<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, 1997
- ---- TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) of THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from ______ to ______
Commission File Number 0-28076
PIONEER FINANCIAL CORPORATION
-----------------------------
(Exact name of registrant as specified in its charter)
United States 61-1273657
------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
25 East Hickman Street, Winchester, Kentucky 40391
- -------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(606) 744-3972
--------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
not applicable.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
-----------------------------
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports); and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of December 16, 1997, the aggregate market value of the shares of common
stock of the registrant outstanding was $8,954,019. This figure is based on the
last known sales price of $43.00 per share, which sale took place during the
week of August 11, 1997. The number of shares of the registrant's common stock
outstanding as of December 16, 1997 was 208,233 shares.
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The aggregate market value of the shares of common stock held by non-affiliates
of the registrant was $7,081,842 as of December 16, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
List hereunder the following documents incorporated by reference and the Part of
Form 10K into which the document is incorporated:
(1) Portions of Annual Report to Stockholders for the year ended September
30, 1997, are incorporated into Part II, Items 5-8 and Part III, Item
11, of this Form 10-K.
(2) Portions of definitive Proxy Statement for the January 14, 1998 Annual
Meeting of stockholders are incorporated into Part III, Items 10-13, of
this Form 10-K.
PIONEER FINANCIAL CORPORATION
Pioneer Financial Corporation (herein "Corporation"), a Kentucky
corporation, was organized in 1994 as a thrift holding company. On December 20,
1994, the stockholders of Pioneer Federal Savings Bank (herein "Pioneer Federal"
or "Bank") approved an agreement and Plan of Reorganization dated October 31,
1994, whereby the Bank became a wholly-owned subsidiary of Pioneer Financial
Corporation. In accordance with the Reorganization Plan, the stockholders of the
Bank exchanged their shares of common stock on a one-for-one basis for common
shares in Pioneer Financial Corporation. Pioneer Federal is the main asset of
Pioneer Financial, and the consolidated financial statements of the Corporation
and of the Bank are attached hereto.
Pioneer Federal Savings Bank, with assets of more than $74.0 million at
September 30, 1997, is the larger of the two thrift institutions in Winchester,
Kentucky. Pioneer Federal is a federally chartered stock savings bank which
conducts business from its corporate headquarters and home office in Winchester,
Clark County, Kentucky, and branch banking offices in Winchester and in Stanton,
Powell County, Kentucky. Pioneer Federal was chartered in 1885 by the
Commonwealth of Kentucky as the Winchester Building and Savings Association. In
1985, Pioneer Federal obtained a federal mutual savings bank charter and changed
its name to Pioneer Federal Savings Bank. As of June 30, 1987, Pioneer Federal
completed its conversion from a federal mutual to a federal stock savings bank.
The Bank is a member of the Federal Home Loan Bank System, and its deposits are
insured by the Savings Association Insurance Fund ("SAIF"), which is
administered by the Federal Deposit Insurance Corporation ("FDIC").
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PART I
Item 1. Business
General
Pioneer Financial Corporation has no significant assets other than the
outstanding capital stock of the Bank. The principal business of Pioneer
Financial Corporation is operating the Bank. Pioneer Federal is primarily
engaged in the business of attracting deposits from the general public and using
such deposits, together with other borrowings and funds, to make residential
mortgage loans, commercial real estate loans, consumer loans (including
automobile and personal loans), and other investments.
The executive offices of the Corporation are located at 25 East Hickman
Street, Winchester, Kentucky 40391, and its telephone number is (606) 744-3972.
The principal sources of funds for the Bank's lending activities are
deposits received from the general public, proceeds from the sale of loans,
principal repayments on loans, mortgage-backed securities and other investments,
as well as funds provided by operations. Another source of funding available to
the Bank is advances from the Federal Home Loan Bank of Cincinnati ("FHLB of
Cincinnati"). The Bank's primary sources of income are interest on loans,
interest on mortgage-backed securities, interest and dividends on investment
securities, commission income and fees charged in connection with its lending
and deposit activities and services. Its principal expenses are interest paid on
deposits and personnel costs incurred in the operations of the Bank's offices.
Pioneer Federal has a wholly-owned subsidiary, Pioneer Service
Corporation, which was formed for the purpose of holding stock in Intrieve,
Incorporated. Intrieve provides on-line computer processing and inquiry service
for Pioneer Federal and numerous other thrift institutions in the region.
Pioneer Federal invested $16,000 in the stock of Pioneer Service Corporation,
which is carried on its books at cost.
The executive offices of the Bank are located at 25 East Hickman
Street, Winchester, Kentucky 40391, and its telephone number is (606) 744-3972.
Market Area
The Bank's primary market area consists of Clark and Powell Counties,
Kentucky which have populations of 30,000 and 12,000, respectively. This area is
primarily rural with a large amount of agri-business. The primary lending
concentration is in the
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Bank's market area, an area mainly comprised of the cities of Winchester and
Stanton. Historically, the economy in the Bank's market area has been dependent
on agriculture, agriculture-related industries and manufacturing. The largest
employers in the market area are East Kentucky Power and the Clark County Board
of Education.
Economic growth in the Bank's market area remains dependent upon the
local economy. In addition, the deposit and loan activity of the Bank is
significantly affected by economic conditions in its market area.
Lending Activities
Generally, federally chartered thrift institutions may invest up to 20%
of assets in secured or unsecured non-real estate loans for commercial,
corporate, business or agricultural purposes, up to 30% of assets in consumer
loans and up to 10% of assets in tangible personal property in order to engage
in equipment leasing. In addition, commercial real estate loans are not required
to be secured by first liens.
Under FIRREA, the aggregate amount of non-residential real estate loans
which a federal savings institution may make may not exceed 400% of the
institution's capital as determined under the capital standards mandated by
FIRREA. Previously, such loans were permitted up to 40% of a savings
institution's assets. On September 30, 1997, the Bank was permitted to make non-
residential real estate loans aggregating approximately $35 million.
Geographic Lending Area. All real estate mortgage loans originated by
Pioneer Federal are secured by real estate located within an 85 mile radius of
Winchester, Kentucky. The Bank has concentrated its lending activity in the
Clark and Powell Counties area. Within limits, the Bank may originate and
purchase participation or whole loans secured by real estate located in other
parts of the United States.
General. The principal lending activity of Pioneer Federal historically
has been the origination of single family conventional loans (i.e., loans that
are neither insured nor partially guaranteed by governmental agencies). Second
mortgage loans, construction loans, loans on agricultural property, loans on
multi-family dwellings, and commercial real estate loans are also offered by the
Bank. The vast majority of the Bank's real estate loans are made on existing
property. A limited number of construction loans have been made. The Bank is not
engaged in real estate development activities.
Real Estate Loans. The loan-to-value ratio, maturity and other
provisions of the loans made by Pioneer Federal generally
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reflect the Bank's policy of making the maximum loan permissible consistent with
applicable regulations, sound lending practices, market conditions and the
Bank's underwriting standards.
Historically, Pioneer Federal made long-term real estate loans with
fixed rates of interest. Beginning in 1980, Pioneer Federal diversified its loan
portfolio by offering adjustable rate loans and short-term fixed rate loans with
a balloon payment. Adjustable rate loans are those in which the interest rate
may change during the term of the loan. Adjustable rate loans and shorter term,
fixed-rate loans allow the average yield received by the Bank on its total loan
portfolio to more closely reflect prevailing interest rates, so as to keep pace
with changes in interest rates paid on savings accounts. Most fixed rate loans
that are offered and retained by the Bank are secured by one-to-four family
owner-occupied dwellings for terms of no more than 30 years with rates fixed up
to 5 years. The Bank uses the secondary market for the purpose of offering
long-term fixed rate loans to its customers, while retaining the servicing of
these loans. These types of loans are normally pre-sold to the Federal Home Loan
Mortgage Corporation (FHLMC).
Pioneer Federal does not have a minimum loan amount requirement for its
real property loans. Due to the cost of underwriting and originating a loan,
however, the Bank charges a minimum origination fee for all mortgage loans. See
"Loan Origination and Other Fees".
All improved real estate which serves as security for a loan from the
Bank must be insured in an amount acceptable to the Bank against fire, extended
coverage, vandalism, malicious mischief and other hazards. Each such policy
contains a standard mortgage clause in favor of the Bank. Where applicable,
flood insurance is also required. Such insurance must be maintained in an amount
not less than the Bank's insurable interest in the security. Borrowers of loans
exceeding 80% of the value of the property given as collateral are required to
have private mortgage insurance in favor of the Bank with a company acceptable
to the Bank.
Residential Real Estate Loans. The Bank extends loans secured by liens
on residential real estate in an amount up to 80% (without private mortgage
insurance) or 95% (with private mortgage insurance) of the appraised value or
sales price of the security, whichever is less. The maximum term of any loan on
a one-to-four family dwelling is 30 years. The maximum loan amount as a
percentage of value and term for multi-family properties is handled on a
case-by-case basis. The maximum term for loans on multi-family property is 30
years.
Generally, second mortgages are taken by the Bank for single-family
residences which have an existing first mortgage
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held by the Bank. Many second mortgages are for home improvement purposes. More
and more frequently, in large part due to current tax laws, the Bank takes a
second mortgage on residential real property in cases where the residential
collateral would not be strictly necessary. These loans are classified as
consumer loans rather than as real estate loans as is consistent with federal
regulations. This is described in a separate paragraph.
Pioneer Federal has a small number of VA-guaranteed and FHA- approved
loans in its loan portfolio. The Bank has outlets in which to process and
originate VA and FHA loans in any county in the State of Kentucky. The Bank's
current policy is to sell any VA or FHA loan which it originates. The Bank is an
approved Rural Housing Services lender and can originate RHS guaranteed loans in
any county in the State of Kentucky. The Bank's current policy is to sell any
RHS loan which it originates.
Construction Loans. Pioneer Federal offers construction loans (loans
for the temporary financing of real estate under construction) to individuals
and building contractors for building projects, generally homes and small office
or commercial buildings. Most construction loans are made for terms less than 12
months, have fixed rates of interest and provide for periodic disbursement of
loan funds based on receipts submitted by the builder during construction and
periodic site inspections by Bank personnel. These loans are primarily
refinanced to permanent loans when construction is completed. The application
process is identical to that required for mortgage loans. Additionally, however,
these borrowers are required to submit the lot or land location, the name of the
builder, copies of plans, specifications, and building cost estimates, which
are used by the Bank in determining the lending value of the subject property.
Construction loans are generally made for a single building although small
project, multi-building loans are occasionally made.
Construction loans may be secured by collateral other than or in
addition to the real estate under construction (e.g. other real estate or
assignments of other types). These loans are classified by the Bank as either
real estate loans (in the case of a first lien mortgage) or consumer loans (in
the case of a second lien mortgage or an assignment of another type where the
value of the real estate is not the primary collateral). Pioneer Federal
generally makes construction loans only in those instances where it expects to
have the permanent loan on the property. At September 30, 1997, Pioneer Federal
had 11 construction loans outstanding, in the total amount of $1,074,654. All of
these loans were for single-family residences.
Commercial Loans. The Bank offers loans secured by income-producing
real estate, primarily small office buildings,
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restaurants, and retail complexes. Depending on the collateral taken for the
loan, the Bank has, in the past, classified loans which are secured by income-
producing real estate as either real estate loans or a type of consumer loan
(e.g., second lien mortgage loan or assignment loan). Most of the loans secured
by mortgages on commercial real estate have terms of 10 to 25 years, with
interest adjustable annually. These mortgage loans are limited to 75% of the
value of the real estate, unless the borrower would qualify for an unsecured
loan, in which case a greater loan value (up to 85%) may be approved. Under
FIRREA, the Bank is permitted to make non-residential real estate loans up to
400% of capital; non-residential real estate loans in excess of such amount must
be approved by the Director of the Office of Thrift Supervision (OTS).
Consumer and Other Loans. Federal regulations permit federally
chartered thrift institutions to make secured and unsecured consumer loans up to
30% of the institution's assets. Though federal thrift institutions have lending
authority above the 30% category for certain consumer loans, Pioneer Federal's
policy is to limit its investment in consumer loans to 20% of its assets. This
limit has never been reached. The Bank makes both secured and unsecured consumer
loans. A loan may be secured by a lien on real estate but still be classified as
a consumer or other loan rather than as a real estate loan in accordance with
federal regulations.
The Bank is active in the origination of secured consumer loans for
automobiles, home improvements and other purposes with a variety of collateral
including automobiles, livestock and equipment. Pioneer Federal offers unsecured
consumer loans only to customers with whom Pioneer has had experience. Consumer
loans are approved by the President or Vice President and any one of the
following: Loan Officer or Branch Manager of the Bank.
Loan Solicitation and Processing
The Bank actively solicits mortgage loan applications from existing
customers, customer referrals, and persons making telephone calls and visits to
its offices. Applications are not taken over the telephone although in some
instances a combination of verbal (by telephone) and written (by mail)
applications are received. Upon receipt of a loan application from a prospective
borrower, a credit report and verifications of employment and income are
obtained. An appraisal of the real estate intended to secure the proposed loan
is made by outside appraisers, all of whom have been approved by the Board of
Directors. At September 30, 1997 staff appraisers are not being used, but staff
appraisers are making periodic construction inspections. Approved outside
appraisers are used for all loans to employees. Appraisals are prepared in
accordance with regulatory guidelines and follow accepted and established
appraisal practices as
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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,
-----------------------------
1997 1996
---------- ----------- ------------ -----------
Amount Percent Amount Percent
---------- ----------- ------------ -----------
Type of Loans: (Dollars In Thousands)
- ------------------------
<S> <C> <C> <C> <C>
Real Estate:
One-to-four family residential $20,503 57.26% $21,253 58.63%
Multi-family and commercial 2,509 7.01% 3,641 10.05%
Agricultural 546 1.52% 565 1.56%
Construction 1,075 3.00% 1,808 4.99%
Consumer:
Commercial 4,397 12.28% 3,283 9.06%
Loans secured by deposits 965 2.69% 1,048 2.89%
Home equity 2,000 5.59% 1,663 4.59%
Other secured 3,563 9.95% 2,711 7.48%
Unsecured 251 0.70% 271 0.75%
---------- ---------- ---------- ----------
Total loans receivable 35,809 100.00% 36,243 100.00%
========== ========== ========== ==========
Less:
Loans in process (731) (403)
Allowance for loan losses (391) (382)
Deferred loan origination fees (196) (211)
---------- ----------
Loans, receivable net $34,491 $35,247
========== ==========
</TABLE>
Loan Maturity Schedule. The following table sets forth certain
information as of September 30, 1997 (the end of the most recent audit year
reported) regarding the dollar amount (in thousands of dollars) of loans
maturing in the Bank's portfolio based on contractual terms to maturity for both
fixed-rate and variable-rate instruments.
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<TABLE>
<CAPTION>
Multi
Family
Agricul-
1-4 Family tural and
Residential Commercial Construction Consumer Total
------- ------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Non-performing $ 149 $ --- $ 3 $ 3 $ 155
------- ------- ------- ------- -------
Amounts Due:
Within 3 months 230 1,072 1,713 3,015
3 months to 1 year 8 5 1,561 1,574
------- ------- ------- ------- -------
Total due within 1 year 238 5 1,072 3,274 4,589
------- ------- ------- ------- -------
After 1 year:
1 to 3 years 313 227 2,445 2,985
3 to 5 years 1,157 50 3,488 4,695
5 to 10 years 2,749 710 1,058 4,517
10 to 20 years 7,833 1,514 131 9,478
Over 20 years 8,064 549 777 9,390
------- ------- ------- ------- -------
Total due after 1 year 20,116 3,050 0 7,899 31,065
------- ------- ------- ------- -------
Total amount due $ 20,503 $ 3,055 $ 1,075 $ 11,176 $ 35,809
======= ======= ======= =======
Less:
Loans in process (731)
Provision for loan losses (391)
Deferred origination fees (196)
-------
Loans receivable, net $ 34,491
=======
</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, 1997 (the end of the
most recent audit year reported) which have predetermined (or fixed) interest
rates and which have floating or adjustable interest rates. Loans which are
contractually due within one year after September 30, 1997 are not included in
this table.
<TABLE>
<CAPTION>
Floating or
Fixed Rates Adjustable Rates Total
---------------- ---------------- ----------------
(In Thousands)
<S> <C> <C> <C>
One-to-four family residential $ 6,509 $ 13,607 $ 20,116
Multi-family, agricultural and 559 2,491 3,050
commercial
Consumer 3,910 3,989 7,899
Construction 0 0 0
---------------- ---------------- ----------------
$ 10,978 $ 20,087 $ 31,065
============== ============== ==============
</TABLE>
Interest rates on adjustable-rate loans are adjusted according to one
of five indices: the National Average Contract Interest Rate for Purchase of
Previously Occupied Homes, the National Average Cost of Funds to SAIF-Insured
Institutions, the weekly average yield on U.S. Treasury Bills adjusted to a
constant maturity of one year, and the Prime Rate and Call Rate published in the
Wall Street Journal. Adjustments on loans are made in accordance with federal
regulations. Maximum and minimum interest rates ("ceilings" and "floors") vary
as do the amounts by which rates can change at any one time ("caps").
Loan Purchases and Sales. Historically, Pioneer Federal was primarily a
portfolio lender. The secondary market, however, has provided Pioneer Federal
with a method by which to offer long- term, fixed rate mortgages to its
customers without incurring additional interest rate risk. Since the Spring of
1986, the Bank has utilized the secondary market to meet its customers' needs
and manage the interest rate risk of the Bank.
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The Bank uses standard FHLMC/FNMA loan documents on all first mortgage
residential loans to enable the Bank to make sales in the secondary market when
market conditions warrant. Pioneer Federal retains the servicing of nearly all
of its loans sold in the secondary market, and collects servicing fees. The fees
received from this activity are included in "loan and other service fees, net"
in the financial statements incorporated by reference in this filing. See "Loan
Origination and Other Fees" below.
Loan Commitments. Commitments for approved mortgage loans are made
orally or in writing. Loan commitments are made for permanent financing of
property under construction, and such commitments are usually outstanding for a
period of six to twelve months prior to the closing of the loan. Pioneer
exercises virtually all commitments it issues. As of September 30, 1997 Pioneer
Federal had $3.9 million in loans approved but not closed; none of these were
evidenced by written commitments. The Bank anticipated selling $1.2 million of
the loans approved but not closed. As of September 30, 1997 Pioneer Federal had
no formal commitments to sell loans.
Loan Origination and Other Fees. In addition to interest earned on
loans, the Bank receives loan origination fees. Loan fees are a percentage of
the principal amount of the mortgage loan which are charged to the borrower for
origination of the loan. Under FASB #91, loan origination fees are recognized as
an adjustment of the loan's yield over the life of the loan by the interest
method to the extent that they exceed costs incurred in the origination of the
loan.
Pioneer Federal's loan origination fees are charged according to
amount, term, loan-to-value, type of loan and market conditions on conventional
residential mortgages and commercial real estate loans. The total amount of
deferred loan fees at September 30, 1997 was $196,000. Any deferred loan fees
not previously accounted for are recognized as income at the time the loan is
sold or paid off.
Loan origination and commitment fees are volatile sources of income.
Such fees vary with the volume and type of loans and commitments made and with
competitive conditions in mortgage markets, which in turn respond to the demand
for and availability of money. The Bank has experienced a decrease in loan fee
income during periods of rising interest rates due to the resulting lack of
demand for mortgage loans.
The Bank receives other fees and charges relating to existing loans,
which include late charges, fees collected in connection with a change in
borrower or other loan modifications, and servicing fees for loans collected for
others. These fees and charges have not constituted a material source of income
in
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the past. Loan service fees as a percentage of net interest income were 7.5%,
6.5% and 6.0% for fiscal 1997, 1996 and 1995, respectively.
Asset Classification, Allowance for Losses and Non-Performing Assets.
Pioneer Federal's collection procedures provide that when a loan is 30 or more
days delinquent the borrower is contacted by mail and payment is requested (in
cases of past delinquent history the borrower is contacted prior to being 30
days delinquent). If the delinquency continues, further efforts are made to
contact the borrower and resolve the problem. In certain instances, the Bank may
modify the loan or grant a limited moratorium on loan payments to enable the
borrower to reorganize his financial affairs. If the loan continues in a
delinquent status for 90 days or more, the Bank may initiate foreclosure
proceedings. Any property acquired as the result of foreclosure or by deed in
lieu of foreclosure is classified as "real estate held for resale" until such
time as it is sold or otherwise disposed of by the Bank.
Federal regulations require savings institutions to classify their
assets on the basis of quality on a regular basis. An asset is classified as
substandard if it is determined to be inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
An asset is classified as doubtful if full collection is highly questionable or
improbable. An asset is classified as loss if it is considered uncollectible,
even if a partial recovery could be expected in the future. The regulations also
provide for a special mention designation, described as assets which do not
currently expose a savings institution to a sufficient degree of risk to warrant
classification but do possess credit deficiencies or potential weaknesses
deserving management's close attention. Assets classified as substandard or
doubtful require a savings institution to establish general allowances for loan
losses. If an asset or portion thereof is classified loss, a savings institution
must either establish a specific allowance for loss in the amount of the asset
classified loss, or charge off such amount. Federal examiners may disagree with
a savings institution's classifications. If a savings institution does not agree
with an examiner's classification of an asset, it may appeal this determination
to the OTS Regional Director. Pioneer Federal regularly reviews its assets to
determine whether any assets require classification or re-classification. The
Board of Directors reviews and approves all classifications. At September 30,
1997, Pioneer Federal had loans designated special mention of $1,144,000 and
classified assets consisting of loans classified as substandard of $106,000,
none as doubtful and $2,500 as loss.
Management will continue to actively monitor Pioneer Federal's asset
quality and will establish loan loss reserves and will charge off loans and
properties acquired in settlement of
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loans against the allowances for losses on such loans and such properties when
appropriate, and will provide specific loss allowances when necessary. Although
management believes it uses the best information available to make
determinations with respect to the allowances for losses, future adjustments may
be necessary if economic conditions differ substantially from the economic
conditions in the assumptions used in making the initial determinations.
Pioneer Federal's methodology for establishing the allowances for
losses takes into consideration probable losses that have been identified in
connection with specific assets as well as losses that have not been identified
but can be expected to occur. Management conducts regular reviews of Pioneer
Federal's assets and evaluates the need to establish allowances on the basis of
these reviews. Allowances are established by the Board of Directors on a
quarterly basis based on an assessment of risk in Pioneer Federal's assets
taking into consideration the composition and quality of the portfolio,
delinquency trends, current charge-offs and loss experience, the state of the
real estate market, regulatory reviews conducted in the regulatory examination
process and general economic conditions. Allowances will be provided for
individual assets, or portions of assets, when ultimate collection is considered
improbable by management based on the current payment status of the assets and
the fair value or net realizable value of the security. At the date of
foreclosure or other repossession, Pioneer Federal would transfer the property
to real estate acquired in settlement of loans at its fair value, net of selling
expenses. Any portion of the outstanding loan balance in excess of fair value
would be charged off against the allowance for loan losses. If, upon ultimate
disposition of the property, net sales proceeds exceed the net carrying value of
the property, a gain on sale of real estate would be recorded. Any losses
realized on sale would be charged to the allowance for loan losses on real
estate acquired through foreclosure. Historically, management has emphasized the
Bank's loss experience over other factors in establishing a provision for loan
losses.
In December 1993 the banking regulatory agencies, including the OTS,
adopted a policy statement regarding maintenance of an adequate allowance for
loan and lease losses and an effective loan review system. This policy includes
an arithmetic formula for checking the reasonableness of an institution's
allowance for loan loss estimate compared to the average loss experience of the
industry as a whole. Examiners will review an institution's allowance for loan
losses and compare it against the sum of (i) 50% of the portfolio that is
classified doubtful; (ii) 15% of the portfolio that is classified as
substandard; and (iii) for the portions of the portfolio that have not been
classified (including those loans designated as special mention), estimated
credit losses over the upcoming twelve months given the facts and
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circumstances as of the evaluation date. This amount is considered neither a
"floor" nor a "safe harbor" of the level of allowance for loan losses an
institution should maintain, but examiners will view a shortfall relative to the
amount as an indication that they should review management's policy on
allocating these allowances to determine whether it is reasonable based on all
relevant factors.
The following table sets forth an analysis of the Bank's allowance for
possible losses for the periods indicated.
<TABLE>
<CAPTION>
At or For the Year
Ended September 30,
1997 1996
------ ------
(Dollars in Thousands)
<S> <C> <C>
Total loans outstanding $ 35,809 $ 36,243
======= =======
Average loans outstanding $ 35,059 $ 33,358
======= =======
Allowance balance (at beginning of period) $ 382 $ 352
Provision (credit):
Residential 57
Consumer
Net charge-offs (recoveries):
Residential 31
Consumer (9) (4)
------- -------
Allowance balance (at end of period) $ 391 $ 382
======= =======
Allowance for loan losses as a percent of 1.09% 1.05%
total loans outstanding
Net loans charged off as a percent of (0.03)% 0.08%
average loans outstanding
</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,
1997 1996
------ ------
Percent of Percent of
Loans to Loans to
Amount Total Loans Amount Total Loans
------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
At end of period allocated to:
Real estate mortgage:
1-4 family residential $ 224 57.26% $ 224 58.63%
Multi-family and commercial 27 7.01% 38 10.05%
Agricultural 6 1.52% 6 1.56%
Construction (1) 12 3.00% 19 4.99%
Consumer (2) 122 31.21% 95 24.77%
----- ------ ----- ------
Total allowances for loan losses $ 391 100.00% $ 382 100.00%
===== ====== ===== ======
</TABLE>
(1) Includes $2,500 specific reserve attributable to a particular loan and not
available for other loan losses.
