments to that law
firm have not exceeded 5% of the registrant's consolidated gross revenues for
its last full fiscal year or any earlier year end. The dollar amount of fees
paid to the law firm for legal services provided in Pioneer Federal's last
fiscal year was $103,969. Of this sum, $102,939 represented fees earned in
connection with title examinations for real estate loans, while the balance
represented fees in foreclosure actions and fees for quarterly and annual
reports. Director Prewitt's compensation from Pioneer Federal plus her share in
the gross fees paid to the law firm has never exceeded $60,000 in any fiscal
year.
(c) Indebtedness of management. Reference is made to "Transactions
Involving Directors and Officers" on page 13 of the Proxy Statement for
information with respect to loans made to executive officers and directors.
(d) Transactions with promoters. Not applicable.
PART IV
ITEM 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K
(a)(1) and (2) The following is a list of financial statements filed as a
part of this annual report and incorporated herein by reference, which financial
statements are contained in the Annual Report to Shareholders filed herewith as
Exhibit 13, and the pages on which those financial statements may be found.
Reports of Independent Certified Public Accountants
Exhibit 13, page 21
Exhibit 28(a)
Consolidated Statements of Financial Condition at September 30, 1996 and 1995
Exhibit 13, page 22
38
<PAGE>
Consolidated Statements of Income for the years ended September 30, 1996, 1995
and 1994
Exhibit 13, page 23
Consolidated Statements of Stockholders' Equity for the years ended September
30,1996, 1995 and 1994
Exhibit 13, page 24
Consolidated Statements of Cash Flows for the years ended September 30, 1996,
1995 and 1994
Exhibit 13, pages 25 and 26
Notes to Consolidated Financial Statements
Exhibit 13, pages 27 through 47
(a)(3) The following exhibits are filed as a part of this report:
Exhibit (13) Annual Report to Stockholders
Exhibit (28)(a) Manually signed Report of Miller, Mayer, Sullivan &
Stevens LLP, and York, Neel & Company, LLP, joint
venturers
Exhibit (28)(b) Proxy Statement for Annual Meeting to be held January
8, 1997
(b) No Form 8-K was filed in the fourth quarter of Fiscal 1996.
(c) See (a)(3) above for all exhibits filed.
(d) Separate financial statements are not applicable.
39
<PAGE>
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.
<TABLE>
<CAPTION>
PIONEER FINANCIAL CORPORATION,
WINCHESTER, KENTUCKY
<S> <C>
Date: December 17, 1996 BY___________________________
Janet W. Prewitt, Director and
Chairman of the Board
Date: December 17, 1996 BY___________________________
Carl C. Norton, Director and
President
Date: December 17, 1996 BY___________________________
Nancy M. Lawwill, Director,
and Vice-President
Date: December 17, 1996 BY__________________________
Anthony D. Parrish, Treasurer
(Principal Financial Officer)
</TABLE>
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.
<TABLE>
<CAPTION>
<S> <C>
Date: December 17, 1996 BY_________________________
George Billings, Jr., Director
Date: December 17, 1996 BY__________________________
William Cress, Director
Date: December 17, 1996 BY__________________________
Ewart W. Johnson, Director
Date: December 17, 1996 BY___________________________
Nora M. Linville, Director
</TABLE>
40
<PAGE>
<TABLE>
<S> <C>
Date: December 17, 1996 BY__________________________
Wayne M. Martin, Director
Date: December 17, 1996 BY___________________________
Thomas D. Muncie, Director
Date: December 17, 1996 BY__________________________
Andrew J. Ryan, Director
Date: December 17, 1996 BY___________________________
Robert G. Strode, Director
</TABLE>
41
<PAGE>
Index to Exhibits
Exhibit No. Description
Exhibit (13) Annual Report to Stockholders
Exhibit (28)(a) Manually signed Report of Miller, Mayer, Sullivan & Stevens
LLP, and York, Neel & Company, LLP, joint venturers
Exhibit (28)(b) Proxy Statement for Annual Meeting to be held January 8, 1997
<PAGE>
PIONEER FINANCIAL CORPORATION
ANNUAL REPORT TO SHAREHOLDERS
FISCAL YEAR ENDING
SEPTEMBER 30, 1996
<PAGE>
PIONEER FINANCIAL CORPORATION
ANNUAL REPORT TO SHAREHOLDERS
FISCAL YEAR ENDED SEPTEMBER 30, 1996
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Corporate Profile ......................................... 1
Consolidated Financial Highlights ......................... 2
Letter to Shareholders ................................... 3
Selected Consolidated Financial and Other Data ............ 4
Management's Discussion and Analysis of Financial
Condition and Results of Operations ................. 6
Financial Statements ...................................... 21
Letter from Auditors ................................. 21
Consolidated Balance Sheets .......................... 22
Consolidated Statement of Income ..................... 23
Consolidated Statement of Stockholders' Equity ....... 24
Consolidated Statement of Cash Flows ................. 25
Notes to Consolidated Financial Statements ........... 27
Corporate Information ..................................... 48
Form 10-K ................................................. 49
</TABLE>
<PAGE>
PIONEER FINANCIAL CORPORATION
Corporate Profile
Pioneer Financial Corporation (herein "Corporation"), a Kentucky
corporation, was organized in 1994 as a thrift holding company. On December 20,
1994, the shareholders of Pioneer Federal Savings Bank approved an agreement and
plan of reorganization dated October 31, 1994, whereby the Savings Bank became a
wholly-owned subsidiary of Pioneer Financial Corporation. In accordance with
the Reorganization Plan, the shareholders of Pioneer Federal exchanged their
shares of common stock on a one-for-one basis for common shares in Pioneer
Financial Corporation. Pioneer Federal is the main asset of Pioneer Financial,
and the consolidated financial statements of the Corporation and of the Savings
Bank are included herein.
Pioneer Federal Savings Bank (herein "Savings Bank"), with assets of more
than $74 million at September 30, 1996, is the larger of the two thrift
institutions in Winchester, Kentucky. It currently ranks third in deposits
among the six financial institutions located in Winchester. In addition,
Pioneer has a branch office located in Stanton, Kentucky, where it is one of
only two financial institutions with full service offices (and the only thrift
institution) in that community.
The business of Pioneer Federal consists primarily of attracting deposits
from the general public and using such deposits, together with other borrowings
and funds, to make residential mortgage loans, commercial real estate loans
(primarily permanent loans), consumer loans (including automobile and personal
loans) and to invest in mortgage-backed securities and other investments.
Pioneer Federal Savings Bank has been in existence since 1885, when the
Commonwealth of Kentucky granted a charter to its predecessor, Winchester
Building & Savings Association. It became a federally-chartered association in
1978, under the name of Pioneer Federal Savings and Loan Association. In 1985,
the Association obtained a federal savings bank charter and changed its name to
Pioneer Federal Savings Bank. Pioneer Federal was issued a federal stock
savings bank charter on July 15, 1987, upon successful completion of its
conversion from mutual to a stock form.
Pioneer Financial Corporation is subject to regulation by the Securities
and Exchange Commission and the Office of Thrift Supervision. Pioneer Federal
Savings Bank is subject to regulation by the Office of Thrift Supervision and
the Federal Deposit Insurance Corporation, which administers the Savings
Association Insurance Fund, that insures Pioneer Federal's deposits. Pioneer
Federal owns stock in the Federal Home Loan Bank of Cincinnati and is a member
of the Federal Home Loan Bank system.
Pioneer Federal has a wholly-owned subsidiary, Pioneer Service Corporation,
which holds stock in Intrieve, Inc. Intrieve provides on line computer
processing and inquiry service to Pioneer Federal and other thrift institutions.
<PAGE>
The principal executive offices of the Corporation and of the Savings Bank
are located at 25 East Hickman Street, Winchester, Kentucky 40391, telephone
number (606) 744-3972.
Consolidated Financial Highlights
<TABLE>
<CAPTION>
September 30,
----------------------------
1996 1995
- -----------------------------------------------------------
<S> <C> <C>
For the Year
Net interest income ..... $ 2,797,403 $ 3,036,789
Net income .............. 706,982 1,077,503
At Year End
Total assets ............ $74,401,137 $78,835,918
Loans receivable, net ... 35,247,421 32,213,705
Savings deposits ........ 64,335,165 67,087,921
Stockholders' equity .... 8,244,635 10,539,778
Stockholders' equity
to total liabilities .. 12.5% 15.4%
- -----------------------------------------------------------
</TABLE>
Capital Stock
At the present time, there is no established market in which shares of the
Corporation's capital stock are regularly traded, nor are there any uniformly
quoted prices for such shares. However, Hilliard-Lyons in Lexington, Kentucky
is maintaining a "work-out market" in the stock, with the most recent price
being $41.50 per share.
During fiscal year 1996, the Corporation paid quarterly dividends of 33c
per share on December 15, 1995, and 35c per share on March 15, 1996, June 15,
1996 and September 15, 1996 to shareholders of record as of December 1, 1995,
March 1, 1996, June 1, 1996 and September 1, 1996, respectively.
As of November 13, 1996, Pioneer Financial Corporation had approximately
301 stockholders.
2
<PAGE>
[LETTERHEAD OF PIONEER FINANCIAL CORPORATION APPEARS HERE]
December 16, 1996
Dear Shareholder:
Pioneer Federal Savings Bank and its Holding Company, Pioneer Financial
Corporation, had another great year for the fiscal year which ended September
30, 1996. The financial statements contained in the enclosed materials show a
reduced net income which is the result of the special assessment to those
institutions insured by the SAIF portion of the FDIC. Without the special
assessment, Pioneer's net income for the fiscal year just ended would have been
$994,000.
Even though our net income was reduced by the special assessment, it was
good news for Pioneer and all other SAIF insured institutions. Our annual SAIF
premium before the special assessment was 23c per $1,000 of deposits. That was
much higher than the premium paid by well capitalized BIF insured institutions.
We, like the other extremely strong SAIF insured institutions (and there are
many like us) were paying the price of the savings and loan debacle of the
1980's. The special assessment has recapitalized the Savings Association
Insurance Fund (SAIF) and our assessment for the coming year will be 4c per
$1,000 of deposits. Therefore, we will make up the sums paid in this special
assessment fairly quickly.
Historically, bank stocks have sold at a higher premium to book value than
have thrift stocks. One of the main reasons for this has been the great
disparity between the insurance assessment for BIF institutions (most banks) and
SAIF institutions (most thrifts, like Pioneer). Even though the special
assessment was very painful to those of us who had done nothing to cause the
SAIF losses, the result will be good for all banking institutions. The
resolution of the BIF/SAIF premium disparity will be real good for Pioneer.
When I wrote you last year, I told you that we expected to do a "face lift"
for the Hickman Street office in 1996. Carl Norton, his fine staff and your
Board of Directors have worked hard to determine the best way to do the
renovation without crippling our ability to serve our customers. We do hope to
begin work very soon.
As always, we are very grateful for the support of our shareholders,
customers, and employees. We look forward to the challenges and opportunities
of the coming year.
Sincerely,
/s/ Janet W. Prewitt
-----------------------------
Janet W. Prewitt
Chairman, Board of Directors
3
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(in Thousands of Dollars)
<TABLE>
<CAPTION>
As of September 30,
-----------------------------------------------
1886 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total amount of:
Loans receivable, net.......... $35,247 $32,214 $29,384 $34,290 $35,149
Investments.................... 31,574 38,676 41,104 36,720 35,386
Cash........................... 733 790 633 462 626
Interest bearing deposits /1/.. 4,935 5,162 6,271 4,605 3,594
Assets......................... 74,401 78,836 79,648 78,432 77,578
Deposits....................... 64,335 67,088 68,686 68,198 67,989
Borrowings..................... 699 742 757 795 941
Stockholders' equity........... 8,245 10,540 9,806 9,087 8,074
OTHER DATA
Number of:
Loans outstanding.............. 2,409 2,418 2,344 2,412 2,402
Savings accounts............... 9,117 9,207 9,253 9,766 10,732
Full customer service
offices open.................. 3 3 3 3 3
</TABLE>
<TABLE>
<CAPTION>
Year ended September 30,
-----------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
OPERATIONS DATA
Total Amount of:
Interest income................ $ 5,659 $ 5,656 $ 5,210 $ 5,819 $ 6,032
Interest expense............... (2,862) (2,619) (2,293) (2,517) (3,229)
Provision for loan losses (57) (19) (5) (178) (218)
------- ------- ------- ------- -------
Net interest income
after provision for
loan losses.................. 2,740 3,018 2,913 3,123 2,585
Non-interest income............ 445 404 389 432 289
Non-interest expense........... 2,092 1,776 1,718 1,614 1,460
------- ------- ------- ------- -------
Net income before
income taxes and
cumulative effect of
change in accounting
principles................... 1,093 1,646 1,584 1,941 1,414
Income tax expense............. 386 568 534 670 514
Cumulative effect of
change in accounting
principle /2/................. (18)
------- ------- ------- ------- -------
Net Income..................... $ 707 $1,078 $ 1,032 $ 1,271 $ 900
======= ======= ======= ======= =======
</TABLE>
- --------------------
/1/ Includes Federal funds sold.
/2/ Reflects adoption of Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes".
4
<PAGE>
<TABLE>
<CAPTION>
KEY OPERATING RATIOS:
At or for the
Years Ended September 30,
--------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Performance Ratios:
- -------------------
Return on average
assets /1/ .................... 0.89% 1.36% 1.30% 1.61% 1.25%
Return on average
equity /1/ .................... 6.97% 10.52% 10.83% 14.78% 11.56%
Average equity to
average assets /1/ ............ 12.72% 12.91% 12.05% 10.91% 10.55%
Interest rate spread ........... 3.18% 3.51% 3.43% 3.96% 3.43%
Net interest margin ............ 3.63% 3.94% 3.78% 4.30% 3.88%
Dividend payout ................ 50.0% 32.7 % 30.3 % 20.3 % 22.7 %
Asset Quality Ratios:
- ---------------------
Nonperforming assets
to total assets at
end of year ................... 0.30% 0.24% 0.13% 0.26% 0.28%
Allowance for loan
losses to total
assets at end of year ......... 0.51% 0.45% 0.44% 0.51% 0.33%
Allowance for loan
losses to nonper-
forming loans at end
of year........................ 171.30% 183.33% 334.62% 193.20% 118.72%
Allowance for loan
losses to total
loans receivable,
net............................ 1.06% 1.05% 1.15% 1.17% 0.74%
Capital Ratios:
- ---------------
Equity to total assets
at end of year................. 11.08% 13.27% 12.31% 11.58% 10.41%
Average equity to
average assets /1/ ........... 12.72% 12.91% 12.05% 10.91% 10.55%
Ratio of average
interest earning
assets to average
interest bearing
liabilities /1/ ............... 112.01% 112.55% 1 111.74% 110.30% 110.30%
</TABLE>
- ----------------------
/1/Average balances are based upon month-end balances.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
In accordance with an agreement and plan of reorganization dated October
31, 1994 and approved by shareholders on December 20, 1994, Pioneer Federal
Savings Bank became a wholly-owned subsidiary of Pioneer Financial Corporation.
The principal assets of the corporation is the outstanding capital stock of the
Savings Bank, and the operations of the Corporation consist solely of the
operations of the Savings Bank. Therefore this discussion relates primarily to
the Savings Bank.
Historically, the Savings Bank has functioned as a financial intermediary,
attracting deposits from the general public and using such deposits to make
mortgage loans and, to a lesser extent, consumer loans, and to purchase
investment securities with a significant concentration in mortgage-backed
securities. As such, its earnings have depended primarily on its net interest
income, or "spread", which is the difference between the amount it receives from
interest earned on loans and investments ("interest-earning assets") and the
amount it pays in interest on its deposits ("interest-bearing liabilities").
Results of operations are also dependent upon the level of the Savings Bank's
non-interest income, including fee income and service charges and by the level
of its non-interest expenses, the most significant component of which is
salaries and employee benefits.
The operations of the Savings Bank are significantly affected by prevailing
economic conditions and the monetary, fiscal and regulatory policies of
government agencies. Lending activities are influenced by the demand for and
supply of housing, competition among lenders, the level of interest rates and
the availability of funds. Deposit flows and costs of funds are likewise
heavily influenced by prevailing market rates of interest on competing
investment alternatives, account maturities and the levels of personal income
and savings in the Savings Bank's market areas.
Historically, Pioneer Federal made long-term real estate loans with fixed
rates of interest. Beginning in 1980, Pioneer Federal diversified its loan
portfolio by offering adjustable rate loans and short-term fixed rate loans with
a balloon payment. Adjustable rate loans are those in which the interest rate
may change during the term of the loan. Adjustable rate loans and shorter term,
fixed-rate loans allow the average yield received by the Savings Bank on its
total loan portfolio to more closely reflect prevailing interest rates, so as to
keep pace with changes in interest rates paid on savings accounts.
6
<PAGE>
ASSET/LIABILITY MANAGEMENT
Net interest income, the primary component of the Savings Bank's net
earnings, is derived from the difference or "spread" between the yield on
interest-earning assets and the cost of the interest-bearing liabilities. The
Savings Bank has sought to reduce its exposure to changes in interest rates by
matching more closely the effective maturities or repricing characteristics of
its interest-earning assets and interest-bearing liabilities. The matching of
the Savings Bank's assets and liabilities may be analyzed by examining the
extent to which its assets and liabilities are interest rate sensitive and by
monitoring the expected effects of interest rate changes on an institution's net
interest income and net portfolio value.
An asset or liability is interest rate sensitive within a specific time
period if it will mature or reprice within that time period. If the Savings
Bank's assets mature or reprice more quickly or to a greater extent than its
liabilities, the Savings Bank's net portfolio value and net interest income
would tend to increase during periods of rising interest rates but decrease
during periods of falling interest rates. If the Savings Bank's assets mature
or reprice more slowly or to a lesser extent than its liabilities, the Savings
Bank's net portfolio value and net interest income would tend to decrease during
periods of rising interest rates but increase during periods of falling interest
rates. The Savings Bank's policy has been to mitigate the interest rate risk
inherent in the historical savings institution business of originating long-term
loans funded by short-term deposits by pursuing certain strategies designed to
decrease the vulnerability of its earnings to material and prolonged changes in
interest rates.
