EXHIBIT 13
PIONEER FINANCIAL CORPORATION
ANNUAL REPORT TO SHAREHOLDERS
Fiscal Year Ending
September 30, 1997
PIONEER FINANCIAL CORPORATION
ANNUAL REPORT TO SHAREHOLDERS
FISCAL YEAR ENDED SEPTEMBER 30, 1997
Table of Contents
Page
----
Corporate Profile .......................................................... 1
Consolidated Financial Highlights .......................................... 2
Letter to Shareholders ..................................................... 3
Selected Consolidated Financial and Other Data ............................. 4
Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................... 6
Financial Statements ....................................................... 17
Letter from Auditors .............................................. 17
Consolidated Balance Sheets ...................................... 18
Consolidated Statements of Income ................................. 19
Consolidated Statements of Stockholders' Equity ................... 20
Consolidated Statements of Cash Flows ............................. 21
Notes to Consolidated Financial Statements ........................ 23
Corporate Information ...................................................... 47
Form 10-K ................................................................. 48
PIONEER FINANCIAL CORPORATION
Corporate Profile
Pioneer Financial Corporation (herein "the Company"), a Kentucky
corporation, was organized in 1994 as a thrift holding company. On December 20,
1994, the shareholders of Pioneer Federal Savings Bank approved an agreement and
plan of reorganization dated October 31, 1994, whereby the Savings Bank became a
wholly-owned subsidiary of Pioneer Financial Corporation. In accordance with the
Reorganization Plan, the shareholders of Pioneer Federal exchanged their shares
of common stock on a one-for-one basis for common shares in Pioneer Financial
Corporation. Pioneer Federal is the main asset of Pioneer Financial, and the
consolidated financial statements of the Company and of the Bank are included
herein.
Pioneer Federal Savings Bank (herein "the Bank"), with assets of more
than $74 million at September 30, 1997, is the larger of the two thrift
institutions in Winchester, Kentucky. It currently ranks third in deposits among
the eight financial institutions located in Winchester.
The business of Pioneer Federal consists primarily of attracting
deposits from the general public and using such deposits, together with other
borrowings and funds, to make residential mortgage loans, commercial real estate
loans (primarily permanent loans), consumer loans (including automobile and
personal loans) and to invest in mortgage-backed securities and other
investments. Pioneer Federal Savings Bank has been in existence since 1885, when
the Commonwealth of Kentucky granted a charter to its predecessor, Winchester
Building & Savings Association. It became a federally-chartered association in
1978, under the name of Pioneer Federal Savings and Loan Association. In 1985,
the Association obtained a federal savings bank charter and changed its name to
Pioneer Federal Savings Bank. Pioneer Federal was issued a federal stock savings
bank charter on July 15, 1987, upon successful completion of its conversion from
mutual to a stock form.
Pioneer Financial Corporation is subject to regulation by the
Securities and Exchange Commission and the Office of Thrift Supervision. Pioneer
Federal Savings Bank is subject to regulation by the Office of Thrift
Supervision and the Federal Deposit Insurance Corporation, which administers the
Savings Association Insurance Fund, that insures Pioneer Federal's deposits.
Pioneer Federal owns stock in the Federal Home Loan Bank of Cincinnati and is a
member of the Federal Home Loan Bank system.
Pioneer Federal has a wholly-owned subsidiary, Pioneer Service
Corporation, which holds stock in Intrieve, Inc. Intrieve provides on line
computer processing and inquiry service to Pioneer Federal and other thrift
institutions.
The principal executive offices of the Company and of the Bank are
located at 25 East Hickman Street, Winchester, Kentucky 40391, telephone number
(606) 744-3972.
Consolidated Financial Highlights
September 30,
---------------------------------
1997 1996
- --------------------------------------------------------------------------------
For the Year
Net interest income $ 2,691,733 $ 2,797,403
Net income 1,066,945 706,982
At Year End
Total assets $74,825,464 $74,401,137
Loans receivable, net 34,490,871 35,247,421
Savings deposits 64,585,148 64,335,165
Stockholders' equity 8,738,198 8,244,635
Stockholders' equity
to total liabilities 13.2% 12.5%
- --------------------------------------------------------------------------------
Capital Stock
At the present time, there is no established market in which shares of
the Company's capital stock are regularly traded, nor are there any uniformly
quoted prices for such shares. However, Hilliard-Lyons in Lexington, Kentucky is
maintaining a "work-out market" in the stock, with the most recent price being
$43.00 per share.
During fiscal year 1997, the Company paid quarterly dividends of
35(cent) per share on December 16, 1996, and 40(cent) per share on March 15,
1997, June 16, 1997 and September 15, 1997 to shareholders of record as of
December 2, 1996, March 1, 1997, June 1, 1997 and September 1, 1997,
respectively.
As of November 5, 1997, Pioneer Financial Corporation had approximately
285 stockholders.