(2) Includes $2,706 specific reserve attributable to particular loans and not
available for other loan losses.
Numerous financial institutions throughout the United States have incurred
losses in recent years due to significant increases in loss provisions and
charge-offs resulting largely from higher levels of loan delinquencies and
foreclosures. Depressed real estate market conditions have adversely affected
the economies of various regions and have had a severe impact on the financial
condition and businesses of many of the financial institutions doing business in
these areas. Considerable uncertainty exists as to the future improvement or
deterioration of the real estate markets in these regions, or of its ultimate
impact on these financial institutions.
As a result of declines in real estate market values and significant losses
experienced by many financial institutions, there has been a greater level of
scrutiny undertaken by regulatory authorities of the loan portfolios of
financial
16
<PAGE>
institutions as part of examinations of such institutions by the FDIC, OTS or
other federal or state regulators. Results of recent examinations indicate that
these regulators may be applying more conservative criteria in evaluating real
estate acquired in settlement of such loans. While management believes Pioneer
Federal has established its existing loan loss allowances in accordance with
generally accepted accounting principles, there can be no assurances that
regulators, in reviewing Pioneer Federal's assets, will not make Pioneer Federal
increase its loan loss allowance, thereby negatively affecting Pioneer Federal's
reported financial condition and results of operations.
The following table sets forth information with respect to the Bank's
non-performing assets for the periods indicated. During the periods shown, the
Bank had no restructured loans within the meaning of Statement of Financial
Accounting Standards No. 15.
17
<PAGE>
<TABLE>
<CAPTION>
At September 30,
1997 1996
------ ------
<S> <C> <C>
(Dollars in Thousands)
Loans accounted for on a non-accrual basis (1):
Construction $ 3 $ 3
Consumer 3 15
----- -----
Total 6 18
----- -----
Accruing loans which are contractually past due
90 days or more (2):
Mortgage loans:
Permanent loans secured by 1-4 family
dwelling units 149 91
Construction 0 0
All other mortgage loans 114
Consumer
----- -----
Total 149 205
----- -----
Total non-accrual and accrual loans 155 223
Real estate owned (3)
----- -----
Total non-performing assets $ 155 $ 223
===== =====
Total non-performing loans to loans 0.44% 0.62%
Total non-performing loans to total assets 0.21% 0.30%
Total non-performing assets to total assets 0.21% 0.30%
</TABLE>
(1) Non-accrual status denotes loans which management believes may have
defined weaknesses whereby accrued interest is inadequately protected
by the current net worth and paying capacity of the obligor, or of the
collateral pledged.
(2) Loans more than 90 days past due will continue to accrue interest when
there is no well-defined weakness in the loan regarding net worth and
paying capacity of the obligor or of the collateral pledged which would
cause management to believe that interest accrued will be
uncollectible.
(3) Other non-performing assets represent property acquired by the Bank
through foreclosure, or repossession. This property is carried at the
lower of its fair market value or the carrying value of the related
loan.
18
<PAGE>
Non-accrual loans
Non-accrual loans at September 30, 1997 consisted of one fixed-rate
construction loan on residential property classified as loss and one fixed-rate
consumer loan classified as loss. The Savings Bank had no other non-performing
assets as of September 30, 1997.
Investment Activities
Income from investment in securities provides the second largest source
of income for Pioneer Federal after interest on loans. Pioneer Federal is
required under federal regulations to maintain a minimum amount of liquid assets
(which may be invested in specified short-term securities) and is also permitted
to make certain other investments. The balance of investments in excess of
regulatory requirements are in a variety of instruments including short-term
instruments (such as Municipal Bonds, Federal Home Loan Bank Bonds and
Certificates of Deposit) and longer-term, higher rate instruments (such as
mortgage-backed securities). Investment decisions are made by authorized
officers of the Bank.
The Bank invests in investment securities in order to diversify its
assets, manage cash flow, obtain yield and maintain the minimum levels of liquid
assets required by regulatory authorities. Such investments generally include
purchases of mortgage-backed securities, federal government and agency
securities and qualified deposits in other financial institutions.
At September 30, 1997, the Bank's investment securities totaled $28.6
million, of which $20.6 million were invested in mortgage-backed securities
primarily issued by Government agencies. These types of investments are interest
rate sensitive, and in addition, are subject to prepayment risk. Prepayment risk
is the risk that the principal of the security will be prepaid in advance of the
normal maturity, and any remaining premium or discount incurred from the
purchase of the investment could have a negative impact on the yield earned on
those investments.
It is management's intention, and Pioneer Federal has the ability, to
hold the majority of its investment security portfolio to maturity. In
accordance with SFAS No. 115, effective October 1, 1995, the Bank began
classifying securities as either held to maturity, available for sale, or
available for trade. Securities classified as held to maturity are carried at
their amortized cost. Securities classified as trading securities are carried at
fair value with any unrealized gain or loss included in net income. Securities
classified as available for sale are carried at fair value, with the net
unrealized gain
19
<PAGE>
or loss carried as a separate component of stockholders' equity. At September
30, 1997, the unrealized holding gains of $155, less the applicable deferred tax
of $53, is included as a separate component of stockholders' equity pursuant to
SFAS No. 115. The balance of investment securities are classified as held to
maturity, which are being held at cost, adjusted for amortization of premiums
and accretion of discounts over the term of the security using the level yield
method. For further information, see Note 2 of Notes to Consolidated Financial
Statements (page 28 of Exhibit 13 here to).
The following table sets forth the carrying value of the Bank's investment
securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
---------- -----------
1997 1996
---------- -----------
(Dollars In Thousands)
<S> <C> <C>
Investment securities available-for-sale:
Mortgage-backed securities $3,302 $3,076
SBA Pools 2,647 4,525
---------- -----------
Total 5,949 7,601
---------- -----------
Investment securities held-to-maturity:
Mortgage-backed securities 17,343 22,147
U.S. Government and federal agencies 4,006 500
Federal Home Loan Bank of Cincinnati,
capital stock 555 509
Municipal bonds 718 817
---------- -----------
Total 22,622 23,973
---------- -----------
Total investment securities $28,571 $31,574
========== ===========
</TABLE>
20
<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, 1997.
<TABLE>
<CAPTION>
-One Year or Less- -One to Five Years- -Five to 10 Years- -More than 10Years-
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
-------- -------- -------- -------- -------- -------- -------- --------
Securities Available-for-Sale (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities $0 0.00% $0 0.00% $0 0.00% $3,302 7.62%
SBA Pools 0 0.00% 0 0.00% 0 0.00% 2,647 7.00%
------- ------- ------- ------- ------- ------- ------- -------
Total 0 0.00% 0 0.00% 0 0.00% 5,949 7.35%
------- ------- ------- ------- ------- ------- ------- -------
Securities Held-to-Maturity:
Mortgage-backed securities 5 9.13% 7,131 6.24% 2,304 7.76% 7,904 6.81%
U.S. Govt. and federal agencies 3,006 5.89% 1,000 5.89% 0 0.00% 0 0.00%
FHLB Stock 0 0.00% 0 0.00% 0 0.00% 555 7.06%
Municipal bonds 100 5.40% 500 5.20% 0 0.00% 118 6.20%
------- ------- ------- ------- ------- ------- ------- -------
Total 3,111 5.87% 8,631 6.14% 2,304 7.76% 8,577 6.82%
------- ------- ------- ------- ------- ------- ------- -------
Total Investment Securities $3,111 5.87% $8,631 6.14% $2,304 7.76% $14,526 7.03%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
-Total Investments-
Carrying Market Average
Value Value Yield
--------- --------- ---------
Securities Available-for-Sale
<S> <C> <C> <C>
Mortgage-backed securities $3,302 $3,302 7.62%
SBA Pools 2,647 2,647 7.00%
------- ------- -------
Total 5,949 5,949 7.35%
------- ------- -------
Securities Held-to-Maturity:
Mortgage-backed securities 17,343 17,321 6.70%
U.S. Govt. and federal agencies 4,006 4,006 5.89%
FHLB Stock 555 555 7.06%
Municipal bonds 718 726 5.39%
------- ------- -------
Total Investment Securities 22,622 22,608 6.53%
------- ------- -------
$28,571 $28,557 6.70%
======= ======= =======
</TABLE>
21
<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 $555,300 at September 30,
1997.
Sources of Funds
Deposits are the major source of the Bank's funds for lending and other
investment purposes. In addition to deposits, Pioneer Federal derives funds from
loan principal repayments. Loan repayments are a relatively stable source of
funds, while deposit inflows and outflows are significantly influenced by
general interest rates and money market conditions. Borrowings from the Federal
Home Loan Bank may be used on a short-term basis to compensate for a reduction
in the availability of funds from other sources. They may also be used on a
longer-term basis for general business purposes.
Deposits. Consumer and commercial deposits are attracted principally
from within the Bank's primary market area through the offering of a broad
selection of deposit instruments including NOW accounts, passbooks, certificates
of deposit and retirement savings plans. The flow of deposits is influenced
significantly by general economic conditions, changes in money market and
prevailing interest rates and competition.
Pioneer Federal's policies are designed primarily to attract deposits
from local residents through Pioneer Federal's branch network rather than from
outside Pioneer Federal's market area. Pioneer Federal does not accept deposits
from brokers due to their rate sensitivity. Pioneer Federal's interest rates,
maturities, service fees and withdrawal penalties on deposits are established by
management on a periodic basis. Management determines deposit interest rates and
maturities based on Pioneer Federal's liquidity requirements, the rates paid by
Pioneer Federal's competitors, Pioneer Federal's growth goals and applicable
regulatory restrictions and requirements.
Savings deposits in Pioneer Federal Savings Bank as of September 30,
1997, were represented by the various types of savings programs described below.
22
<PAGE>
<TABLE>
<CAPTION>
Minimum Balance as of Percentage of
Interest balance September 30, Total
Category Term Rate (1) Amount 1997 (2) Deposits
-------------------------------------- ------------- -------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C>
NOW Accounts None 1.93% 300 $14,003 21.68%
Regular Savings None 2.92% 100 9,482 14.68%
Money Market Accounts None 3.20% 2,500 1,796 2.78%
Certificates of Deposit:
Fixed Term, Fixed Rate 7-31 days 4.00% 0 10 0.02%
Fixed Term, Fixed Rate 91 days 4.00% 1,000 306 0.47%
Fixed Term, Fixed Rate 6 month 4.60% 1,000 3,819 5.91%
Fixed Term, Fixed Rate 6 month 4.62% 1,000 2,199 3.40%
Fixed Term, Fixed Rate 12 months 5.14% 500 9,565 14.81%
Fixed Term, Fixed Rate 12 months 4.81% 500 268 0.41%
Fixed Term, Fixed Rate 12 months 4.50% * 2 0.01%
IRA, Fixed Term, Fixed Rate 18 months 5.67% 100 2,086 3.22%
IRA, Fixed Term, Variable Rate 18 months 5.60% 100 4,029 6.25%
Fixed Term, Fixed Rate 18 months 5.26% 1,000 6,801 10.53%
Fixed Term, Fixed Rate 24 months 5.32% 1,000 5,232 8.10%
Fixed Term, Fixed Rate 30 months 4.69% * 30 0.05%
Fixed Term, Fixed Rate 36 months 5.82% 1,000 2,857 4.42%
Fixed Term, Fixed Rate 48 months 4.86% * 26 0.04%
Fixed Term, Fixed Rate 60 months 6.70% 5,000 1,946 3.02%
Fixed Term, Fixed Rate 72 months 5.77% * 128 0.20%
-------------- ------------
$64,585 100.00%
============== ============
</TABLE>
(1) Represents weighted average interest rates
(2) In thousands
* This type of certificate was no longer offered at September 30, 1997
23
<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 quarter is charged (excluding minors' accounts). This account allows
for unlimited deposits and three withdrawals per month. If more than nine
withdrawals are requested per quarter, a $2 per withdrawal fee is collected. A
dormant charge of $5 per quarter is assessed if there has been no activity on
the account for 2 years and the balance is under $500 at quarter end. Simple
interest is credited quarterly and is calculated from the date of funds being
deposited to the date of withdrawal.
NOW Accounts. NOW accounts are checking accounts. Pioneer offers four
types of NOW accounts. The SETTLERS account allows up to 50 checks to be written
monthly without charge; after that there is a 20 cent charge for each check
written. A monthly service fee is not charged if a minimum balance of $300 is
maintained; if the account drops below $300 a $5 per month maintenance fee is
charged. The SETTLERS account is a non-interest bearing account. The PIONEER
account allows unlimited checking. This account pays money market rates when a
minimum balance of $1000 is maintained. If the balance drops below $1000 a $7.50
per month maintenance fee is charged. The FOUNDERS account is for customers over
age 55. This account pays interest if a balance of $1000 or greater is
maintained. A monthly service charge of $3 is assessed if the balance falls
below $100. The FOUNDERS account allows unlimited checking. The WINCHESTER
account is for non-profit community organizations. This account allows unlimited
checking and pays interest when a minimum balance of $1000 is maintained. If the
balance falls below $100, a $3 monthly maintenance fee is charged.
Money Market Deposit Accounts ("MMDAs"). The Garn Act authorized, in
late 1982, a new type of money market deposit account intended to have rates
that are competitive with money market rates. In accordance with regulatory
limitations, the main features of the Bank's MMDA include the following: (1)
$2,500 minimum balance (interest reverts to the NOW account rate when the
account balance drops below the minimum balance requirement, with $7.50 monthly
maintenance fee if balance falls below $1000); (2) no limit on the rate the Bank
may pay on the account; (3) six preauthorized or automatic third party transfers
in an amount in excess of $500 are permitted, three of which may be by check,
with $2.00 per withdrawal over six; (4) no restrictions on the size and
frequency of withdrawals by mail or in person; (5) no restriction on additional
deposits to the account; and (6) no minimum maturity or early withdrawal
penalty.
24
<PAGE>
Individual Retirement Accounts ("IRAs"). The Bank offers tax-deferred
Individual Retirement Accounts. Pioneer Federal offers certificates established
solely for IRA accounts which have a maturity of 18 months.
The Bank currently offers IRAs which have both fixed and floating
interest rates.
Certificates of Deposit ("CDs"). Pioneer Federal offers certificates of
deposit with terms ranging from three months to five years. The required minimum
investment varies with the different terms of the certificates. Interest on the
certificates is simple interest, payable monthly, quarterly, or at maturity. The
interest rates on these certificates are set weekly by the Bank and are fixed
for the term of the certificate.
The following table indicates the amount (in thousands) of the
certificates of deposit of $100,000 or more by time remaining until maturity at
September 30, 1997.
<TABLE>
<S> <C>
Three months or less: $ 1,599
More than three through six months: 1,635
More than six through twelve months: 1,838
Over twelve months: 1,919
-------
$ 6,991
=======
</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,
1997 1996
Average Average Average Average
Balance Rate Balance Rate
------- ------- ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Deposit Category:
Demand Accounts (1) $16,745 2.10% $18,783 2.93%
Passbook Accounts 9,583 2.91% 9,838 2.20%
Certificates 38,913 5.21% 39,497 5.37%
------- ------- ------- ------
$65,241 4.06% $68,118 4.13%
======= ======= ======= ======
</TABLE>
(1) Non-interest bearing deposits are not in excess of 10% of total deposits.
25
<PAGE>
Borrowings
Savings deposits historically have been the primary source of funds for
the Bank's lending and investment activities and for its general business
activities. The Bank is authorized, however, to use advances from the FHLB of
Cincinnati to supplement its supply of lendable funds and to meet deposit
withdrawal requirements. Advances from the FHLB are secured by a portion of the
Bank's mortgage loans.
The FHLB of Cincinnati functions as a central reserve bank providing
credit for savings institutions and certain other member financial institutions.
As a member, the Bank is required to own capital stock in the FHLB and is
authorized to apply for advances on the security of such stock and certain of
its home mortgages and other assets (principally, securities which are
obligations of, or guaranteed by, the United States), provided certain standards
related to credit worthiness have been met. See "Regulation of the Bank --
Federal Home Loan Bank System."
Competition
The Bank faces strong competition in the attraction of savings deposits
and in the origination of real estate loans. Its most direct competition for
savings deposits has historically come from commercial banks and other thrifts
located in its primary lending area and Fayette County, Kentucky. The Bank faces
additional significant competition for investors' funds from offerors of
short-term money market securities and other corporate and government
securities. The Bank's competition for real estate loans comes principally from
other thrifts, commercial banks and mortgage banking companies.
The Bank competes for loans principally through the interest rates and
loan fees it charges and the efficiency and quality of the services it provides
borrowers. It competes for savings by offering depositors a wide variety of
savings accounts, checking accounts, convenient office locations, convenient
hours of operation, tax-deferred retirement accounts, and other miscellaneous
services.
The Bank considers Clark and Powell Counties, Kentucky, to be its
primary market area for savings and mortgage loans. As of September 30, 1997,
there were eight other financial institutions located in these counties; one of
the eight is a thrift institution. Management believes that Pioneer Federal has
good community identification in the area, and feels that local ownership of the
Bank is an important factor contributing to the Bank's success. Nonetheless, the
Bank competes with much larger financial institutions in Clark County and nearby
Lexington, Kentucky. These competitors offer better loan rates and broader
customer services than the Bank from time to time due to their
26
<PAGE>
size, financial resources and competitive strategy.
The Deregulation and Garn Acts and regulations implementing these Acts
significantly expanded the range of services which savings and loan associations
can offer to the public. These Acts, rate deregulation and high interest rates
in the early 1980's caused a dramatic increase in competition (e.g., money
market mutual funds, Treasury securities, municipal bonds, etc.) for savings
dollars and have increased competition with commercial banks in regard to loans,
checking accounts and other types of financial services. In addition, large
conglomerates and investment banking firms entered the market for financial
services during the past decade. The savings public became increasingly
sophisticated. Thus the Bank encountered, and may continue to encounter,
increased competition in the financial services offered and Pioneer will have to
be innovative and knowledgeable about its market, as well as exert effective
controls over its costs, in order to remain competitive.
Sale of Stanton Branch Deposits and Physical Facility
On October 17, 1997, Pioneer Financial Corporation sold the deposits of
Pioneer Federal Savings Bank at its Stanton branch, together with the real
estate and improvements on which that branch was located, to Peoples Exchange
Bank of Beattyville, Kentucky, Inc. The decision to sell the deposits and
physical assets was made over a period of time and was not entered into lightly.
Pioneer Federal had opened its Stanton branch in 1980. The management of Pioneer
Federal wanted to increase its customer base east of Clark County for several
reasons.
Unfortunately, the Stanton branch never proved as profitable as the
rest of the Bank. Management of Pioneer Federal continued to operate this branch
due to its commitment to providing service and competition in the Powell County
and Eastern Kentucky market. However, in 1997, additional competition moved into
that area, which no longer made Pioneer's presence in Powell County as important
to those residents. Of course, the presence of additional competition would
decrease the likelihood of Pioneer's future profitability in Powell County.
When it became apparent that Peoples Exchange Bank was going to move
its main office to Powell County, and Peoples Exchange made an offer to purchase
Pioneer's physical building, together with its deposit base, the Board of
Directors reluctantly decided to make that sale. The price paid by Peoples
Exchange Bank was a good price, and the opportunity would likely not be
repeated. (See Note 17 of Notes to Consolidated Financial Statements.)
27
<PAGE>
Subsidiaries
Pioneer Federal Savings Bank has one service corporation subsidiary,
Pioneer Service Corporation ("PSC"). In August, 1978, Pioneer Federal formed PSC
and purchased all of its stock for $16,000. PSC was formed by the Bank for the
purpose of acquiring stock in Intrieve, Incorporated. Intrieve is a non-profit
corporation based in Cincinnati, Ohio, which provides on-line computer
processing and inquiry service to Pioneer Federal and other savings and loan
institutions in the region. To date, PSC has conducted no business activities.
Personnel
As of September 30, 1997, the Bank had 24 full-time employees, and 9
part-time employees. The employees are not represented by a collective
bargaining unit. The Bank believes its relationship with its employees to be
good.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements, and Notes thereto, presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering the changes in
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Bank's operations. Unlike
most industrial companies, nearly all the assets and liabilities of the Bank are
monetary in nature. As a result, interest rates have greater impact on the
Bank's performance than do the effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or to the same extent as the
price of goods and services.
Year 2000 Concerns
Many computer programs use two digits to identify the year in a date
field. When computations involve the year 2000 and subsequent years, these
programs could create erroneous results, or could fail. Pioneer Federal has
appointed a committee and instituted an action plan, to address any problems
which it might face regarding the year 2000, both in terms of computer hardware
and software. At present, Pioneer Federal's management does not consider that
the cost of remedying any such problems will be material. However, as the
committee progresses through its agenda, should this assessment of the costs of
remedy change so that said costs would materially affect the Company's future
financial results, then such will be reported.
28
<PAGE>
Company Regulation
General. The Corporation is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Corporation is required
to register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS will have enforcement authority
over the Corporation and its non-savings association subsidiaries, should such
subsidiaries be formed, which also permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
association. This regulation and oversight is intended primarily for the
protection of the depositors of the Bank and not for the benefit of stockholders
of the Corporation. The Corporation is also required to file certain reports
with, and otherwise comply with the rules and regulations of, the OTS and the
Securities and Exchange Commission ("SEC").
QTL Test. As a unitary savings and loan holding company, the
Corporation generally will not be subject to activity restrictions, provided the
Bank satisfies the QTL test (See Qualified Thrift Lender Test, page 36). If the
Corporation acquires control of another savings association as a separate
subsidiary, it would become a multiple savings and loan holding company, and the
activities of the Corporation, and any of its subsidiaries (other than the Bank
or any other SAIF-insured savings association) would become subject to
restrictions applicable to bank holding companies unless such other associations
each also qualify as a QTL or were acquired in a supervised acquisition.
Restrictions on Acquisitions. The Corporation must obtain approval from
the OTS before acquiring control of any other SAIF-insured association. Such
acquisitions are generally prohibited if they result in a multiple savings and
loan holding company controlling savings associations in more than one state.
However, such interstate acquisitions are permitted based on specific state
authorization or in a supervisory acquisition of a failing savings association.
Federal law generally provides that no "person", acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control", as that term is defined in OTS regulations, of a federally insured
savings institution without giving at least 60 days written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition.
Such an acquisition of control may be disapproved if it is determined, among
other things, that: (i) the acquisition would substantially lessen competition;
(ii) the financial condition of the acquiring person might jeopardize the
financial stability of the savings institution or prejudice the interest of its
depositors; or (iii) the competency, experience,
29
<PAGE>
or integrity of the acquiring person or the proposed management personnel
indicates that it would not be in the interests of the depositors or the public
to permit the acquisition of control by such person.
The Bank Holding Company Act of 1956 ("BHCA") authorizes the Federal
Reserve Board to approve an application by a bank holding company to acquire
control of a savings association. Furthermore, a bank holding company that
controls a savings association is authorized to merge or consolidate the assets
and liabilities of the savings association with, or transfer assets and
liabilities to, any subsidiary bank which is a member of the BIF with the
approval of the appropriate federal banking agency and the Federal Reserve
Board. Generally, federal savings associations can acquire or be acquired by any
insured depository institution.
Federal Securities Law. The Corporation's Common Stock is registered
with the SEC under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The Corporation is subject to the information, proxy
solicitation, insider trading restrictions and other requirements under the
Exchange Act. The Commission maintains a web site which contains reports, proxy
and information statements and other information pertaining to registrants that
file electronically with the commission, including the Corporation. The web site
address is as follows: (http://www.sec.gov).
Bank Regulation
General. The Bank is chartered as a federal savings bank under the Home
Owners' Loan Act, as amended (the "HOLA") which is implemented by regulations
adopted and administered by the OTS. As a federal savings bank, the Bank is
subject to regulation, supervision and regular examination by the OTS. The OTS
also has extensive enforcement authority over all savings institutions and their
holding companies, including the Bank and the Company. Federal banking laws and
regulations control, among other things, the Bank's required reserves,
investments, loans, mergers and consolidations, payment of dividends and other
aspects of the Bank's operations. The deposits of the Bank are insured by the
SAIF administered by the FDIC to the maximum extent provided by law ($100,000
for each depositor). In addition, the FDIC has certain regulatory and
examination authority over OTS-regulated savings institutions and may recommend
enforcement actions against savings institutions to the OTS. The supervision and
regulation of the Bank is intended primarily for the protection of the deposit
insurance fund and the Bank's depositors rather than for holders of the
Company's stock or for the Company as the holder of the stock of the Bank.
30
<PAGE>
Pioneer Federal must file reports with the OTS and the FDIC concerning
its activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the Savings Association
Insurance Fund ("SAIF") and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such regulations, whether
by the OTS, the FDIC or the United States Congress, could have a material
adverse impact on the Company and the Bank and their operations.
Proposed Legislation. Legislation currently pending before the United
States Congress would, if enacted, require all federal savings institutions
(such as the Bank) to convert to a national bank or a state bank or savings bank
charter. In addition, the proposed legislation would cause the Company to be
regulated not as a savings and loan holding company, but rather as a bank
holding company or a "financial services" holding company (a new regulatory
classification created by the legislation). If the pending legislation were to
be adopted in its current form, it would eliminate certain advantages now
enjoyed by federal savings institutions, such as unrestricted interstate
branching.