Management's principal strategy in managing the Savings Bank's interest
rate risk has been to maintain short and intermediate term assets in the
portfolio, including locally originated adjustable rate mortgage loans. The
Savings Bank does not actively offer long-term fixed rate loans. All fixed rate
loans that are offered and retained by the Savings Bank are secured by one to
four-family owner-occupied dwellings for terms of no more than 15 years.
Likewise, the interest rate charged on the Savings Bank's adjustable rate loans
typically reprice after one, three or five years with maximum periodic interest
rate adjustment limits ("caps"). At September 30, 1996, the Savings Bank had no
loans that reprice after five years from that date. In managing its portfolio
investment and mortgage-backed and related securities, the Savings Bank seeks to
purchase investment and mortgage-backed and related securities that mature on a
basis that approximates the estimated maturities of the Savings Bank's
liabilities.
7
<PAGE>
Management has attempted to lengthen the average maturity of its
liabilities by adopting a tiered pricing program for its certificates of
deposit. The Savings Bank offers higher rates of interest on its longer term
certificates in order to encourage depositors to invest in certificates with
longer maturities.
INTEREST RATE SENSITIVITY ANALYSIS
The Savings Bank's future financial performance depends to a large extent
on how successful it is in limiting the sensitivity of earnings and net asset
value to changes in interest rates. Such sensitivity may be analyzed by
examining the amount by which the market value of the Savings Bank's portfolio
equity changes given an immediate and sustained change in interest rates. Based
on the latest information available, it is estimated that the Savings Bank's
market value of portfolio equity at September 30, 1996 would decrease by
approximately $1.0 million or 7% given a 200 basis point immediate and sustained
increase in interest rates. It is estimated that the Savings Bank's market
value of portfolio equity at September 30, 1996 would decrease by approximately
$100,000 or 1% given a 200 basis point immediate and sustained decrease in
interest rates.
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
The Savings Bank's earnings depend primarily on its net interest income,
the difference between the income it receives on its loan portfolio and other
investments and its cost of money, consisting primarily of interest paid on
savings deposits. Net interest income is affected by (i) the difference between
rates of interest earned on its interest-earning assets and rates paid on its
interest-bearing liabilities (commonly known as "the spread"); and (ii) the
relative amounts of its interest-earning assets and interest-bearing
liabilities. When interest-earning assets approximate or exceed interest-
bearing liabilities, any positive spread will generate net interest income.
Thrift institutions have traditionally used interest rate spreads as a measure
of net interest income. Another indicator of an institution's net interest
income is its "net yield on interest-earning assets", which is net interest
income divided by average interest-earning assets.
The following table sets forth certain information relating to the Savings
Bank's average interest-earning assets and interest-bearing liabilities and
reflects the average yield on assets and average cost of liabilities for the
periods indicated. Such yields and costs are derived by dividing income or
expense by the average monthly balance of assets or liabilities, respectively,
for the periods presented. During the periods indicated, nonaccruing loans are
included in the net loan category. Average balances are derived from month-end
average balances. Management does not believe that the use of month-end
balances instead of average daily balances has caused any material difference in
the information presented.
8
<PAGE>
AVERAGE BALANCES AND YIELD/RATES
(In thousands of dollars)
<TABLE>
<CAPTION>
Year ended September 30,
--------------------------------------------------------------------------------------------------
1996 1995 1994
-------------------------------- ------------------------------- -------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance /1/ Interest Rate Balance /1/ Interest Average Balance /1/ Interest Rate
------------ -------- ------- ----------- -------- -------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Loans /2/....................... $33,358 $3,057 9.16% $31,622 $2,813 8.90% $31,089 $2,717 8.74
Investment Securities........... 5,352 384 7.17 7,872 474 6.02 4,076 238 5.84
Mortgage-Backed Securities...... 30,064 1,783 5.93 31,280 2,019 6.45 36,382 2,063 5.67
Other Investments............... 8,333 435 5.22 6,368 350 5.50 5,563 192 3.45
------------ -------- ------- ----------- -------- -------- ----------- -------- ---------
Total Interest Earning
Assets........................ 77,107 5,659 7.34 77,142 5,656 7.33 77,110 5,210 6.76
-------- -------- --------
Non Interest Earning Assets...... 2,704 2,275 1,979
------------ ----------- -----------
Total Assets.................. 79,811 79,417 79,089
============ =========== ===========
Interest Bearing Liabilities:
Savings Deposits................ 68,118 2,816 4.13 67,794 2,569 3.79 68,236 2,241 3.28
FHLB Advances................... 719 46 6.40 744 50 6.72 775 52 6.71
------------ -------- ------- ----------- -------- -------- ----------- -------- ---------
Total Interest Bearing
Liabilities................... 68,837 2,862 4.16 68,538 2,619 3.82 69,011 2,293 3.32
-------- -------- --------
Non Interest Bearing
Liabilities..................... 825 630 545
Stockholders' Equity............. 10,149 10,249 9,533
------------ ----------- -----------
Total Liabilities and
Stockholders' Equity........... $79,811 $79,417 $79,089
============ =========== ===========
Net Interest Income.............. $2,797 $3,037 $2,917
======== ======== ========
Interest Rate Spread /3/......... 3.18% 3.51% 3.44%
======== ========= ==========
Net Interest Margin /4/.......... 3.63% 3.94% 3.78%
======== ========= ==========
Ratio of Average Interest
Bearing Assets to Average
Interest Bearing Liabilities 112.01% 112.55% 111.74%
======= ======== =========
</TABLE>
- ---------------------------------
/1/ Average Balances are based on month-end balances.
/2/ Includes loans held for sale.
/3/ Represents the difference between the average yield on interest-earning
assets and the average cost of interest-bearing liabilities.
/4/ Represents net interest income as a percentage of the average balance of
interest-earning assets for the same period.
9
<PAGE>
Rate/Volume Analysis
The following table sets forth certain information regarding changes in
interest income and interest expense of the Savings Bank for the periods
indicated. For each category of interest-earning asset and interest-bearing
liability, information is provided on changes attributable to (1) changes in
volume (changes in volume multiplied by old rate); (2) changes in rate (change
in rate multiplied by old volume); (3) changes in rate-volume (changes in rate
multiplied by the change in volume).
<TABLE>
<CAPTION>
Year ended September 30,
---------------------------------------------------------------------------------------------------------
1995 vs. 1996 1994 vs. 1995 1993 vs. 1994
Increase/(Decrease) Increase/(Decrease) Increase/(Decrease)
Due to Due to Due to
---------------------------------- --------------------------------- ----------------------------------
Volume Rate R/V Total Volume Rate R/V Total Volume Rate R/V Total
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income:
Loan Portfolio......... 157.5 82.2 4.5 244.2 46.6 48.0 0.8 95.4 (308.0) (301.0) 28.1 (580.9)
Investments............ (151.7) 90.5 (29.0) (90.2) 235.2 0.5 0.4 236.1 164.3 (55.5) (55.2) 53.6
Mortgage Backed
Securities............ (78.4) (164.7) 6.3 (236.8) (289.3) 285.2 (40.0) (44.1) 107.0 (207.5) (10.2) (110.7)
Other Interest Income.. 109.1 (17.8) (5.5) 85.8 30.7 111.4 16.1 158.2 42.0 (10.9) (1.5) 29.6
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Interest-earning
Assets................ 36.5 (9.7) (23.7) (3.0) 23.2 445.1 (22.7) 445.6 5.3 (574.9) (38.8) (608.4)
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Interest Expense:
Savings Deposits....... 12.3 233.5 1.1 246.9 (14.5) 345.3 (2.2) 328.6 1.4 (220.0) (0.1) (218.7)
Borrowings and Federal
Home Loan Bank
Advances.............. (1.7) (2.4) .1 (4.0) (2.1) (0.2) 0.0 (2.3) (1.5) (4.8) 0.1 (6.2)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Interest-bearing
liabilities........... 10.6 231.1 1.2 242.9 (16.6) 345.1 (2.2) 326.3 (0.1) (224.8) 0.0 (224.9)
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Net change in net
interest income
(expense).............. 25.9 (240.9) (24.9) (239.9) 39.8 100.0 (20.5) 119.3 5.4 (350.1) (38.8) (383.5)
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
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
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1996 AND 1995
The Company's consolidated assets decreased $4.4 million, or 5.6% to $74.4
million, at September 30, 1996 compared to 78.8 million at September 30, 1995.
Securities available-for-sale increased $2.1 million, securities held-to-
maturity decreased $9.2 million, loans increased $3.0 million, cash and cash
equivalents plus certificates of deposit decreased $285,000, and other non-
interest earning assets decreased by $81,000.
Securities available-for-sale increased $2.1 million due to a $3.6 million
purchase of two mortgage-backed securities offset by $1.5 million in principal
repayments received on mortgage-backed securities and amortization of premiums.
Securities held-to-maturity decreased $9.2 million due to the call and maturity
of two U.S. Treasury instruments and three bonds totaling $14.6 million, the
redemption of $55,000 of FHLB stock, and principal repayments received on
mortgage backed securities and amortization of premiums totalling $5.0 million
offset by the purchase of $10.5 million in U.S. Government obligations and debt
securities of U.S. Government agencies. Securities classified as held-to-
maturity at September 30, 1996 reflected unrealized losses of $528,000.
Management considers these unrealized losses as temporary declines in the fair
value and does not consider any of the securities permanently impaired.
Liabilities of the Company decreased $2.1 million or 3.1% to $66.2 million
at September 30, 1996 compared to $68.3 million at September 30, 1995. The
decrease in liabilities was primarily due to the decrease in deposits of $2.7
million, reflecting the strong competition within the local market area and
expiration of the Savings Bank's term for rotated community deposits (Clark
County School Board).
Stockholders' equity decreased by $2.3 million to $8.2 million at September
30, 1996 compared to $10.5 million at September 30, 1995. The decrease was due
to the $2.7 million repurchase of 64,244 shares pursuant to an agreement
approved by the Board of Directors of the Company on October 17, 1995 and
payment of dividends totaling $354,000 offset by net income of $707,000 plus an
increase of $18,000 in the net unrealized appreciation of securities available-
for-sale.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND
1995
Net Income
Income before the cumulative effect of a change in accounting principle
decreased by $371,000 or 34.4% to $707,000 for the year ended September 30, 1996
as compared to $1,078,000 for the same period in 1995. The net decrease was due
to a decrease of $239,000 in net interest income, an increase of $39,000 in the
provision for loan losses and an increase of $316,000 in non-interest expense
offset by an increase of $41,000 in non-interest income and a decrease of
$182,000 in income tax expense.
11
<PAGE>
Interest Income
Interest income was $5.7 million for the years ended September 30, 1996 and
1995. For the year ended September 30, 1996, interest income was 7.34% of
average interest earning assets as compared to 7.33% for the year ended
September 30, 1995.
Interest Expense
Interest expense was $2.9 million, or 4.16% of average interest bearing
liabilities for the year ended September 30, 1996 as compared to $2.6 million,
or 3.82% of average interest bearing liabilities for the corresponding period in
1995. The increase in interest expense was primarily the result of an increase
of 34 basis points in the average rate paid on deposits and an increase of
approximately $300,000 in average interest bearing deposits in 1996 compared to
1995.
Provision for Loan Losses
The provision for loan losses was approximately $57,000 and $19,000 for the
years ended September 30, 1996 and 1995, respectively. Management considers many
factors in determining the necessary levels of the allowance for loan losses,
including an analysis of specific loans in the portfolio, estimated value of the
underlying collateral, assessment of general trends in the real estate market,
delinquency trends, prospective economic and regulatory conditions, inherent
loss in the loan portfolio and the relationship of the allowance for loan losses
to outstanding loans. At September 30, 1996, the allowance for loan losses
represented 1.06% of total loans compared to 1.05% at September 30, 1995.
Non-Interest Income
Non-interest income amounted to $445,000 and $404,000 for the years ended
September 30, 1996 and 1995, respectively. Non-interest income increased $41,000
in the 1996 period compared to the same period in 1995. The increase was due to
an additional net gain on the sale of securities and loans of $26,000 plus an
increase of $15,000 in service fees on loans and deposits for the year ended
September 30, 1996 as compared to the corresponding period in 1995.
Non-Interest Expense
Non-interest expenses increased $316,000 or 17.8% to $2.1 million for the
year ended September 30, 1996 compared to $1.8 million for the same period in
1995. Non-interest expense was 2.6% and 2.2% of average assets for the years
ended September 30, 1996 and 1995, respectively. The increase of $316,000 was
primarily due to an increase of $444,000 in federal insurance premiums offset by
$101,000 decrease in legal fees and a $30,000 decrease in other operating
expenses. The increase of $444,000
12
<PAGE>
in federal insurance premiums was primarily due to a special assessment of
$435,000 assessed by the FDIC to recapitalize the Savings Association Insurance
Fund (SAIF), pursuant to legislation signed by the President on September 30,
1996. The decrease of $101,000 in legal expenses was due to special services
provided during 1995 which was not a recurring expense, plus reimbursement of
$44,000 in legal fees pursuant to a legal settlement in fiscal year 1996. The
decrease of $30,000 in other operating expenses was primarily due to a $23,000
decrease in loan related expenses net of reimbursements.
Income Tax Expense
The provision for income tax expense amounted to approximately $386,000 and
$568,000 for the years ended September 30, 1996 and 1995, respectively. The
provision for income tax expense as a percentage of income before income tax
expense and cumulative effect of the change in accounting principle amounted to
35.3% and 34.5% for 1996 and 1995, respectively.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1995 AND
1994
Net Income
Income before the cumulative effect of a change in accounting principle
increased by $27,000 or 2.6% to $1,078,000 for the year ended September 30, 1995
as compared to $1,050,000 for the same period in 1995. The net increase was due
to an increase of $119,000 in net interest income, plus an increase of $14,000
in non-interest income offset by increases of $14,000 in the provision for loan
losses, $58,000 in non-interest expense and $34,000 in income tax expense. The
Company changed its method of accounting for federal income taxes in Fiscal Year
1994, which resulted in additional expense of $18,000, reducing net income to
$1,032,000 for 1994.
Interest Income
Interest income was $5.7 million, or 7.33% of average interest earning
assets for the year ended September 30, 1995 as compared to $5.2 million, or
6.76% of average interest earning assets for the year ended September 30, 1994.
The increase in interest income was primarily the result of an increase of 57
basis points in the average rate earned on interest earning assets.
Interest Expense
Interest expense was $2.6 million, or 3.82% of average interest bearing
liabilities for the year ended September 30, 1995 as compared to $2.3 million,
or 3.32% of average interest bearing liabilities for the corresponding period in
1994. The increase in interest expense was primarily the result of an increase
of 50 basis points in the average rate paid on deposits
13
<PAGE>
partially offset by the decrease of approximately $473,000 in average interest
bearing deposits in 1995 compared to 1994.
Provision for Loan Losses
The provision for loan losses was $19,000 and $5,000 for the years ended
September 30, 1995 and 1994, respectively. Management considers many factors in
determining the necessary levels of the allowance for loan losses, including an
analysis of specific loans in the portfolio, estimated value of the underlying
collateral, assessment of general trends in the real estate market, delinquency
trends, prospective economic and regulatory conditions, inherent loss in the
loan portfolio and the relationship of the allowance for loan losses to
outstanding loans. At September 30, 1995, the allowance for loan losses
represented 1.05% of total loans compared to 1.15% at September 30, 1994.
Non-Interest Income
Non-interest income amounted to $404,000 and $388,000 for the years ended
September 30, 1995 and 1994, respectively. Non-interest income increased $14,000
in fiscal year 1995 compared to the same period in 1994. The increase was due to
an increase of $49,000 in service fees on loans and deposits offset by a
decrease of $35,000 in the net gain on the sale of securities and loans for the
year ended September 30, 1995 as compared to the corresponding period in 1994.
Non-Interest Expense
Non-interest expenses increased $58,000 or 3.4% to $1.8 million for the
year ended September 30, 1995 compared to $1.7 million for the same period in
1994. Non-interest expense was 2.2% of average assets for both years ended
September 30, 1995 and 1994. The increase of $58,000 was primarily due to an
increase of $61,000 in compensation and benefits and an increase of $50,000 in
other operating expenses offset by a $40,000 decrease in legal expenses and a
$13,000 decrease in various other non-interest expense accounts. Compensation
and benefits increased $61,000 due to normal salary increases and a bonus paid
in 1995 that was not paid in 1994. The decrease of $40,000 in legal expenses was
due to special services provided in 1994 which was not a recurring expense. The
increase of $50,000 in other operating expense was caused primarily by an
increase of $22,000 related to loan expenses, an increase of $12,000 in
expenditures related to the new holding company and a net increase of $16,000 in
various other expenditures.
Income Tax Expense
The provision for income tax expense amounted to approximately $568,000 and
$534,000 for the years ended September 30, 1995 and 1994, respectively. The
provision for income tax expense as a percentage of income before income tax
expense and
14
<PAGE>
cumulative effect of the change in accounting principle amounted to 34.5% and
33.7% for 1995 and 1994, respectively.
MORTGAGE BANKING ACTIVITY
Net loans increased from $32.0 million at September 30, 1995 to $35.2
million at September 30, 1996, an increase of 10.1%. The Savings Bank's
portfolio of loans owned by others but serviced by the Savings Bank increased
.4% from $50.1 million at September 30, 1995 to $50.3 million at September 30,
1996. The Savings Bank originated all of the loans which it services.
LIQUIDITY AND COMMITTED RESOURCES
The Corporation's primary source of liquidity is dividends paid by the
Savings Bank. The Savings Bank is subject to certain regulatory limitations with
respect to the payment of dividends to the Corporation.
The Savings Bank's primary sources of funds are deposits and proceeds from
principal and interest payments on loans and mortgage-backed securities.