As consideration of the proposed legislation is in its early stages,
the Company cannot predict whether or in what form the legislation will be
enacted. However, based upon the provisions of the currently pending
legislation, the management of the Company does not believe that the enactment
of such legislation would have a material adverse effect on its financial
condition or results of operations.
Business Activities. The Bank derives its lending and investment powers
from the HOLA and the regulations of the OTS thereunder. Under these laws and
regulations, the Bank may invest in mortgage loans secured by residential and
commercial real estate, commercial and consumer loans, certain types of
commercial paper and debt securities, and certain other assets. The Bank may
also establish service corporations that may engage in activities not otherwise
permissible for the Bank, including certain real estate equity investments and
securities and insurance brokerage. These investment powers are subject to
various limitations.
Branching. Subject to certain limitations, OTS regulations currently
permit a federally chartered savings institution like
31
<PAGE>
the Bank to establish branches in any state of the United States, provided that
the federal savings institution qualifies as a "domestic building and loan
association" under the Internal Revenue Code. See "Qualified Thrift Lender
Test". The authority for a federal savings institution to establish an
interstate branch network would facilitate a geographic diversification of the
institutions's activities. However, recently proposed federal legislation could,
if enacted, restrict the Bank's ability to open branches in states other than
Kentucky. See "Proposed Legislation".
Insurance of Deposit Accounts. The Bank's deposit accounts are insured
by the SAIF to a maximum of $100,000 for each insured member (as defined by law
and regulation). The FDIC has the authority, should it initiate proceedings to
terminate an institution's deposit insurance, to suspend the insurance of any
such institution without tangible capital. However, if a savings association has
positive capital when it includes qualifying intangible assets, the FDIC cannot
suspend deposit insurance unless capital declines materially, the institution
fails to enter into and remain in compliance with an approved capital plan, or
the institution is operating in an unsafe or unsound manner.
Regardless of an institution's capital level, insurance of deposits may
be terminated by the FDIC upon a finding that the institution has engaged in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC or the institution's primary regulator. The
management of the Bank is unaware of any practice, condition or violation that
might lead to termination of its deposit insurance.
On September 30, 1996, H.R. 1362 was signed into law by the President.
Title II of H.R. 1362 is titled the Economic Growth and Paperwork Reduction Act
of 1996 (the "Act"). Among its many provisions, the Act provided resolution of
the BIF/SAIF premium disparity. Before September 30, 1996, most insured
depository institutions holding BIF-assessable deposits paid the statutory
minimum of $2,000 for insurance on these deposits while most insured depository
institutions with SAIF-assessable deposits paid 23 basis points per $100 of
these deposits for deposit insurance. The Bank paid, for the year ended
September 30, 1996, an insurance premium to the FDIC equal to 0.23% of its total
deposits.
The BIF/SAIF legislation provided for a one-time assessment to
recapitalize the SAIF. The assessment was based upon the amount of
SAIF-assessable deposits held by an institution as of March 31, 1995 (with
certain exceptions). The assessment was effective on September 30, 1996 and
payable on November 27, 1996.
32
<PAGE>
The BIF/SAIF legislation did not specify an actual assessment but
stated that the total assessment would be equal to the amount necessary to
recapitalize the SAIF as of October 1, 1996. Institutions were assessed at the
rate of 65.7 basis points per $100 of SAIF-assessable deposits as of March 31,
1995. The BIF/SAIF legislation provided that the amount of the special
assessment is deductible under Section 162 of the Internal Revenue Code (the
"Code") in the year the assessment is paid. The BIF/SAIF legislation also
provided that section 172(f) of the Code will not apply to deductions taken
under section 162 of the Code for the special assessment. The Bank's assessment
amounted to approximately $435,000 before tax benefit, and such amount was
accrued in the financial statements as of September 30, 1996.
As a result of the recapitalization of the SAIF by the 1996 Act, the
FDIC reduced the insurance assessment rate for SAIF-assessable deposits for
periods beginning on October 1, 1996. In 1997, the FDIC set the effective
insurance assessment rates for SAIF-insured institutions, such as the Bank, at
zero to 27 basis points. In addition, SAIF-insured institutions will be
required, until December 31, 1999, to pay assessments to the FDIC at an annual
rate of between 6.0 and 6.5 basis points to help fund interest payments on
certain bonds issued by the Financing Corporation ("FICO"), an agency of the
federal government established to recapitalize the predecessor to the SAIF.
During this period, BIF member banks will be assessed for payment of the FICO
obligations at one-fifth the annual rate applicable to SAIF member institutions.
After December 31, 1999, BIF and SAIF members will be assessed at the same rate
(currently estimated at approximately 2.4 basis points) to service the FICO
obligations.
The 1996 Act also provides that the FDIC may not assess regular
insurance assessments for the SAIF unless required to maintain or to achieve the
designated reserve ratio of 1.25% except for such assessments on those
institutions that are not classified as "well-capitalized" or that have been
found to have "moderately severe" or "unsatisfactory" financial, operational or
compliance weaknesses. The Bank is classified as "well-capitalized" and has not
been found by the OTS to have such supervisory weaknesses.
Regulatory Capital Requirements. OTS capital regulations require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted assets, (2) a leverage ratio (core capital) equal to
at least 3% of total adjusted assets, and (3) a risk-based capital requirement
equal to 8.0% of total risk-weighted assets.
Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), plus purchased mortgage servicing rights
valued at the lower of the maximum percentage established by the OTS or the
amount
33
<PAGE>
includable in core capital. Core capital is defined as common stockholders'
equity (including retained earnings), noncumulative perpetual preferred stock
and majority interests in the equity accounts of consolidated subsidiaries, and
qualifying supervisory goodwill, less nonqualifying intangible assets.
The OTS leverage ratio regulation establishes a core capital ratio of
at least 3% for those savings associations in the strongest financial and
managerial condition based on the "CAMEL" rating system currently in use by the
OTS. Those savings associations receiving a CAMEL rating of "1", the best
possible rating on a scale of 1 to 5, will be required to maintain a ratio of
core capital to adjusted total assets of 3%. All other savings associations will
be required to maintain minimum core capital of at least 4% of total adjusted
assets, with a maximum core capital ratio requirement of 5%. In determining the
required minimum core capital ratio, the OTS would assess the quality of risk
management and the level of risk in each savings association on a case-by-case
basis. The OTS has not indicated the standards it will use in establishing the
appropriate core capital requirement for savings associations not rated "1"
under the CAMEL rating system.
The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital (which is defined as core capital plus
supplementary capital) of 8.0% of risk-weighted assets. The components of
supplementary capital include, among other items, cumulative perpetual preferred
stock, perpetual subordinated debt, mandatory convertible subordinated debt,
intermediate-term preferred stock and the portion of the allowance for loan
losses not designated for specific loan losses. The portion of the allowances
for loan and lease losses includable in supplementary capital is limited to a
maximum of 1.25% of risk-weighted assets. Overall, supplementary capital is
limited to 100% of core capital. A savings association must calculate its
risk-weighted assets by multiplying each asset and off-balance sheet item by
various risk factors as determined by the OTS, which range from 0% for cash to
100% for delinquent loans, property acquired through foreclosure, commercial
loans and other assets.
As of September 30, 1997, the Bank had tangible, core and risk-based
capital of $8.6 million, $8.6 million and $9.0 million, respectively, which
amounts significantly exceed all applicable fully phased-in regulatory capital
requirements of the OTS.
OTS regulations set forth the methodology for calculating an Interest
Rate Risk (IRR) component which is added to the risk-based capital requirements
for OTS regulated thrift institutions. Generally, savings associations with a
greater than "normal" level of interest rate exposure will be subject to a
deduction
34
<PAGE>
from total capital for purposes of calculating their risk-based capital
requirement. Specifically, interest rate exposure will be measured as the
decline in net portfolio value due to a 200 basis point change in market
interest rates. The IRR component to be deducted from total capital is equal to
one-half the difference between an institution's measured exposure and the
"normal" level of exposure (which is defined as 2% of the estimated economic
value of its assets). Institutions, such as the Bank, with less than $300
million in assets and a risk-based capital ratio in excess of 12% are exempt
from deducting the IRR component.
In addition, pursuant to the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), the OTS must revise the risk-based capital
regulations to include a credit risk component and a nontraditional activities
component (IRR), the purpose of which will be to increase the minimum capital
requirements for savings associations with higher credit risks. The OTS has,
however, indefinitely deferred enforcement of its IRR requirements.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), the federal banking regulators are required to take prompt
corrective action in respect of depository institutions that do not meet certain
minimum capital requirements, including a leverage limit and a risk-based
capital requirement. All institutions, regardless of their capital levels, are
restricted from making any capital distribution or paying any management fees
that would cause the institution to become undercapitalized. As required by the
FDICIA, banking regulators, including the OTS, have issued regulations that
classify insured depository institutions by capital levels and provide that the
applicable agency will take various prompt corrective actions to resolve the
problems of any institution that fails to satisfy the capital standards.
Dividend and Other Capital Distribution Limitations. OTS regulations
impose limitations upon all capital distributions by savings institutions, such
as cash dividends, payments to repurchase or otherwise acquire its shares,
payments to shareholders of another institution in a cash-out merger, and other
distributions charged against capital. The rule establishes three tiers of
institutions, based primarily on an institution's capital level. OTS regulations
require the Bank to give the OTS 30 days advance notice of any proposed
declaration of dividends to the Corporation, and the OTS has the authority under
its supervisory powers to prohibit the payment of dividends to the Corporation.
In addition, the Bank may not declare or pay a cash dividend on its capital
stock if the effect thereof would be to reduce the regulatory capital of the
Bank below the amount required for the liquidation account established pursuant
to the Bank's conversion. Finally, under the FDICIA, a savings
35
<PAGE>
association is prohibited from making a capital distribution if, after making
the distribution, the savings association would be undercapitalized (not meet
any one of its minimum regulatory capital requirements).
Qualified Thrift Lender Test. The Home Owners' Loan Act, as amended
("HOLA"), requires savings institutions to meet a Qualified Thrift Lender (QTL)
test. If the Bank maintains an appropriate level of Qualified Thrift Investments
("QTIs") (primarily residential mortgages and related investments, including
certain mortgage-related securities) and otherwise qualifies as a QTL, it will
continue to enjoy full borrowing privileges from the FHLB of Cincinnati. The
required percentage of QTIs is 65% of portfolio assets (defined as all assets
minus intangible assets, property used by the institution in conducting its
business and liquid assets equal to 10% of total assets). Certain assets are
subject to a percentage limitation of 20% of portfolio assets. In addition,
savings associations may include shares of stock of the FHLBs, Federal National
Mortgage Association ("FNMA"), and FHLMC as qualifying QTIs. Compliance with the
QTL test is determined on a monthly basis in nine out of every 12 months. As of
September 30, 1997, the Bank qualified as a QTL.
A savings association that does not meet a QTL test must either convert
to a bank charter or comply with the following restrictions on its operations:
(i) the savings association may not engage in any new activity or make any new
investment, directly or indirectly, unless such activity or investment is
permissible for a national bank; (ii) the branching powers of the savings
association shall be restricted to those of a national bank; (iii) the savings
association shall not be eligible to obtain any advances from its FHLB; and (iv)
payment of dividends by the savings association shall be subject to the rules
regarding payment of dividends by a national bank. Upon the expiration of three
years from the date the savings association ceases to be a QTL, it must cease
any activity and not retain any investment not permissible for a national bank
and immediately repay any outstanding FHLB advances (subject to safety and
soundness considerations.)
Transactions With Affiliates. Generally, restrictions on transactions
with affiliates require that transactions between a savings association or its
subsidiaries and its affiliates be on terms as favorable to the Bank as
comparable transactions with non-affiliates. In addition, certain of these
transactions are restricted to an aggregate percentage of the Bank's capital,
and collateral in a specified amount must usually be provided by affiliates to
receive loans from the Bank. Affiliates of the Bank include the Corporation and
any company which would be under common control with the Bank. In addition, a
savings association may not lend to any affiliate engaged in activities not
36
<PAGE>
permissible for a bank holding company or acquire the securities of any
affiliate which is not a subsidiary. The OTS has the discretion to treat
subsidiaries of the savings association as affiliates on a case-by-case basis.
The Bank's authority to extend credit to its officers, directors, and
10% stockholders as well as entities that such persons control is currently
governed by Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O
promulgated by the Federal Reserve Board. Among other things, these regulations
require such loans to be made on terms substantially similar to those offered to
unaffiliated individuals, place limits on the amounts of loans the Bank may make
to such persons based, in part, on the Bank's capital position, and require
certain approval procedures to be followed. OTS regulations, with minor
variation, apply Regulation O to savings associations.
Liquidity Requirements. All savings associations are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. As of September 30, 1997, the Bank's
liquidity ratio was 29.13%.
Liquid assets for purposes of this ratio include specific short term
assets (e.g., cash, certain time deposits, certain banker's acceptances, and
short-term U.S. Government obligations), and long-term assets (e.g., U.S.
Government obligations of more than one and less than five years, and state
agency obligations with a maximum remaining term of 24 months). The regulations
governing liquidity requirements include as liquid assets: debt securities
hedged with forward commitments obtained from, or debt securities subject to
repurchase agreements with, members of the Bank of Primary Dealers in United
States Government Securities or banks whose accounts are insured by the FDIC;
debt securities directly hedged with a short financial future position; and debt
securities that provide the holder with a right to redeem the security at par
value, regardless of the stated maturities of the securities. The OTS is also
authorized to designate as liquid assets certain mortgage-related securities
with less than one year to maturity. Short-term liquid assets currently must
constitute at least 1% of an association's average daily balance of net
withdrawable deposit accounts and current borrowings. Monetary penalties may be
imposed upon associations for violations of liquidity requirements.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Cincinnati, which is one of 12 regional FHLBs that administer the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for
37
<PAGE>
its members within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
loans to members (i.e., advances) in accordance with policies and procedures
established by the Board of Directors of the FHLB. As of September 30, 1997, the
Bank had borrowed $652,225 from the FHLB of Cincinnati to fund operations; there
can be no assurances that additional borrowings will not be made in the future.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Cincinnati in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts, or similar obligations at
the beginning of each year. As of September 30, 1997, the Bank had $555,300 in
FHLB stock, which was in compliance with this requirement.
The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low-and moderate-income housing projects. These contributions have adversely
affected the level of FHLB dividends paid and could continue to do so in the
future. For the fiscal year ended September 30, 1997, dividends paid by the FHLB
of Cincinnati to the Bank totaled $46,500.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW, and Super
NOW checking accounts) and non-personal time deposits. The balances maintained
to meet the reserve requirements imposed by the Federal Reserve Board may be
used to satisfy the liquidity requirements that are imposed by the OTS. As of
September 30, 1997, the Bank was in compliance with its Federal Reserve Board
minimum reserve requirements.
Savings associations have authority to borrow from the Federal Reserve
Bank "discount window", but Federal Reserve policy generally requires savings
associations to exhaust all OTS sources before borrowing from the Federal
Reserve System. The Bank had no such borrowings at September 30, 1997.
Federal Taxation
The Company and the Bank file a consolidated tax return on a fiscal
year (September 30) basis. Thrift institutions are subject to the provisions of
the Code in the same general manner as other corporations. Prior to recent
legislation, institutions such as the Bank which met certain definitional tests
and other conditions prescribed by the Code benefitted from certain favorable
provisions regarding their deductions from taxable income for annual additions
to their bad debt reserve. For
38
<PAGE>
purposes of the bad debt reserve deductions, loans were separated into
"qualifying real property loans", which generally are loans secured by interests
in certain real property, and nonqualifying loans, which are all other loans.
The bad debt reserve deduction with respect to nonqualifying loans was based on
actual loss experience, although the amount of the bad debt reserve deduction
with respect to qualifying real property loans could be based upon actual loss
experience (the "experience method") or a percentage of taxable income
determined without regard to such deduction (the "percentage of taxable income
method"). Legislation recently signed by the President repealed the percentage
of taxable income method of calculating the bad debt reserve. The Bank
historically has elected to use the percentage method.
Earnings appropriated to an institution's bad debt reserve and claimed
as a tax deduction are not available for distribution to shareholders (including
distributions made on dissolution or liquidation), unless such amount was
included in taxable income, along with the amount deemed necessary to pay the
resulting federal income tax. For information regarding additions to the tax bad
debt reserves, see Note 7 to Financial Statements.
The federal income tax returns of the Company and the Bank have not
been examined by the IRS during the past 10 years.
State Taxation
The Commonwealth of Kentucky imposes no income or franchise taxes on
savings institutions. Pioneer Federal is subject to an annual Kentucky ad
valorem tax. This tax is .1% of the Bank's savings accounts, common stock,
capital and retained income with certain deductions allowed for amounts borrowed
by depositors and for securities guaranteed by the U.S. Government or certain of
its agencies. For the fiscal year ended September 30, 1997, the amount of such
expense for the Bank was $65,545.
The Corporation is subject to an annual license fee on capital employed
and income tax on its operations by the Commonwealth of Kentucky. The annual
license fee is based on $2.10 per $1,000 of capital employed and the tax on
income ranges from 4% on the first $25,000 of taxable income to 8.25% on taxable
income in excess of $250,000.
Item 2. Properties
Pioneer Financial's and Pioneer Federal's main office is located at 25
East Hickman Street, Winchester, Kentucky. The building is a one story building
of contemporary design constructed in 1975 and expanded in 1978. The building
has 5,670 square feet, with four teller stations, two drive-in windows (which
serve two lanes of traffic), five private offices, a
39
<PAGE>
Directors' Conference Room, a kitchen, a large lobby, two restrooms, a walk-in
vault, a storage room, and a tellers' work area. There are eleven computer
terminals at the main office.
As of September 30, 1997 Pioneer Federal still owned a branch office at
17 East Pendleton Street, Stanton, Kentucky. It consisted of a brick-veneer
modular building, constructed in 1980. The building had 1,120 square feet, with
two teller stations, one drive-in window, one large private office, a kitchen,
two restrooms, and a tellers' work area. There were three computer terminals at
the branch office. Its value is included in the table below.
The Bank also has a branch in Winchester, Kentucky, at the corner of
the Bypass (Kentucky Highway 1958) and Fulton Road. This building is of a
contemporary design, with a concrete exterior. The branch has a small kitchen,
two restrooms, an office, conference room, safety deposit boxes and a walk-in
vault. The Bypass branch has eight computer terminals, three drive-in lanes and
an automatic teller machine (ATM).
<TABLE>
<CAPTION>
September 30,
1997 1996
----------------------
<S> <C> <C>
Land, buildings and
improvements....... $1,850,235 $1,637,310
Furniture, fixtures
and equipment...... 790,987 720,748
--------- ---------
Total, at cost....... 2,641,222 2,358,058
Less accumulated
depreciation....... 1,228,958 1,182,071
--------- ---------
$1,412,264 $1,175,987
========= =========
</TABLE>
Item 3. Legal Proceedings
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
40
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholders
Matters
(a) Market Information. As of the date hereof, there is no established
public trading market for Pioneer Financial's common stock. The most recent sale
of Pioneer Financial's stock for which Pioneer Financial is aware of the
purchase price occurred during the week of August 11, 1997, with the price per
share being $43.00.
(b) Holders. As of December 1, 1997, there were approximately 285 holders
of shares of Pioneer Financial's common stock, par value $1 per share.
(c) Dividends. During fiscal year 1997, Pioneer Financial's Board of
Directors declared quarterly dividends of 35 cents per share payable on December
16, 1996, and 40 cents per share payable on March 15, 1997, June 16, 1997 and
September 15, 1997 to shareholders of record as of December 2, 1996, March 1,
1997, June 1, 1997 and September 1, 1997, respectively. Total dividends paid in
fiscal 1997 amounted to $322,761.
The Corporation may not declare or pay cash dividends on any of its stock
if the effect thereof would cause the Bank's net worth to be reduced below (1)
the amount required for the liquidation account established in connection with
its stock conversion, or (2) the net worth and capital distribution requirements
imposed by the OTS and FDIC. (see Note 8 to Consolidated Financial Statements,
on page 36 of the Corporation's Annual Report to Shareholders, Exhibit 13
hereto).
Item 6. Selected Financial Data
The information contained under the section captioned "Selected
Consolidated Financial and Other Data" on pages 4 and 5 of the Corporation's
Annual Report to Shareholders (Exhibit 13 hereto) is incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 6 through 16 of the Corporation's Annual Report to Shareholders (Exhibit
13) is incorporated herein by reference.
41
<PAGE>
Item 8. Financial Statement and Supplementary Data
The financial statements and supplemental data contained on pages 17 through
46 of the Corporation's Annual Report to Shareholders (attached hereto as
Exhibit 13) as listed in Item 14, are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
(a) Changes in Registrant's Certifying Accountant. Not applicable.
(b) Disagreements with Accountants. Not applicable.
PART III
Item 10. Directors and Executive Officers of Pioneer Federal
Reference is made to "Election of Directors" from pages 5 through 7 of
the Proxy Statement for the January, 1998 annual meeting of stockholders
(Exhibit 28(b) hereto).
Pursuant to Section 16(a) of the Securities Exchange Act of 1934, as
amended, the Corporation's executive officers and directors, and persons who own
more than ten percent of registered class of the Corporation's equity securities
are required to file reports of ownership with the OTS and the National
Association of Securities Dealers, Inc. Executive officers, directors and
greater than ten-percent shareholders are required by SEC regulation to furnish
the Corporation with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 4 or 5 were
required for those persons, the Corporation believes that, since September 30,
1996, all filing requirements applicable to its executive officers, directors
and greater than ten-percent beneficial owners were complied with.
Item 11. Executive Compensation
(a) Cash Compensation. Reference is made to "Remuneration of Officers" on
pages 12 through 13 of the Proxy Statement (Exhibit 28(b) hereto, which is
incorporated herein by reference) for information with respect to the cash
compensation of the registrant's executive and other officers as a group.
(b) Compensation Pursuant to Plans. The registrant has instituted a "401(k)"
retirement plan as of December 1, 1985. With respect to this plan, reference is
made to the section captioned "Remuneration of Officers" on pages 12 and 13 of
the
42
<PAGE>
Proxy Statement (Exhibit 28(b) hereto) and Note 10 on page 38 of the financial
statements included in the Annual Report to Shareholders (Exhibit 13 hereto) for
details concerning this retirement plan. There is no contractual obligation for
the registrant to contribute sums to this plan. To date, Pioneer Federal has
contributed $242,420 to this 401(k) plan.
(c) Employee Stock Ownership Plan. On October 31, 1994, the registrant
approved the establishment of an Employee Stock Ownership Plan (ESOP) in which
employees meeting age and service requirements are eligible to participate. The
ESOP is effective beginning January 1, 1994. The Board of Directors authorized
the funding of the ESOP with contributions of $38,488 and $30,512 for the years
ended September 30, 1997 and 1996 respectively.
(d) Other Compensation. Not applicable.
(e) Compensation of Directors. Reference is made to "Directors' Fees" on
page 11 and "Election of Directors" on pages 5 to 8 of the Proxy Statement
(Exhibit 28(b) hereto) for the description of the remuneration paid to the
registrant's directors.
(f) Termination of Employment and Change of Control Arrangement. Not
applicable.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Reference is made to "Voting Securities" on pages 2 through 4 of the
Proxy Statement (Exhibit 28(b) hereto, incorporated herein by reference) for
information pertaining to the security ownership of certain beneficial owners
and management.
Item 13. Certain Relationships and Related Transactions
(a) Transactions with Management and Others. Reference is made to
"Transactions Involving Directors and Officers" on page 14 of the Proxy
Statement (Exhibit 28(b) hereto, incorporated herein by reference) for
information with respect to transactions involving directors or executive
officers or members of their immediate families.
(b) Certain Business Relationships. The registrant's Chairman of the
Board, Janet W. Prewitt, is an equity partner in the law firm of White, McCann &
Stewart, a general practice law firm located in Winchester, Kentucky, which
serves as general counsel to Pioneer Federal Savings Bank. Payments to that law
firm have not exceeded 5% of the registrant's consolidated gross revenues for
its last full fiscal year or any earlier year end. The dollar amount of fees
paid to the law firm for legal services provided in Pioneer Federal's last
fiscal year was $90,948. Of
43
<PAGE>
this sum, $85,588 represented fees earned in connection with title examinations
for real estate loans, while the balance represented fees in foreclosure actions
and fees for quarterly and annual reports. Director Prewitt's compensation from
Pioneer Federal plus her share in the gross fees paid to the law firm has never
exceeded $60,000 in any fiscal year.
(c) Indebtedness of Management. Reference is made to "Transactions
Involving Directors and Officers" on page 14 of the Proxy Statement for
information with respect to loans made to executive officers and directors.
(d) Transactions with promoters. Not applicable.
PART IV
Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K
(a)(1) and (2) The following is a list of financial statements filed as a
part of this annual report and incorporated herein by reference, which financial
statements are contained in the Annual Report to Shareholders filed herewith as
Exhibit 13, and the pages on which those financial statements may be found.
Reports of Independent Certified Public Accountants
Exhibit 13, page 17
Exhibit 28(a)
Consolidated Statements of Financial Condition at September 30, 1997 and 1996
Exhibit 13, page 18
Consolidated Statements of Income for the years ended September 30, 1997, 1996
and 1995
Exhibit 13, page 19
Consolidated Statements of Stockholders' Equity for the years ended September
30, 1997, 1996 and 1995
Exhibit 13, page 20
Consolidated Statements of Cash Flows for the years ended September 30, 1997,
1996 and 1995
Exhibit 13, pages 21 and 22
44
<PAGE>
Notes to Consolidated Financial Statements
Exhibit 13, pages 23 through 46
(a)(3) The following exhibits are filed as a part of
this report:
Exhibit 13 Annual Report to Stockholders
Exhibit 28(a) Manually signed Report of Miller,
Mayer, Sullivan & Stevens LLP
Exhibit 28(b) Proxy Statement for Annual Meeting to be
held January 14, 1998
(b) No Form 8-K was filed in the fourth quarter of fiscal 1997.
(c) See (a) (3) above for all exhibits filed.
(d) Separate financial statements are not applicable.
45
<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.
PIONEER FINANCIAL CORPORATION,
WINCHESTER, KENTUCKY
Date: December 16, 1997 BY /s/Janet W. Prewitt
-------------------------------
Janet W. Prewitt, Director and
Chairman of the Board
Date: December 16, 1997 BY /s/Carl C. Norton
-------------------------------
Carl C. Norton, Director and
President
Date: December 16, 1997 BY /s/Nancy M. Lawwill
-------------------------------
Nancy M. Lawwill, Director,
and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: December 16, 1997 BY /s/William Cress
-------------------------------
William Cress, Director
Date: December 16, 1997 BY /s/Ewart W. Johnson
-------------------------------
Ewart W. Johnson, Director
Date: December 16, 1997 BY /s/Nora M. Linville
-------------------------------
Nora M. Linville, Director
Date: December 16, 1997 BY /s/Wayne M. Martin
-------------------------------
Wayne M. Martin, Director
Date: December 16, 1997 BY /s/Thomas D. Muncie
-------------------------------
Thomas D. Muncie, Director
Date: December 16, 1997 BY /s/Andrew J. Ryan
-------------------------------
Andrew J. Ryan, Director
Date: December 16, 1997 BY /s/Robert G. Strode
-------------------------------
Robert G. Strode, Director
<PAGE>
EXHIBIT 13
PIONEER FINANCIAL CORPORATION
ANNUAL REPORT TO SHAREHOLDERS
Fiscal Year Ending
September 30, 1997
<PAGE>
PIONEER FINANCIAL CORPORATION
ANNUAL REPORT TO SHAREHOLDERS
FISCAL YEAR ENDED SEPTEMBER 30, 1997
Table of Contents
Page
----
Corporate Profile .......................................................... 1
Consolidated Financial Highlights .......................................... 2
Letter to Shareholders ..................................................... 3
Selected Consolidated Financial and Other Data ............................. 4
Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................... 6
Financial Statements ....................................................... 17
Letter from Auditors .............................................. 17
Consolidated Balance Sheets ...................................... 18
Consolidated Statements of Income ................................. 19
Consolidated Statements of Stockholders' Equity ................... 20
Consolidated Statements of Cash Flows ............................. 21
Notes to Consolidated Financial Statements ........................ 23
Corporate Information ...................................................... 47
Form 10-K ................................................................. 48
<PAGE>
PIONEER FINANCIAL CORPORATION
Corporate Profile
Pioneer Financial Corporation (herein "the Company"), a Kentucky
corporation, was organized in 1994 as a thrift holding company. On December 20,
1994, the shareholders of Pioneer Federal Savings Bank approved an agreement and
plan of reorganization dated October 31, 1994, whereby the Savings Bank became a
wholly-owned subsidiary of Pioneer Financial Corporation. In accordance with the
Reorganization Plan, the shareholders of Pioneer Federal exchanged their shares
of common stock on a one-for-one basis for common shares in Pioneer Financial
Corporation. Pioneer Federal is the main asset of Pioneer Financial, and the
consolidated financial statements of the Company and of the Bank are included
herein.
Pioneer Federal Savings Bank (herein "the Bank"), with assets of more
than $74 million at September 30, 1997, is the larger of the two thrift
institutions in Winchester, Kentucky. It currently ranks third in deposits among
the eight financial institutions located in Winchester.
The business of Pioneer Federal consists primarily of attracting
deposits from the general public and using such deposits, together with other
borrowings and funds, to make residential mortgage loans, commercial real estate
loans (primarily permanent loans), consumer loans (including automobile and
personal loans) and to invest in mortgage-backed securities and other
investments. Pioneer Federal Savings Bank has been in existence since 1885, when
the Commonwealth of Kentucky granted a charter to its predecessor, Winchester
Building & Savings Association. It became a federally-chartered association in
1978, under the name of Pioneer Federal Savings and Loan Association. In 1985,
the Association obtained a federal savings bank charter and changed its name to
Pioneer Federal Savings Bank. Pioneer Federal was issued a federal stock savings
bank charter on July 15, 1987, upon successful completion of its conversion from
mutual to a stock form.
Pioneer Financial Corporation is subject to regulation by the
Securities and Exchange Commission and the Office of Thrift Supervision. Pioneer
Federal Savings Bank is subject to regulation by the Office of Thrift
Supervision and the Federal Deposit Insurance Corporation, which administers the
Savings Association Insurance Fund, that insures Pioneer Federal's deposits.
Pioneer Federal owns stock in the Federal Home Loan Bank of Cincinnati and is a
member of the Federal Home Loan Bank system.
Pioneer Federal has a wholly-owned subsidiary, Pioneer Service
Corporation, which holds stock in Intrieve, Inc. Intrieve provides on line
computer processing and inquiry service to Pioneer Federal and other thrift
institutions.
The principal executive offices of the Company and of the Bank are
located at 25 East Hickman Street, Winchester, Kentucky 40391, telephone number
(606) 744-3972.
<PAGE>
Consolidated Financial Highlights
<TABLE>
<CAPTION>
September 30,
---------------------------------
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
For the Year
Net interest income $ 2,691,733 $ 2,797,403
Net income 1,066,945 706,982
At Year End
Total assets $74,825,464 $74,401,137
Loans receivable, net 34,490,871 35,247,421
Savings deposits 64,585,148 64,335,165
Stockholders' equity 8,738,198 8,244,635
Stockholders' equity
to total liabilities 13.2% 12.5%
- --------------------------------------------------------------------------------
</TABLE>
Capital Stock
At the present time, there is no established market in which shares of
the Company's capital stock are regularly traded, nor are there any uniformly
quoted prices for such shares. However, Hilliard-Lyons in Lexington, Kentucky is
maintaining a "work-out market" in the stock, with the most recent price being
$43.00 per share.
During fiscal year 1997, the Company paid quarterly dividends of
35(cent) per share on December 16, 1996, and 40(cent) per share on March 15,
1997, June 16, 1997 and September 15, 1997 to shareholders of record as of
December 2, 1996, March 1, 1997, June 1, 1997 and September 1, 1997,
respectively.
As of November 5, 1997, Pioneer Financial Corporation had approximately
285 stockholders.
2
<PAGE>
[LETTERHEAD OF PIONEER FINANCIAL CORPORATION APPEARS HERE]
December 16, 1997
Dear Shareholder:
As you can see from the enclosed Annual Report to Shareholders for our
fiscal year ending September 30, 1997, the most recent fiscal year was another
excellent year for Pioneer Federal. It was comparable to 1994 and 1995. You may
remember that the net income for fiscal year ended September 30, 1996 was
significantly lower than 1994, 1995 or 1997 due to a special assessment to
financial institutions who, like Pioneer Federal, were insured by the SAIF
portion of the FDIC. Without the special assessment, Pioneer Federal's net
income for fiscal year 1996 would have been just under $1,000,000.
Although it happened after the end of the fiscal year, I want to
mention Pioneer Federal's ceasing to operate a branch in Stanton, Kentucky. As
most all of you are aware, this occurred on October 17, 1997. People's Exchange
Bank of Beattyville, Kentucky, Inc., which had earlier given notice of its
intention to move its main bank office to Stanton, Kentucky, made an offer for
our Stanton branch bank building and real estate and Stanton deposits. We valued
our Powell County customers and relationships - many of which had existed before
we ever had a branch office in Powell County. However, acceptance of the offer
was determined to be in the best interests of our shareholders. We did not sell
our Powell County loans other than loans secured by savings accounts (commonly
called "share loans").
We have finally completed our much-needed renovations at the main
office on Hickman Street this year. I know that it was an inconvenience to our
customers as well as our staff, but we feel that we are more efficiently using
our space and able to provide better service in the renovated space. Thank you
for your indulgence during our reconstruction work.
As I'm sure you have observed, we have more banking competitors in
Clark County this year than when I wrote you in December, 1996. We are excited
about the challenges and opportunities of the coming year. As always, we are
very grateful for the loyalty and support of our shareholders, customers and
employees.
Sincerely,
/s/ Janet W. Prewitt
-----------------------------
Janet W. Prewitt,
Chairman, Board of Directors
3
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(in Thousands of Dollars)
------------------------
<TABLE>
<CAPTION>
As of September 30,
---------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Total amount of:
Loans receivable, net...................... $34,491 $35,247 $32,214 $29,384 $34,290
Investments................................ 28,571 31,574 38,676 41,104 36,720
Cash....................................... 1,189 733 790 633 462
Interest bearing deposits/1/............... 8,289 4,935 5,162 6,271 4,605
Assets..................................... 74,825 74,401 78,836 79,648 78,432
Deposits................................... 64,585 64,335 67,088 68,686 68,198
Borrowings................................. 652 699 742 757 795
Stockholders' equity....................... 8,738 8,245 10,540 9,806 9,087
Other Data
Number of:
Loans outstanding.......................... 2,346 2,409 2,418 2,344 2,412
Savings accounts........................... 8,652 9,117 9,207 9,253 9,766
Full customer service offices open......... 3 3 3 3 3
<CAPTION>
Year ended September 30,
---------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Operations Data
Total amount of:
Interest income............................ $ 5,393 $ 5,659 $ 5,656 $ 5,210 $ 5,819
Interest expense........................... (2,701) (2,862) (2,619) (2,293) (2,517)
Provision for loan losses.................. (57) (19) (5) (178)
-------- -------- -------- -------- --------
Net interest income after
provision for loan losses................ 2,692 2,740 3,018 2,913 3,123
Non-interest income........................ 489 445 404 389 432
Non-interest expense....................... 1,572 2,092 1,776 1,718 1,614
-------- -------- -------- -------- --------
Net income before income taxes and
cumulative effect of change in
accounting principles.................... 1,609 1,093 1,646 1,584 1,941
Income tax expense......................... 542 386 568 534 670
Cumulative effect of change
in accounting principle/2/............... (18)
-------- -------- -------- -------- --------
Net income................................. $ 1,067 $ 707 $ 1,078 $ 1,032 $ 1,271
======== ======== ======== ======== ========
</TABLE>
- ------------------------------------
/1/Includes Federal funds sold.
/2/Reflects adoption of Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes."
4
<PAGE>
Key Operating Ratios:
<TABLE>
<CAPTION>
As of and for the years ended September 30,
----------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on average assets/1/....... 1.42% 0.89% 1.36% 1.30% 1.61%
Return on average equity/1/....... 12.86% 6.97% 10.52% 10.83% 14.78%
Average equity to
average assets1................. 11.07% 12.72% 12.91% 12.05% 10.91%
Interest rate spread.............. 3.36% 3.18% 3.51% 3.43% 3.96%
Net interest margin............... 3.72% 3.63% 3.94% 3.78% 4.30%
Dividend payout................... 30.25% 50.00% 32.7% 30.30% 20.30%
Asset Quality Ratios:
Nonperforming assets to total
assets at end of year........... 0.21% 0.30% 0.24% 0.13% 0.26%
Allowance for loan losses to
total assets at end of year..... 0.52% 0.51% 0.45% 0.44% 0.51%
Allowance for loan losses to
nonperforming loans at end
of year......................... 252.26% 171.30% 183.33% 334.62% 193.20%
Allowance for loan losses to
total loans receivable, net..... 1.13% 1.06% 1.05% 1.15% 1.17%
Capital Ratios:
Equity to total assets at
end of year..................... 11.68% 11.08% 13.27% 12.31% 11.58%
Average equity to
average assets/1/............... 11.07% 12.72% 12.91% 12.05% 10.91%
Ratio of average interest
earning assets to average
interest bearing
liabilities/1/.................. 109.64% 112.01% 112.55% 111.74% 110.30%
</TABLE>
- --------------------
/1/Average balances are based upon month-end balances.
<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 (Pioneer Federal or Bank) became a wholly-owned subsidiary of Pioneer
Financial Corporation (Company). The purpose of the discussion that follows is
to provide insight into the consolidated financial condition and results of
operation of Pioneer Financial Corporation and its subsidiary, Pioneer Federal
Savings Bank.
The primary business of the Company is the operation of the Bank. The assets of
the Company consist of all of the outstanding capital stock of the Bank, and a
note receivable from the Company's Employee Stock Ownership Plan (ESOP).
Therefore, this discussion relates primarily to the Bank.
Historically, the Bank has functioned as a financial intermediary, attracting
deposits from the general public, and using such deposits to make mortgage
loans, and to a lesser extent, consumer loans, and to purchase investment
securities with a significant concentration in mortgage-backed securities. As
such, its earnings have depended primarily on its net interest income, or
"spread," which is the difference between the amount it receives from interest
earned on loans and investments ("interest-earning assets") and the amount it
pays in interest on its deposits ("interest-bearing liabilities"). Results of
operations are also dependent upon the level of the Bank's non-interest income,
including fee income and service charges, and by the level of its non-interest
expenses, the most significant component of which is salaries and employee
benefits.
The operations of the Bank and the entire thrift industry are significantly
affected by prevailing economic conditions and the monetary, fiscal, and
regulatory policies of government agencies. Lending activities are influenced by
the demand for and supply of housing, competition among lenders, the level of
interest rates, and the availability of funds. Deposit flows and costs of funds
are likewise heavily influenced by prevailing market rates of interest on
competing investment alternatives, account maturities, and the levels of
personal income and savings in the Bank's market areas.
The Bank's interest earning assets have been historically concentrated in real
estate - collateralized instruments, principally single-family residential
loans, and to a lesser extent, loans secured by multi-family residential and
commercial properties, construction loans, home equity lines of credit, second
mortgages on single-family residences and consumer loans, both secured and
unsecured including loans secured by savings accounts. In addition, the Bank
invests in mortgage-backed securities, which are secured by single-family
residential loans and guaranteed by government agencies. The Bank also invests
in U.S. Government Treasury and Agency securities, Federal funds, and interest-
bearing deposits, primarily with the Federal Home Loan Bank of Cincinnati. The
Bank's source of funding for these investments has principally been deposits
placed with the Bank by consumers in the market area it serves.
Asset/Liability Management
Net interest income, the primary component of the Bank's net earnings, is
derived from the difference or "spread" between the yield on interest-earning
assets and the cost of the interest-bearing liabilities. The Bank has sought to
reduce its exposure to changes in interest rates by matching more closely the
effective maturities
6
<PAGE>
or repricing characteristics of its interest-earning assets and interest-bearing
liabilities. The matching of the Bank's assets and liabilities may be analyzed
by examining the extent to which its assets and liabilities are interest-rate
sensitive and by monitoring the expected effects of interest rate changes on an
institution's net interest income and net portfolio value.
An asset or liability is interest-rate sensitive within a specific time period
if it will mature or reprice within that time period. If the Bank's assets
mature or reprice more quickly or to a greater extent than its liabilities, the
Bank's net portfolio value and net interest income would tend to increase during
periods of rising interest rates, but decrease during periods of falling
interest rates. If the Bank's assets mature or reprice more slowly or to a
lesser extent than its liabilities, the Bank's net portfolio value and net
interest income would tend to decrease during periods of rising interest rates.
The Bank's policy has been to mitigate the interest rate risk inherent in the
historical savings institution business of originating long-term loans funded by
short-term deposits by pursuing certain strategies designed to decrease the
vulnerability of its earnings to material and prolonged changes in interest
rates.
Management's principal strategy in managing the Bank's interest rate risk has
been to maintain short and intermediate term assets in the portfolio, including
locally originated adjustable rate mortgage loans. The Bank's policy is to not
actively offer long-term fixed rate loans. Fixed rate loans that are offered and
retained by the Bank are secured by one to four-family owner-occupied dwellings,
primarily for terms of no more than 15 years. Likewise, the interest rate
charged on the Bank's adjustable rate loans typically reprice after one, three,
or five years with maximum periodic interest rate adjustment limits ("caps"). At
September 30, 1997, the Bank had no loans that reprice after five years from
that date. In managing its portfolio investment and mortgage-backed and related
securities, the Bank seeks to purchase investment and mortgage-backed and
related securities that mature on a basis that approximates the estimated
maturities of the Bank's liabilities.
Management has attempted to lengthen the average maturity of its liabilities by
adopting a tiered pricing program for its certificates of deposit. The Bank
offers higher rates of interest on its longer term certificates in order to
encourage depositors to invest in certificates with longer maturities.
Interest Rate Sensitivity Analysis
The Bank's future financial performance depends to a large extent on how
successful it is in limiting the sensitivity of earnings and net asset value to
changes in interest rates. Such sensitivity may be analyzed by examining the
amount by which the market value of the Bank's portfolio equity changes given an
immediate and sustained change in interest rates. Based on the latest
information available, it is estimated that the Bank's market value of portfolio
equity at June 30, 1997 would decrease by approximately $1.0 million or 8% given
a 200-basis point immediate and sustained increase in interest rates. It is
estimated that the Savings Bank's market value of portfolio equity at June 30,
1997 would decrease by approximately $25,000 or 0% given a 200-basis point
immediate and sustained decrease in interest rates. There has been no material
change in the Company's consolidated net assets since June 30, 1997.
Average Balances, Interest, and Average Yields
The Bank's earnings depend primarily on its net interest income, the difference
between the income it receives on its loan portfolio and other investments and
its cost of money, consisting primarily of interest paid on savings deposits.
Net interest income is affected by (i) the difference between rates of interest
earned on its interest-earning assets and rates paid on its interest-bearing
liabilities (commonly known as "the spread"); and
7
<PAGE>
(ii) the relative amounts of its interest-earning assets and interest-bearing
liabilities. When interest-earning assets approximate or exceed interest-bearing
liabilities, any positive spread will generate net interest income. Thrift
institutions have traditionally used interest rate spreads as a measure of net
interest income. Another indicator of an institution's net interest income is
its "net yield on interest-earning assets," which is net interest income divided
by average interest-earning assets.
The following table sets forth certain information relating to the Bank's
average interest-earning assets and interest-bearing liabilities and reflects
the average yield on assets and average cost of liabilities for the periods
indicated. Such yields and costs are derived by dividing income or expense by
the average monthly balance of assets or liabilities, respectively, for the
periods presented. During the periods indicated, nonaccruing loans are included
in the net loan category. Average balances are derived from month-end average
balances. Management does not believe that the use of month-end balances instead
of average daily balances has caused any material difference in the information
presented.
8
<PAGE>
AVERAGE BALANCES AND YIELD/RATES
(in thousands of dollars)
-------------------
<TABLE>
<CAPTION>
Year ended September 30,
----------------------------------------------------------------------
1997 1996
--------------------------------- -----------------------------------
Average Average Average Average
Balance/1/ Interest Yield/Rate Balance/1/ Interest Yield/Rate
---------- -------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Loans/2/...................................... $ 35,059 $ 3,111 8.87% $ 33,358 $ 3,057 9.16%
Investment securities......................... 2,588 117 4.52 5,352 384 7.17
Mortgage-backed securities.................... 25,856 1,704 6.59 30,064 1,783 5.93
Other investments............................. 8,763 461 5.26 8,333 435 5.22
-------- -------- -------- -------- -------- --------
Total interest earning assets............... 72,266 5,393 7.46 77,107 5,659 7.34
-------- --------
Non interest earning assets................... 2,715 2,704
-------- --------
Total assets................................ $ 74,981 $ 79,811
======== --------
Interest-bearing Liabilities:
Savings deposits.............................. $ 65,241 2,652 4.06 $ 68,118 2,816 4.13
FHLB advances 672 49 7.29 719 46 6.40
-------- -------- -------- --------
Total interest bearing liabilities 65,913 2,701 4.10 68,837 2,862 4.16
-------- --------
Non interest bearing liabilities.............. 769 825
Stockholders' equity.......................... 8,299 10,149
-------- --------
Total liabilities and stockholders' equity.. $ 74,981 $ 79,811
======== ========
Net interest income.............................. $ 2,692 $ 2,797
======== ========
Interest rate spread/3/.......................... 3.36% 3.18%
======== ========
Net interest margin/4/........................... 3.72% 3.63%
======== ========
Ratio of average interest-bearing assets to
average interest-bearing liabilities 109.64% 112.01%
======== ========
<CAPTION>
Year ended September 30,
---------------------------------------
1995
---------------------------------------
Average Average
Balance/1/ Interest Yield/Rate
---------- -------- ----------
<S> <C> <C> <C>
Interest Earning Assets:
Loans/2/...................................... $ 31,622 $ 2,813 8.90%
Investment securities......................... 7,872 474 6.02
Mortgage-backed securities.................... 31,280 2,019 6.45
Other investments............................. 6,368 350 5.50
--------- -------- --------
Total interest earning assets............... 77,142 5,656 7.33
Non interest earning assets................... 2,275 --------
---------
Total assets................................ $ 79,417
=========
Interest-bearing Liabilities:
Savings deposits.............................. $ 67,794 2,569 3.79
FHLB advances 744 50 6.72
--------- -------- --------
Total interest bearing liabilities 68,538 2,619 3.82
Non interest bearing liabilities.............. 630 --------
Stockholders' equity.......................... 10,249
---------
Total liabilities and stockholders' equity.. $ 79,417
=========
Net interest income.............................. $ 3,037
========
Interest rate spread/3/.......................... 3.51%
========
Net interest margin/4/........................... 3.94%
========
Ratio of average interest-bearing assets to
average interest-bearing liabilities 112.56%
========
</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-earnings 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 (change in rate multiplied
by the change in volume).
<TABLE>
<CAPTION>
Year ended September 30,
----------------------------------------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995 1995 vs. 1994
Increase/(Decrease) Increase/(Decrease) Increase/(Decrease)
Due to Due to Due to
------------------------------- ------------------------------- ------------------------------
Volume Rate R/V Total Volume Rate R/V Total Volume Rate R/V Total
------ ------ ---- ------ ------ ---- ----- ----- ----- --- --- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loan portfolio .............. 155.8 (96.7) (4.9) 54.1 157.5 82.2 4.5 244.2 46.6 48.0 0.8 95.4
Investments ................. (197.4) (142.8) 73.2 (267.0) (151.7) 90.5 (29.0) (90.2) 235.2 0.5 0.4 236.1
Mortgage-backed securities .. (249.9) 198.4 (27.8) (79.3) (78.4) (164.7) 6.3 (236.8) (289.3) 285.2 (40.0) (44.1)
Other interest income ....... 22.4 3.3 0.2 26.0 109.1 (17.8) (5.5) 85.8 30.7 111.4 16.1 158.2
------ ------ ---- ------ ------ ----- ----- ----- ----- ----- ---- -----
Total interest-earning assets (269.1) (37.8) 40.7 (266.2) 36.5 (9.7) (23.7) (3.0) 23.2 445.1 (22.7) 445.6
====== ====== ==== ====== ====== ===== ===== ===== ===== ===== ==== =====
Interest expense:
Savings deposit ............. (117.8) (47.7) 2.0 (163.5) 12.3 233.5 1.1 246.9 (14.5) 345.3 (2.2) 328.6
Borrowings and Federal
Home Loan Bank Advances .. (3.0) 6.4 (0.4) 3.0 (1.7) (2.4) 0.1 (4.0) (2.1) (0.2) 0.0 (2.3)
------ ------ ---- ------ ------ ----- ----- ----- ----- ----- ---- -----
Total interest-bearing
liabilities................ (120.8) (41.3) 1.6 (160.5) 10.6 231.1 1.2 242.9 (16.6) 345.1 (2.2) 326.3
====== ====== ==== ====== ====== ===== ===== ===== ===== ===== ==== =====
Net change in net interest
income (expense) ............ (148.3) 3.5 39.1 (105.7) 25.9 (240.9) (24.9) (239.9) 39.8 100.0 (20.5) 119.3
====== ====== ==== ====== ====== ===== ===== ===== ===== ===== ==== =====
</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, 1997 and 1996
The Company's consolidated assets increased by $400,000 to $74.8 million at
September 30, 1997 compared to $74.4 million at September 30, 1996. Short-term
investments consisting of interest-bearing deposits and Federal funds sold
increased a total of $3.4 million or 40.4% to $8.3 million at September 30,
1997. This increase was funded primarily by principal repayments on
mortgage-backed securities, and the maturity of other investment securities.
Investment securities, including both securities available-for-sale and
securities held-to-maturity totaled $28.6 million at September 30, 1997 compared
to $31.6 million at September 30, 1996.
The net loan portfolio decreased $700,000 or 2% to $34.5 million at September
30, 1997 compared to $35.2 million at September 30, 1996. The allowance for loan
losses totaled $391,000 and $382,000 at September 30, 1997 and 1996,
respectively. At September 30, 1997, the ratio of the allowance for loan losses
to loans was 1.13% compared to 1.06% at September 30, 1996. The Bank's
non-performing loans were $155,000 at September 30, 1997. The Bank's ratio of
allowance for loan losses to non-performing loans was 252.6% at September 30,
1997 compared to 171.3% at September 30, 1996. The determination of the
allowance for loan losses is based on management's analysis, which is done at a
minimum on a quarterly basis. Various factors are considered, including the
market value of the underlying collateral, growth and composition of the loan
portfolio, the relationship of the allowance for loan losses to outstanding
loans, historical loss experience, delinquency trends and prevailing economic
conditions. Although management believes its allowance for loan losses is
adequate, there can be no assurance that additional allowances will not be
required or that losses on loans will not be incurred.