Additional sources of liquidity are advances from the FHLB of Cincinnati and
other borrowings. At September 30, 1996, the Savings Bank had outstanding
advances from the FHLB of Cincinnati totalling $698,798.
OTS regulations require that the Savings Bank maintain specified levels of
liquidity. Liquidity is measured as a ratio of cash and certain investments to
withdrawable savings. The minimum level of liquidity required by the regulations
is presently 5.0%. As of September 30, 1996, the Savings Bank's liquidity ratio
under applicable federal regulations was 24.8% as compared to 26.7% at September
30, 1995. At September 30, 1996, the Savings Bank had $25.7 million in
certificates of deposit maturing within one year, and $11.7 million maturing
between one and three years. Management believes, based on past experience, that
the Savings Bank will retain much of the deposits or replace them with new
deposits.
As of September 30, 1996, the Savings Bank had $2.3 million in loans
approved but not closed; none of these were evidenced by written commitments.
The Savings Bank anticipated selling $1.2 million of the loans approved but not
closed. As of September 30, 1996, Pioneer Federal had four formal commitments to
sell loans, totalling $138,000.
The Savings Bank is required to maintain specified amounts of capital
pursuant to federal law and regulations promulgated by OTS. The capital
standards generally require the maintenance of regulatory capital sufficient to
meet a tangible capital requirement, a core capital requirement and a risk-based
capital requirement. At September 30, 1996, the Savings Bank's tangible and core
capital totalled $8.1 million. This amount exceeded the tangible capital
requirement of $1.1 million by $7.0 million, and the core capital requirement of
$2.2 million by $5.9 million on
15
<PAGE>
that date. At September 30, 1996, the Savings Bank's risk-based capital
totalled $8.5 million, which exceeded its risk-based capital requirement of $2.5
million by $6.0 million.
Impact of Inflation and Changing Prices
The consolidated financial statements of the Company and notes thereto,
presented elsewhere herein, have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
due to inflation. The impact of inflation is reflected in the increased cost of
the Company's operations. Unlike most industrial companies, nearly all the
assets and liabilities of the Company are monetary. As a result, interest rates
have a greater impact on the Company's performance than do the effects of
general level of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the price of goods and services.
Impact of Recent Accounting Pronouncements
Disclosures of Fair Value of Financial Instruments. In December, 1991, the
---------------------------------------------------
Financial Accounting Standards Board (the "FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 107, "Disclosures about Fair Value of
Financial Instruments." SFAS No. 107 requires the Company to disclose the fair
value of its financial instruments, which will include the majority of its
balance sheet accounts in addition to selected off-balance sheet items. SFAS
No. 107 became effective for the Company in fiscal 1996 because the Company has
less than $150 million in total assets. Earlier adoption was required for
entities with assets in excess of $150 million. SFAS No. 107 focuses only on
disclosure of fair values in the financial statements and,therefore, has no
effect on consolidated financial position and results of operations.
Accounting for Impaired Loans. In September, 1993, the FASB issued SFAS
------------------------------
No. 114, "Accounting by Creditors for Impairment of a Loan." SFAS No. 114
specifies that allowances for loan losses on impaired loans should be determined
using the present value of estimated future cash flows of the loan, discounted
at the loans' effective interest rate. A loan is impaired when it is probable
that all principal and interest amounts will not be collected according to the
loan contract. SFAS No. 114 is effective for fiscal years beginning after
December 15, 1994, which for the Company is the 1996 fiscal year. Management
adopted SFAS No. 114 on October 1, 1995, without material impact on consolidated
financial position or results of operations. In October, 1994, the FASB amended
certain of the revenue recognition provisions of SFAS No. 114 by the issuance of
SFAS No. 118. Such revisions similarly had no material effect on the
consolidated financial condition or results of operations of the Company.
16
<PAGE>
Derivative Financial Instruments. In October, 1994, the FASB issued SFAS
---------------------------------
No. 119, "Disclosure About Derivative Financial Instruments and Fair Value of
Financial Instruments." SFAS No. 119 requires financial statement disclosure of
certain derivative financial instruments, defined as futures, forwards, swaps,
option contracts, or other financial instruments with similar characteristics.
In the opinion of management, the disclosure requirements of SFAS No. 119 will
not have a material effect on the Company's consolidated financial condition or
results of operations, as the Company does not invest in derivative financial
instruments, as defined in SFAS No. 119. As a result, the applicability of SFAS
No. 119 relates solely to disclosure requirements pertaining to fixed-rate and
adjustable-rate loan commitments.
Accounting for ESOP. The Accounting Standards Executive Committee of the
--------------------
American Institute of Certified Public Accountants ("AcSEC") has issued
Statement of Position ("SOP 93-6") on "Employers' Accounting for Employee Stock
Ownership Plans" ("ESOP"). SOP 93-6, among other things, changes the measure of
compensation expense recorded by employers from the cost of ESOP shares to the
fair value of ESOP shares. To the extent that fair value of the Company's ESOP
shares differs from the costs of such shares, compensation expense must be
recorded in the Company's financial statements for the fair value of ESOP shares
allocated to participants for a reporting period. SOP 93-6 was adopted by the
Company during fiscal 1995, without material financial statement effect.
Accounting for Mortgage Servicing. In May, 1995, the FASB issued SFAS No.
----------------------------------
122, "Accounting for Mortgage Servicing Rights." SFAS No. 122 requires that the
Company recognizes as separate assets rights to service mortgage loans for
others, regardless of how those servicing rights were acquired. An institution
that acquires mortgage servicing rights through either the purchase or
origination of mortgage loans and sells those loans with servicing rights
retained would allocate some of the cost of the loans to the mortgage servicing
rights. SFAS No. 122 also requires that an enterprise allocate the cost of
purchasing or originating the mortgage loans between the mortgage servicing
rights and the loans when mortgage loans are securitized, if it is practicable
to estimate the fair value of mortgage servicing rights. Additionally, SFAS No.
122 requires that capitalized mortgage servicing rights and capitalized excess
servicing receivables be assessed for impairment. Impairment would be measured
based on fair value. SFAS No. 122 is to be applied prospectively in the
Company's fiscal year beginning October 1, 1996, to transactions in which an
entity acquires mortgage servicing rights and to impairment evaluations of all
capitalized mortgage servicing rights and capitalized excess servicing
receivables whenever acquired. Retroactive application is prohibited.
Management adopted SFAS No. 122 on October 1, 1996, as required, without
material effect on the Company's consolidated financial position or results of
operations.
17
<PAGE>
Accounting for Stock-Based Compensation. In October, 1994, the FASB issued
----------------------------------------
SFAS No. 123 entitled "Accounting for Stock-Based Compensation." SFAS no. 123
establishes a fair value based method of accounting for stock-based compensation
paid to employees. SFAS No. 123 recognizes the fair value of an award of stock
or stock options on the grant date and is effective for transactions occurring
after December, 1995. Companies are allowed to continue to measure compensation
cost for those plans using the intrinsic value based method of accounting, which
generally does not result in compensation expense recognition for most plans.
Companies that elect to remain with the existing accounting are required to
disclose in a footnote to the financial statements pro forma net earnings and,
if presented, earnings per share, as if SFAS No. 123 had been adopted. The
Company does not currently have any outstanding stock options and therefore
adoption of SFAS No. 123 will not have a material effect on the Company's
consolidated financial condition or results of operations.
Accounting for Transfers of Financial Assets. In June, 1996, the FASB
---------------------------------------------
issued SFAS No. 125, "Accounting for Transfers of Financial Assets, Servicing
Rights, and Extinguishment of Liabilities," that provides accounting guidance on
transfers of financial assets, servicing of financial assets, and extinguishment
of liabilities. SFAS No. 125 introduces an approach to accounting for transfers
of financial assets that provides a means of dealing with more complex
transactions in which the seller disposes of only a partial interest in the
assets, retains rights or obligations, makes use of special purpose entities in
the transaction, or otherwise has continuing involvement with the transferred
assets. The new accounting method, the financial components approach, provides
that the carrying amount of the financial assets transferred be allocated to
components of the transaction based on their relative fair values. SFAS No. 125
provides criteria for determining whether control of assets has been
relinquished and whether a sale has occurred. If the transfer does not quality
as a sale, it is accounted for as a secured borrowing. Transactions subject to
the provisions of SFAS No. 125 include, among others, transfers involving
repurchase agreements, securitizations of financial assets, loan participations,
factoring arrangements, and transfers of receivables with recourse.
An entity that undertakes an obligation to service financial assets
recognizes either a servicing asset or liability for the servicing contract
(unless related to a securitization of assets, and all the securitized assets
are retained and classified as held-to-maturity). A servicing asset or liability
that is purchased or assumed is initially recognized at its fair value.
Servicing assets and liabilities are amortized in proportion to and over the
period of estimated net servicing income or net servicing loss and are subject
to subsequent assessments for impairment based on fair value.
18
<PAGE>
SFAS No. 125 provides that a liability is removed from the balance sheet
only if the debtor either pays the creditor and is relieved of its obligation
for the liability or is legally released from being the primary obligor.
SFAS No. 125 is effective for transfer and servicing of financial assets
and extinguishment of liabilities occurring after December 31, 1996, and is to
be applied prospectively. Earlier or retroactive application is not permitted.
Management does not believe that adoption of SFAS No. 125 will have a material
adverse effect on the Company's consolidated financial position or results of
operations.
Other Developments - BIF-SAIF Premium Disparity; Deposit Insurance Assessment;
Bad Debt Reserve Recapture
The Bank's savings deposits are insured by the Savings Associations
Insurance Fund ("SAIF"), which is administered by the Federal Deposit Insurance
Corporation ("FDIC"). The assessment rate currently ranges from 0.23% of
deposits for well capitalized institutions to 0.31% of deposits for
undercapitalized institutions.
The FDIC also administers the Bank Insurance Fund ("BIF"), which has the
same designated reserve ratio as the SAIF. On August 8, 1995, the FDIC adopted
an amendment to the BIF risk-based assessment schedule which lowered the deposit
insurance assessment rate for most commercial banks and other depository
institutions with deposits insured by the BIF to a range of 0.31% of insured
deposits for undercapitalized BIF-insured institutions to 0.04% of deposits for
well-capitalized institutions, which constitute over 90% of BIF-insured
institutions. The FDIC amendment became effective September 30, 1995. On
November 14, 1995, the BIF assessment rate schedule was further revised to a
statutory minimum of $2,000 annually for well capitalized institutions to 0.27%
for deposits for undercapitalized institutions. These revisions to the BIF
assessment rate schedule created a substantial disparity in the deposit
insurance premiums paid by BIF and SAIF members and placed SAIF-insured savings
institutions such as the Bank at a significant competitive disadvantage to BIF-
insured institutions.
On September 30, 1996, the President signed legislation which among other
things, recapitalized the Savings Associations Insurance Fund through a special
assessment on most savings financial institutions, such as the Savings Bank. The
special assessment amounted to 65.7 basis points applied to the Savings Bank's
insured deposits as of March 31, 1995, and amounted to $435,000. The expense was
recognized in the consolidated financial statements for the year ended September
30, 1996 and the after tax impact was to reduce net income by $287,000 or $1.12
per share of common stock. As a result of this special assessment, the insurance
assessment rate on the Bank's deposits will be reduced to the same rates
assessed banks insured by BIF beginning January 1, 1997.
19
<PAGE>
In addition, the legislation repealed the bad debt deduction under the
percentage of taxable income method of the Internal Revenue Code for savings
banks. Savings banks, like the Bank, which have previously used the percentage
of taxable income method in computing its bad debt deduction for tax purposes
will be required to recapture into taxable income post-1987 reserves over a six-
year period beginning with the 1996 taxable year (fiscal year 1997 for the
Bank). The start of such recapture may be delayed until the 1998 taxable year
if the dollar amount of the institutions's residential loan originations in each
year is not less than the average dollar amount of residential loans originated
in each of the nine most recent years disregarding the years with the highest
and lowest originations during such period. For purposes of this test,
residential loan originations would not include refinancing and home equity
loans. The impact of this legislation will not have a material impact on the
financial statements of the Company.
DIVIDENDS ON AND PRICE RANGE OF COMMON STOCK
During fiscal year 1996, the Corporation declared dividends in the
following amounts:
December 15, 1995 33c per share
March 15, 1996 35c per share
June 15, 1996 35c per share
September 15, 1996 35c per share
Under OTS regulations, the Savings Bank may not pay cash dividends on its
Common Stock if, as a result thereof, its regulatory capital would be reduced
below its regulatory requirement. The Savings Bank exceeded all of the minimum
regulatory capital requirements during the entire fiscal year.
The Savings Bank's stock sold for $41.50 per share at the beginning of the
fiscal year; the Corporation's stock sold for up to $40.00 per share at mid-
year, and the last sale during the fiscal year was at $41.50 per share.
CERTIFYING ACCOUNTANT
Miller, Mayer, Sullivan & Stevens LLP, and York, Neel & Company, LLP, joint
venturers, have been appointed as the Corporation's independent auditor for the
fiscal year ending September 30, 1996 pursuant to the recommendation of the
Audit Committee of the Board of Directors. A representative of Miller, Mayer,
Sullivan & Stevens LLP is expected to be present at the annual meeting with an
opportunity to make a statement if he desires to do so and to answer appropriate
questions with respect to that firm's examination of the Corporation's financial
statements and records for the fiscal year ended September 30, 1996.
20
<PAGE>
[LETTERHEAD OF YORK, NEEL & COMPANY APPEARS HERE]
MILLER, MAYER, SULLIVAN & STEVENS LLP
CERTIFIED PUBLIC ACCOUNTANTS
"INNOVATORS OF SOLUTION TECHNOLOGY"
INDEPENDENT AUDITORS' REPORT
Board of Directors
Pioneer Financial Corporation
Winchester, Kentucky
We have audited the accompanying consolidated balance sheets of Pioneer
Financial Corporation and Subsidiary as of September 30, 1996 and 1995 and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the years in the three year period ended September 30, 1996. These
consolidated financial statements are the responsibility of the management of
Pioneer Financial Corporation (Company). Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pioneer Financial
Corporation and Subsidiary as of September 30, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three year
period ended September 30, 1996 in conformity with generally accepted accounting
principles.
/s/ Miller, Mayer, Sullivan & Stevens /s/ York, Neel & Company, LLP
Lexington, Kentucky Owensboro, Kentucky
November 11, 1996 November 11, 1996
<PAGE>
<TABLE>
<CAPTION>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995
---------------------------
ASSETS 1996 1995
------------ -----------
<S> <C> <C>
Cash and due from banks $ 732,573 $ 790,037
Interest bearing deposits 1,529,881 4,874,490
Federal funds sold 3,211,000
Certificates of deposit 194,000 288,000
Securities available-for-sale, at fair value 7,601,611 5,468,682
Securities held-to-maturity, fair value of $23,520,598
and $32,898,797 for 1996 and 1995, respectively 23,972,497 33,207,364
Loans receivable, net 35,247,421 32,026,342
Loans held for sale 187,363
Accrued interest receivable 535,269 675,154
Premises and equipment, net 1,175,987 1,177,412
Prepaid federal income taxes 119,357
Other assets 81,541 141,074
----------- -----------
Total assets $74,401,137 $78,835,918
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $64,335,165 $67,087,921
Advances from Federal Home Loan Bank 698,798 742,430
Advance payments by borrowers for taxes and insurance 26,788 23,396
Deferred federal income taxes 138,040 120,420
Federal income taxes payable 7,614
Other liabilities 957,711 314,359
----------- -----------
Total liabilities 66,156,502 68,296,140
----------- -----------
Stockholders' equity
Common stock, $1 par value, 500,000 shares authorized; 208,233 and 208,233 272,477
272,477 shares, issued and outstanding for 1996 and 1995, respectively
Additional paid-in capital 1,797,432 2,351,858
Retained earnings, substantially restricted 6,213,169 7,907,176
Net unrealized appreciation on securities available-for-sale,
net of deferred income taxes 25,801 8,267
----------- -----------
Total stockholders' equity 8,244,635 10,539,778
----------- -----------
Total liabilities and stockholders' equity $74,401,137 $78,835,918
=========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
22
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995, AND 1994
----------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
INTEREST INCOME:
Interest on loans $3,057,393 $2,812,782 $2,717,427
Interest and dividends on securities 2,167,280 2,493,348 2,300,702
Other interest income 434,493 349,560 192,087
---------- ---------- ----------
Total interest income 5,659,166 5,655,690 5,210,216
---------- ---------- ----------
INTEREST EXPENSE:
Interest on deposits 2,815,403 2,569,375 2,240,756
Interest on borrowings 46,360 49,526 51,781
---------- ---------- ----------
Total interest expense 2,861,763 2,618,901 2,292,537
---------- ---------- ----------
Net interest income 2,797,403 3,036,789 2,917,679
Provision for loan losses 57,433 19,000 5,000
---------- ---------- ----------
Net interest income after provision for loan losses 2,739,970 3,017,789 2,912,679
---------- ---------- ----------
NON-INTEREST INCOME:
Loan and other service fees, net 409,519 394,470 344,683
Gain on matured security 33,310
Gain (loss) on sale of securities 1,822 (6,083)
Gain on sale of loans 2,698 7,546 50,533
---------- ---------- ----------
445,527 403,838 389,133
---------- ---------- ----------
NON-INTEREST EXPENSE:
Compensation and benefits 863,508 848,817 787,870
Occupancy expenses, net 190,194 203,789 204,357
Office supplies and expenses 110,441 103,926 106,578
Federal and other insurance premiums 616,705 172,036 177,736
Legal expenses 3,827 104,953 144,637
Data processing expenses 136,616 141,176 140,157
State franchise tax 64,790 64,409 69,496
Other operating expenses 106,117 136,875 87,003
---------- ---------- ----------
2,092,198 1,775,981 1,717,834
---------- ---------- ----------
Income before income tax expense and cumulative effect of
change in accounting principle 1,093,299 1,645,646 1,583,978
Income tax expense 386,317 568,143 533,755
---------- ---------- ----------
Income before cumulative effect of change in
accounting principle 706,982 1,077,503 1,050,223
Cumulative effect of change in accounting principle (17,881)
---------- ---------- ----------
Net income $ 706,982 $1,077,503 $1,032,342
========== ========== ==========
Earnings per share $2.76 $3.95 $3.79
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
23
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
NET UNREALIZED
APPRECIATION ON
ADDITIONAL SECURITIES TOTAL
COMMON PAID-IN RETAINED AVAILABLE-FOR- STOCKHOLDERS'
STOCK CAPITAL EARNINGS SALE EQUITY
-------- ---------- ----------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1993 $272,477 $2,351,858 $ 6,462,175 $ $ 9,086,510
Net Income 1,032,342 1,032,342
Declaration of dividend (313,349) (313,349)
-------- ---------- ----------- --------------- ---------------
Balance, September 30, 1994 272,477 2,351,858 7,181,168 9,805,503
Net Income 1,077,503 1,077,503
Declaration of dividend (351,495) (351,495)
Cumulative effect October 1, 1994 of
change in accounting for securities 64,189 64,189
Change in net unrealized gain on
securities available-for-sale, net of
deferred income taxes (55,922) (55,922)
-------- ---------- ----------- --------------- ---------------
Balance, September 30, 1995 272,477 2,351,858 7,907,176 8,267 10,539,778
Net Income 706,982 706,982
Declaration of dividend (353,533) (353,533)
Stock repurchase (64,244 shares) (64,244) (554,426) (2,047,456) (2,666,126)
Change in net unrealized gain on
securities available-for-sale, net of
deferred income taxes 17,534 17,534
-------- ---------- ----------- -------------- ---------------
Balance, September 30, 1996 $208,233 $1,797,432 $ 6,213,169 $ 25,801 $ 8,244,635
======== ========== =========== ============== ===============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
24
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995, AND 1994
------------------
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 706,982 $ 1,077,503 $ 1,032,342
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 57,433 19,000 5,000
Amortization of investment premium (discount) 168,615 108,179 359,511
Amortization of organizational cost 13,507 12,382
Provision for depreciation 53,365 79,900 77,132
Amortization of loan fees (92,303) (48,617) (64,067)
FHLB stock dividend (27,400) (36,900) (28,400)
Securities (gain)loss, net (33,310) (1,822) 6,083
Loans originated for sale (10,162,642) (7,457,985) (17,868,395)
Proceeds from loans held for sale 10,165,340 7,465,531 17,918,928
Gain on sale of loans (2,698) (7,546) (50,533)
Change in:
Prepaid expense 46,028 (57,523) (8,088)
Interest receivable 139,885 (58,475) 42,931
Interest payable 15,914 5,886 (15,741)
Accrued liabilities 627,438 55,866 29,843
Income taxes payable (118,385) 11,364 46,935
------------ ----------- ------------
Net cash provided by operating activities 1,557,769 1,166,743 1,483,481
------------ ----------- ------------
INVESTING ACTIVITIES
Net (increase) decrease in loans (2,998,846) (2,800,413) 5,012,344
Investment securities, matured 895,000
Purchase of investment securities (4,195,075)
Purchase of mortgage-backed securities (21,160,745)
Sale of mortgage-backed securities 8,217,951
Principal repayments, mortgage-backed securities 6,486,307 3,995,015 11,590,282
Purchase of premises and equipment (51,941) (18,494) (61,380)
Purchase of FHLB stock (68,400)
Redemption of FHLB stock 55,200 91,800
Proceeds from sale of securities available-for-sale 4,488,932
Purchase of securities available-for-sale (3,614,506) (5,679,519)
Purchase of securities held-to-maturity (10,484,665) (8,074,208)
Maturity of securities held-to-maturity 14,578,264 7,548,430
Maturity of certificates of deposit 94,000
------------ ----------- ------------
Net cash provided (used) by investing activities 4,063,813 (448,457) 229,977
------------ ----------- ------------
(Continued)
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995, AND 1994
----------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Net increase (decrease) in demand deposits,
NOW accounts and savings accounts (1,678,188) (4,229,812) 3,577,821
Net increase (decrease) in certificates of deposit (1,074,568) 2,632,198 (3,089,972)
Cash dividends (353,533) (351,495) (313,349)
Federal Home Loan Bank Advance, repayments (43,632) (14,606) (37,887)
Net increase (decrease) in custodial accounts 3,392 5,492 (13,247)
Stock repurchase (2,666,126)
----------- ----------- -----------
Net cash provided (used) by financing activities (5,812,655) (1,958,223) 123,366
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents (191,073) (1,239,937) 1,836,824
Cash and cash equivalents, beginning of year 5,664,527 6,904,464 5,067,640
----------- ----------- -----------
Cash and cash equivalents, end of year $ 5,473,454 $ 5,664,527 $ 6,904,464
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES
Cash payments for:
Interest on deposits $ 2,811,085 $ 2,563,490 $ 2,256,496
Income taxes $ 505,000 $ 627,000 $ 505,000
Mortgage loans originated to finance sale of
foreclosed real estate $ 46,500
Transfers from loans to real estate acquired
through foreclosures $ 78,414
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
26
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
On December 20, 1994, the stockholders of Pioneer Federal Savings Bank
(Bank) approved an agreement and Plan of Reorganization dated October 31,
1994, whereby the Bank through a reverse merger became a wholly owned
subsidiary of Pioneer Financial Corporation (Company), a unitary savings
and loan holding company. In accordance with the Reorganization Plan,
stockholders of the Bank exchanged their shares of common stock on a one
for one basis for common shares in the Company's common stock, which
represented 100% of the outstanding stock of the Company.
The Company is a corporation organized under the laws of Kentucky. The
Company is a savings and loan holding company whose activities are
primarily limited to holding the stock of the Bank. The Bank is a federally
chartered stock savings bank and a member of the Federal Home Loan Bank
System. As a member of this system, the Bank is required to maintain an
investment in capital stock of the Federal Home Loan Bank of Cincinnati
(FHLB) in an amount equal to at least the greater of 1% of its outstanding
loan and mortgage-backed securities or .3% of total assets as of December
31 of each year.
The Bank conducts a general banking business in central Kentucky which
primarily consists of attracting deposits from the general public and
applying those funds to the origination of loans for residential, consumer,
and nonresidential purposes. The Bank's profitability is significantly
dependent on net interest income which is the difference between interest
income generated from interest-earning assets (i.e. loans and investments)
and the interest expense paid on interest-bearing liabilities (i.e.
customer deposits and borrowed funds). Net interest income is affected by
the relative amount of interest-earning assets and interest-bearing
liabilities and the interest received or paid on these balances. The level
of interest rates paid or received by the Bank can be significantly
influenced by a number of environmental factors, such as governmental
monetary policy, that are outside of management's control.
The consolidated financial information presented herein has been prepared
in accordance with generally accepted accounting principles (GAAP) and
general accounting practices within the financial services industry. In
preparing consolidated financial statements in accordance with GAAP,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues
and expenses during the reporting period. Actual results could differ from
such estimates.
The following is a summary of the Company's significant accounting policies
which have been consistently applied in the preparation of the accompanying
consolidated financial statements.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of the Company and the Bank. All significant intercompany
accounts and transactions have been eliminated.
27
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------
LOAN ORIGINATION FEES. The Bank accounts for loan origination fees in
accordance with SFAS No. 91 "Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Cost of
Leases." Pursuant to the provisions of SFAS No. 91, origination fees
received from loans, net of direct origination costs, are deferred and
amortized to interest income using the level-yield method, giving effect to
actual loan prepayments. Additionally, SFAS No. 91 generally limits the
definition of loan origination costs to the direct costs attributable to
originating a loan, i.e., principally actual personnel costs. Fees received
for loan commitments that are expected to be drawn upon, based on the
Bank's experience with similar commitments, are deferred and amortized over
the life of the loan using the level-yield method. Fees for other loan
commitments are deferred and amortized over the loan commitment period on a
straight-line basis.
INVESTMENT SECURITIES. On October 1, 1994, the Bank adopted Statement of
Financial Accounting Standards(SFAS) No. 115 "Accounting for Certain
Investments in Debt and Equity Securities." SFAS No. 115 requires that all
investments in debt securities and all investments in equity securities
that have readily determinable fair values be classified into three
categories. Securities that management has positive intent and ability to
hold until maturity are classified as held-to-maturity. Securities that are
bought and held specifically for the purpose of selling them in the near
term are classified as trading securities. All other securities are
classified as available-for-sale. Securities classified as trading and
available-for-sale are carried at market value. Unrealized holding gains
and losses for trading securities are included in current income.
Unrealized holding gains and losses for available-for-sale securities are
reported as a net amount in a separate component of stockholders' equity
until realized. Investments classified as held-to-maturity will be carried
at amortized cost. The cumulative effect of this change was to increase
stockholders' equity by $97,256, net of deferred taxes of $33,067, as of
October 1, 1994.
Securities that management has the intent and ability to hold to maturity
are classified as held-to-maturity, and carried at cost, adjusted for
amortization of premium or accretion of discount over the term of the
security, using the level yield method. Included in this category of
investments is the FHLB stock which is a restricted stock carried at cost.
Securities available-for-sale are carried at market value. Adjustments
from amortized cost to market value are recorded in stockholders' equity
net of deferred income tax until realized. The identified security method
is used to determine gains or losses on sales of securities.
Prior to October 1, 1994, investment securities were carried at cost,
adjusted for amortization of premiums and accretion of discounts. The
investment securities were carried at cost, as it was management's intent
and the Bank had the ability to hold the securities until maturity.
Investment securities held for indefinite periods of time, or which
management utilized as part of its asset/liability management strategy, or
that would be sold in response to changes in interest rates, prepayment
risk, or the perceived need to increase regulatory capital were classified
as held-for-sale at the point of purchase and carried at the lower of cost
or market.
Regulations require the Bank to maintain an amount of cash and U.S.
government and other approved securities equal to a prescribed percentage
(5% at September 30, 1996 and 1995) of
(Continued)
28
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
deposit accounts (net of loans secured by deposits) plus short-term
borrowings. At September 30, 1996 and 1995, the Bank met these
requirements.
OFFICE PROPERTIES AND EQUIPMENT. Office properties and equipment are
stated at cost less accumulated depreciation. Depreciation is computed
using the straight line method and the double declining balance method over
the estimated useful lives of the related assets. The gain or loss on the
sales of property and equipment is recorded in the year of disposition.
REAL ESTATE OWNED. Real estate owned is generally comprised of property
acquired through foreclosure or deed in lieu of foreclosure. Foreclosed
real estate is recorded at the lower of cost or fair value, net of selling
expenses, which subsequently becomes the cost, at the date of foreclosure.
Expenses relating to holding property, including interest expense, are not
capitalized. These expenses are charged to operations as incurred. Gains
on the sale of real estate are recognized upon the ultimate disposal of the
property. Valuations are periodically performed by management, and an
allowance for losses is established by a charge to operations if the
carrying value of a property exceeds its net realizable value.
LOANS RECEIVABLE. Mortgage loans held for sale are valued at the lower of
cost or market, as calculated on an aggregate loan basis. All other loans
are stated at the principal amount outstanding. The Bank has adequate
liquidity and capital, and it is generally management's intention to hold
such assets to maturity.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on the Bank's past
loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to pay, estimated value
of any underlying collateral, and current economic conditions. While
management uses the best information available, future adjustments may be
necessary if conditions differ substantially from assumptions used in
management's evaluation. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the
allowance for loan losses and may require additions to the allowances based
on their judgment about information available to them at the time of their
examination.
Interest earned on loans receivable is recorded in the period earned.
Uncollectible interest on loans that are contractually past due is charged
off or an allowance is established based on management's periodic
evaluation. The allowance is established by a charge to interest income
equal to all interest previously accrued, and income is subsequently
recognized only to the extent cash payments are received until, in
management's judgment, the borrower's ability to make periodic interest and
principal payments is back to normal, in which case the loan is returned to
accrual status.
In June 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." This promulgation, which was amended by SFAS No. 118
as to certain income recognition and disclosure provisions, became
effective as to the Company in fiscal 1996. The new accounting standards
require that impaired loans be measured based upon the present value of
expected future
(Continued)
29
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
cash flows discounted at the loan's effective interest rate, or as an
alternative, at the loan's observable market price or fair value of the
collateral. The Bank's current procedures for evaluating impaired loans
result in carrying such loans at the lower of cost or fair value.
The Bank adopted SFAS No. 114, as subsequently amended, on October 1, 1995,
without material effect on consolidated financial condition or results of
operations.
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. In applying the provisions of SFAS No. 114, the Bank considers
its investment in one-to-four family residential loans and consumer
installment loans to be homogenous and therefore excluded from separate
identification for evaluation of impairment. With respect to the Bank's
investment in impaired multi-family and nonresidential loans, such loans
are collateral dependent, and as a result, are carried as a practical
expedient at the lower of cost or fair value.
Collateral dependent loans when put in non-accrual status are considered to
constitute more than a minimum delay in repayment and are evaluated for
impairment under SFAS No. 114 at that time.
DEPOSITS. The Bank's deposits are insured by the Savings Association
Insurance Fund ("SAIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC"). The Bank currently pays an assessment rate
of 23% on customer deposits under $100,000. On September 30, 1996, the
President signed legislation, which among other things, recapitalized the
Savings Association Insurance Fund through a special assessment on savings
financial institutions, such as the Bank. The special assessment amounted
to $435,000 for the Bank and is included in the Federal and other insurance
premium expense for the year ended September 30, 1996. As a result of the
recapitalization of the SAIF, the Bank's assessment rate for insurance on
deposits, beginning in 1997, is expected to be reduced to approximately 4%
on deposits under $100,000.
INCOME TAXES. The Company accounts for federal income taxes in accordance
with the provisions of SFAS No. 109, "Accounting for Income Taxes." SFAS
No. 109 established financial accounting and reporting standards for the
effects of income taxes that result from the Company's activities within
the current and previous years. Pursuant to the provisions of SFAS No. 109,
a deferred tax liability or deferred tax asset is computed by applying the
current statutory tax rates to net taxable or deductible differences
between the tax basis of an asset or liability and its reported amount in
the financial statements that will result in taxable or deductible amounts
in future periods. Deferred tax assets are recorded only to the extent that
the amount of net deductible temporary differences or carryforward
attributes may be utilized against current period earnings, carried back
against prior years earnings, offset against taxable temporary differences
reversing in future periods, or utilized to the extent of management's
estimate of future taxable income. A valuation allowance is provided for
deferred tax assets to the extent that the value of net deductible
temporary differences and carryforward attributes exceeds management's
estimates of taxes payable on future taxable income. Deferred tax
liabilities are provided on the total amount of net temporary differences
taxable in the future.
(Continued)
30
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
The Company files a consolidated federal income tax return with the Bank.
The current income tax expense or benefit is allocated to each Corporation
included in the consolidated tax return based on their tax expense or
benefit computed on a separate return basis.
EFFECT OF IMPLEMENTING NEW ACCOUNTING STANDARDS. In March 1995, the FASB
issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles and goodwill related to those assets to be held
and used, and for long-lived assets and certain identifiable intangible
assets to be dispose of. The Standard requires an impairment loss to be
recognized when the carrying amount of the asset exceeds the fair value of
the asset. Management does not anticipate the implementation of this
standard having a material adverse impact on the financial statements.
In May 1995, the FASB issued SFAS No. 122 "Accounting for Mortgage
Servicing Rights," which amended SFAS No. 65 "Accounting for Certain
Mortgage Banking Activities." SFAS No. 122 requires a mortgage banking
enterprise to recognize as separate assets rights to service mortgage loans
for others; however, these servicing rights are acquired. This statement
applies prospectively in fiscal years beginning after December 15, 1995.
The Company is not required to adopt the standard for the periods presented
in these financial statements, and as such, has not determined the impact
on the consolidated financial statements of adopting this standard.
CASH AND CASH EQUIVALENTS. For purposes of reporting consolidated cash
flows, the Bank considers cash, balances with banks, federal funds sold,
and interest bearing deposits in other financial institutions with original
maturities of three months or less to be cash equivalents. Cash and cash
equivalents includes approximately $4.5 million on deposit with other banks
which is not covered by FDIC insurance.
RECLASSIFICATION. Certain presentations of accounts previously reported
have been reclassified in these consolidated financial statements. Such
reclassifications had no effect on net income or retained income as
previously reported.
(Continued)
31
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
2. INVESTMENT SECURITIES
The cost and estimated fair value of securities held by the Bank as of
September 30, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
1996
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
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
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
1995
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
----------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
Securities, available-for-sale:
SBA Pools $ 3,263,731 $18,951 $ $ 3,282,682
Mortgage-Backed Securities 2,192,425 6,425 2,186,000
----------- ----------- ----------- -----------
$ 5,456,156 $18,951 $ 6,425 $ 5,468,682
=========== =========== =========== ===========
Securities, held-to-maturity:
Debt Securities:
U.S. Government and Federal Agencies $ 5,043,343 $44,570 $ $ 5,087,913
Municipal Bonds 316,901 900 317,801
----------- ----------- ----------- -----------
5,360,244 45,470 5,405,714
----------- ----------- ----------- -----------
Mortgage-Backed Securities 27,310,520 354,037 26,956,483
----------- ----------- ----------- -----------
Federal Home Loan Bank of Cincinnati,
capital stock - 5,366 shares 536,600 536,600
----------- ----------- ----------- -----------
$33,207,364 $45,470 $354,037 $32,898,797
=========== =========== =========== ===========
</TABLE>
(Continued)
32
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
The amortized cost and estimated market value of debt securities at September
30, 1996, by contractual maturity, are as follows:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
------------- -------------
<S> <C> <C>
Due in one year or less $ 100,000 $ 100,000
Due after one year through five years 1,099,258 1,091,591
Due after five years through ten years
Due after ten years 117,963 125,089
----------- -----------
$ 1,317,221 $ 1,316,680
=========== ===========
</TABLE>
Effective October 1, 1994, the Bank changed its policy in accounting for debt
and equity securities to conform with the requirements of SFAS No. 115
"Accounting for Certain Investments in Debt and Equity Securities." The
unrealized gain on securities available-for-sale of $39,093 net of deferred
income taxes of $13,292 has been recorded as a separate component of
stockholders' equity as of September 30, 1996.