Premises and equipment increased $200,000 to $1.4 million compared to $1.2
million. The increase was due to remodeling of the Bank's main office.
Deposits totaled $64.6 million at September 30, 1997 compared to $64.3 million
at September 30, 1996. In October of 1997 the Bank finalized the sale of its
Branch bank located in Stanton, Kentucky, which resulted in the transfer of $4.9
million in deposits to the purchaser. The Bank realized a net gain on the sale
of the Branch of approximately $600,000. The sale will allow management to
concentrate efforts and resources in their primary market area of Winchester,
Kentucky.
Stockholders' equity increased $500,000 to $8.7 million at September 30, 1997
compared to $8.2 million at September 30, 1996. The increase was due to net
income for fiscal year 1997 of $1.1 million less dividend payments of $300,000
and the net reduction of $225,000 from unallocated stock in the Employee Stock
Ownership Plan (ESOP). In fiscal year 1997, the Company made a loan of $250,000
to the ESOP Trust for the purpose of acquiring outstanding stock of the Company.
The ESOP Trust used the proceeds of the loan to acquire 6,022 shares of the
Company's common stock, which is collateral for the loan. The stock is released
from collateral in proportion to the principal repayments made on the loan and
allocated to the participants in the Plan. Under generally accepted accounting
principles, the stock is earned by participants over the expected amortization
period of the loan balance.
Comparison of Results of Operations for the Years Ended September 30, 1997 and
1996
Net Income. The Company's consolidated net income for the year ended September
30, 1997 was $1,067,000, compared to $707,000 for the year ended September 30,
1996. In comparing 1997 to 1996, the increase of $360,000 in net income resulted
from a reduction in non-interest expense of $520,000, a decrease
11
<PAGE>
in the provision for loan losses of $57,000 plus an increase in non-interest
income of $44,000 offset by a reduction in net interest income of $105,000 and
an increase in income tax expense of $156,000.
Net Interest Income. Net interest income for the year ended September 30, 1997
was $2.7 million, compared to $2.8 million for the year ended September 30,
1996. The decrease of $105,000 in net interest income for the year ended
September 30, 1997 was due primarily to a decrease in the average balances of
interest earning assets offset in part by a decrease in the average balance of
interest-bearing liabilities for 1997 compared to 1996. The average balance of
interest earning assets in 1997 was $72.3 million with an average yield of
7.46%, compared to average balances of $77.1 million with an average yield of
7.34% for 1996. The average balance of interest-bearing liabilities in 1997 was
$66.0 million with an average cost of funds of 4.10% compared to average
balances of $68.9 million with an average cost of funds of 4.16% for 1996. The
decrease in the average balances of interest earning assets was due primarily to
a decrease in the last quarter of 1996 from the repurchase of stock for $2.7
million, plus a decrease in deposits of approximately $2.7 million, due to the
rotation of the local school board deposits.
Interest Income. Interest income decreased $266,000 from $5.7 million to $5.4
million, or by 4.7% during 1997 compared to 1996. This decrease resulted
primarily from the decrease in the average balance of interest earning assets
from $77.1 million in 1996 compared to $72.3 million in 1997. The average yield
on interest earning assets increased to 7.46% from 7.34% due to an increase in
the average balance of loans from $33.4 million to $35.1 million in 1997
compared to 1996. The increase in loans was funded by repayments of
mortgage-backed securities and the maturity of other investment securities as
part of management's strategy to obtain higher investment yields.
Interest Expense. Interest expense decreased $161,000 from $2.9 million to $2.7
million or by 5.6% during 1997 compared to 1996. This decrease resulted
primarily from a decrease in the average balance of interest-bearing liabilities
from $68.9 million in 1996 compared to $66.0 million in 1997.
Provision for Loan Losses. Bank management determined that no additional
provision for loan losses was required in 1997. The provision for loan losses in
1996 was $57,000. The decision to not provide an additional provision for loan
losses was based on the various factors management uses to evaluate the adequacy
of the allowance for loan losses, with the more significant factors being the
similar composition and size of the loan portfolio in 1997 and 1996, and
favorable delinquency trends, with relatively stable economic conditions.
Non-Interest Income. Non-interest income increased $44,000 for the year ended
September 30, 1997 compared to the same period in 1996. The increase is due to
the recognition in 1997 of the fair market value of mortgage servicing rights
for loans sold in the secondary market, which resulted in additional gains on
the sale of these loans totaling $100,000. The Bank began recognizing mortgage
servicing rights as the result of adopting Statement of Financial Accounting
Standards (SFAS) No. 122 Accounting for Mortgage Servicing Rights in 1997, which
was subsequently superseded by SFAS No. 125 Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. This increase
of $100,000 was offset in part by a decrease in loan fees of approximately
$22,000 and a decrease in the gain on the sale of securities of $33,000 in 1997
compared to 1996.
Non-Interest Expense. Non-interest expense decreased $500,000 from 2.1 million
in 1996 to $1.6 million in 1997. The decrease of $500,000 was primarily due to a
$522,000 decrease in Federal or other insurance premiums. This decrease was due
to a special SAIF premium assessment in 1996 of $435,000, plus a reduction in
the insurance rate paid on deposits in 1997 to approximately .06% as compared to
.23% in 1996.
12
<PAGE>
Income Taxes. The Bank's effective income tax rate was 34.0% in 1997 and 35.3%
in 1996. The increase in income tax expense of $156,000 is due to the increase
in income for 1997 as compared to 1996.
Comparison of Results of Operations for the Years Ended September 30, 1996 and
1995
Net Income. Net income decreased by $371,000 or 34.4% to $707,000 for the year
ended September 30, 1996 as compared to $1,078,000 for the same period in 1995.
The net decrease was due to a decrease of $239,000 in net interest income, an
increase of $39,000 in the provision for loan losses, and an increase of
$316,000 in non-interest expense offset by an increase of $41,000 in
non-interest income, and a decrease of $182,000 in income tax expense.
Net Interest Income. Net interest income for the year ended September 30, 1996
was $2.8 million, compared to $3.0 million for the year ended September 30,
1995. The decrease of $240,000 for the year ended September 30, 1996 was
primarily due to a higher cost of funds in 1996 compared to 1995. Average
interest-bearing liabilities in 1996 amounted to $68.9 million, with the average
interest rate paid amounting to 4.16%, compared to the average balance of
interest-bearing liabilities in 1995 of $68.5 million with an average interest
rate paid of 3.82%. Interest expense for 1996 was $2.9 million compared to $2.6
million in 1995. Interest income was $5.7 million in 1996 and 1995.
Interest Income. Interest income was $5.7 million for the years ended September
30, 1996 and 1995. For the year ended September 30, 1996, interest income was
7.34% of average interest earning assets as compared to 7.33% for the year ended
September 30, 1995.
Interest Expense. Interest expense was $2.9 million, or 4.16% of average
interest-bearing liabilities for the year ended September 30, 1996 as compared
to $2.6 million, or 3.82% of average interest-bearing liabilities for the
corresponding period in 1995. The increase in interest expense was primarily the
result of an increase of 34 basis points in the average rate paid on deposits
and an increase of approximately $300,000 in average interest-bearing deposits
in 1996 compared to 1995.
Provision for Loan Losses. The provision for loan losses was approximately
$57,000 and $19,000 for the years ended September 30, 1996 and 1995,
respectively. Management considers many factors in determining the necessary
levels of the allowance for loan losses, including an analysis of specific loans
in the portfolio, estimated value of the underlying collateral, assessment of
general trends in the real estate market, delinquency trends, prospective
economic conditions, inherent loss in the loan portfolio and the relationship of
the allowance for loan losses to outstanding loans. At September 30, 1996, the
allowance for loan losses represented 1.06% of total loans compared to 1.05% at
September 30, 1995.
Non-Interest Income. Non-interest income amounted to $445,000 and $404,000 for
the years ended September 30, 1996 and 1995, respectively. Non-interest income
increased $41,000 in the 1996 period compared to the same period in 1995. The
increase was due to an additional net gain on the sale of securities and loans
of $26,000 plus an increase of $15,000 in service fees on loans and deposits for
the year ended September 30, 1996 as compared to the corresponding period in
1995.
Non-Interest Expense. Non-interest expense increased $316,000 or 17.8% to $2.1
million for the year ended September 30, 1996 compared to $1.8 million for the
same period in 1995. Non-interest expense was 2.6% and 2.2% of average assets
for the years ended September 30, 1996 and 1995, respectively. The increase of
$316,000 was primarily due to an increase of $444,000 in federal insurance
premiums offset by $101,000
13
<PAGE>
decrease in legal fees and a $30,000 decrease in other operating expenses. The
increase of $444,000 in federal insurance premiums was primarily due to a
special assessment of $435,000 assessed by the FDIC to recapitalize the Savings
Association Insurance Fund (SAIF), pursuant to legislation signed by the
President on September 30, 1996. The decrease of $101,000 in legal expenses was
due to special services provided during 1995, which was not a recurring expense,
plus reimbursement of $44,000 in legal fees pursuant to a legal settlement in
fiscal year 1996. The decrease of $30,000 in other operating expenses was
primarily due to a $23,000 decrease in loan related expenses net of
reimbursements.
Income Tax Expense. The provision for income tax expense amounted to
approximately $386,000 and $568,000 for the years ended September 30, 1996 and
1995, respectively. The provision for income tax expense as a percentage of
income before income tax expense amounted to 35.3% and 34.5% for 1996 and 1995,
respectively.
Mortgage Banking Activity
Net loans decreased from $35.2 million at September 30, 1996 to $34.5 million at
September 30, 1997. The Bank's portfolio of loans, owned by others but serviced
by the Bank, increased 3.8% from $50.3 million at September 30, 1996 to $52.2
million at September 30, 1997. The Bank originated all of the loans which it
services.
Liquidity and Committed Resources
The Company's primary source of liquidity is dividends paid by the Bank. The
Bank is subject to certain regulatory limitations with respect to the payment of
dividends to the Company.
The Bank's primary sources of funds are deposits and proceeds from principal and
interest payments on loans and mortgage-backed securities. Additional sources of
liquidity are advances from the FHLB of Cincinnati and other borrowings. At
September 30, 1997, the Bank had outstanding advances from the FHLB of
Cincinnati totaling $652,000.
OTS regulations require that the Bank maintain specified levels of liquidity.
Liquidity is measured as a ratio of cash and certain investments to withdrawable
savings. The minimum level of liquidity required by the regulations is presently
5.0%. As of September 30, 1997, the Bank's liquidity ratio under applicable
federal regulations was 29.13% as compared to 24.8% at September 30, 1996. At
September 30, 1997, the Bank had $29.8 million in certificates of deposit
maturing within one year, and $8.9 million maturing between one and three years.
Management believes, based on past experience, that the Bank will retain much of
the deposits or replace them with new deposits.
As of September 30, 1997, the Bank had $2.6 million in loans approved, but not
closed; none of these were evidenced by written commitments. The Bank
anticipated selling $1.2 million of the loans approved, but not closed.
The Bank is required to maintain specified amounts of capital pursuant to
federal law and regulations promulgated by OTS. The capital standards generally
require the maintenance of regulatory capital sufficient to meet a tangible
capital requirement, a core capital requirement, and a risk-based capital
requirement. At September 30, 1997, the Bank's tangible and core capital totaled
$8.6 million. This amount exceeded the tangible capital requirement of $1.1
million by $7.5 million, and the core capital requirement of $2.2 million
14
<PAGE>
by $6.4 million on that date. At September 30, 1997, the Bank's risk-based
capital totaled $9.0 million, which exceeded its risk-based capital requirement
by $6.6 million.
Impact of Inflation and Changing Prices
The financial statements and notes thereto presented herein have been prepared
in accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of money
over time and due to inflation.
The impact of inflation is reflected in the increased cost of the Bank's
operations.
Unlike most industrial companies, nearly all the assets and liabilities of the
Bank are monetary in nature. As a result, changes in interest rates have a
greater impact on the Bank's performance than do the effects of general levels
of inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the price of goods and services.
Impact of New Accounting Standards
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. In June 1996, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
("SFAS 125"). SFAS 125 provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that focuses on
control. Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished. This statement is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996, and is to be applied prospectively. Earlier
or retroactive application is not permitted. The Bank adopted the provisions of
SFAS 125 in January 1997. The impact of the Bank adopting this statement
amounted to an increase in net income of $66,000 for the year ended September
30, 1997.
Accounting for Earnings Per Share. In February 1997, the FASB issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS
128 establishes standards for computing and presenting earnings per share (EPS)
and applies to entities with publicly held common stock or potential common
stock. This statement simplifies the standards for computing earnings per share
previously found in APB Opinion No. 15, Earnings Per Share, and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS and requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation.
SFAS 128 is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods; earlier application is not
permitted. This statement requires restatement of all prior-period EPS data
presented. The Company will adopt the statement at the end of the first quarter
in fiscal year 1998. Basic and diluted earnings per share under SFAS 128 would
be identical to earnings per share as presented in the financial statements, and
therefore, will not have any material effect on the Company.
15
<PAGE>
Reporting of Comprehensive Income. In June 1997, the Financial Accounting
Standards Board issued Statements of Financial Accounting Standards No. 130,
Reporting of Comprehensive Income ("SFAS 130"), which establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of financial statements. This
statement also requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
This statement is effective for fiscal years beginning after December 15, 1997.
Earlier application is permitted. Reclassification of financial statements for
earlier periods provided for comparative purposes is required. The Company does
not anticipate that adoption of SFAS 130 will have a material effect on the
Company.
Disclosure about Segments and Related Information. In June 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information
("SFAS 131"), which establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to stockholders. This
statement also establishes standards for related disclosures about products and
services, geographic areas, and major customers. This statement requires the
reporting of financial and descriptive information about an enterprise's
reportable operating segments.
This statement is effective for financial statements for periods beginning after
December 15, 1997. In the initial year of application, comparative information
for earlier years is to be restated. The Company does not anticipate that the
adoption of SFAS 131 will have a material effect on the Company.
Dividends on and Price Range of Common Stock. During fiscal year 1997, the
Company declared dividends in the following amounts:
<TABLE>
<S> <C>
December 15, 1996............................................35(cent) per share
March 15, 1997...............................................40(cent) per share
June 16, 1997................................................40(cent) per share
September 15, 1997...........................................40(cent) per share
</TABLE>
Under OTS regulations, the Bank may not pay cash dividends on its common stock
if, as a result thereof, its regulatory capital would be reduced below its
regulatory requirement. The Bank exceeded all of the minimum regulatory capital
requirements during the entire fiscal year.
The Company's stock sold for $41.50 per share at the beginning of the fiscal
year; the Company's stock sold for up to $41.50 per share at midyear, and the
last sale during the fiscal year was at $43.00 per share.
Certifying Accountant. Miller, Mayer, Sullivan, & Stevens, LLP has been
appointed as the Company's independent auditor for the fiscal year ending
September 30, 1997 pursuant to the recommendation of the Audit Committee of the
Board of Directors. A representative of Miller, Mayer, Sullivan, & Stevens, LLP
is expected to be present at the annual meeting with an opportunity to make a
statement if he desires to do so and to answer appropriate questions with
respect to the firm's audit of the Company's consolidated financial statements
and records for the fiscal year ended September 30, 1997.
16
<PAGE>
[LETTERHEAD OF MILLER, MAYER, SULLIVAN & STEVENS LLP APPEARS HERE]
Board of Directors
Pioneer Financial Corporation
Winchester, Kentucky
We have audited the accompanying consolidated balance sheets of Pioneer
Financial Corporation and Subsidiary as of September 30, 1997 and 1996 and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the years in the three year period ended September 30, 1997. These
consolidated financial statements are the responsibility of the management of
Pioneer Financial Corporation (Company). Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pioneer Financial
Corporation and Subsidiary as of September 30, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three year
period ended September 30, 1997 in conformity with generally accepted accounting
principles.
/s/ Miller, Mayer, Sullivan, & Stevens, LLP
Lexington, Kentucky
October 31, 1997
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and 1996
---------------
<TABLE>
<CAPTION>
ASSETS 1997 1996
----------- ----------
<S> <C> <C>
Cash and due from banks $ 1,188,974 $ 732,573
Interest bearing deposits 1,138,456 1,529,881
Federal funds sold 7,151,000 3,211,000
Certificates of deposit 194,000
Securities available-for-sale, at fair value 5,949,386 7,601,611
Securities held-to-maturity, fair value of $22,608,182
and $23,520,598 for 1997 and 1996, respectively 22,621,995 23,972,497
Loans receivable, net 34,490,871 35,247,421
Loans held for sale 152,750
Accrued interest receivable 455,824 535,269
Premises and equipment, net 1,412,264 1,175,987
Other assets 263,944 200,898
----------- -----------
Total assets $74,825,464 $74,401,137
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $64,585,148 $64,335,165
Advances from Federal Home Loan Bank 652,225 698,798
Advance payments by borrowers for taxes and insurance 39,607 26,788
Other liabilities 810,286 1,095,751
----------- -----------
Total liabilities 66,087,266 66,156,502
----------- -----------
Stockholders' equity
Common stock, $1 par value, 500,000 shares authorized; 208,233 shares,
issued and outstanding for 1997 and 1996, respectively 208,233 208,233
Additional paid-in capital 1,797,432 1,797,432
Retained earnings, substantially restricted 6,957,353 6,213,169
Unallocated Employee Stock Ownership Plan (ESOP) stock (224,922)
Net unrealized appreciation on securities available-for-sale,
net of tax of $53 in 1997 and $13,292 in 1996 102 25,801
----------- -----------
Total stockholders' equity 8,738,198 8,244,635
----------- -----------
Total liabilities and stockholders' equity $74,825,464 $74,401,137
=========== ===========
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
18
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
for the years ended September 30, 1997, 1996, and 1995
---------------
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Interest on loans $3,110,644 $3,057,393 $2,812,782
Interest and dividends on securities 1,821,596 2,167,280 2,493,348
Other interest income 460,739 434,493 349,560
---------- ---------- ----------
Total interest income 5,392,979 5,659,166 5,655,690
---------- ---------- ----------
Interest expense:
Interest on deposits 2,652,734 2,815,403 2,569,375
Interest on borrowings 48,512 46,360 49,526
---------- ---------- ----------
Total interest expense 2,701,246 2,861,763 2,618,901
---------- ---------- ----------
Net interest income 2,691,733 2,797,403 3,036,789
Provision for loan losses 57,433 19,000
---------- ---------- ----------
Net interest income after provision for loan losses 2,691,733 2,739,970 3,017,789
---------- ---------- ----------
Non-interest income:
Loan and other service fees, net 381,132 409,519 394,470
Gain (loss) on sale of securities 33,310 1,822
Gain on sale of loans 108,494 2,698 7,546
---------- ---------- ----------
489,626 445,527 403,838
---------- ---------- ----------
Non-interest expense:
Compensation and benefits 892,855 863,508 848,817
Occupancy expenses, net 172,074 190,194 203,789
Office supplies and expenses 97,386 110,441 103,926
Federal and other insurance premiums 94,633 616,705 172,036
Legal expenses 7,634 3,827 104,953
Data processing expenses 143,000 136,616 141,176
State franchise tax 65,545 64,790 64,409
Other operating expenses 98,907 106,117 136,875
---------- ---------- ----------
1,572,034 2,092,198 1,775,981
---------- ---------- ----------
Income before income tax expense 1,609,325 1,093,299 1,645,646
Income tax expense 542,380 386,317 568,143
---------- ---------- ----------
Net income $1,066,945 $ 706,982 $1,077,503
========== ========== ==========
Earnings per share $ 5.12 $ 2.76 $ 3.95
========== ========== ==========
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
19
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended September 30, 1997, 1996, and 1995
---------------
<TABLE>
<CAPTION>
Net
Unrealized Unallocated
Appreciation Employee
Additional on Securities Stock Total
Common Paid-In Retained Available- Ownership Stockholders'
Stock Capital Earnings for-Sale Plan Stock Equity
--------- ----------- ----------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1994 $ 272,477 $ 2,351,858 $ 7,181,168 $ 9,805,503
Net Income 1,077,503 1,077,503
Declaration of dividend (351,495) (351,495)
Cumulative effect October 1, 1994 of 64,189 64,189
change in accounting for securities
Change in net unrealized gain on (55,922) (55,922)
securities available-for-sale, net of
deferred income taxes
--------- ----------- ----------- --------- ---------- -----------
Balance, September 30, 1995 272,477 2,351,858 7,907,176 8,267 10,539,778
Net Income 706,982 706,982
Declaration of dividend (353,533) (353,533)
Stock repurchase (64,244 shares) (64,244) (554,426) (2,047,456) (2,666,126)
Change in net unrealized gain on
securities available-for-sale, net
of deferred income taxes 17,534 17,534
--------- ----------- ----------- --------- ---------- -----------
Balance, September 30, 1996 208,233 1,797,432 6,213,169 25,801 8,244,635
Net income 1,066,945
Declaration of dividend (322,761)
Unallocated ESOP stock (249,913)
ESOP shares earned in 1997 24,991
Change in net unrealized gain on securities
available-for-sale, net of deferred income
taxes 25,699
--------- ----------- ----------- --------- ---------- -----------
Balance, September 30, 1997 $ 208,233 $ 1,797,432 $ 6,957,353 $ 102 $ (224,922) $ 8,738,198
========= =========== =========== ========= ========== ===========
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
20
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended September 30, 1997, 1996, and 1995
---------------
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- ------------
<S> <C> <C> <C>
Operating activities
Net income $ 1,066,945 $ 706,982 $ 1,077,503
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 57,433 19,000
Amortization of investment premium (discount) 77,724 168,615 108,179
Amortization of organizational cost 13,507 13,507 12,382
Provision for depreciation 48,522 53,365 79,900
ESOP benefit expense 24,991
Amortization of loan fees (95,694) (92,303) (48,617)
FHLB stock dividend (46,500) (27,400) (36,900)
Securities (gain)loss, net (33,310) (1,822)
Loans originated for sale (10,554,724) (10,162,642) (7,457,985)
Proceeds from loans held for sale 10,663,218 10,165,340 7,465,531
Gain on sale of loans (108,494) (2,698) (7,546)
Change in:
Prepaid expense (122,060) 46,028 (57,523)
Interest receivable 79,444 139,885 (58,475)
Interest payable 12,497 15,914 5,886
Accrued liabilities (376,592) 627,438 55,866
Income taxes payable 137,381 (118,385) 11,364
------------ ------------ -----------
Net cash provided by operating activities 820,165 1,557,769 1,166,743
------------ ------------ -----------
Investing activities
Net (increase) decrease in loans 699,494 (2,998,846) (2,800,413)
Principal repayments, mortgage-backed securities 5,288,984 6,486,307 3,995,015
Purchase of premises and equipment (284,799) (51,941) (18,494)
Redemption of FHLB stock 55,200 91,800
Proceeds from sale of securities available-for-sale 4,488,932
Purchase of securities available-for-sale (3,614,506) (5,679,519)
Purchase of securities held-to-maturity (8,991,996) (10,484,665) (8,074,208)
Maturity of securities held-to-maturity 6,635,575 14,578,264 7,548,430
Maturity of certificates of deposit 194,000 94,000
------------ ------------ -----------
Net cash provided (used) by investing activities 3,541,258 4,063,813 (448,457)
------------ ------------ -----------
</TABLE>
Continued
The accompanying notes are an integral
part of the consolidated financial statements.
21
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
for the years ended September 30, 1997, 1996, and 1995
---------------
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Financing activities
Net increase (decrease) in demand deposits, (365,680) (1,678,188) (4,229,812)
NOW accounts and savings accounts
Net increase (decrease) in certificates of deposit 615,663 (1,074,568) 2,632,198
Cash dividends (322,762) (353,533) (351,495)
Federal Home Loan Bank Advance, repayments (46,573) (43,632) (14,606)
Net increase (decrease) in custodial accounts 12,818 3,392 5,492
Stock repurchase (2,666,126)
ESOP stock purchase (249,913)
---------- ---------- ----------
Net cash provided (used) by financing activities (356,447) (5,812,655) (1,958,223)
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents 4,004,976 (191,073) (1,239,937)
Cash and cash equivalents, beginning of year 5,473,454 5,664,527 6,904,464
---------- ---------- ----------
Cash and cash equivalents, end of year $9,478,430 $5,473,454 $5,664,527
========== ========== ==========
Supplemental Disclosures
Cash payments for:
Interest on deposits $2,688,749 $2,811,085 $2,563,490
Income taxes $ 405,000 $ 505,000 $ 627,000
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
22
<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.
23
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
Principles of Consolidation. The consolidated financial statements
include the accounts of the Company and the Bank. All significant
intercompany accounts and transactions have been eliminated.
Loan Origination Fees. The Bank accounts for loan origination fees in
accordance with Statement of Accounting Standards (SFAS) SFAS No. 91
"Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Cost of Leases."
Pursuant to the provisions of SFAS No. 91, origination fees received
from loans, net of direct origination costs, are deferred and amortized
to interest income using the level-yield method, giving effect to
actual loan prepayments. Additionally, SFAS No. 91 generally limits the
definition of loan origination costs to the direct costs attributable
to originating a loan, i.e., principally actual personnel costs. Fees
received for loan commitments that are expected to be drawn upon, based
on the Bank's experience with similar commitments, are deferred and
amortized over the life of the loan using the level-yield method. Fees
for other loan commitments are deferred and amortized over the loan
commitment period on a straight-line basis.