For the year ended September 30, 1996, the Bank received $14,578,264 from the
maturity and call of U.S. Government instruments and debt securities backed
by U.S. Government agencies, all of which were classified as securities held-
to-maturity. The Bank recognized a gain of $33,310 on the call of a Federal
National Mortgage Association (FNMA) bond.
For the year ended September 30, 1995, the Bank received $548,050 from the
sale of equity securities and $3,940,882 from the sale of mortgage-backed
securities, all of which were classified as securities available-for-sale.
The Bank recognized a gain of $506,267 on the sale of the equity securities
and a $504,445 loss on the sale of the mortgage-backed securities. For the
year ended September 30, 1994, the Bank received $8,217,951 from the sale of
mortgage-backed securities recognizing a loss of $6,083.
The Bank has pledged mortgage-backed securities totaling $2,855,000 to secure
certain municipal deposits as of September 30, 1996.
(Continued)
33
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
3. LOANS RECEIVABLE
<TABLE>
<CAPTION>
Loans receivable, net at September 30, 1996 and 1995 consists of the following:
1996 1995
------------ -----------
<S> <C> <C>
Loans secured by first lien mortgages on real estate:
Residential, one-to-four family properties $21,252,055 $20,068,885
Multi-family and commercial properties 2,127,870 1,557,696
Agricultural loans 565,313 789,132
Construction loans 1,808,092 2,054,728
Other loans:
Commercial loans 4,796,056 3,925,614
Loans secured by deposits 1,048,311 973,157
Home equity loans 1,662,736 1,175,119
Other secured loans 2,710,992 2,686,983
Signature loans, unsecured 271,109 212,431
------------ -----------
36,242,534 33,443,745
Loans in process (403,128) (863,886)
Provisions for loan losses (382,469) (352,244)
Deferred loan origination fees (209,516) (201,273)
------------ -----------
Loans receivable, net $35,247,421 $32,026,342
============ ===========
</TABLE>
The Bank services loans sold to other associations or governmental agencies
of approximately $50,317,000, $50,138,000, and $48,468,000, as of September
30, 1996, 1995 and 1994, respectively.
The Bank provides an allowance to the extent considered necessary to provide
for losses that may be incurred upon the ultimate realization of loans. The
changes in the allowance for loss on loans is analyzed as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning or period $352,244 $347,618 $397,512
Additions charged to operations 57,433 19,000 5,000
Charge-offs (36,901) (18,433) (71,038)
Recoveries 9,693 4,059 16,144
-------- -------- --------
Balance at end of period $382,469 $352,244 $347,618
======== ======== ========
</TABLE>
At September 30, 1996, the Bank had identified impaired loans totaling
$18,000. The allowance for loan losses included $18,000 related to these
impaired loans. The average amount of impaired loans for the year ended
September 30, 1996 was $34,800. Interest income received and recognized on
impaired loans totaled $2,324 for the year ended September 30, 1996.
(Continued)
34
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
The following is a summary of non-performing loans (in thousands) for the
years ended September 30, 1996, 1995, and 1994, respectively:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Non-accrual loans $ 18 $ 41 $ 32
Loans past due 90 days or more 205 151 72
-------- -------- --------
Total non-performing loan balances $223 $192 $104
======== ======== ========
</TABLE>
If interest on non-accrual loans had been accrued, such income would have
been approximately $5,035, $2,391, and $7,072, for 1996, 1995, and 1994,
respectively.
Loans to executive officers and directors, including loans to affiliated
companies of which executive officers and directors are principal owners, and
loans to members of the immediate family of such persons at September 30,
1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1996 1995
--------- --------
<S> <C> <C>
Balance at beginning or period $ 132,127 $126,435
Additions during year 222,827 20,032
Repayments (151,378) (14,340)
--------- --------
Balance at end of period $ 203,576 $132,127
========= ========
</TABLE>
4. PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
Office premises and equipment at September 30, 1996 and 1995 includes the following:
USEFUL
DESCRIPTION LIFE 1996 1995
----------- ----------- ------------ ------------
<S> <C> <C> <C>
Land, buildings, and improvements 30-45 years $ 1,637,310 $ 1,599,420
Furniture, fixtures, and equipment 5-10 years 720,748 705,062
----------- ----------- ------------
Balance at end of period 2,358,058 2,304,482
Less accumulated depreciation (1,182,071) (1,127,070)
----------- -----------
$ 1,175,987 $ 1,177,412
=========== ===========
Depreciation expense for the years ended September 30, 1996, 1995 and 1994
amounted to $53,365, $79,900, and $77,132, respectively.
</TABLE>
(Continued)
35
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
5. DEPOSITS
Deposit accounts at September 30, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------
1996 1995
------------ -----------
<S> <C> <C>
Demand deposit accounts, non-interest bearing $ 2,463,426 $ 2,521,436
Passbook accounts with a weighted average rate of 2.94% and
3.00% at September 30, 1996 and 1995, respectively 9,757,570 9,939,079
NOW and MMDA deposits with a weighted average rate of 2.48%
and 2.43% at September 30, 1996 and 1995, respectively 13,424,027 14,862,696
------------ -----------
25,645,023 27,323,211
Certificate of deposits with a weighted average interest rate of
5.24% and 5.37% at September 30, 1996 and 1995, respectively 38,690,142 39,764,710
------------ -----------
Total Deposits $64,335,165 $67,087,921
============ ===========
Jumbo certificates of deposit (minimum denomination of $100,000) $ 6,064,944 $ 6,742,571
============ ===========
</TABLE>
<TABLE>
<CAPTION>
Certificates of deposit by maturity at September 30, 1996 and 1995 (in thousands) are as follows:
SEPTEMBER 30,
-------------------------
1996 1995
------------ -----------
<S> <C> <C>
Less than 1 year $ 25,659 $ 29,949
1-2 years 10,291 6,403
2-3 years 1,421 1,514
Maturing in years thereafter 1,319 1,899
------------ -----------
$ 38,690 $ 39,765
============ ===========
</TABLE>
<TABLE>
<CAPTION>
Certificates of deposit by maturity and interest rate category at September 30, 1996 (in thousands) are as follows:
AMOUNT DUE
--------------------------------------------------------------
LESS THAN AFTER 3
ONE YEAR 1-2 YEARS 2-3 YEARS YEARS TOTAL
--------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
2.01--4.00% $ 384 $ $ $ $ 384
4.01--6.00% 23,767 9,378 1,198 201 34,544
6.01--8.00% 1,508 913 223 1,118 3,762
--------- ---------- ----------- --------- ---------
$25,659 $10,291 $1,421 $1,319 $38,690
========= ========== =========== ========= =========
</TABLE>
(Continued)
36
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
<TABLE>
<CAPTION>
Interest expense on deposits for the periods indicated are as follows:
YEARS ENDED SEPTEMBER 30,
---------------------------------------
1996 1995 1994
----------- ---------- -----------
<S> <C> <C> <C>
Money market and NOW account $ 415,846 $ 395,111 $ 367,268
Savings Accounts 288,054 307,751 358,322
Certificates 2,111,503 1,866,513 1,515,166
----------- ---------- -----------
$2,815,403 $2,569,375 $2,240,756
=========== ========== ===========
</TABLE>
The Bank maintains arrangements for clearing NOW and MMDA accounts with the
Federal Home Loan Bank of Cincinnati. The Bank is required to maintain
adequate collected funds in its Demand Account to cover average daily
clearings. The Bank was in compliance with this requirement at September 30,
1996 and 1995.
6. ADVANCES FROM FEDERAL HOME LOAN BANK
The advances from the Federal Home Loan Bank consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
MATURITY DATE INTEREST RATE 1996 1995
------------- ------------- -------- --------
<S> <C> <C> <C>
1/1/2006 6.80% $186,460 $198,502
2/1/2007 6.35% 362,467 386,337
4/1/2007 7.50% 124,282 131,705
7/1/2025 5.50% 25,589 25,886
-------- --------
$698,798 $742,430
======== ========
</TABLE>
<TABLE>
<CAPTION>
The following summarizes the amounts due on FHLB advances by year for each of the
next five fiscal years and thereafter.
FISCAL YEAR AMOUNT
----------- --------
<S> <C>
1997 $ 46,629
1998 49,835
1999 53,261
2000 56,923
2001 60,839
Subsequent to 2001 431,311
--------
$698,798
========
</TABLE>
(Continued)
37
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
At September 30, 1996 and 1995, the Bank had a cash management advance line
of credit with the Federal Home Loan Bank of Cincinnati that allows the Bank
to borrow up to $4,000,000 for a maximum thirty day period at a fixed rate or
for a maximum of ninety days at a variable rate. No commitment fees are paid
under the agreement. There were no borrowings against this line of credit at
September 30, 1996.
These advances are collateralized by Federal Home Loan Bank stock and a
blanket agreement against certain real estate loans.
7. INCOME TAXES
Effective January 1, 1993, the Bank adopted SFAS No. 109 "Accounting for
Income Taxes" which requires an asset and liability approach to accounting
for income taxes. The cumulative effect of adopting SFAS No. 109 was to
decrease net income for the year ended September 30, 1994 by $17,881.
The provision for income taxes for the periods indicated consist of the
following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Federal income tax expense:
Current expense $377,730 $526,821 $488,740
Deferred expense 8,587 41,322 45,015
-------- -------- --------
$386,317 $568,143 $533,755
======== ======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
FHLB stock $ 3,598 $ (878) $ 9,656
Allowance for loan losses 12,153 44,860 36,626
Other, net (7,164) (2,660) (1,267)
-------- -------- --------
Net deferred tax expense $ 8,587 $41,322 $45,015
======== ======== ========
</TABLE>
(Continued)
38
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
For the periods indicated, total income tax expense differed from the amounts
computed by applying the U.S. Federal income tax rate of 34% to income before
income taxes as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Expected income tax expense at federal tax rate $371,722 $559,520 $538,552
Other, net 14,595 8,623 (4,797)
-------- -------- --------
Total income tax expense $386,317 $568,143 $533,755
======== ======== ========
Effective income tax rate 35.3% 34.5% 33.7%
======== ======== ========
Deferred tax assets and liabilities as of September 30, 1996 and 1995 consisted of the following:
1996 1995
-------- --------
Deferred tax assets:
Deferred loan fee income $ 71,235 $ 66,360
-------- --------
Deferred tax liabilities:
FHLB stock 86,886 83,288
Allowance for loan losses 106,089 93,937
Other, net 3,008 5,296
-------- --------
195,983 182,521
-------- --------
Net deferred taxes payable $124,748 $116,161
======== ========
</TABLE>
In addition to the net deferred tax liabilities outlined in the preceding
table, the financial statements include a deferred tax liability of $13,292
and $4,259 on the unrealized gain on securities available-for-sale as of
September 30, 1996 and 1995, respectively. These amounts have been charged
against the unrealized gain on securities available-for-sale with the net
amount of $25,801 and $8,267 recorded as a separate component of stockholders'
equity at September 30, 1996 and 1995, respectively.
The Internal Revenue Code allows savings institutions a special bad debt
deduction, subject to certain limitations, based on the greater of actual
experience or a percentage of taxable income method before such deduction.
The effective bad debt deduction under the percentage of taxable income method
is equal to approximately 8% of taxable income. In September of 1996,
legislation was passed by Congress, which repealed the bad debt deduction
under the percentage of taxable income method of the Internal Revenue Code for
savings banks. Savings banks, like the Bank, which have previously used the
percentage of taxable income method in computing its bad debt deduction for
tax purposes will be required to recapture into taxable income post 1987 tax
reserves over a six-year period, effective in fiscal year 1997 for the Bank.
The impact of this legislation will not have a material impact on the
financial statements of the Company.
(Continued)
39
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
8. STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL
REGULATORY CAPITAL. The Bank is subject to minimum regulatory capital
requirements promulgated by the Office of Thrift Supervision (OTS). Such
minimum capital standards generally require the maintenance of regulatory
capital sufficient to meet each of three tests, hereinafter described as the
tangible capital requirement, the core capital requirement and the risk-based
capital requirement. The tangible capital requirement provides for minimum
tangible capital (defined as stockholders' equity less all intangible assets)
equal to 1.5% of adjusted total assets. The core capital requirement provides
for minimum core capital (tangible capital plus certain forms of supervisory
goodwill and other qualifying intangible assets such as capitalized mortgage
servicing rights) equal to 3.0% of adjusted total assets. A recent OTS
proposal, if adopted in present form, would increase the core capital
requirement to a range of 4%-5% of adjusted total assets for substantially
all savings institutions. Management anticipates no material change to the
Bank's present excess regulatory capital position as a result of this change
in the regulatory capital requirement. The risk-based capital requirement
provides for the maintenance of core capital plus general loss allowances
equal to 8.0% of risk-weighted assets. In computing risk-weighted assets, the
Savings Bank multiplies the value of each asset on its statement of financial
condition by a defined risk-weighting factor, e.g., one-to-four family
residential loans carry a risk-weighted factor of 50%.
As of September 30, 1996, the Bank's regulatory capital exceeded all minimum
regulatory capital requirements as shown in the following table:
<TABLE>
<CAPTION>
REGULATORY CAPITAL
-------------------------------------------------------------
TANGIBLE CORE RISK-BASED
CAPITAL PERCENT CAPITAL PERCENT CAPITAL PERCENT
-------- ------- ------- ------- ---------- -------
(IN THOUSANDS)
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Capital under generally $8,169 % $8,169 % $8,169 %
accepted accounting principles
Adjusments:
Net unrealized appreciation
on securities available-for-
sale (26) (26) (26)
General valuation allowances 364
-------- ------- ----------
Regulatory capital computed 8,143 10.9 8,143 10.9 8,507 26.8
Minimum capital requirement 1,117 1.5 2,234 3.0 2,498 8.0
-------- ------- ------- ------- ---------- -------
Regulatory capital-excess $7,026 9.4% $5,909 7.9% $6,009 18.8%
======== ======= ======= ======= ========== =======
</TABLE>
RETAINED EARNINGS RESTRICTION. The Bank is allowed a special bad debt
deduction limited generally to eight percent (8%) of otherwise taxable income
and subject to certain limitations based on aggregate loans and savings
account balances at the end of the year. If the amount qualifying as
deductions under
(Continued)
40
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
the Internal Revenue Code are later used for purposes other than for bad debt
losses, they will be subject to Federal income tax at the then current
corporation rate. Retained earnings at September 30, 1996 includes
approximately $1,596,000, for which Federal income tax has not been provided
nor has been required to be provided (see Note 7).
LIQUIDATION ACCOUNT. Upon conversion to a capital stock savings bank,
eligible account holders who continued to maintain their deposit accounts in
the Bank were granted priority in the event of the future liquidation of the
Bank through the establishment of a special "Liquidation Account" in an
amount equal to the consolidated net worth of the Bank at September 30, 1986.
The Liquidation Account was $2,531,513 at September 30, 1986 and will be
reduced in proportion to reductions in the balance of eligible account
holders as determined on each subsequent fiscal year end. The existence of
the Liquidation Account will not restrict the use or application of net worth
except with respect to the cash payment of dividends.
DIVIDEND RESTRICTIONS: The payment of cash dividends by the Bank on its
Common Stock is limited by regulations of the OTS. Interest on savings
accounts will be paid prior to payments of dividends on common stock. The
Bank may not declare or pay a cash dividend to the Company in excess of 100%
of its net income to date during the current calendar year plus the amount
that would reduce by one-half the Bank's capital ratio at the beginning of
the year without prior OTS approval. Additional limitation on dividends
declared or paid, or repurchases of the Bank stock are tied to the Bank's
level of compliance with its regulatory capital requirements.
9. STOCK REPURCHASE
Pursuant to a Stock Purchase Agreement approved by the Board of Directors and
the Office of Thrift Supervision, the Company purchased 64,244 shares of the
Company's outstanding stock, of which 58,069 shares were owned by a group of
stockholders collectively known as the "EKH Group." The 64,244 shares of
common stock were purchased in July of 1996 at a total cost of $2,666,126.
10. RETIREMENT BENEFITS
PROFIT SHARING PLAN: On December 17, 1985, the Board of Directors of the
Bank adopted an employee pension benefit plan (referred to as a "401K Profit
Sharing Plan") as described under the Employees' Retirement Income Security
Act of 1974. The Plan became effective December 19, 1985. The Plan covers
all full time employees who have been employed six months prior to the
anniversary date of the Plan. Under the Plan, the Bank makes discretionary
contributions based on profits, in accordance with Section 401(k) of the
Internal Revenue Code. The Bank did not make any contributions to the Plan
for the year ended September 30, 1996 and 1995, and contributed $27,514 to
the Plan for the year ended September 30, 1994.
On October 31, 1994, the Board of Directors of the Bank established an
Employee Stock Ownership Plan (the "ESOP") in which employees meeting age and
service requirements are eligible to participate. The ESOP is effective
beginning January 1, 1994. The ESOP Plan covers all employees
(Continued)
41
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
who have attained the age of 18 and completed at least 1,000 hours of service
annually. Contributions to the Plan are determined by the Board of Directors
for each plan year and can be made in the form of company stock, cash, or
other consideration. The amount of the Company's contribution for each plan
year shall at a minimum be the amount necessary to service any debt incurred
by the Trustee on behalf of the Trust for the purchase of Company stock. At
September 30, 1996 the Trust had not incurred any debt for the purchase of
Company stock.
The Company accounts for the ESOP transactions in accordance with Statement
of Position 93-6 "Employers Accounting for Employee Stock Ownership Plans."
As a nonleveraged ESOP the compensation cost for the periods included in
these financial statements is based on the Company's contribution approved by
the Board of Directors for the periods presented. Contributions to the ESOP
Trust amounted to $30,512 and $24,425 for the years ended September 30, 1996
and 1995, respectively.