Investment Securities. On October 1, 1994, the Bank adopted Statement
of Financial Accounting Standards(SFAS) No. 115 "Accounting for Certain
Investments in Debt and Equity Securities." SFAS No. 115 requires that
all investments in debt securities and all investments in equity
securities that have readily determinable fair values be classified
into three categories. Securities that management has positive intent
and ability to hold until maturity are classified as held-to-maturity.
Securities that are bought and held specifically for the purpose of
selling them in the near term are classified as trading securities. All
other securities are classified as available-for-sale. Securities
classified as trading and available-for-sale are carried at market
value. Unrealized holding gains and losses for trading securities are
included in current income. Unrealized holding gains and losses for
available-for-sale securities are reported as a net amount in a
separate component of stockholders' equity until realized. Investments
classified as held-to-maturity are carried at amortized cost. The
cumulative effect of this change was to increase stockholders' equity
by $97,256, net of deferred taxes of $33,067, as of October 1, 1994.
Securities that management has the intent and ability to hold to
maturity are classified as held-to-maturity, and carried at cost,
adjusted for amortization of premium or accretion of discount over the
term of the security, using the level yield method. Included in this
category of investments is the FHLB stock which is a restricted stock
carried at cost. Securities available-for-sale are carried at market
value. Adjustments from amortized cost to market value are recorded in
stockholders' equity net of deferred income tax until realized. The
identified security method is used to determine gains or losses on
sales of securities.
Regulations require the Bank to maintain an amount of cash and U.S.
government and other approved securities equal to a prescribed
percentage (5% at September 30, 1997 and 1996) of
(Continued)
24
<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, 1997 and 1996, the Bank met these
requirements.
Office Properties and Equipment. Office properties and equipment are
stated at cost less accumulated depreciation. Depreciation is computed
using the straight line method and the double declining balance method
over the estimated useful lives of the related assets. The gain or loss
on the sales of property and equipment is recorded in the year of
disposition.
Real Estate Owned. Real estate owned is generally comprised of property
acquired through foreclosure or deed in lieu of foreclosure. Foreclosed
real estate is initially recorded at fair value, net of selling
expenses, establishing a new cost basis. Expenses relating to holding
property, including interest expense, are not capitalized. These
expenses are charged to operations as incurred. Valuations are
periodically performed by management, and an allowance for losses is
established by a charge to operations if the carrying value of a
property exceeds its net realizable value.
Loans Receivable. Mortgage loans held for sale are valued at the lower
of cost or market, as calculated on an aggregate loan basis. All other
loans are stated at the principal amount outstanding. The Bank has
adequate liquidity and capital, and it is generally management's
intention to hold such assets to maturity.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on the Bank's past
loan loss experience, known and inherent risks in the portfolio,
adverse situations that may affect the borrower's ability to pay,
estimated value of any underlying collateral, and current economic
conditions. While management uses the best information available,
future adjustments may be necessary if conditions differ substantially
from assumptions used in management's evaluation. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the allowance for loan losses and may require
additions to the allowances based on their judgment about information
available to them at the time of their examination.
Interest earned on loans receivable is recorded in the period earned.
Uncollectible interest on loans that are contractually past due is
charged off or an allowance is established based on management's
periodic evaluation. The allowance is established by a charge to
interest income equal to all interest previously accrued, and income is
subsequently recognized only to the extent cash payments are received
until, in management's judgment, the borrower's ability to make
periodic interest and principal payments is back to normal, in which
case the loan is returned to accrual status.
(Continued)
25
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
In June 1993, the FASB issued SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan." This promulgation, which was amended by SFAS
No. 118 as to certain income recognition and disclosure provisions,
became effective as to the Company in fiscal 1996. The new accounting
standards require that impaired loans be measured based upon the
present value of expected future cash flows discounted at the loan's
effective interest rate, or as an alternative, at the loan's observable
market price or fair value of the collateral. The Bank's current
procedures for evaluating impaired loans result in carrying such loans
at the lower of cost or fair value.
The Bank adopted SFAS No. 114, as subsequently amended, on October 1,
1995, without material effect on consolidated financial condition or
results of operations.
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable
to collect all amounts due according to the contractual terms of the
loan agreement. In applying the provisions of SFAS No. 114, the Bank
considers its investment in one-to-four family residential loans and
consumer installment loans to be homogenous and therefore excluded from
separate identification for evaluation of impairment. With respect to
the Bank's investment in impaired multi-family and nonresidential
loans, such loans are collateral dependent, and as a result, are
carried as a practical expedient at the lower of cost or fair value.
Collateral dependent loans when put in non-accrual status are
considered to constitute more than a minimum delay in repayment and are
evaluated for impairment under SFAS No. 114 at that time.
Deposits. The Bank's deposits are insured by the Savings Association
Insurance Fund ("SAIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC"). On September 30, 1996, the President
signed legislation, which among other things, recapitalized the Savings
Association Insurance Fund through a special assessment on savings
financial institutions, such as the Bank. The special assessment
amounted to $435,000 for the Bank and is included in the Federal and
other insurance premium expense for the year ended September 30, 1996.
As a result of the recapitalization of the SAIF, the Bank's assessment
rate for insurance on deposits, beginning in 1997, was reduced from 23%
to approximately 6% on deposits under $100,000.
Income Taxes. The Company accounts for federal income taxes in
accordance with the provisions of SFAS No. 109, "Accounting for Income
Taxes." SFAS No. 109 established financial accounting and reporting
standards for the effects of income taxes that result from the
Company's activities within the current and previous years. Pursuant to
the provisions of SFAS No. 109, a deferred tax liability or deferred
tax asset is computed by applying the current statutory tax rates to
net taxable or deductible differences between the tax basis of an asset
or liability and its reported amount in the financial statements that
will result in taxable or deductible amounts in future periods.
Deferred tax assets are recorded only to the extent that the amount of
net deductible temporary differences or carryforward attributes may be
utilized against current period earnings,
(Continued)
26
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
carried back against prior years earnings, offset against taxable
temporary differences reversing in future periods, or utilized to the
extent of management's estimate of future taxable income. A valuation
allowance is provided for deferred tax assets to the extent that the
value of net deductible temporary differences and carryforward
attributes exceeds management's estimates of taxes payable on future
taxable income. Deferred tax liabilities are provided on the total
amount of net temporary differences taxable in the future.
The Company files a consolidated federal income tax return with the
Bank. The current income tax expense or benefit is allocated to each
Corporation included in the consolidated tax return based on their tax
expense or benefit computed on a separate return basis.
Effect of Implementing New Accounting Standards. In June of 1996, the
FASB issued SFAS No. 125 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," which superseded
SFAS No. 122, "Accounting for Mortgage Servicing Rights," and amended
SFAS No. 65 "Accounting for Certain Mortgage Baning Activities." SFAS
No. 125 requires the Company to recognize, as separate assets, rights
to service mortgage loans for others; however, these servicing rights
are acquired. SFAS No. 125 was effective for the Company on January 1,
1997, and applied prospectively to mortgage banking transactions
occurring after that date.
The Company recognized mortgage servicing rights of $105,716 for the
year ended September 30, 1997. Amortization of the mortgage servicing
rights totaled $6,087 for the same period. The Bank sells certain
residential loans, primarily fixed rate loans secured by single family
residences in the secondary market. The fair value of the mortgage
servicing rights was determined by quoted prices in the secondary
market. The mortgage servicing rights on the loans sold in the
secondary market are grouped by their primary risk characteristics,
which is the interest rate. The mortgage servicing rights are being
amortized in proportion to and over the period of net servicing income
earned on the related loans being serviced. At September 30, 1997,
there was no allowance recognized for impairment of the recorded
balance of mortgage servicing rights.
Cash and Cash Equivalents. For purposes of reporting consolidated cash
flows, the Bank considers cash, balances with banks, federal funds
sold, and interest bearing deposits in other financial institutions
with original maturities of three months or less to be cash
equivalents. Cash and cash equivalents includes approximately $8.2
million on deposit with other banks which is not covered by FDIC
insurance.
Reclassification. Certain presentations of accounts previously reported
have been reclassified in these consolidated financial statements. Such
reclassifications had no effect on net income or retained income as
previously reported.
(Continued)
27
<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, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1997
-------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Securities, available-for-sale:
SBA Pools $ 2,657,013 $ 9,608 $ 2,647,405
Mortgage-Backed Securities 3,292,217 9,764 3,301,981
----------- ----------- ----------- ------------
$ 5,949,230 $ 9,764 $ 9,608 $ 5,949,386
=========== =========== =========== ============
Securities, held to maturity:
Debt Securities:
U.S. Government and Federal Agencies $ 4,000,625 $ 615 $ $ 4,006,240
Municipals Bonds 717,536 8,771 726,307
----------- ----------- ----------- ------------
4,723,161 9,386 4,732,547
----------- ----------- ----------- ------------
Mortgage-Backed Securities 17,343,534 10,629 33,828 17,320,335
----------- ----------- ----------- ------------
Federal Home Loan Bank of Cincinnati,
capital stock - 5,553 555,300 555,300
----------- ----------- ----------- ------------
$22,621,995 $ 20,015 $ 33,828 $ 22,608,182
=========== =========== =========== ============
</TABLE>
(Continued)
28
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
<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>
The amortized cost and estimated market value of debt securities at
September 30, 1997, by contractual maturity, are as follows:
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
---------- -----------
<S> <C> <C>
Due in one year or less $3,105,937 $3,105,930
Due after one year through five years 1,499,190 1,498,828
Due after five years through ten years
Due after ten years 118,034 127,789
---------- ----------
$4,723,161 $4,732,547
========== ==========
</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
$155 net of deferred income taxes of $53 has been recorded as a
separate component of stockholders' equity as of September 30, 1997.
For the year ended September 30, 1997, the Bank received $6,635,575
from the maturity and call of U.S. Government instruments, debt
securities backed by U.S. Government agencies, and mortgage-backed
securities, all of which were classified as securities
held-to-maturity.
(Continued)
29
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
For the year ended September 30, 1996, the Bank received $14,578,264
from the maturity and call of U.S. Government instruments and debt
securities backed by U.S. Government agencies, all of which were
classified as securities held-to-maturity. The Bank recognized a gain
of $33,310 on the call of a Federal National Mortgage Association
(FNMA) bond.
For the year ended September 30, 1995, the Bank received $548,050 from
the sale of equity securities and $3,940,882 from the sale of
mortgage-backed securities, all of which were classified as securities
available-for-sale. The Bank recognized a gain of $506,267 on the sale
of the equity securities and a $504,445 loss on the sale of the
mortgage-backed securities.
The Bank has pledged mortgage-backed securities totaling $3,605,000 to
secure certain municipal deposits as of September 30, 1997.
3. Loans Receivable
Loans receivable, net at September 30, 1997 and 1996 consists of the
following:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Loans secured by first lien mortgages on real estate:
Residential, one-to-four family properties $ 20,503,214 $ 21,252,055
Multi-family and commercial properties 1,088,140 2,127,870
Agricultural loans 545,793 565,313
Construction loans 1,074,654 1,808,092
Other loans:
Commercial loans 5,818,338 4,796,056
Loans secured by deposits 964,993 1,048,311
Home equity loans 2,000,421 1,662,736
Other secured loans 3,562,910 2,710,992
Signature loans, unsecured 250,893 271,109
------------ ------------
35,809,356 36,242,534
Loans in process (731,545) (403,128)
Allowance for loan losses (391,341) (382,469)
Deferred loan origination fees (195,599) (209,516)
------------ ------------
Loans receivable, net $ 34,490,871 $ 35,247,421
============ ============
</TABLE>
The Bank services loans sold to other associations or governmental
agencies of approximately $52,235,331, $50,317,000, and $50,138,000, as
of September 30, 1997, 1996, and 1995, respectively.
(Continued)
30
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
The Bank provides an allowance to the extent considered necessary to
provide for losses that may be incurred upon the ultimate realization of
loans. The changes in the allowance for loss on loans is analyzed as
follows:
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning or period $382,469 $352,244 $347,618
Additions charged to operations 57,433 19,000
Charge-offs (4,069) (36,901) (18,433)
Recoveries 12,941 9,693 4,059
-------- -------- --------
Balance at end of period $391,341 $382,469 $352,244
======== ======== ========
</TABLE>
At September 30, 1997, the Bank had identified impaired loans totaling
$5,206. The allowance for loan losses included $5,206 related to these
impaired loans. At September 30, 1996, the Bank had identified impaired
loans totaling $18,000. The allowance for loan losses at September 30,
1996 included $18,000 related to those impaired loans. The average amount
of impaired loans for the year ended September 30, 1997 and 1996 was
$11,600 and $34,800, respectively. Interest income received and
recognized on impaired loans totaled $599 and $2,324 for the year ended
September 30, 1997 and 1996, respectively.
The following is a summary of non-performing loans (in thousands) for
the years ended September 30, 1997, 1996, and 1995, respectively:
<TABLE>
<CAPTION>
September 30,
----------------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Non-accrual loans $6 $18 $41
Loans past due 90 days or more 149 205 151
------ ------ ------
Total non-performing loan balances $ 155 $ 223 $ 192
====== ====== ======
</TABLE>
If interest on non-accrual loans had been accrued, such income would
have been approximately $4,436, $5,035, and $2,391 for 1997, 1996, and
1995, respectively.
Loans to executive officers and directors, including loans to
affiliated companies of which executive officers and directors are
principal owners, and loans to members of the immediate family of such
persons at September 30, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
September 30,
-------------------------
1997 1996
-------- --------
<S> <C> <C>
Balance at beginning or period $203,576 $132,127
Additions during year 247,373 222,827
Repayments (135,159) (151,378)
-------- --------
Balance at end of period $315,790 $203,576
======== ========
</TABLE>
(Continued)
31
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
4. Premises and Equipment
Office premises and equipment at September 30, 1997 and 1996 includes
the following:
<TABLE>
<CAPTION>
Useful
Description Life 1997 1996
----------- ----------- ---------- ----------
<S> <C> <C> <C>
Land, buildings, and improvements 30-45 years $1,850,235 $1,637,310
Furniture, fixtures, and equipment 5-10 years 790,986 720,748
----------- ---------- ----------
Balance at end of period 2,641,221 2,358,058
Less accumulated depreciation (1,228,957) (1,182,071)
---------- ----------
$1,412,264 $1,175,987
========== ==========
</TABLE>
Depreciation expense for the years ended September 30, 1997, 1996, and
1995 amounted to $48,522, $53,365, and $79,900, respectively.
5. Deposits
Deposit accounts at September 30, 1997 and 1996 are summarized as
follows:
<TABLE>
<CAPTION>
September 30,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Demand deposit accounts, non-interest bearing $ 2,889,357 $ 2,463,426
Passbook accounts with a weighted average rate of 2.95% and 2.94% at 9,482,320 9,757,570
September 30, 1997 and 1996, respectively
NOW and MMDA deposits with a weighted average rate of 2.55% and 2.48% 12,907,666 13,424,027
at September 30, 1997 and 1996, respectively
----------- -----------
25,279,343 25,645,023
Certificate of deposits with a weighted average interest rate of 39,305,805 38,690,142
5.30% and 5.24% at September 30, 1997 and 1996, respectively
----------- -----------
Total Deposits $64,585,148 $64,335,165
=========== ===========
Jumbo certificates of deposit (minimum denomination of $100,000) $ 6,991,246 $ 6,064,944
=========== ===========
</TABLE>
(Continued)
32
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
Certificates of deposit by maturity at September 30, 1997 and 1996 (in
thousands) are as follows:
<TABLE>
<CAPTION>
September 30,
-----------------
1997 1996
------- -------
<S> <C> <C>
Less than 1 year $29,823 $25,659
1-2 years 7,477 10,291
2-3 years 1,511 1,421
Maturing in years thereafter 495 1,319
------- -------
$39,306 $38,690
======= =======
</TABLE>
Certificates of deposit by maturity and interest rate category at
September 30, 1997 (in thousands) are as follows:
<TABLE>
<CAPTION>
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% $ 317 $ $ $ $ 317
4.01--6.00% 27,858 6,482 697 205 35,242
6.01--8.00% 1,648 995 814 290 3,747
------- ------ ------ ---- -------
$29,823 $7,477 $1,511 $495 $39,306
======= ====== ====== ==== =======
</TABLE>
Interest expense on deposits for the periods indicated are as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Money market and NOW account $ 348,167 $ 415,846 $ 395,111
Savings Accounts 276,786 288,054 307,751
Certificates 2,027,781 2,111,503 1,866,513
---------- ---------- ----------
$2,652,734 $2,815,403 $2,569,375
========== ========== ==========
</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, 1997 and 1996.
(Continued)
33
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
6. Advances from Federal Home Loan Bank
The advances from the Federal Home Loan Bank consist of the following:
<TABLE>
<CAPTION>
September 30,
-------------------
Maturity Date Interest Rate 1997 1996
------------- ------------- -------- --------
<S> <C> <C> <C>
1/1/2006 6.80% $173,573 $186,460
2/1/2007 6.35% 337,153 362,467
4/1/2007 7.50% 116,283 124,282
7/1/2025 5.50% 25,216 25,589
-------- --------
$652,225 $698,798
======== ========
</TABLE>
The following summarizes the amounts due on FHLB advances by year for
each of the next five fiscal years and thereafter.
<TABLE>
<CAPTION>
Fiscal Year Amount
----------- ------
<S> <C>
1998 $49,835
1999 53,261
2000 56,923
2001 60,839
2002 65,026
Subsequent to 2002 366,341
--------
$652,225
========
</TABLE>
At September 30, 1997 and 1996, the Bank had a cash management advance
line of credit with the Federal Home Loan Bank of Cincinnati that allows
the Bank to borrow up to $4,000,000 for a maximum thirty day period at a
fixed rate or for a maximum of ninety days at a variable rate. No
commitment fees are paid under the agreement. There were no borrowings
against this line of credit at September 30, 1997.
These advances are collateralized by Federal Home Loan Bank stock
totaling $555,300 and a blanket agreement against certain real estate
loans amounting to $978,338.
7. Income Taxes
Effective January 1, 1993, the Bank adopted SFAS No. 109 "Accounting for
Income Taxes" which requires an asset and liability approach to
accounting for income taxes.
(Continued)
34
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
The provision for income taxes for the periods indicated consist of the
following:
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Federal income tax expense:
Current expense $ 741,031 $ 377,730 $ 526,821
Deferred tax benefit (198,651) 8,587 41,322
---------- ---------- ----------
$ 542,380 $ 386,317 $ 568,143
========== ========== ==========
</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,
------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
FHLB stock $ 12,784 $ 3,598 $ (878)
Allowance for loan losses (230,498) 12,153 44,860
Other, net 19,063 (7,164) (2,660)
---------- ---------- ----------
Net deferred tax (benefit) expense $(198,651) $ 8,587 $ 41,322
========== ========== ==========
</TABLE>
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,
------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Expected income tax expense at federal tax rate $ 547,171 $ 371,722 $ 559,520
Other, net (4,791) 14,595 8,623
---------- ---------- ----------
Total income tax expense $ 542,380 $ 386,317 $ 568,143
========== ========== ==========
Effective income tax rate 33.7% 35.3% 34.5%
========== ========== ==========
</TABLE>
(Continued)
35
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
Net deferred tax assets included in other assets at September 30, 1997 and net
deferred tax liabilities included in other liabilities at September 30, 1996
consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 124,409 $
Deferred loan fee income 61,057 71,235
---------- ----------
185,466 71,235
---------- ----------
Deferred tax liabilities:
FHLB stock 99,670 86,886
Allowance for loan losses 106,089
Other, net 11,946 16,300
---------- ----------
111,616 209,275
---------- ----------
Net deferred taxes (asset) payable $ 73,850 $(138,040)
========== ==========
</TABLE>
For the years ended September 30, 1996 and 1995, the Bank was allowed a
special bad debt deduction limited generally to eight percent (8%) of
otherwise taxable income and subject to certain limitations based on
aggregate loans and savings account balances at the end of the year. If the
amounts qualifying as deductions under the Internal Revenue Code provision
were later used for purposes other than bad debt losses, they would be
subject to Federal income tax at the then current corporation rate.
In 1996, the Internal Revenue Service repealed this special provision for
thrift institutions, such as the Bank, for determining the allowable tax
bad debt reserves. Effective for tax years ending December 31, 1996 or
after, fiscal year September 30, 1997 for the Bank, all thrift institutions
are taxed as other banking institutions. Institutions under $500 million in
assets are allowed to use the reserve method of determining their bad debt
deduction based on their actual experience while larger institutions (over
$500 million) must use the specific charge off method in determining their
deduction. Tax bad debt reserves accumulated since December 31, 1987 must
be included in taxable income of the Bank prorated over a six year period,
beginning in the tax year effected by the change. This change did not have
a material impact on the Bank as a deferred tax liability was provided for
these accumulated reserves. The accumulated tax bad debt reserves as of
December 31, 1987, which amounts to approximately $1,598,000 is only
subject to being taxed at a later date under certain circumstances, such as
the Bank converting to a type of institution that is not considered a bank
for tax purposes. These financial statements do not include any deferred
tax liability related to the accumulated tax bad debt reserves as of
December 31, 1987.
8. Stockholders' Equity and Regulatory Capital
Regulatory Capital. The Bank is subject to minimum regulatory capital
requirements promulgated by the Office of Thrift Supervision (OTS). Such
minimum capital standards generally require the
(Continued)
36
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
maintenance of regulatory capital sufficient to meet each of three tests,
hereinafter described as the tangible capital requirement, the core capital
requirement and the risk-based capital requirement. The tangible capital
requirement provides for minimum tangible capital (defined as stockholders'
equity less all intangible assets) equal to 1.5% of adjusted total assets.
The core capital requirement provides for minimum core capital (tangible
capital plus certain forms of supervisory goodwill and other qualifying
intangible assets such as capitalized mortgage servicing rights) equal to
3.0% of adjusted total assets. The risk-based capital requirement provides
for the maintenance of core capital plus general loss allowances equal to
8.0% of risk-weighted assets. In computing risk-weighted assets, the
Savings Bank multiplies the value of each asset on its statement of
financial condition by a defined risk-weighting factor, e.g., one-to-four
family residential loans carry a risk-weighted factor of 50%.
As of September 30, 1997, the Bank's regulatory capital exceeded all
minimum regulatory capital requirements as shown in the following table:
<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 $ 8,638 % $ 8,638 % $ 8,638 %
accepted accounting principles
Adjustments: -0- -0- -0-
Net unrealized appreciation
on securities available-for-sale
General valuation allowances 378
Regulatory capital computed 8,638 11.5 8,638 11.5 9,016 29.8
Minimum capital requirement 1,123 1.5 2,245 3.0 2,419 8.0
----------- ------------ ------------ ------------ ------------- -----------
Regulatory capital-excess $ 7,515 10.0% $ 6,393 8.5% $ 6,597 21.8%
=========== ============ ============ ============ ============= ===========
</TABLE>
Retained Earnings Restriction. Retained earnings includes tax bad debt
reserves of $1,598,000 accumulated prior to December 31, 1987 for which
no Federal income tax has been provided. These tax bad debt reserves are
only taxable in certain circumstances, such as if the Bank converted to
an institution that did not qualify as a bank for tax purposes (see
Note 7).
Liquidation Account. Upon conversion to a capital stock savings bank,
eligible account holders who continued to maintain their deposit accounts
in the Bank were granted priority in the event of the future liquidation
of the Bank through the establishment of a special "Liquidation Account"
in an amount equal to the consolidated net worth of the Bank at September
30, 1986. The Liquidation Account was $2,531,513 at September 30, 1986
and is reduced in proportion to reductions in the balance of eligible
account holders as determined on each subsequent fiscal year end. The
existence
(Continued)
37
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
of the Liquidation Account will not restrict the use or application of
net worth except with respect to the cash payment of dividends.
Dividend Restrictions: The payment of cash dividends by the Bank on its
Common Stock is limited by regulations of the OTS. Interest on savings
accounts will be paid prior to payments of dividends on common stock.
The Bank may not declare or pay a cash dividend to the Company in excess
of 100% of its net income to date during the current calendar year plus
the amount that would reduce by one-half the Bank's capital ratio at the
beginning of the year without prior OTS approval. Additional limitation
on dividends declared or paid, or repurchases of the Bank stock are tied
to the Bank's level of compliance with its regulatory capital
requirements.
9. Stock Repurchase
During the fiscal year ended September 30, 1996, pursuant to a Stock
Purchase Agreement approved by the Board of Directors and the Office of
Thrift Supervision, the Company purchased 64,244 shares of the Company's
outstanding stock, of which 58,069 shares were owned by a group of
stockholders collectively known as the "EKH Group." The 64,244 shares of
common stock were purchased in July of 1996 at a total cost of
$2,666,126.
10. Retirement Benefits
Profit Sharing Plan. On December 17, 1985, the Board of Directors of the
Bank adopted an employee pension benefit plan (referred to as a "401K
Profit Sharing Plan") as described under the Employees' Retirement
Income Security Act of 1974. The Plan became effective December 19,
1985. The Plan covers all full-time employees who have attained the age
of 20 1/2 years and have been employed six months prior to the
anniversary date of the Plan. Under the Plan, the Bank makes
discretionary contributions based on profits, in accordance with Section
401(k) of the Internal Revenue Code. The Bank did not make any
contributions to the Plan for the years ended September 30, 1997, 1996,
and 1995.