11. RELATED PARTIES
Mrs. Janet White Prewitt serves the Company as Chairman of the Board of
Directors. Mrs. Prewitt is an equity partner in the law firm of White,
MCCann, and Stewart that serves as general counsel to Pioneer Federal Savings
Bank. The fees paid to the Law Firm for fiscal years 1996, 1995, and 1994
were $103,969, $77,385, and $107,951, respectively. (See Note 4 for a
summary of loans to officers and directors). In addition, White, MCCann, and
Stewart receives commissions on title insurance premiums related to real
estate mortgages originated by the Bank. These commissions amounted to
$29,889, $14,915, and $21,960 for the years ended September 30, 1996, 1995,
and 1994, respectively.
12. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATION OF
CREDIT RISK
The Bank is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers.
These financial instruments include mortgage commitments outstanding which
amounted to approximately $1,107,600 and $774,500 for the year ended
September 30, 1996 and 1995, respectively plus unused lines of credit granted
to customers totaling $1,689,376 and $2,366,602 at September 30, 1996 and
1995, respectively. In addition, at September 30, 1996 and 1995,
respectively, the Bank had made loan commitments for real estate loans
secured by first mortgages totaling $1,169,350 and $1,032,375, which it
anticipated selling in the secondary market. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheets.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments and consumer
lines of credit are represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments
and conditional obligations as it does for on-balance sheet instruments.
Since many of the loan commitments may expire without being drawn upon, the
total commitment amount does not necessarily represent future requirements.
The Bank evaluates each customer's credit worthiness on a case-by-case basis.
The amount of collateral obtained upon extension of credit is based on
(Continued)
42
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
management's credit evaluation of the counterparty. Collateral held varies,
but primarily includes residential real estate.
The Bank has concentrated its lending activity within a 90 mile radius of
Winchester, Kentucky. Therefore, a substantial portion of its debtors'
ability to honor their contracts is dependent on the economy of this area.
13. EARNINGS PER SHARE
Earnings per share for the year ended September 30, 1996, 1995, and 1994 was
calculated by dividing net income $706,982, $1,077,503, and $1,032,342 by the
weighted average number of shares of common stock outstanding during the
year, which was 256,416 for the year ended September 30, 1996 and 272,477 for
the years ended September 30, 1995 and 1994.
14. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
In December 1991, the FASB issued SFAS No. 107, "Disclosures About Fair Value
of Financial Instruments." This statement extends the existing fair value
disclosure practices for some instruments by requiring all entities to
disclose the fair value of financial instruments (as defined), both assets
and liabilities recognized and not recognized in the statements of financial
condition, for which it is practicable to estimate fair value.
There are inherent limitations in determining fair value estimates, as they
relate only to specific data based on relevant information at that time. As a
significant percentage of the Bank's financial instruments do not have an
active trading market, fair value estimates are necessarily based on future
expected cash flows, credit losses, and other related factors. Such estimates
are accordingly, subjective in nature, judgmental and involve imprecision.
Future events will occur at levels different from that in the assumptions,
and such differences may significantly affect the estimates.
The statement excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.
Additionally, the tax impact of the unrealized gains or losses has not been
presented or included in the estimates of fair value.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments.
CASH AND CASH EQUIVALENTS. The carrying amounts reported in the statement of
financial condition for cash and short-term instruments approximate those
assets' fair values.
INVESTMENT SECURITIES. Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments. No active market exists for the Federal Home Loan Bank capital
stock. The
(Continued)
43
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
carrying value is estimated to be fair value since if the Bank withdraws
membership in the Federal Home Loan Bank, the stock must be redeemed for face
value.
LOANS RECEIVABLE. The fair value of loans was estimated by discounting the
future cash flows using the current rates at which similar loans would be
made to borrowers with similar credit ratings and for the same remaining
maturities.
DEPOSITS. The fair value of savings deposits and certain money market
deposits is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities.
LOAN COMMITMENTS AND UNUSED HOME EQUITY LINES OF CREDIT. The fair value of
loan commitments and unused home equity lines of credit is estimated by
taking into account the remaining terms of the agreements and the present
credit-worthiness of the counterparties.
The estimated fair value of the Company's financial instruments at September
30, 1996 are as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
----------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 5,733,454 $ 5,733,454
Securities available-for-sale 7,601,611 7,601,611
Securities held-to-maturity 23,972,497 23,520,598
Loans receivable, net 35,247,421 35,330,761
LIABILITIES
Deposits 64,335,165 64,393,038
FHLB advances 698,798 500,093
UNRECOGNIZED FINANCIAL INSTRUMENTS
Loan commitments 1,107,600
Unused lines of credit 1,689,376
</TABLE>
(Continued)
44
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
15. PIONEER FINANCIAL CORPORATION FINANCIAL INFORMATION (PARENT COMPANY ONLY)
The parent company's principal assets are its investment in the Bank and
cash balances on deposit with the Bank. The following are condensed
financial statements for the parent company as of and for the year ended
September 30, 1996.
PIONEER FINANCIAL CORPORATION
CONDENSED STATEMENT OF FINANCIAL CONDITION
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Cash and due from banks $ 26,773
Investment in subsidiary 8,167,641
Organizational cost, net 41,648
Other assets 8,573
----------
Total assets $8,244,635
==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Stockholders' equity:
Common stock $ 208,233
Additional paid-in capital 1,797,432
Retained earnings 6,213,169
Net unrealized appreciation on securities available-for-sale 25,801
----------
Total liabilities and stockholders' equity $8,244,635
==========
</TABLE>
PIONEER FINANCIAL CORPORATION
CONDENSED STATEMENT OF INCOME
YEAR ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
INCOME:
<S> <C>
Cash dividends from Bank $3,019,659
----------
EXPENSE:
Amortization of organizational expense 13,507
Other operating 5,689
----------
19,196
----------
Income before income tax benefit 3,000,463
Income tax benefit 6,512
----------
Net income $3,006,975
==========
</TABLE>
(Continued)
45
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
PIONEER FINANCIAL CORPORATION
CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
OPERATING ACTIVITIES:
<S> <C>
Net income $3,006,975
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization of organizational cost 13,507
Increase in receivables (6,468)
----------
Net cash provided by operating activities 3,014,014
----------
INVESTING ACTIVITIES:
Net cash provided (used) by investing activities
----------
FINANCING ACTIVITIES:
Dividends paid (353,533)
Stock repurchase (2,666,126)
----------
Net cash used by financing activities (3,019,659)
----------
Decrease in cash and cash equivalents (5,645)
Cash and cash equivalents at beginning of period 32,418
----------
Cash and cash equivalents at end of period $ 26,773
==========
</TABLE>
(Continued)
46
<PAGE>
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:
<TABLE>
<CAPTION>
PIONEER SERVICE CORPORATION
BALANCE SHEETS, SEPTEMBER 30, 1996 AND 1995
--------------
ASSETS 1996 1995
---------- ----------
<S> <C> <C>
Cash $ 653 $ 683
Investments 15,000 15,000
---------- ----------
$15,653 $15,683
========== ==========
STOCKHOLDERS' EQUITY
Common stock $16,000 $16,000
Paid-in capital 1,000 1,000
Deficit (1,347) (1,317)
---------- ----------
$15,653 $15,683
========== ==========
The Service Corporation incurred expenses of $30 and $45 for the years ended
September 30, 1996 and 1995, respectively.
</TABLE>
47
<PAGE>
CORPORATE INFORMATION
OFFICES
Executive offices: Branch offices:
25 East Hickman Street Pioneer Drive Pendleton Street
Winchester, KY 40391 Winchester, KY 40391 Stanton, KY 40380
(606) 744-3972 (606) 744-3896 (606) 663-4104
DIRECTORS
George W. Billings, Jr. William M. Cress
Retired U.S. Postmaster, Exec. Vice President,
Proprietor of Billings Hinkle Contracting
Tax Service, Stanton, KY Corporation, Stanton, KY
Ewart W. Johnson Nancy M. Lawwill
Retired, Lexington, KY Vice President, Treasurer
and Assistant Secretary,
Pioneer Federal
Nora M. Linville Wayne M. Martin
Secretary, Pioneer Federal President and General
and Retired Executive Manager, WKYT-TV,
Vice President Lexington, KY
Thomas D. Muncie Carl C. Norton
President, Muncie Buick-GMC President and Secretary,
Truck, Inc. Pioneer Financial;
President, Pioneer Federal
Janet W. Prewitt Andrew James Ryan
Board Chair, Pioneer Financial President, Andy Ryan
and Pioneer Federal; Asst. Pontiac-Nissan, Inc.
Secretary, Pioneer Financial;
and Attorney, White, McCann
& Stewart
Robert G. Strode
Retired Vice President
Ag-Gro Fertilizer Company
ADVISORY DIRECTORS
John D. Harrison Roger Davis
Retired; Stanton, KY Clay City, KY
Martha W. Hampton Clifford R. Langley
Stanton, KY Winchester, KY
Nellie K. Meadows Willard M. Martin
Clay City, KY Retired Housing Authority
Executive Director
Beckner Shimfessel
Retired Clark County Clerk
48
<PAGE>
OTHER OFFICERS AND SIGNIFICANT EMPLOYEES
Anthony Parrish Janet R. Tutt Rob Agee
Chief Financial Assistant Treasurer Loan Officer
Officer
Dianna Davis Doris Estes Bobby R. Trent
Branch Manager/ Branch Manager/ Compliance/Security
Loan Officer Loan Officer
Vicki Rupard
Loan Officer
AUDITORS LEGAL COUNSEL
Miller, Mayer, Sullivan & Stevens LLP White, McCann & Stewart
2365 Harrodsburg Road 125 S. Main Street
Lexington, KY 40504 Winchester, KY 40391
ANNUAL MEETING
The Annual Meeting of the shareholders of Pioneer Financial Corporation will be
held on Wednesday, January 8, 1997, at 10:00 a.m. at the main office, 25 East
Hickman Street, Winchester, Kentucky.
FORM 10-K
A COPY OF THE CORPORATION'S FORM 10-K AS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION WILL BE FURNISHED WITHOUT CHARGE TO STOCKHOLDERS AS OF THE
RECORD DATE UPON WRITTEN REQUEST TO THE SECRETARY, PIONEER FINANCIAL
CORPORATION, 25 EAST HICKMAN STREET, WINCHESTER, KENTUCKY 40391.
49
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 733
<INT-BEARING-DEPOSITS> 1,724
<FED-FUNDS-SOLD> 3,211
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,602
<INVESTMENTS-CARRYING> 23,972
<INVESTMENTS-MARKET> 23,521
<LOANS> 35,629
<ALLOWANCE> 382
<TOTAL-ASSETS> 74,401
<DEPOSITS> 64,335
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,123
<LONG-TERM> 699
0
0
<COMMON> 208
<OTHER-SE> 8,036
<TOTAL-LIABILITIES-AND-EQUITY> 74,401
<INTEREST-LOAN> 3,057
<INTEREST-INVEST> 2,167
<INTEREST-OTHER> 435
<INTEREST-TOTAL> 5,659
<INTEREST-DEPOSIT> 2,816
<INTEREST-EXPENSE> 46
<INTEREST-INCOME-NET> 2,797
<LOAN-LOSSES> 57
<SECURITIES-GAINS> 33
<EXPENSE-OTHER> 2,092
<INCOME-PRETAX> 1,093
<INCOME-PRE-EXTRAORDINARY> 1,093
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 386
<EPS-PRIMARY> 2.76
<EPS-DILUTED> 0
<YIELD-ACTUAL> 3.63
<LOANS-NON> 18
<LOANS-PAST> 205
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 352
<CHARGE-OFFS> 37
<RECOVERIES> 10
<ALLOWANCE-CLOSE> 382
<ALLOWANCE-DOMESTIC> 382
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE>
[LETTERHEAD OF YORK, NEEL & COMPANY APPEARS HERE]
MILLER, MAYER, SULLIVAN & STEVENS LLP
CERTIFIED PUBLIC ACCOUNTANTS
"INNOVATORS OF SOLUTION TECHNOLOGY"
INDEPENDENT AUDITORS' REPORT
Board of Directors
Pioneer Financial Corporation
Winchester, Kentucky
We have audited the accompanying consolidated balance sheets of Pioneer
Financial Corporation and Subsidiary as of September 30, 1996 and 1995 and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the years in the three year period ended September 30, 1996. These
consolidated financial statements are the responsibility of the management of
Pioneer Financial Corporation (Company). Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pioneer Financial
Corporation and Subsidiary as of September 30, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three year
period ended September 30, 1996 in conformity with generally accepted accounting
principles.
/s/ Miller, Mayer, Sullivan & Stevens /s/ York, Neel & Company, LLP
Lexington, Kentucky Owensboro, Kentucky
November 11, 1996 November 11, 1996
<PAGE>
December 16, 1996
Dear Shareholder:
Our 1997 Annual Meeting of Shareholders will be held at 10:00 a.m. on
Wednesday, January 8, 1997, at the main office at 25 E. Hickman Street,
Winchester, Kentucky. At the meeting action will be taken to elect three Direc-
tors to serve for a term of three years. In addition, we will ratify the
appointment by the Board of Directors of Miller, Mayer, Sullivan & Stevens LLP,
to prepare the fiscal year 1997 audit. At the meeting I will report on the
business outlook for the fiscal year. I urge you to attend the meeting.
The formal notice of the meeting and the Proxy Statement containing
information relative to the meeting follow this letter.
Please be sure to sign and return the enclosed proxy card whether or not
you plan to attend the meeting so that your shares will be voted. If you do
attend the meeting, you will have an opportunity to revoke your proxy and vote
in person if you prefer.
If you have any questions about the meeting or proxy, please visit our
main office at 25 E. Hickman Street, Winchester, Kentucky, or call us at (606)
744-3972. The Board of Directors appreciates your interest in Pioneer.
Your Board of Directors has declared a quarterly dividend of $0.35 per
share payable this date to shareholders of record on December 1, 1996; your
dividend check is enclosed. As of March 15, 1996, the annual dividend was
increased to $1.40 per share, which is payable quarterly rather than annually.
Sincerely,
/s/ Carl C. Norton
---------------------------------
Carl C. Norton, President
<PAGE>
PIONEER FINANCIAL CORPORATION
WINCHESTER, KENTUCKY
25 E. Hickman Street
Winchester, Kentucky 40391
(606) 744-3972
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JANUARY 8, 1997
Notice is hereby given that the annual meeting of shareholders of Pioneer
Financial Corporation (the "Corporation") will be held at 10:00 a.m. on January
8, 1997 at the home office of the Corporation's wholly-owned subsidiary, Pioneer
Federal Savings Bank, at 25 E. Hickman Street, Winchester, Kentucky, for the
following purposes:
1. To elect three Directors of the class whose term of office expires in
1997, to serve for a term of three years;
2. To ratify the appointment of Miller, Mayer, Sullivan & Stevens LLP to
serve as the auditors of the Savings Bank for fiscal year 1997; and
3. To receive the reports of officers and transact such other business as
may properly come before the meeting. Management is not aware of any such
other business.
The Board of Directors has fixed the close of business on December 2, 1996
as the record date for determining shareholders entitled to notice of and to
vote at the annual meeting.
The Proxy Statement accompanies this Notice.
By Order of the Board of Directors
/s/ Carl C. Norton
CARL C. NORTON, PRESIDENT
Dated this 16th day of December, 1996
Winchester, Kentucky
YOUR BOARD OF DIRECTORS URGES YOU TO CONSIDER THIS PROXY MATERIAL CAREFULLY AND
TO FILL IN, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD AS SOON AS POSSIBLE TO
ASSURE THAT YOUR VOTES WILL BE COUNTED. YOU MAY REVOKE YOUR PROXY AT ANY TIME
BEFORE IT IS VOTED BY DELIVERING TO THE SECRETARY OF PIONEER FINANCIAL CORPOR
ATION EITHER A WRITTEN REVOCATION OF THE PROXY OR A DULY EXECUTED PROXY BEARING
A LATER DATE, OR BY APPEARING AT THE ANNUAL MEETING AND VOTING IN PERSON. A
RETURN ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE.
<PAGE>
PIONEER FINANCIAL CORPORATION
25 E. Hickman Street
Winchester, Kentucky 40391
(606) 744-3972
PROXY STATEMENT
ANNUAL MEETING, JANUARY 8, 1997
THE PROXY AND SOLICITATION
This Proxy Statement is being mailed on December 16, 1996 to the shareholders of
Pioneer Financial Corporation in connection with the solicitation, by the Board
of Directors, of the enclosed form of Proxy for the Annual Meeting of
Shareholders to be held at 10:00 a.m. on Wednesday, January 8, 1997, at the main
office, 25 East Hickman Street, Winchester, Kentucky. A shareholder may revoke
a writing appointing a Proxy either by giving notice to the Corporation in
writing, by executing a later-dated Proxy, or by appearing at the meeting and
voting in person. The cost of soliciting the Proxy will be borne by Pioneer
Financial Corporation.
PURPOSES OF ANNUAL MEETING
The Annual Meeting has been called for the purposes of: (1) electing three
Directors of the class whose term of office expires in 1997; and (2) ratifying
the appointment of Miller, Mayer, Sullivan & Stevens LLP, as auditors for the
fiscal year 1997. In addition, the shareholders may receive reports of
officers, and transact such other business as may properly come before the
meeting.
The persons named in the enclosed Proxy have been selected by the Board of
Directors and will vote shares represented by valid Proxies. They have
indicated that, unless otherwise specified in the Proxy, they intend to vote to
elect as Directors the nominees listed on pages 5 and 6. All of the nominees
are presently members of the Corporation's Board of Directors.
The Board of Directors has no reason to believe that any of the nominees
will be unable to serve as a Director. Each of the nominees has agreed to serve
as a Director, if elected, and has heretofore served as a Director. In the
event, however, of the death or unavailability of any nominee or nominees, the
Proxy to that extent will be voted for such other person or persons as the Board
of Directors may recommend.