Employee Stock Ownership Plan. On October 31, 1994, the Board of
Directors of the Bank established an Employee Stock Ownership Plan (the
"ESOP") in which employees meeting age and service requirements are
eligible to participate. The ESOP is effective beginning January 1,
1994. The ESOP Plan covers all employees who have attained the age of 20
1/2 with six months service prior to the entry date. Contributions to
the Plan are determined by the Board of Directors for each plan year and
can be made in the form of company stock, cash, or other consideration.
On April 11, 1997 the Board of Directors of the Company authorized a
loan to the ESOP Trust in the amount of $249,913. The ESOP Trust used
the proceeds of the loan to acquire 6,022 shares of the Company's
outstanding stock from persons affiliated with the Bank. The loan is to
be repaid in ten annual installments, beginning December 1, 1997.
Interest is based on the prime rate published
(Continued)
38
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
in the Wall Street Journal and is adjusted annually. The stock is
pledged as collateral on the loan. The Bank is expected to make annual
contributions sufficient to meet the debt service requirements. As the
debt is repaid, ESOP shares which were initially pledged as collateral
are released from collateral, based on the proportion of debt service
paid in that year, and allocated to Plan participants.
The Company accounts for its ESOP in accordance with the Statement of
Position 93-6, "Employers Accounting for Employee Stock Ownership Plans"
(Statement). The Statement prescribes the accounting treatment for
initially leveraged ESOPs, which requires among other things that:
a. For ESOP shares committed to be released in a period to
compensate employees directly, employers should recognize
compensation costs equal to the average fair value (as determined
on a monthly basis) of the shares committed to be released;
b. Dividends on unallocated shares used to repay ESOP loans are
not considered dividends for financial reporting purposes;
c. For an internally leveraged ESOP, the Company loan receivable
and the ESOP note payable as well as the related income/expense
are not reflected in the consolidated financial statements;
d. For earnings per share computations, ESOP shares that have
been committed to be released should be considered outstanding.
ESOP shares that have not been committed to be released should
not be considered outstanding.
ESOP compensation was $24,991, $30,512, and $24,425 for the years ended
September 30, 1997, 1996, and 1995, respectively. For 1997, 602 shares
were committed to be released from collateral. At September 30, 1997,
there were 5,420 unallocated ESOP shares having a fair value of
$224,922.
11. Related Parties
Mrs. Janet White Prewitt serves the Company as Chairman of the Board of
Directors. Mrs. Prewitt is an equity partner in the law firm of White,
McCann, and Stewart that serves as general counsel to Pioneer Federal
Savings Bank. The fees paid to the Law Firm for fiscal years 1997, 1996,
and 1995, were $90,948, $103,969, and $77,385, respectively. (See Note 4
for a summary of loans to officers and directors). In addition, White,
McCann, and Stewart receives commissions on title insurance premiums
related to real estate mortgages originated by the Bank. These
commissions amounted to $10,858, $29,889, and $14,915 for the years
ended September 30, 1997, 1996, and 1995, respectively.
(Continued)
39
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
12. Financial Instruments with Off-Balance Sheet Risk and Concentration of
Credit Risk
The Bank is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include mortgage commitments
outstanding which amounted to approximately $2,634,854 and $1,107,600
for the year ended September 30, 1997 and 1996, respectively plus unused
lines of credit granted to customers totaling $2,242,683 and $1,689,376
at September 30, 1997 and 1996, respectively. The mortgage loan
committments at September 30, 1997 and 1996 included fixed rate loan
commitments of $610,955 and $370,000, respectively. In addition, at
September 30, 1997 and 1996, respectively, the Bank had made loan
commitments for real estate loans secured by first mortgages totaling
$1,235,202 and $1,169,350, which it anticipated selling in the secondary
market. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheets.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments and
consumer lines of credit are represented by the contractual amount of
those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments. Since many of the loan commitments may expire without being
drawn upon, the total commitment amount does not necessarily represent
future requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained
upon extension of credit is based on management's credit evaluation of
the counterparty. Collateral held varies, but primarily includes
residential real estate.
The Bank has concentrated its lending activity within a 90 mile radius
of Winchester, Kentucky. Therefore, a substantial portion of its
debtors' ability to honor their contracts is dependent on the economy of
this area.
13. Earnings Per Share
Earnings per share for the year ended September 30, 1997, 1996, and 1995
was calculated by dividing net income $1,066,945, $706,982, and
$1,077,503 by the weighted average number of shares of common stock
outstanding during the year, which were 208,233, 256,417, and 272,477
shares for the years ended September 30, 1997, 1996, and 1995,
respectively.
14. Disclosures about Fair Value of Financial Instruments
In December 1991, the FASB issued SFAS No. 107, "Disclosures About Fair
Value of Financial Instruments." This statement extends the existing
fair value disclosure practices for some instruments by requiring all
entities to disclose the fair value of financial instruments (as
defined),
(Continued)
40
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
both assets and liabilities recognized and not recognized in the
statements of financial condition, for which it is practicable to
estimate fair value.
There are inherent limitations in determining fair value estimates, as
they relate only to specific data based on relevant information at that
time. As a significant percentage of the Bank's financial instruments do
not have an active trading market, fair value estimates are necessarily
based on future expected cash flows, credit losses, and other related
factors. Such estimates are accordingly, subjective in nature,
judgmental and involve imprecision. Future events will occur at levels
different from that in the assumptions, and such differences may
significantly affect the estimates.
The statement excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Accordingly,
the aggregate fair value amounts presented do not represent the
underlying value of the Company. Additionally, the tax impact of the
unrealized gains or losses has not been presented or included in the
estimates of fair value.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments.
Cash and Cash Equivalents. The carrying amounts reported in the
statement of financial condition for cash and short-term instruments
approximate those assets' fair values.
Investment Securities. Fair values for investment securities are based
on quoted market prices, where available. If quoted market prices are
not available, fair values are based on quoted market prices of
comparable instruments. No active market exists for the Federal Home
Loan Bank capital stock. The carrying value is estimated to be fair
value since if the Bank withdraws membership in the Federal Home Loan
Bank, the stock must be redeemed for face value.
Loans Receivable. The fair value of loans was estimated by discounting
the future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for the same
remaining maturities.
Deposits. The fair value of savings deposits and certain money market
deposits is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated using the
rates currently offered for deposits of similar remaining maturities.
Loan Commitments and Unused Home Equity Lines of Credit. The fair value
of loan commitments and unused home equity lines of credit is estimated
by taking into account the remaining terms of the agreements and the
present credit-worthiness of the counterparties.
(Continued)
41
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
The estimated fair value of the Company's financial instruments at
September 30, 1997 are as follows:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
----------- -----------
<S> <C> <C>
Assets
Cash and cash equivalents $ 9,478,430 $ 9,478,430
Securities available-for-sale 5,949,386 5,949,386
Securities held-to-maturity 22,621,995 22,608,182
Loans receivable, net 34,490,871 34,932,118
Liabilities
Deposits 64,585,148 64,916,792
FHLB advances 652,225 443,565
Unrecognized Financial Instruments
Loan commitments 2,634,854
Unused lines of credit 2,242,683
</TABLE>
(Continued)
42
<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, 1997.
Pioneer Financial Corporation
Condensed Statement of Financial Condition
September 30, 1997
<TABLE>
<S> <C>
Assets:
Cash and due from banks $ 24,679
Investment in subsidiary 8,636,473
Organizational cost, net 28,140
Other assets 48,906
--------------
Total assets $ 8,738,198
==============
Liabilities and Stockholders' Equity:
Liabilities $
--------------
Stockholders' equity:
Common stock 208,233
Additional paid-in capital 1,797,432
Retained earnings 6,957,353
Unallocated Employee Stock Ownership Plan (ESOP) stock (224,922)
Net unrealized appreciation on securities available-for-sale 102
--------------
Total liabilities and stockholders' equity $ 8,738,198
==============
</TABLE>
(Continued)
43
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
Pioneer Financial Corporation
Condensed Statement of Income
year ended September 30, 1997
<TABLE>
<S> <C>
Income:
Cash dividends from Bank $ 572,762
--------------
Expense:
Amortization of organizational expense 13,508
Other operating 2,181
--------------
15,689
--------------
Income before income tax benefit 557,073
Income tax benefit 5,334
--------------
Net income before equity in undistributed net income of subsidiary 562,407
Equity in undistributed net income of subsidiary 1,077,300
--------------
Net income $ 1,639,707
==============
</TABLE>
(Continued)
44
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
Pioneer Financial Corporation
Condensed Statement of Cash Flows
year ended September 30, 1997
<TABLE>
<S> <C>
Operating activities:
Net income $ 1,639,707
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed net income of subsidiary (1,077,300)
Amortization of organizational cost 13,508
Increase in receivables (5,334)
--------------
Net cash provided by operating activities 570,581
--------------
Investing activities:
Net cash provided (used) by investing activities
Financing activities:
Dividends paid (322,762)
Loan to Employee Stock Ownership Plan (ESOP) (249,913)
--------------
Net cash used by financing activities (572,675)
--------------
Decrease in cash and cash equivalents (2,094)
Cash and cash equivalents at beginning of period 26,773
--------------
Cash and cash equivalents at end of period $ 24,679
==============
</TABLE>
(Continued)
45
<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:
PIONEER SERVICE CORPORATION
Balance Sheets, September 30, 1997 and 1996
--------------------
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Cash $ 653 $ 653
Investments 15,000 15,000
-------- --------
$ 15,653 $ 15,653
======== ========
STOCKHOLDERS' EQUITY
Common stock $ 16,000 $ 16,000
Paid-in capital 1,000 1,000
Deficit (1,347) (1,347)
-------- --------
$ 15,653 $ 15,653
======== ========
</TABLE>
The Service Corporation incurred expenses of $-0- and $30 for the years
ended September 30, 1997 and 1996, respectively.
17. Subsequent Events
On May 23, 1997, the Bank entered into a purchase and assumption
agreement with People's Exchange Bank of Beattyville, Kentucky, Inc. to
sell and assign certain assets and certain deposit liabilities of its
branch office in Stanton, Kentucky. This agreement was finalized and
settled on October 29, 1997. Deposit accounts transferred to the
purchaser amounted to $4,930,683. In addition, the Bank sold loans
totaling $34,370, which were secured by deposits transferred in the
Agreement, plus property and equipment having a book value of $50,000.
The transaction resulted in a net gain to the Bank of approximately
$575,000.
46
<PAGE>
CORPORATE INFORMATION
<TABLE>
<CAPTION>
OFFICES
<S> <C> <C>
Executive offices: Branch offices:
25 East Hickman Street Pioneer Drive Pendleton Street
Winchester, KY 40391 Winchester, KY 40391 Stanton, KY 40380
(606) 744-3972 (606) 744-3896 (Branch closed 10/97)
DIRECTORS
William M. Cress Robert G. Strode
Exec. Vice President, Retired Vice President,
Hinkle Contracting Corporation, Ag-Gro Fertilizer Company
Stanton, KY
Ewart W. Johnson Nancy M. Lawwill
Retired, Lexington, KY Vice President, Treasurer
and Assistant Secretary,
Pioneer Federal
Nora M. Linville Wayne M. Martin
Secretary, Pioneer Federal President and General
and Retired Executive Manager, WKYT-TV,
Vice President Lexington, KY
Thomas D. Muncie Carl C. Norton
President, Muncie Buick-GMC President and Secretary,
Truck, Inc. Pioneer Financial;
President, Pioneer Federal
Janet W. Prewitt Andrew James Ryan
Board Chair, Pioneer Financial President, Andy Ryan
and Pioneer Federal; Asst. Pontiac-Nissan, Inc.
Secretary, Pioneer Financial;
and Attorney, White, McCann
& Stewart
ADVISORY DIRECTORS
Clifford R. Langley Beckner Shimfessel
Winchester, KY Retired Clark County Clerk
Willard M. Martin
Retired Housing Authority
Executive Director
</TABLE>
47
<PAGE>
OTHER OFFICERS AND SIGNIFICANT EMPLOYEES
Janet R. Tutt Lisa Earlywine
Assistant Treasurer Loan Officer
Doris Estes Bobby R. Trent
Branch Manager/ Compliance/Security
Loan Officer
Dianna Davis
Vicki Rupard Branch Manager/Loan Officer,
Loan Officer Stanton Branch (now closed)
AUDITORS LEGAL COUNSEL
Miller, Mayer, Sullivan & Stevens LLP White, McCann & Stewart
2365 Harrodsburg Road 125 S. Main Street
Lexington, KY 40504 Winchester, KY 40391
ANNUAL MEETING
The Annual Meeting of the shareholders of Pioneer Financial Corporation
will be held on Wednesday, January 14, 1998, at 10:00 a.m. at the main office,
25 East Hickman Street, Winchester, Kentucky.
FORM 10-K
A COPY OF THE CORPORATION'S FORM 10-K AS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION WILL BE FURNISHED WITHOUT CHARGE TO STOCKHOLDERS AS OF THE
RECORD DATE UPON WRITTEN REQUEST TO THE SECRETARY, PIONEER FINANCIAL
CORPORATION, 25 EAST HICKMAN STREET, WINCHESTER, KENTUCKY 40391.
48
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 1,189
<INT-BEARING-DEPOSITS> 1,138
<FED-FUNDS-SOLD> 7,151
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,949
<INVESTMENTS-CARRYING> 22,622
<INVESTMENTS-MARKET> 22,608
<LOANS> 34,882
<ALLOWANCE> 391
<TOTAL-ASSETS> 74,825
<DEPOSITS> 64,585
<SHORT-TERM> 50
<LIABILITIES-OTHER> 850
<LONG-TERM> 602
0
0
<COMMON> 208
<OTHER-SE> 8,530
<TOTAL-LIABILITIES-AND-EQUITY> 74,825
<INTEREST-LOAN> 3,111
<INTEREST-INVEST> 1,822
<INTEREST-OTHER> 460
<INTEREST-TOTAL> 5,393
<INTEREST-DEPOSIT> 2,653
<INTEREST-EXPENSE> 2,701
<INTEREST-INCOME-NET> 2,692
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,572
<INCOME-PRETAX> 1,609
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,067
<EPS-PRIMARY> 5.12
<EPS-DILUTED> 5.12
<YIELD-ACTUAL> 3.72
<LOANS-NON> 6
<LOANS-PAST> 149
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 382
<CHARGE-OFFS> 4
<RECOVERIES> 13
<ALLOWANCE-CLOSE> 391
<ALLOWANCE-DOMESTIC> 391
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE>
EXHIBIT 28(a)
MILLER, MAYER, SULLIVAN & STEVENS LLP
CERTIFIED PUBLIC ACCOUNTANTS
"INNOVATORS OF SOLUTION TECHNOLOGY"/SM/
INDEPENDENT AUDITORS' REPORT
Board of Directors
Pioneer Financial Corporation
Winchester, Kentucky
We have audited the accompanying consolidated balance sheets of Pioneer
Financial Corporation and Subsidiary as of September 30, 1997 and 1996 and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the years in the three year period ended September 30, 1997. These
consolidated financial statements are the responsibility of the management of
Pioneer Financial Corporation (Company). Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pioneer Financial
Corporation and Subsidiary as of September 30, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three year
period ended September 30, 1997 in conformity with generally accepted accounting
principles.
/s/ Miller, Mayer, Sullivan, & Stevens, LLP
MILLER, MAYER, SULLIVAN, & STEVENS, LLP
Lexington, Kentucky
October 31, 1997
<PAGE>
EXHIBIT 28(b)
PIONEER FINANCIAL CORPORATION
WINCHESTER, KENTUCKY
25 E. Hickman Street
Winchester, Kentucky 40391
(606) 744-3972
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JANUARY 14, 1998
Notice is hereby given that the annual meeting of shareholders of Pioneer
Financial Corporation (the "Corporation") will be held at 10:00 a.m. on January
14, 1998 at the home office of the Corporation's wholly-owned subsidiary,
Pioneer Federal Savings Bank, at 25 E. Hickman Street, Winchester, Kentucky, for
the following purposes:
1. To elect three Directors of the class whose term of office expires in
1998, to serve for a term of three years, and to elect one Director of the class
whose term expires in 1998, to serve for a term of two years.
2. To ratify the appointment of Miller, Mayer, Sullivan & Stevens LLP to
serve as the auditor of the Savings Bank for fiscal year 1998; and
3. To receive the reports of officers and transact such other business as
may properly come before the meeting. Management is not aware of any such other
business.
The Board of Directors has fixed the close of business on December 1, 1997
as the record date for determining shareholders entitled to notice of and to
vote at the annual meeting.
The Proxy Statement accompanies this Notice.
By Order of the Board of Directors
CARL C. NORTON, PRESIDENT
Dated this 16th day of December, 1997
Winchester, Kentucky
YOUR BOARD OF DIRECTORS URGES YOU TO CONSIDER THIS PROXY MATERIAL CAREFULLY AND
TO FILL IN, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD AS SOON AS POSSIBLE TO
ASSURE THAT YOUR VOTES WILL BE COUNTED. YOU MAY REVOKE YOUR PROXY AT ANY TIME
BEFORE IT IS VOTED BY DELIVERING TO THE SECRETARY OF PIONEER FINANCIAL
CORPORATION EITHER A WRITTEN REVOCATION OF THE PROXY OR A DULY EXECUTED PROXY
BEARING A LATER DATE, OR BY APPEARING AT THE ANNUAL MEETING AND VOTING IN
PERSON. A RETURN ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE.
<PAGE>
PIONEER FINANCIAL CORPORATION
25 E. Hickman Street
Winchester, Kentucky 40391
(606) 744-3972
PROXY STATEMENT
Annual Meeting, January 14, 1998
The Proxy and Solicitation
This Proxy Statement is being mailed on December 16, 1997 to the shareholders of
Pioneer Financial Corporation in connection with the solicitation, by the Board
of Directors, of the enclosed form of proxy for the Annual Meeting of
Shareholders to be held at 10:00 a.m. on Wednesday, January 14, 1998, at the
main office, 25 East Hickman Street, Winchester, Kentucky. A shareholder may
revoke a writing appointing a proxy either by giving notice to the Corporation
in writing, by executing a later-dated proxy, or by appearing at the meeting and
voting in person. The cost of soliciting the proxy will be borne by Pioneer
Financial Corporation.
Purposes of Annual Meeting
The Annual Meeting has been called for the purposes of: (1) electing four
Directors of the class whose term of office expires in 1998 (three of whom will
serve until January, 2001, and one of whom will serve until January, 2000); and
(2) ratifying the appointment of Miller, Mayer, Sullivan & Stevens LLP, as
auditor for the fiscal year 1998. In addition, the shareholders may receive
reports of officers, and transact such other business as may properly come
before the meeting.
The persons named in the enclosed proxy have been selected by the Board of
Directors and will vote shares represented by valid proxies. They have
indicated that, unless otherwise specified in the proxy, they intend to vote to
elect as Directors the nominees listed on pages 6 and 7. All of the nominees
are presently members of the Corporation's Board of Directors.
The Board of Directors has no reason to believe that any of the nominees
will be unable to serve as a Director. Each of the nominees has agreed to serve
as a Director, if elected, and has heretofore served as a Director. In the
event, however, of the death or unavailability of any nominee or nominees, the
proxy to that extent will be voted for such other person or persons as the Board
of Directors may recommend.
Miller, Mayer, Sullivan & Stevens LLP, has been appointed by the Board of
Directors as auditor of the Corporation for the fiscal year ending September 30,
1998. If no contrary directions are indicated, proxies will be voted in favor
of ratification of the appointment of auditors.
<PAGE>
The Corporation has no knowledge of any other matters to be presented to
the meeting. In the event other matters do properly come before the meeting,
the persons named in the proxy will vote in accordance with their judgment on
such matters.
Shares may be voted at the meeting in person or by proxy. The accompanying
proxy is solicited by the Board of Directors of Pioneer Financial Corporation
and is intended to permit each shareholder as of the record date to vote. All
valid proxies received prior to the meeting will be voted. Unless marked to the
contrary, such proxies will be voted for the election of four Directors, and for
the ratification of the appointment of independent auditors. If any other
business is brought before the meeting, the proxies will be voted in accordance
with the judgment of the persons voting the proxies. A shareholder who has
given a proxy may revoke it at any time prior to such proxy being voted at the
meeting by filing with Pioneer Federal an instrument revoking it, or a duly
executed proxy bearing a later date, or by attending the meeting and giving
notice of such revocation. Attendance at the meeting does not by itself
constitute revocation of a proxy.
The owners of a majority of the outstanding shares of the Corporation must
be present, in person or by proxy, at the Annual Meeting to constitute a quorum.
The four nominees for Directors receiving a plurality of the votes cast at
the meeting in person or by proxy shall be elected. All other matters require
for approval the favorable vote of a majority of shares voted at the meeting in
person or by proxy.
In addition to the use of the mails, proxies may be solicited by the
Directors, officers and employees of Pioneer Federal Savings Bank, the wholly-
owned subsidiary of the Corporation, without additional compensation, by
personal interview, telephone, telegraph or otherwise. Arrangements may also be
made with brokerage firms and other custodians, nominees and fiduciaries who
hold the voting securities of record for the forwarding of solicitation material
to the beneficial owners thereof. Pioneer Financial Corporation will reimburse
such brokers, custodians, nominees and fiduciaries for the reasonable out-of-
pocket expenses incurred by them in connection therewith.
1999 Shareholder Proposals
The deadline for shareholders to submit proposals to be considered for inclusion
in the Proxy Statement for the 1999 Annual Meeting of Shareholders is expected
to be September 1, 1998.
Voting Securities
The Board of Directors has fixed the close of business on December 1, 1997 as
the record date for determining shareholders
2
<PAGE>
entitled to notice of the meeting and to vote. The Corporation has outstanding
and entitled to vote at the meeting 208,233 shares of common stock. Shareholders
are entitled to one vote for each share held on the record date on all matters
presented to the shareholders at the Annual Meeting except that, in the election
of Directors, cumulative voting rules will apply. Under cumulative voting, each
shareholder is entitled to cast as many votes in the aggregate as shall equal
the number of shares of common stock owned by him or her multiplied by the
number of Directors to be elected. Each shareholder, or his or her Proxy, may
cast all of his or her votes (as thus determined) for a single nominee for
Director or may distribute them among two or more nominees, in the shareholder's
discretion. As to the authority of the persons named as proxies in the
accompanying proxy card to cumulate votes, see the section entitled ITEM ONE -
NOMINEES FOR ELECTION AS DIRECTORS FOR TERMS OF OFFICE EXPIRING IN 2000 AND
2001.
The following table sets forth information furnished to the Corporation
with respect to persons known by the Corporation to be the beneficial owners of
more than 5% of the Corporation's common stock (as of September 30, 1997).
<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
26 East Broadway
Winchester, Kentucky
</TABLE>
In addition, Cede & Company holds 29,199 shares (14.02%) as nominal owner
for other persons and entities. We are assured by members of that firm that
none of the parties for whom it holds Pioneer Financial stock would be the
beneficial owner of more than 5% of the Corporation's stock.
The following table sets forth, as of December 1, 1997, information
furnished to the Corporation with respect to the beneficial ownership by each
Director and nominee, and by all present Directors and officers as a group, of
the Corporation's common stock. This table further provides, for each Director,
the age, period from which each has served as a Director of Pioneer Federal
Savings Bank (the Corporation's wholly-owned subsidiary), his or her principal
occupation or employment, and information with respect to the beneficial
ownership, as such term is defined under Rules and Regulations of the Securities
and Exchange Commission, of the outstanding shares of the Corporation's common
stock by each Director and by all Directors and officers as a group.
3
<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:
William M. Cress (55) 1991 1998 1,050 .50%
Engineer; Director
Carl C. Norton (41) 1993 1998 2,644 1.27%
Banker; President and
Director
Janet W. Prewitt (50) 1972 1998 7,350 3.53%
Attorney; Director and
Chairman of the Board
Robert G. Strode (58) 1974 1998 6,785 3.26%
General Contractor;
Director
Continuing Directors:
Thomas D. Muncie (60) 1974 2000 2,850 1.37%
President, Muncie
Buick-GMC Truck, Inc.;
Director
Andrew James Ryan (38) 1995 1999 70 .03%
President, Andy Ryan
Pontiac Nissan, Inc.;
Director
Nancy M. Lawwill (61) 1981 1999 2,000 .96%
Banker; Director,
Vice President, Treasurer
and Assistant Secretary
Wayne M. Martin (51) 1991 1999 600 .29%
President, WKYT-TV 27;
Director
Retiring Directors, who
will
become Advisory Directors
Ewart W. Johnson (75) 1989(4) 2000 5,275 2.53%
Retired; Director
Nora M. Linville (75) 1976 2000 2,400 1.15%
Retired; Director and
Secretary to the Board
Advisory Directors to
Pioneer Federal Savings
Bank:
Clifford R. Langley 5,000 2.40%
Willard M. Martin 5,015 2.41%
Beckner Shimfessel 2,500 1.20%
All Directors and executive 31,024 14.89%
officers as a group,
excluding Advisory
Directors
(10 persons)
All Directors and executive 43,539 20.91%
officers as a group,
including Advisory Directors
(13 persons)
</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.
4
<PAGE>
(3) Ms. Prewitt is an equity partner in the law firm of White, McCann &
Stewart. Her law firm received gross fees from Pioneer Federal of
$101,805.59 during fiscal year ended September 30, 1997, including
$10,858.02 of commissions from title insurance written in connection with
loans made at the Savings Bank. Ms. Prewitt's share of the gross fees was
$24,433.34.
(4) Mr. Johnson was elected Director of the Bank on May 28, 1965 and served in
that position until his resignation on October 17, 1972. He served as a
Director Emeritus of the Savings Bank from 1972 until the January, 1989
Annual Meeting of Shareholders, when he was elected to serve the remaining
unexpired term then held by Clifford R. Langley.