Miller, Mayer, Sullivan & Stevens LLP and York, Neel & Company, LLP, under
a joint venture agreement, were the auditors of record for the Corporation for
fiscal year 1996. The joint venture of Miller, Mayer, Sullivan & Stevens LLP
and York, Neel & Company, LLP has been dissolved. Miller, Mayer, Sullivan &
Stevens LLP, have been appointed by the Board of Directors as auditors of the
Corporation for the fiscal year ending September 30, 1997. If no contrary
directions are indicated, Proxies will
<PAGE>
be voted in favor of ratification of the appointment of auditors.
The Corporation has no knowledge of any other matters to be presented to
the meeting. In the event other matters do properly come before the meeting,
the persons named in the Proxy will vote in accordance with their judgment on
such matters.
Shares may be voted at the meeting in person or by proxy. The accompanying
proxy is solicited by the Board of Directors of Pioneer Financial Corporation
and is intended to permit each shareholder as of the record date to vote. All
valid proxies received prior to the meeting will be voted. Unless marked to the
contrary, such proxies will be voted for the election of three directors, and
for the ratification of the appointment of independent auditors. If any other
business is brought before the meeting, the proxies will be voted in accordance
with the judgment of the persons voting the proxies. A shareholder who has
given a proxy may revoke it at any time prior to such proxy being voted at the
meeting by filing with Pioneer Federal an instrument revoking it, or a duly
executed proxy bearing a later date, or by attending the meeting and giving
notice of such revocation. Attendance at the meeting does not by itself
constitute revocation of a proxy.
The owners of a majority of the outstanding shares of the Corporation must
be present, in person or by proxy, at the Annual Meeting to constitute a quorum.
The three nominees for directors receiving a plurality of the votes cast at
the meeting in person or by proxy shall be elected. All other matters require
for approval the favorable vote of a majority of shares voted at the meeting in
person or by proxy.
In addition to the use of the mails, proxies may be solicited by the
directors, officers and employees of Pioneer Federal Savings Bank, the wholly-
owned subsidiary of the Corporation, without additional compensation, by
personal interview, telephone, telegraph or otherwise. Arrangements may also be
made with brokerage firms and other custodians, nominees and fiduciaries who
hold the voting securities of record for the forwarding of solicitation material
to the beneficial owners thereof. Pioneer Financial Corporation will reimburse
such brokers, custodians, nominees and fiduciaries for the reasonable out-of-
pocket expenses incurred by them in connection therewith.
1998 SHAREHOLDER PROPOSALS
The deadline for shareholders to submit proposals to be considered for
inclusion in the Proxy Statement for the 1998 Annual Meeting of Shareholders is
expected to be September 1, 1997.
2
<PAGE>
VOTING SECURITIES
The Board of Directors has fixed the close of business on December 2, 1996 as
the record date for determining shareholders entitled to notice of the meeting
and to vote. The Corporation has outstanding and entitled to vote at the
meeting 208,233 shares of common stock. Shareholders are entitled to one vote
for each share held on the record date on all matters presented to the
shareholders at the Annual Meeting except that, in the election of directors,
cumulative voting rules will apply. Under cumulative voting, each shareholder
is entitled to cast as many votes in the aggregate as shall equal the number of
shares of common stock owned by him or her multiplied by the number of directors
to be elected. Each shareholder, or his or her Proxy, may cast all of his or
her votes (as thus determined) for a single nominee for director or may
distribute them among two or more nominees, in the shareholder's discretion. As
to the authority of the persons named as Proxies in the accompanying Proxy card
to cumulate votes, see the section entitled ITEM ONE -NOMINEES FOR ELECTION AS
DIRECTORS FOR TERM OF OFFICE EXPIRING IN 2000.
The following table sets forth information furnished to the Corporation
with respect to persons known by the Corporation to be the beneficial owners of
more than 5% of the Corporation's common stock (as of September 30, 1996).
<TABLE>
<CAPTION>
Name and Address of Number of Shares Percent
Beneficial Owner Beneficially Owned of Stock
- ----------------------- ------------------ ---------
<S> <C> <C>
Lee Ricketts 10,736 5.16%
c/o Corner Drug Store
2 N. Main Street
Winchester, Kentucky
</TABLE>
In addition, Cede & Company holds 25,226 shares (12.11%) as nominal owner
for other persons and entities. We are assured by members of that firm that
none of the parties for whom it holds Pioneer Financial stock would be the
beneficial owner of more than 5% of the Corporation's stock.
The following table sets forth, as of December 1, 1996, information
furnished to the Corporation with respect to the beneficial ownership by each
Director and nominee, and by all present Directors and officers as a group, of
the Corporation's common stock. This table further provides, for each Director,
the age, period from which each has served as a Director of Pioneer Federal
Savings Bank (the Corporation's wholly-owned subsidiary), his principal
occupation or employment, and information with respect to the beneficial
ownership, as such term is defined under Rules and Regulations of the Securities
and Exchange Commission, of the outstanding shares of the Corporation's Common
Stock by each director and by all directors and officers as a group.
3
<PAGE>
<TABLE>
<CAPTION>
Amount & Nature
Name, Age, Principal (1) Current of Beneficial
Occupation, Directorship Director Term Ownership of Percent
& Business Experiences Since Expires Common Shares of Stock
- ---------------------------- ----------- ----------- --------------- ----------
<S> <C> <C> <C> <C>
Nominees for Director:
Ewart W. Johnson (74) 1989(4) 1997 5,275 2.53%
Retired; Director
Nora M. Linville (74) 1976 1997 2,400 1.15%
Retired; Director and
Secretary to the Board
Thomas D. Muncie (59) 1974 1997 2,850 1.37%
President, Muncie
Buick-GMC Truck, Inc.;
Director
Continuing Directors:
William M. Cress (54) 1991 1998 1,050 .50%
Engineer; Director
Carl C. Norton (40) 1993 1998 5,666 2.72%
Banker; President and
Director
Janet W. Prewitt (49) 1972 1998 5,850 2.81%
Attorney; Director and
Chairman of the Board
Robert G. Strode (57) 1974 1998 6,785 3.26%
General Contractor; Director
George W. Billings, Jr. (72) 1980 1999 618 .30%
Retired; Director
Andrew James Ryan (37) 1995 1999
President, Andy Ryan
Pontiac Nissan, Inc.;
Director
Nancy M. Lawwill (60) 1981 1999 2,000 .96%
Banker; Director,
Vice President, Treasurer
and Assistant Secretary
Wayne M. Martin (50) 1991 1999 500 .24%
President, WKYT-TV 27;
Director
Advisory Directors to
Pioneer Federal Savings Bank:
Roger Davis 400 .19%
Martha W. Hampton 2,400 1.15%
John D. Harrison 500 .24%
Clifford R. Langley 5,000 2.40%
Willard M. Martin 5,015 2.41%
Nellie K. Meadows 1,000 .48%
Beckner Shimfessel 2,500 1.20%
All directors and executive 32,994 15.84%
officers as a group,
excluding advisory directors
(12 persons)
All directors and executive 49,809 23.92%
officers as a group,
including advisory directors
(19 persons)
</TABLE>
- ------------------------
(1) All members of the Board of Directors have held the positions set forth
above for at least five years, unless otherwise indicated.
(2) Includes all shares of Corporation Common Stock owned by each director's
spouse, or as custodian or trustee over which shares such individuals
effectively exercise sole voting and investment power.
(3) Ms. Prewitt is an equity partner in the law firm of White, McCann &
Stewart. Her law firm received gross fees from Pioneer Federal of
$143,191.47 during fiscal year ended September 30, 1996, including
$29,888.92 of commissions from title insurance written in connection with
loans made at the Savings Bank. Ms. Prewitt's share of the gross fees was
$34,365.95.
(4) Mr. Johnson was elected director of the Bank on May 28, 1965 and served in
that position until his resignation on October 17, 1972. He served as a
Director Emeritus of the Savings Bank from 1972 until the January, 1989
Annual Meeting of Shareholders, when he was elected to serve the remaining
unexpired term then held by Clifford R. Langley.
4
<PAGE>
Each officer, director and beneficial owner of more than 10% of any class
of equity securities of Pioneer Financial Corporation is required to file a
report with the Securities Exchange Commission and/or Office of Thrift
Supervision initially reporting securities beneficially owned by him or her, and
then reporting any change in ownership of securities. These reports must be
filed by the 10th day of the calendar month following the date on which such a
transaction occurred. All of the statements of changes in beneficial ownership
of securities to be filed by officers and directors of Pioneer Financial
Corporation have been timely filed in fiscal year 1996, except that: Mrs.
Prewitt had, prior to the death of her father in August, 1996, reported his
6,000 shares as being beneficially owned by her (she having had the power to
vote those shares pursuant to Power of Attorney). Following Mr. White's death,
she failed to timely file the report reducing the number of shares beneficially
owned by her, but she has filed that report in the interim.
NOMINEES AND DIRECTORS WHOSE TERMS OF OFFICE WILL CONTINUE
Pioneer Financial Corporation is governed by a Board of Directors consisting of
eleven members, as set forth in Pioneer's Bylaws. The Board is divided into
three classes, with the members of each class serving for three year terms.
Information as to each of the nominees and continuing Directors is given below.
Unless stated to the contrary, the Directors have been engaged in their current
occupations for at least the five preceding years. One class of the Board is
due for election at this Annual Meeting (Item No. One, below).
The nominees for election as members of the Board of Directors, with
information furnished to the Corporation by them as of December 1, 1996, are as
follows:
ITEM NO. ONE - NOMINEES FOR ELECTION AS DIRECTORS FOR TERM OF
OFFICE EXPIRING IN 2000
EWART W. JOHNSON (age 74) is a retired businessman and former Kentucky State
Parks Commissioner. He was elected a Director of Pioneer Federal on May 28,
1965 and served in that position until his resignation on October 17, 1972. He
served as a Director Emeritus of the Savings Bank from 1972 until the January,
1989 Annual Meeting of Shareholders, when he was elected to serve the remaining
unexpired term then held by Clifford R. Langley. Mr. Johnson serves on the
Operations/Business Plan Committee.
NORA M. LINVILLE (age 74) has been a Director of the Savings Bank since 1976.
She retired from Pioneer Federal as Executive Vice President in 1992, having
been with Pioneer Federal since 1952. She serves as Secretary to the Board and
on the Executive, Salary and Audit Committees.
5
<PAGE>
THOMAS D. MUNCIE (age 59) has been a Director of Pioneer Federal since 1974. He
is President of Muncie Buick-GMC Truck, Inc., an automobile dealership located
in Winchester. Mr. Muncie currently serves on the Executive and
Operations/Business Plan Committees.
If any person or persons other than the aforesaid nominees are nominated as
directors, then the Proxies named in the enclosed Proxy card, or their
substitutes, or a majority of them, shall have the right in their discretion to
vote for some number less than all the aforesaid nominees or for less than all
of the aforesaid nominees equally. If any of the aforesaid nominees becomes
unwilling or unable to accept nomination or election, then the Proxies shall
have the right to vote for any substitute nominee in place of the nominee who
has become unwilling or unable to accept nomination or election.
The Board of Directors has nominated Mrs. Linville and Messrs. Johnson and
Muncie to serve as Directors until 2000, or until their respective successors
shall have been elected and shall qualify. Election of the nominees requires
the affirmative vote of a plurality of the votes actually cast at the Annual
Meeting. THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE
ELECTION OF THESE NOMINEES AS DIRECTORS.
CONTINUING DIRECTORS
Present Directors whose term of office will continue after the meeting,
with information furnished to the Savings Bank by them as of December 1, 1996,
are as follows:
PRESENT DIRECTORS WHOSE TERMS OF OFFICE EXPIRE IN 1998
CARL C. NORTON (age 40) is President of Pioneer Financial Corporation and
Pioneer Federal Savings Bank, and as such is Chairman of all committees of the
Board of Directors. He is a Winchester native, a past president of the Central
Kentucky League of Savings Institutions and a director of the Winchester Clark
County Chamber of Commerce and the Winchester-Clark County Industrial
Developmental Authority. Mr. Norton holds a Bachelors degree in accounting from
the University of Kentucky and he is a graduate of the Kentucky School of
Banking and the School of Banking of the South. Mr. Norton has over sixteen
years of banking experience. He has served as a director of Pioneer Federal
since January, 1993, and has been employed by Pioneer since February, 1992.
Prior to coming to Pioneer Federal, Mr. Norton was Executive Vice-President and
Chief Managing Officer of First Security Bank of Clark County.
JANET W. PREWITT (age 49) has been a Director of Pioneer Federal since 1972.
She served as the Savings Bank's President from 1976 until 1993, and is
currently Chairperson of the Board of Directors of both Pioneer Financial
Corporation and its wholly-owned subsidiary, Pioneer Federal Savings Bank. Mrs.
Prewitt is
6
<PAGE>
an equity partner in the law firm of White, McCann & Stewart, a general practice
law firm located in Winchester, which serves as general counsel to Pioneer
Federal and Pioneer Financial. Legal services performed by the law firm are
attended by Mr. John H. Rompf, Jr., and Mrs. Beverly Ann Shea (Mrs. Prewitt's
sister) of the firm, who are not otherwise associated with the Corporation nor
the Savings Bank. In fiscal 1996, Pioneer Federal paid White, McCann & Stewart
$143,191.47 in legal fees (including the law firm's percentage of commissions
paid on title insurance premiums paid by Pioneer Federal during fiscal 1996 and
some prior years). Of this sum, $137,703.73 represented fees earned in
connection with title examinations and title insurance for real estate loans,
while the balance represented fees in foreclosure actions and fees for quarterly
and annual reports.
WILLIAM M. CRESS (age 54) is Executive Vice President of Hinkle Contracting
Corporation in Paris, Kentucky. He has been employed by Hinkle since 1972,
having spent 12 years with the Kentucky Department of Highways prior to that.
He majored in Civil Engineering at the University of Kentucky and is a
Registered Professional Engineer. He is a native of Powell County and currently
resides in Stanton. He is Director of Beech Fork Golf Club and past President
of the Plant-Mix Asphalt Industry of Kentucky, Powell County Education
Foundation, and Powell County Alumni Association. Mr. Cress was an Advisory
Director of the Savings Bank from June 17, 1980 until January 9, 1991, when he
was elected to serve the remaining unexpired term then held by John D. Harrison.
Mr. Cress serves on the Salary and Operations/Business Plan Committees.
ROBERT G. STRODE (age 57) has been a Director of Pioneer Federal since 1974.
Mr. Strode retired in June, 1990 as Vice President of Ag-Gro Fertilizer Company,
a fertilizer processing company located in Winchester. Mr. Strode currently
serves on the Audit and Executive Committees.
PRESENT DIRECTORS WHOSE TERMS OF OFFICE EXPIRE IN 1999
GEORGE W. BILLINGS, JR. (age 72) has been a Director of Pioneer Federal since
1980. He retired as Postmaster for the
United States Postal Service in Stanton, Kentucky in January, 1989. Mr.
Billings currently serves on the Audit, Salary and Asset/Liability Committees.
NANCY M. LAWWILL (age 60) has been a Director of Pioneer Federal since 1981.
She has served as Pioneer Federal's Treasurer since 1973, as Assistant Secretary
since 1974 and as Vice President since 1994. She has been with the Savings Bank
since 1966, and is the Savings Bank's data processing and computer coordinator
and is in charge of operations, as well as serving as a Loan Officer. Mrs.
Lawwill serves on the Loan, Asset/Liability and CRA Committees.
7
<PAGE>
WAYNE M. MARTIN (age 50) was elected to Pioneer Federal's Board of Directors on
January 9, 1991, to serve the remainder of Mr. Beckner Shimfessel's term. He is
President and General Manager for WKYT-TV 27 in Lexington, and has been with
WKYT since March, 1987. He is a Winchester native, and is President-elect of
the Kentucky Broadcasters Association. Mr. Martin holds a Bachelors degree in
Business Administration, a Masters degree in Education and a Rank I
Administrative certification - all from Morehead State University. He also
serves on the Board of Trustees of Cardinal Hill, is Chairman of the Greater
Lexington United marketing Committee, Director and Vice President of the Child
Advocacy Center of the Bluegrass, and is an Elder of First Christian Church,
Winchester, Kentucky. Mr. Martin currently serves on the Salary, CRA and
Executive Committees.
ANDREW JAMES RYAN (age 37) was elected a Director of Pioneer Federal and Pioneer
Financial on December 1, 1995 to fill the remainder of the term of Michael S.
Houlihan, who died suddenly on November 28, 1995. Mr. Ryan is President of Andy
Ryan Pontiac Nissan, Inc, an automobile dealership in Winchester. He was
General Manager of White Chevrolet and Pontiac of Manchester from 1982 until
moving to Winchester in November, 1991 to assume his current duties. He is
President of the Winchester New Car Dealers Association, a member of the
Winchester Rotary and Kiwanis Clubs, and is a deacon of First Christian Church,
Winchester, Kentucky. Mr. Ryan currently serves on the Operations/Business Plan
Committee.
ADVISORY DIRECTORS
Pioneer Federal Savings Bank, Pioneer Financial's wholly-owned subsidiary, has
seven Advisory Directors who are elected to that position by the Board of
Directors when, in the opinion of the Board of Directors, the Savings Bank would
benefit from the particular expertise of such persons. These Directors are
assigned to the various committees of the Bank's Board of Directors. Advisory
Directors do not have voting or other authority at the Board and committee
meetings. Advisory Directors who have served as Directors of the Savings Bank
carry the honorary title of Director Emeritus. Directors are routinely asked to
serve as Advisory Directors upon retirement as Directors. The following persons
currently serve as Advisory Directors to the Savings Bank: Clifford R. Langley,
John D. Harrison, Beckner Shimfessel and Willard M. Martin (all of whom were
appointed Directors Emeritus upon retirement from the Board of Directors); Roger
Davis, Martha W. Hampton, Nellie K. Meadows (all of whom are residents of Powell
County, Kentucky, where a branch office of the Savings Bank is located).