Each officer, Director and beneficial owner of more than 10% of any class
of equity securities of Pioneer Financial Corporation is required to file a
report with the Securities and Exchange Commission and/or Office of Thrift
Supervision initially reporting securities beneficially owned by him or her, and
then reporting any change in ownership of securities. These reports must be
filed by the 10th day of the calendar month following the date on which such a
transaction occurred. All of the statements of changes in beneficial ownership
of securities to be filed by officers and Directors of Pioneer Financial
Corporation have been timely filed in fiscal year 1997.
Changes in Directorship
Ewart W. Johnson and Nora M. Linville having attained the age for mandatory
retirement as Director of Pioneer Financial Corporation are now retiring as of
the Annual Meeting. They will continue to serve, however, as Advisory Directors
to Pioneer Federal Savings Bank.
Further, George W. Billings, Jr. formerly served as a Director of the
Corporation. However, he resigned as Director effective November 1, 1997 due to
ill health. The effect of the resignation of Mr. Billings and the mandatory
retirement of Ms. Linville and Mr. Johnson was considered by the Board of
Directors of Pioneer Financial Corporation at its meeting on September 16, 1997.
The Board voted to amend the Bylaws of the Corporation, to reduce the number of
Directors of Pioneer Financial Corporation to ten effective November 1, 1997,
and to eight effective after the Annual Meeting on January 14, 1998. The
amendment to the Bylaws is stated as follows:
ARTICLE III - BOARD OF DIRECTORS
Section 2. Number and term. The Board of Directors shall consist of
ten members from November 1, 1997 and eight members from the date of
the next shareholders meeting thereafter. The Board shall be divided
into three classes as nearly equal in number as possible. One member
of the next class to be elected after November 1, 1997 shall be
elected for a term of two years to equalize the size of the classes;
all other members of
5
<PAGE>
each class shall be elected for a term of three years until their
successors are elected and qualified. One class shall be elected by
ballot annually.
Nominees and Directors Whose Terms of Office will Continue
Pioneer Financial Corporation is governed by a Board of Directors to consist of
eight members effective January 14, 1998, as set forth in Pioneer's Bylaws,
above. The Board is divided into three classes, with the members of each class
to serve for three year terms (except as stated above). Information as to each
of the nominees and continuing Directors is given below. Unless stated to the
contrary, the Directors have been engaged in their current occupations for at
least the five preceding years. One class of the Board is due for election at
this Annual Meeting (Item No. One, below).
The nominees for election as members of the Board of Directors, with
information furnished to the Corporation by them as of December 1, 1997, are as
follows:
ITEM NO. ONE - NOMINEE FOR ELECTION AS DIRECTOR FOR TERM OF
OFFICE EXPIRING IN 2000
Janet W. Prewitt (age 50) has been a Director of Pioneer Federal since 1972.
She served as the Savings Bank's President from 1976 until 1993, and is
currently Chairperson of the Board of Directors of both Pioneer Financial
Corporation and its wholly-owned subsidiary, Pioneer Federal Savings Bank. Ms.
Prewitt is an equity partner in the law firm of White, McCann & Stewart, a
general practice law firm located in Winchester, which serves as general counsel
to Pioneer Federal and Pioneer Financial. Legal services performed by the law
firm are attended by Mr. John H. Rompf, Jr., and Mrs. Beverly Ann Shea (Ms.
Prewitt's sister) of the firm, who are not otherwise associated with the
Corporation nor the Savings Bank. In fiscal 1997, Pioneer Federal paid White,
McCann & Stewart $101,805.59 in legal fees (including the law firm's percentage
of commissions paid on title insurance premiums paid by Pioneer Federal during
fiscal 1996 and some prior years). Of this sum, $96,445.68 represented fees
earned in connection with title examinations and title insurance for real estate
loans, while the balance represented fees in foreclosure actions and fees for
quarterly and annual reports.
ITEM NO. TWO - NOMINEES FOR ELECTION AS DIRECTORS FOR TERMS OF
OFFICE EXPIRING IN 2001
Carl C. Norton (age 41) is President of Pioneer Financial Corporation and
Pioneer Federal Savings Bank, and as such is Chairman of all committees of the
Board of Directors. He is a Winchester native, a past president of the Central
Kentucky League of Savings Institutions, Director of the Winchester- Clark
County Chamber of Commerce and the Winchester-Clark County Industrial
Development Authority. Mr. Norton holds a Bachelors
6
<PAGE>
degree in accounting from the University of Kentucky and he is a graduate of the
Kentucky School of Banking and the School of Banking of the South. Mr. Norton
has over seventeen years of banking experience. He has served as a Director of
Pioneer Federal since January, 1993, and has been employed by Pioneer since
February, 1992. Prior to coming to Pioneer Federal, Mr. Norton was Executive
Vice-President and Chief Managing Officer of First Security Bank of Clark
County.
William M. Cress (age 55) is Executive Vice President of Hinkle Contracting
Corporation in Paris, Kentucky. He has been employed by Hinkle since 1972,
having spent 12 years with the Kentucky Department of Highways prior to that.
He majored in Civil Engineering at the University of Kentucky and is a
Registered Professional Engineer. He is a native of Powell County and currently
resides in Stanton. He is Director of Beech Fork Golf Club and past President
of the Plant-Mix Asphalt Industry of Kentucky, Powell County Education
Foundation, and Powell County Alumni Association. Mr. Cress was an Advisory
Director of the Savings Bank from June 17, 1980 until January 9, 1991, when he
was elected to serve the remaining unexpired term then held by John D. Harrison.
Mr. Cress serves on the Salary and Operations/Business Plan Committees.
Robert G. Strode (age 58) has been a Director of Pioneer Federal since 1974.
Mr. Strode retired in June, 1990 as Vice President of Ag-Gro Fertilizer Company,
a fertilizer processing company located in Winchester. Mr. Strode currently
serves on the Audit and Executive Committees.
If any person or persons other than the aforesaid nominees are nominated as
Directors, then the proxies named in the enclosed proxy card, or their
substitutes, or a majority of them, shall have the right in their discretion to
vote for some number less than all the aforesaid nominees or for less than all
of the aforesaid nominees equally. If any of the aforesaid nominees becomes
unwilling or unable to accept nomination or election, then the proxies shall
have the right to vote for any substitute nominee in place of the nominee who
has become unwilling or unable to accept nomination or election.
The Board of Directors has nominated Ms. Prewitt to serve as Director until
2000, and Messrs. Norton, Strode and Cress to serve as Directors until 2001, or
until their respective successors shall have been elected and shall qualify.
Election of the nominees requires the affirmative vote of a plurality of the
votes actually cast at the Annual Meeting. THE BOARD OF DIRECTORS RECOMMENDS
THAT SHAREHOLDERS VOTE "FOR" THE ELECTION OF THESE NOMINEES AS DIRECTORS.
Continuing Directors
Present Directors whose term of office will continue after the meeting,
with information furnished to the Savings Bank by them as of December 1, 1997,
are as follows:
7
<PAGE>
PRESENT DIRECTORS WHOSE TERMS OF OFFICE EXPIRE IN 1999
Nancy M. Lawwill (age 61) has been a Director of Pioneer Federal since 1981.
She has served as Pioneer Federal's Treasurer since 1973, as Assistant Secretary
since 1974 and as Vice President since 1994. She has been with the Savings Bank
since 1966, and is the Savings Bank's data processing and computer coordinator
and is in charge of operations, as well as serving as a Loan Officer. Mrs.
Lawwill serves on the Loan, Asset/Liability and CRA Committees.
Wayne M. Martin (age 51) was elected to Pioneer Federal's Board of Directors on
January 9, 1991, to serve the remainder of Mr. Beckner Shimfessel's term. He is
President and General Manager for WKYT-TV 27 in Lexington, and has been with
WKYT since March, 1987. He is a Winchester native, and is President of the
Kentucky Broadcasters Association. Mr. Martin holds a Bachelors degree in
Business Administration, a Masters degree in Education and a Rank I
Administrative certification - all from Morehead State University. He also
serves on the Board of Trustees of Cardinal Hill Hospital, is Chairman of the
Lexington Area Sports Authority, Director and President of the Child Advocacy
Center of the Bluegrass, and is an Elder of First Christian Church, Winchester,
Kentucky. Mr. Martin currently serves on the Salary, CRA and Executive
Committees.
Andrew James Ryan (age 38) was elected a Director of Pioneer Federal and Pioneer
Financial on December 1, 1995 to fill the remainder of the term of Michael S.
Houlihan, who died suddenly on November 28, 1995. Mr. Ryan is President of Andy
Ryan Pontiac Nissan, Inc., an automobile dealership in Winchester. He was
General Manager of White Chevrolet and Pontiac of Manchester from 1982 until
moving to Winchester in November, 1991 to assume his current duties. He is past
President of the Winchester New Car Dealers Association, a member of the
Winchester Rotary and Kiwanis Clubs, and is a deacon of First Christian Church,
Winchester, Kentucky. Mr. Ryan currently serves on the Operations/Business Plan
Committee.
PRESENT DIRECTOR WHOSE TERM OF OFFICE WILL EXPIRE IN 2000
Thomas D. Muncie (age 60) has been a Director of Pioneer Federal since 1974. He
is President of Muncie Buick-GMC Truck, Inc., an automobile dealership located
in Winchester. Mr. Muncie currently serves on the Executive and
Operations/Business Plan Committees.
RETIRING DIRECTORS WHO WILL BECOME ADVISORY DIRECTORS
Ewart W. Johnson (age 75) is a retired businessman and former Kentucky State
Parks Commissioner. He was elected a Director of Pioneer Federal on May 28,
1965 and served in that position until his resignation on October 17, 1972. He
served as a Director Emeritus of the Savings Bank from 1972 until the January,
1989 Annual Meeting of Shareholders, when he was elected to serve the
8
<PAGE>
remaining unexpired term then held by Clifford R. Langley. Mr. Johnson serves on
the Operations/Business Plan Committee. Mr. Johnson, having attained the
mandatory retirement age, will be retiring from the Board of Directors of
Pioneer Financial Corporation at its meeting on January 14, 1998. It is
anticipated that Mr. Johnson will be elected an Advisory Director of Pioneer
Federal Savings Bank, as stated below.
Nora M. Linville (age 75) has been a Director of the Savings Bank since 1976.
She retired from Pioneer Federal as Executive Vice President in 1992, having
been with Pioneer Federal since 1952. She serves as Secretary to the Board and
on the Executive, Salary and Audit Committees. Ms. Linville, having attained
the mandatory retirement age, will be retiring from the Board of Directors of
Pioneer Financial Corporation at its meeting on January 14, 1998. It is
anticipated that Ms. Linville will be elected an Advisory Director of Pioneer
Federal Savings Bank, as stated below.
Advisory Directors
Pioneer Federal Savings Bank, Pioneer Financial's wholly-owned subsidiary,
currently has three Advisory/Emeritus Directors. Advisory Directors are elected
to that position by the Board of Directors when, in the opinion of the Board of
Directors, the Savings Bank would benefit from the particular expertise of such
persons. These Directors are assigned to the various committees of the Bank's
Board of Directors. Advisory Directors do not have voting or other authority at
the Board and committee meetings. Advisory Directors who have served as
Directors of the Savings Bank carry the honorary title of Director Emeritus.
Directors are routinely asked to serve as Advisory Directors upon retirement as
Directors. The following persons currently serve as Advisory/Emeritus Directors
to the Savings Bank: Clifford R. Langley, Beckner Shimfessel and Willard M.
Martin (all of whom were appointed Directors Emeritus upon retirement from the
Board of Directors). Roger Davis, Martha W. Hampton and Nellie K. Meadows
formerly served as Advisory Directors to Pioneer Federal Savings Bank; however,
when Pioneer Federal ceased operation of a branch office in Stanton, effective
October 17, 1997, Ms. Hampton, Ms. Meadows and Mr. Davis resigned as Advisory
Directors. It is anticipated that Nora M. Linville and Ewart W. Johnson will be
elected as Advisory/Emeritus Directors to Pioneer Federal Savings Bank,
following their retirement as Directors of Pioneer Financial Corporation.
Family Associations Among Directors and Officers
Wayne M. Martin, Director, is the son of Willard M. Martin, a Director Emeritus
of the Savings Bank.
Committees of the Board of Directors
The Board of Directors of the Corporation and of Pioneer Federal Savings Bank,
its principal subsidiary, have established the following committees, the members
of which are designated
9
<PAGE>
annually by the Board of Directors of the Corporation and of the Savings Bank.
The President serves as Chairman of all committee meetings (except Salary
Committee), and the Chairman of Pioneer Financial's Board serves as an ex-
officio member of all committees.
Loan Committee. The Loan Committee meets at least weekly, and makes
decisions on all mortgage loan applications. All loans approved are presented
to the Board of Directors for ratification, except that loans to a borrower who
owes or would owe the Savings Bank more than $200,000 are presented to the Board
of Directors for approval. Regular members of the Loan Committee include the
Executive Officers of the Savings Bank and its Loan Officers.
Audit Committee. The Audit Committee meets on an as-needed basis. The
committee nominates the independent auditor, discusses accounting changes, and
analyzes the financial position of the Savings Bank. Members of the Audit
Committee include Messrs. Strode, Willard Martin and Mrs. Linville.
Asset/Liability Committee. The Asset/Liability Committee meets quarterly
to analyze the Savings Bank past and present performance and the risks inherent
in future strategies, which may be employed by the Bank. Members of the
Asset/Liability Committee are Ms. Prewitt, Mrs. Lawwill and Mrs. Vermillion.
Operations/Business Plan Committee. The Operations/Business Plan Committee
meets on an as-needed basis, to discuss, analyze, and monitor operation systems
and procedures of the Corporation and of the Savings Bank. Members of the
committee include Messrs. Cress, Johnson, Muncie, Shimfessel and Ryan.
CRA (Community Reinvestment Act) Committee. This Committee meets
periodically to review HMDA (Home Mortgage Disclosure Act) data and CRA
activities conducted by the Savings Bank. This Committee also sets CRA policy
and direction for the upcoming months. Members of the CRA Committee include Ms.
Prewitt, Mrs. Lawwill, and Messrs. Norton, Wayne Martin, Trent and Ryan.
Executive Committee. The Executive Committee acts for the Board of
Directors between Board meetings. Committee members include Mrs. Linville, and
Messrs. Norton, Wayne Martin, Strode and Muncie. The committee meets on an as-
needed basis.
Salary Committee. The Salary Committee meets on an as-needed basis to
review salaries of employees. Members of this committee include Mrs. Linville,
and Messrs. Cress and Wayne Martin.
Nominating Committee. Pursuant to the Corporation's By-laws, the Board of
Directors as a whole acts as a Nominating Committee for selecting the
management's nominees for election as Directors. The Nominating Committee must
deliver its written nominations to its secretary at least 20 days prior to the
Annual
10
<PAGE>
Meeting. No other nominations for Directors shall be voted upon at the Annual
Meeting, except those made by shareholders in writing delivered to the secretary
at least 10 days prior to the Annual Meeting. If the Nominating Committee does
not act prior to 20 days before the Annual Meeting, then nominations may be made
at the meeting by any shareholder entitled to vote. The Board, at its September
16, 1997 meeting, nominated Ms. Prewitt and Messrs. Norton, Strode and Cress for
election as Directors for the above-listed term.
During the fiscal year ended September 30, 1997, the Savings Bank's Board
of Directors held 12 regular meetings and 4 special meeting. The Savings Bank's
Loan Committee met 52 times, while the Salary Committee met once during fiscal
1997. The Operations/Business Plan Committee met once; the Executive Committee
met 9 times during the fiscal year. The Audit Committee held 1 formal meeting,
to receive the report of the Corporation's auditors for fiscal year 1997. The
CRA Committee met 3 times; the Asset/Liability Committee held 3 meetings. A
Powell County Branch Committee (consisting of Directors and Advisory Directors
from Powell County) meets on a regular basis to discuss procedures and issues
particularly pertinent to the operation of the Powell County Branch. This
Committee held 11 meetings during fiscal 1997. During fiscal 1997, the
Corporation's Board of Directors held 4 regular meetings and 2 special meetings,
and no unanimous consents without meeting. No Director of the Corporation
attended fewer than 75% of the total meetings of the Board of Directors and
committees on which such Board member served during this period, except for
Ewart W. Johnson, who was out of the state for a significant period of time.
Directors' Fees
Directors are paid by Pioneer Federal Savings Bank a fee of $400 per month, plus
$25 for each committee meeting attended. Directors Emeritus are paid $400 per
month. When the Bank has had Advisory Directors who are not Directors Emeritus,
they were paid $200 per month. Directors who are officers of the Corpo-ration
receive no fees for serving on the Board of Directors or for attending Board
meetings or committee meetings.
Officers Who Are Not Directors
The following information is supplied with respect to officers and significant
employees of Pioneer Federal Savings Bank, the Corporation=s principal
subsidiary, who do not serve on the Corporation's nor the Savings Bank's Board
of Directors. No arrangements or understandings exist between the Corporation or
Pioneer Federal and any person listed below pursuant to which such person was
elected as an officer.
11
<PAGE>
<TABLE>
<CAPTION>
Name Age Positions Currently Held
With Pioneer Federal
<S> <C> <C>
Janet Tutt 55 Assistant Treasurer since 1980;
employee of Pioneer since 1974
Doris Estes 50 Bypass Branch Manager and Loan
Officer since August, 1993;
Employee of Pioneer since 1984
Bobby R. Trent 48 Compliance/Security since June,
1995; was previously Chief Operations
Officer/Compliance Officer with
Salt Lick Deposit Bank
Vicki Rupard 37 Loan Officer since September, 1995;
was previously Mortgage
Administrative Assistant with
Peoples Commercial Bank
Lisa Earlywine 26 Loan officer since February, 1997; was
previously a Loan Processor with
Pioneer Federal Savings Bank
Dianna Davis 48 Stanton Branch Manager/Loan Officer
since October, 1995, and an employee
of the Bank since 1985
</TABLE>
Remuneration of Officers
The following table sets forth for the fiscal year ended September 30, 1997,
certain information as to compensation received by all executive officers of the
Corporation as a group for services in all capacities to the Corporation.
During such period, only one executive officer of the Corporation or of Pioneer
Federal received total cash compensation in excess of $60,000.00, that being
President Carl C. Norton. Mr. Norton's cash compensation by Pioneer Federal
during fiscal 1997 was $90,000.00. Ms. Prewitt's compensation as Chairman of
the Board of Pioneer Federal and of the Corporation, when added to her equity
portion of the fees paid by Pioneer to White, McCann & Stewart, did not exceed
$60,000.00 during fiscal 1997 or any prior year.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Number of Persons Capacities in Cash
in Group Which Served Compensation (1)
- --------------------------------------------------------------------------------
<S> <C> <C>
All Executive Officers Executive Officers $ 217,545
as a Group (4 persons, (including Chief
4 positions) Financial Officer)
Other Significant Employees Branch Managers, $ 172,226
as a group (6 persons, Asst. Treas., Loan
4 positions) Officers, Compliance/
Security
</TABLE>
12
<PAGE>
(1) In addition to cash compensation, all executive officers of the Savings
Bank, except Ms. Prewitt, are participants in the Savings Bank's group life
insurance and Blue Cross/Blue Shield major medical insurance plans, the costs of
which are paid by the Savings Bank. The Savings Bank maintains a "401(k)"
employee profit sharing plan as described under the Employees' Retirement Income
Security Act of 1974. The Plan became effective December 19, 1985. Under the
Plan, the Savings Bank may make contributions in accordance with Section 401(k)
of the Internal Revenue Code. The Savings Bank's contributions are allocated to
each participant based on the ratio the participant's compensation bears to the
total compensation. Employees may also contribute to the Plan. The Plan covers
all full-time employees who have attained the age of 20 1/2 years once they have
completed 6 months of service at an anniversary date of the Plan. The
participant's account balance vests at 20% after completing 2 years of service;
this vesting is increased by 20% for each year thereafter, with 100% vesting
after 6 years of service. Upon retirement, the employee may withdraw all or
parts of his vested portion of the Plan at his discretion (in accordance with
Section 401(k)). The Board Chairperson of the Savings Bank participates in the
"401(k)" plan. During fiscal 1997 the Savings Bank made no contributions to the
"401(k)" plan on behalf of the Executive Officers or Other Significant
Employees. Ms. Prewitt participates in the life insurance and 401(k) plans
only.
In addition, Pioneer Federal Savings Bank established an Employee Stock
Ownership Plan on October 31, 1994. Under the Plan, the Savings Bank may make
contributions in accordance with Section 401(a) of the Internal Revenue Code in
the form of cash or stock for employees of the Savings Bank who are eligible on
attainment of age 20 1/2 and completion of at least a six-month period of
service are eligible to participate. The Savings Bank made a contribution to
the ESOP of $38,487.56 for fiscal year 1997; of this sum, $11,365.19 was
contributed to the ESOP on behalf of the Executive Officers and $13,167.82 was
contributed to the ESOP on behalf of the Other Significant Employees.
The following chart shows annual compensation (there being no long-term
compensation) of the Corporation's President and Chief Managing Officer for the
last three fiscal years (including his compensation by Pioneer Federal Savings
Bank):
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
NAME AND PRINCIPAL FISCAL YEAR ----------------------------------------------
POSITION ENDED 9/30 SALARY BONUS OTHER (BENEFITS)
- ------------------ ----------- ------------ ------------ ------------------
<S> <C> <C> <C> <C>
Carl C. Norton, 1997 $ 90,000.00 $ -0- $ 10,741.83
President and 1996 $ 83,892.34 $ 2,500.00 $ 10,656.35
Chief Managing 1995 $ 79,999.92 $ 2,500.00 $ 9,374.60
Officer 1994 $ 72,115.84 $ 2,700.00 $ 8,993.84
</TABLE>
13
<PAGE>
Transactions Involving Directors and Officers
Pioneer Federal currently offers loans to its officers and Directors for various
purposes consistent with the Corporation's and the Savings Bank's regular
lending policies as limited by applicable law and regulation. These loans are
made in the ordinary course of business, are made on the same terms and
conditions as those prevailing at the time for comparable transactions with non-
affiliated persons, and, in the judgment of management, do not involve more than
normal risk of collectibility or present other unfavorable features.
Set forth below is certain information relating to loans made to Pioneer
Federal executive officers and Directors (and their affiliates and immediate
family members) whose total aggregate loan balances exceeded $60,000.00 at any
time during the year ended September 30, 1997. Loans which were originated by
the Savings Bank but have been sold on the secondary market are not included.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Borrower and Original Original Current
Type of When Loan Interest Interest 9/30/97
Loan Originated Amount Rate Rate Balance
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Wayne Martin, 8/29/96 $51,375.00 9% 9% $ 45,616.64
Director:
residential/
real estate
Chris Martin, son of 5/30/96 52,700.00 6% 8% $ 50,747.17
Director Martin: ----------
residential/
real estate
(first mortgage,
home)
Total: $ 96,363.81
</TABLE>
During the year ended September 30, 1997, there were no loans made to Pioneer
Federal officers (who are not considered principal officers for the purposes of
the annual audit) whose total aggregate loan balances exceeded $60,000 at any
time during the fiscal year. Loans which were originated by the Savings Bank
but have been sold on the secondary market are not included.
ITEM NO. THREE - SELECTION OF INDEPENDENT AUDITOR
Miller, Mayer, Sullivan & Stevens LLP, have been appointed as the Corporation's
independent auditor for the fiscal year ending September 30, 1998 pursuant to
the recommendation of the Audit Committee of the Board of Directors. A
representative of Miller, Mayer, Sullivan & Stevens LLP is expected to be
present at the meeting with an opportunity to make a statement if he desires to
do so and to answer appropriate questions with respect to that
14
<PAGE>
firm's audit of the Corporation's consolidated financial statements and records
for the fiscal year ended September 30, 1997.
The appointment of the auditors must be approved by a majority of the votes
cast by the stockholders of the Corporation at the meeting. THE BOARD OF
DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE APPROVAL OF THE
APPOINTMENT OF AUDITORS.
ITEM NO. FOUR - OTHER MATTERS
The Board of Directors is not aware of any business to come before the meeting
other than those matters described above in this Proxy Statement. However, if
any other matters should properly come before the Meeting, it is intended that
Proxies in the accompanying form will be voted in respect thereof in accordance
with the judgment of the person or persons holding the proxies.
Annual Report
The Annual Report of the Corporation for the fiscal year ended September 30,
1997 is enclosed herewith. The consolidated financial statements of the
Corporation and its subsidiary and the accompanying notes and report of
independent auditors, the quarterly data and supplementary information on the
effects of inflation, the selected financial data for each of the last five
fiscal years, and management's discussion and analysis of the summary of
operations contained in the Annual Report are incorporated by reference in this
Proxy Statement.
By Order of the Board of Directors
CARL C. NORTON, PRESIDENT
Dated this 16th day of December, 1997, Winchester, Kentucky
- --------------------------------------------------------------------------------
FORM 10-K
- --------------------------------------------------------------------------------
A COPY OF THE CORPORATION'S FORM 10-K AS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION WILL BE FURNISHED WITHOUT CHARGE TO STOCKHOLDERS AS OF THE
RECORD DATE UPON WRITTEN REQUEST TO THE SECRETARY, PIONEER FINANCIAL
CORPORATION, 25 EAST HICKMAN STREET, WINCHESTER, KENTUCKY 40391.
15