FAMILY ASSOCIATIONS AMONG DIRECTORS AND OFFICERS
Wayne M. Martin, Director, is the son of Willard M. Martin, a Director Emeritus
of the Savings Bank.
8
<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Corporation and of Pioneer Federal Savings Bank,
its principal subsidiary, have established the following committees, the members
of which are designated annually by the Board of Directors of the Corporation
and of the Savings Bank. The President serves as Chairman of all committee
meetings (except Salary Committee), and the Chairman of Pioneer Financial's
Board serves as an ex-officio member of all committees.
Loan Committee. The Loan Committee meets at least weekly, and makes
decisions on all mortgage loan applications. All loans approved are presented
to the Board of Directors for ratification, except that loans to a borrower who
owes or would owe the Savings Bank more than $200,000 are presented to the Board
of Directors for approval. Regular members of the Loan Committee include the
Executive Officers of the Savings Bank and its Loan Officers.
Audit Committee. The Audit Committee meets on an as-needed basis. The
committee nominates the independent auditor, discusses accounting changes, and
analyzes the financial position of the Savings Bank. Members of the Audit
Committee include Messrs. Strode, Billings, Willard Martin and Mrs. Linville.
Asset/Liability Committee. The Asset/Liability Committee meets quarterly
to analyze the Savings Bank past and present performance and the risks inherent
in future strategies, which may be employed by the Bank. Members of the
Asset/Liability Committee are Mrs. Prewitt, Mrs. Lawwill, Mr. Billings and Mr.
Tony Parrish, the Savings Bank's Chief Financial Officer.
Operations/Business Plan Committee. The Operations/Business Plan Committee
meets on an as-needed basis, to discuss, analyze, and monitor operation systems
and procedures of the Corporation and of the Savings Bank. Members of the
committee include Messrs. Cress, Johnson, Muncie, Shimfessel, and Ryan.
CRA (Community Reinvestment Act) Committee. This Committee meets
periodically to review HMDA (Home Mortgage Disclosure Act) data and CRA
activities conducted by the Savings Bank. This Committee also sets CRA policy
and direction for the upcoming months. Members of the CRA Committee include
Mrs. Hampton, Mrs. Prewitt, Mrs. Lawwill, and Messrs. Norton, Wayne Martin, and
Trent.
Executive Committee. The Executive Committee acts for the Board of
Directors between Board meetings. Committee members include Mrs. Linville, and
Messrs. Norton, Wayne Martin, Strode and Muncie. The committee meets on an as-
needed basis.
Salary Committee. The Salary Committee meets on an as-needed basis to
review salaries of employees. Members of this
9
<PAGE>
committee include Mrs. Linville, and Messrs. Billings, Cress and Wayne Martin.
Nominating Committee. Pursuant to the Corporation's By-laws, the Board of
Directors as a whole acts as a Nominating Committee for selecting the
management's nominees for election as Directors. The Nominating Committee must
deliver its written nominations to its secretary at least 20 days prior to the
Annual Meeting. No other nominations for Directors shall be voted upon at the
Annual Meeting, except those made by shareholders in writing delivered to the
secretary at least 10 days prior to the Annual Meeting. If the Nominating
Committee does not act prior to 20 days before the Annual Meeting, then
nominations may be made at the meeting by any shareholder entitled to vote. The
Board, at its September 17, 1996 meeting, nominated Mrs. Linville and Messrs.
Johnson and Muncie for election as Directors for the above-listed term.
During the fiscal year ended September 30, 1996, the Savings Bank's Board
of Directors held 12 regular meetings and 1 special meeting. The Savings Bank's
Loan Committee met 52 times, while the Salary Committee met once during fiscal
1996. The Operations/Business Plan Committee met once; the Executive Committee
met 9 times during the fiscal year. The Audit Committee held 1 formal meeting,
to receive the report of the Corporation's auditors for fiscal year 1996. The
CRA Committee met once; the Asset/Liability Committee held 2 meetings. A Powell
County Branch Committee (consisting of Directors and Advisory Directors from
Powell County) meets on a regular basis to discuss procedures and issues
particularly pertinent to the operation of the Powell County Branch. This
Committee held 8 meetings during fiscal 1996. During Fiscal 1996, the
Corporation's Board of Directors held 4 regular meetings and 3 special meetings,
and 1 unanimous consents without meeting. No Director of the Corporation
attended fewer than 75% of the total meetings of the Board of Directors and
committees on which such Board member served during this period, except for Mr.
Johnson, who was out of the state for a significant period of time. Further,
Mr. Beverly White, a Director Emeritus of the Savings Bank, became ill during
fiscal 1996, and eventually resigned. He missed three regular meetings of the
Savings Bank's Board of Directors prior to his resignation, but did not accept a
Director's fee for those months.
DIRECTORS' FEES
Directors are paid by Pioneer Federal Savings Bank a fee of $400 per month, plus
$25 for each committee meeting attended. Directors Emeritus are paid $400 per
month; other Advisory Directors are paid $200 per month. Directors who are
officers of the Corporation receive no fees for serving on the Board of
Directors or for attending Board meetings or committee meetings.
10
<PAGE>
OFFICERS WHO ARE NOT DIRECTORS
The following information is supplied with respect to officers and significant
employees of Pioneer Federal Savings Bank, the Corporations principal
subsidiary, who do not serve on the Corporation's nor the Savings Bank's Board
of Directors. No arrangements or understandings exist between the Corporation or
Pioneer Federal and any person listed below pursuant to which such person was
elected as an officer.
<TABLE>
<CAPTION>
POSITIONS CURRENTLY HELD
NAME AGE WITH PIONEER FEDERAL
<S> <C> <C>
Janet Tutt 54 Assistant Treasurer since 1980;
employee of Pioneer since 1974
Doris Estes 48 Bypass Branch Manager and Loan
Officer since August, 1993;
Employee of Pioneer since 1984
Dianna Davis 47 Stanton Branch Manager/Loan Officer
since October, 1995 and an
employee of the Bank since 1985
Bobby R. Trent 47 Compliance/Security since June,
1995; was previously Chief Operations
Officer/Compliance Officer with
Salt Lick Deposit Bank
Vicki Rupard 36 Loan Officer since September, 1995;
Was previously Mortgage
Administrative Assistant with
Peoples Commercial Bank
Anthony Parrish 30 Chief Financial Officer since
April, 1996; was previously
employed as Sr. Vice-President and
Chief Financial Officer at Peoples
Commercial Bank
Rob Agee 29 Loan officer since June, 1996; was
previously a Mortgage Loan Officer
with Pikeville National Bank
</TABLE>
REMUNERATION OF OFFICERS
The following table sets forth for the fiscal year ended September 30, 1996,
certain information as to compensation received by all executive officers of the
Corporation as a group for services in all capacities to the Corporation.
During such period, only one executive officer of the Corporation or of Pioneer
Federal received total cash compensation in excess of $60,000.00, that being
President Carl C. Norton. Mr. Norton's cash compensation by Pioneer Federal
during fiscal 1996 was
11
<PAGE>
$86,402.34. Ms. Prewitt's compensation as Chairman of the Board of Pioneer
Federal and of the Corporation, when added to her equity portion of the fees
paid by Pioneer to White, McCann & Stewart, did not exceed $60,000.00 during
fiscal 1996 or any prior year.
<TABLE>
<CAPTION>
NUMBER OF PERSONS CAPACITIES IN CASH
IN GROUP WHICH SERVED COMPENSATION (1)
- -------------------------- ------------------ ----------------
<S> <C> <C>
All Executive Officers Executive Officers $185,262.79
as a Group (4 persons, (including Chief
4 positions) Financial Officer)
Other Significant Employees Controller, Branch $188,380.02
as a group (7 persons, Manager, Asst. Treas.,
5 positions) Loan Officers, Compliance/
Security
</TABLE>
(1) In addition to cash compensation, all executive officers of the Savings
Bank are participants in the Savings Bank's group life insurance and Blue
Cross/Blue Shield major medical insurance plans, the costs of which are paid by
the Savings Bank. The Savings Bank maintains a "401(k)" employee profit sharing
plan as described under the Employees' Retirement Income Security Act of 1974.
The Plan became effective December 19, 1985. Under the Plan, the Savings Bank
may make contributions in accordance with Section 401(k) of the Internal Revenue
Code. The Savings Bank's contributions are allocated to each participant based
on the ratio the participant's compensation bears to the total compensation.
Employees may also contribute to the Plan. The Plan covers all full-time
employees who have attained the age of 20 1/2 years once they have completed 6
months of service at an anniversary date of the Plan. The participant's account
balance vests at 20% after completing 2 years of service; this vesting is
increased by 20% for each year thereafter, with 100% vesting after 6 years of
service. Upon retirement, the employee may withdraw all or parts of his vested
portion of the Plan at his discretion (in accordance with Section 401(k)). The
Board Chairperson of the Savings Bank participates in the "401(k)" plan. During
fiscal 1996 the Savings Bank made no contributions to the "401(k)" plan on
behalf of the Executive Officers or Other Significant Employees.
In addition, Pioneer Federal Savings Bank established an Employee Stock
Ownership Plan on October 31, 1994. Under the Plan, the Savings Bank may make
contributions in accordance with Section 401(a) of the Internal Revenue code in
the form of cash or stock for employees of the Savings Bank who are eligible on
attainment of age 20 1/2 and completion of at least a six-month period of
service are eligible to participate. The Savings Bank made a cash contribution
to the ESOP of $30,512.44 made during fiscal 1996; of this sum, $10,796.00 was
contributed to the ESOP on behalf of the Executive Officers and $4,312.74 was
contributed to the ESOP on behalf of the Other Significant Employees.
12
<PAGE>
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
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
NAME AND PRINCIPAL FISCAL YEAR -----------------------------------------------
POSITION ENDED 9/30 SALARY BONUS OTHER (BENEFITS)
- -------------------- ----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
Carl C. Norton, 1996 $83,892.34 $ 2,500.00 $10,656.35
President and 1995 $79,999.92 $ 2,500.00 $ 9,374.60
Chief Managing 1994 $72,115.84 $ 2,700.00 $ 8,993.84
Officer
</TABLE>
TRANSACTIONS INVOLVING DIRECTORS AND OFFICERS
Pioneer Federal currently offers loans to its officers and Directors for various
purposes consistent with the Corporation's and the Savings Bank's regular
lending policies as limited by applicable law and regulation. These loans are
made in the ordinary course of business, are made on the same terms and
conditions as those prevailing at the time for comparable transactions with non-
affiliated persons, and, in the judgment of management, do not involve more than
normal risk of collectibility or present other unfavorable features.
Set forth below is certain information relating to loans made to Pioneer
Federal executive officers and Directors (and their affiliates and immediate
family members) whose total aggregate loan balances exceeded $60,000.00 at any
time during the year ended September 30, 1996. Loans which were originated by
the Savings Bank but have been sold on the secondary market are note included.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Borrower and Original Original Current
Type of When Loan Interest Interest 9/30/96
Loan Originated Amount Rate Rate Balance
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Wayne Martin, 8/29/96 $51,375.00 9% 9% $ 51,375.00
Director:
residential/
real estate
Chris Martin, son of 5/30/96 52,700.00 6% 6% $ 52,439.20
Director Martin
residential/
real estate
(first mortgage,
home)
Andrew James Ryan, 6/28/96 196,000.00 9% 9% $ 53,455.00
Director:
residential/
real estate,
(construction loan - in process) -----------
$157,269.20
</TABLE>
13
<PAGE>
During the year ended September 30, 1996, there were no loans made to Pioneer
Federal officers (who are not considered principal officers for the purposes of
the annual audit) whose total aggregate loan balances exceeded $60,000 at any
time during the fiscal year. Loans which were originated by the Savings Bank
but have been sold on the secondary market are not included.
LEGAL PROCEEDINGS
Four shareholders combined to form East Kentucky Holdings, a general
partnership, in 1994. On July 24, 1994, the Savings Bank filed a lawsuit styled
Pioneer Federal Savings Bank v. Fred M. Higgins, Catherine H. Howard, Charles
- -----------------------------------------------------------------------------
Lester Key, Phillip R. Perry, individually and d/b/a East Kentucky Holdings, a
- ------------------------------------------------------------------------------
Kentucky general partnership, (collectively, the "EKH Group") in the United
- ----------------------------
States District Court, Eastern District of Kentucky, Civil Action No. 94-232.
The Complaint alleged that the EKH Group, acting in concert, engaged in a tender
offer with respect to the Bank's stock without complying with the disclosure and
filing requirements of Sections 14(d) and 14(e) of the Williams Act, the Change
in Bank Control Act and the applicable regulations. Through that lawsuit, the
Bank sought an injunction requiring the EKH Group to cease their tender offer
activities, to comply with applicable laws and to restrict their activities with
respect to the Bank.
The EKH Group filed a Counterclaim which sought to enjoin an alleged tender
offer by the Savings Bank, its officers, directors, agents and others acting in
concert with them. The Counterclaim also requested the Court to order the
Savings Bank to declare a dividend to its shareholders, to seek competitive
bids for its legal services, to evaluate and disclose bona fide offers to
purchase the Bank, and to fully disclose and address any conflicts of interest
of the Bank's directors.
Pioneer and the members of the EKH group entered into a Mutual Release and
Agreed Order of Dismissal of the civil matter. The Savings Bank redeemed the
EKH stock at a price per share of $41.50 in July, 1996, following confirmation
from the Office of Thrift Supervision (OTS) that the redemption was consistent
with all statutes, rules, regulations, policies, directives or orders of the
OTS.
The redemption included the 58,069 shares of stock of the EKH group and
6,175 shares of stock owned by the Corporation's chairman, Janet W. Prewitt, and
certain of those persons presumed to be acting in concert with her. The
redemption of the shares of Ms. Prewitt, etc., is necessitated by the EKH
redemption to keep the ownership of the Corporation's stock by Ms. Prewitt and
those presumed to be acting in concert with her below 10% and thus avoid her
undergoing the personal expense and time involved in a control filing with the
OTS.
14
<PAGE>
ITEM NO. TWO - SELECTION OF INDEPENDENT AUDITOR
Miller, Mayer, Sullivan & Stevens LLP, have been appointed as the Corporation's
independent auditor for the fiscal year ending September 30, 1997 pursuant to
the recommendation of the Audit Committee of the Board of Directors. A
representative of Miller, Mayer, Sullivan & Stevens LLP is expected to be
present at the meeting with an opportunity to make a statement if he desires to
do so and to answer appropriate questions with respect to that firm's
examination of the Corporation's financial statements and records for the fiscal
year ended September 30, 1996.
The appointment of the auditors must be approved by a majority of the votes
cast by the stockholders of the Corporation at the Meeting. THE BOARD OF
DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE APPROVAL OF THE
APPOINTMENT OF AUDITORS.
ITEM NO. THREE - OTHER MATTERS
The Board of Directors is not aware of any business to come before the Meeting
other than those matters described above in this Proxy Statement. However, if
any other matters should properly come before the Meeting, it is intended that
Proxies in the accompanying form will be voted in respect thereof in accordance
with the judgment of the person or persons holding the Proxies.
ANNUAL REPORT
The Annual Report of the Corporation for the fiscal year ended September 30,
1996 is enclosed herewith. The consolidated financial statements of the
Corporation and its subsidiary and the accompanying notes and report of
independent auditors, the quarterly data and supplementary information on the
effects of inflation, the selected financial data for each of the last five
fiscal years, and management's discussion and analysis of the summary of
operations contained in the Annual Report are incorporated by reference in this
Proxy Statement.
By Order of the Board of Directors
/s/ Carl C. Norton
CARL C. NORTON, PRESIDENT
Dated this 16th day of December, 1996, Winchester, Kentucky
- ----------------------------------------------------------------
FORM 10-K
- ----------------------------------------------------------------
A COPY OF THE CORPORATION'S FORM 10-K AS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION WILL BE FURNISHED WITHOUT CHARGE TO STOCKHOLDERS AS OF THE
RECORD DATE UPON WRITTEN REQUEST TO THE SECRETARY, PIONEER FINANCIAL
CORPORATION, 25 EAST HICKMAN STREET, WINCHESTER, KENTUCKY 40391.
15
<PAGE>
REVOCABLE PROXY
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
PIONEER FINANCIAL CORPORATION
The undersigned shareholder hereby appoints the Board of Directors of
Pioneer Financial Corporation, with full power of substitution, to act as proxy
for and to vote the stock of the undersigned at the annual meeting of
Shareholders of Pioneer Financial Corporation, Winchester, Kentucky, to be held
at its registered office, 25 East Hickman Street, Winchester, Kentucky, on
Wednesday, January 8, 1997, at 10:00 A.M., Eastern Standard time, or any
adjournment thereof, for the purposes stated in the Notice of Annual Meeting.
The undersigned hereby directs this proxy to be voted as follows:
1. Election of the following as Directors to serve until the Annual Meeting
in January, 2000, or until their successors are elected and qualified (this
proxy will be voted for each nominee listed unless: (a) the box labelled
"AGAINST" is marked, or (b) the nominee's name is marked out by striking
through, in which event another name may be substituted):
Ewart W. Johnson FOR [ ] AGAINST [ ]
-------------------------
Nora M. Linville FOR [ ] AGAINST [ ]
-------------------------
Thomas D. Muncie FOR [ ] AGAINST [ ]
-------------------------
2. Ratification of the appointment of Miller, Mayer, Sullivan & Stevens LLP, to
serve as the independent auditors of the Corporation for fiscal year 1997;
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. The undersigned further authorizes my/our proxies to vote this proxy for or
against any other business as may properly come before the meeting, in the
discretion of the above-named proxies:
FOR [ ] AGAINST [ ] ABSTAIN [ ]
THIS PROXY WILL BE VOTED AS DIRECTED. IF NO CONTRARY DIRECTION IS INDICATED,
THIS PROXY WILL BE VOTED FOR THE ABOVE PROPOSITIONS.
Dated:____________________________
__________________________________
(Stockholder)
__________________________________
(Stockholder)
(Please sign and date this proxy. Please sign
exactly as indicated above.)