2
[LETTERHEAD OF PIONEER FINANCIAL CORPORATION APPEARS HERE]
December 16, 1997
Dear Shareholder:
As you can see from the enclosed Annual Report to Shareholders for our
fiscal year ending September 30, 1997, the most recent fiscal year was another
excellent year for Pioneer Federal. It was comparable to 1994 and 1995. You may
remember that the net income for fiscal year ended September 30, 1996 was
significantly lower than 1994, 1995 or 1997 due to a special assessment to
financial institutions who, like Pioneer Federal, were insured by the SAIF
portion of the FDIC. Without the special assessment, Pioneer Federal's net
income for fiscal year 1996 would have been just under $1,000,000.
Although it happened after the end of the fiscal year, I want to
mention Pioneer Federal's ceasing to operate a branch in Stanton, Kentucky. As
most all of you are aware, this occurred on October 17, 1997. People's Exchange
Bank of Beattyville, Kentucky, Inc., which had earlier given notice of its
intention to move its main bank office to Stanton, Kentucky, made an offer for
our Stanton branch bank building and real estate and Stanton deposits. We valued
our Powell County customers and relationships - many of which had existed before
we ever had a branch office in Powell County. However, acceptance of the offer
was determined to be in the best interests of our shareholders. We did not sell
our Powell County loans other than loans secured by savings accounts (commonly
called "share loans").
We have finally completed our much-needed renovations at the main
office on Hickman Street this year. I know that it was an inconvenience to our
customers as well as our staff, but we feel that we are more efficiently using
our space and able to provide better service in the renovated space. Thank you
for your indulgence during our reconstruction work.
As I'm sure you have observed, we have more banking competitors in
Clark County this year than when I wrote you in December, 1996. We are excited
about the challenges and opportunities of the coming year. As always, we are
very grateful for the loyalty and support of our shareholders, customers and
employees.
Sincerely,
/s/ Janet W. Prewitt
-----------------------------
Janet W. Prewitt,
Chairman, Board of Directors
3
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(in Thousands of Dollars)
------------------------
As of September 30,
---------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Balance Sheet Data
Total amount of:
Loans receivable, net...................... $34,491 $35,247 $32,214 $29,384 $34,290
Investments................................ 28,571 31,574 38,676 41,104 36,720
Cash....................................... 1,189 733 790 633 462
Interest bearing deposits/1/............... 8,289 4,935 5,162 6,271 4,605
Assets..................................... 74,825 74,401 78,836 79,648 78,432
Deposits................................... 64,585 64,335 67,088 68,686 68,198
Borrowings................................. 652 699 742 757 795
Stockholders' equity....................... 8,738 8,245 10,540 9,806 9,087
Other Data
Number of:
Loans outstanding.......................... 2,346 2,409 2,418 2,344 2,412
Savings accounts........................... 8,652 9,117 9,207 9,253 9,766
Full customer service offices open......... 3 3 3 3 3
Year ended September 30,
---------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Operations Data
Total amount of:
Interest income............................ $ 5,393 $ 5,659 $ 5,656 $ 5,210 $ 5,819
Interest expense........................... (2,701) (2,862) (2,619) (2,293) (2,517)
Provision for loan losses.................. (57) (19) (5) (178)
-------- -------- -------- -------- --------
Net interest income after
provision for loan losses................ 2,692 2,740 3,018 2,913 3,123
Non-interest income........................ 489 445 404 389 432
Non-interest expense....................... 1,572 2,092 1,776 1,718 1,614
-------- -------- -------- -------- --------
Net income before income taxes and
cumulative effect of change in
accounting principles.................... 1,609 1,093 1,646 1,584 1,941
Income tax expense......................... 542 386 568 534 670
Cumulative effect of change
in accounting principle/2/............... (18)
-------- -------- -------- -------- --------
Net income................................. $ 1,067 $ 707 $ 1,078 $ 1,032 $ 1,271
======== ======== ======== ======== ========
- ------------------------------------
/1/Includes Federal funds sold.
/2/Reflects adoption of Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes."
4
Key Operating Ratios:
As of and for the years ended September 30,
----------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Performance Ratios:
Return on average assets/1/....... 1.42% 0.89% 1.36% 1.30% 1.61%
Return on average equity/1/....... 12.86% 6.97% 10.52% 10.83% 14.78%
Average equity to
average assets1................. 11.07% 12.72% 12.91% 12.05% 10.91%
Interest rate spread.............. 3.36% 3.18% 3.51% 3.43% 3.96%
Net interest margin............... 3.72% 3.63% 3.94% 3.78% 4.30%
Dividend payout................... 30.25% 50.00% 32.7% 30.30% 20.30%
Asset Quality Ratios:
Nonperforming assets to total
assets at end of year........... 0.21% 0.30% 0.24% 0.13% 0.26%
Allowance for loan losses to
total assets at end of year..... 0.52% 0.51% 0.45% 0.44% 0.51%
Allowance for loan losses to
nonperforming loans at end
of year......................... 252.26% 171.30% 183.33% 334.62% 193.20%
Allowance for loan losses to
total loans receivable, net..... 1.13% 1.06% 1.05% 1.15% 1.17%
Capital Ratios:
Equity to total assets at
end of year..................... 11.68% 11.08% 13.27% 12.31% 11.58%
Average equity to
average assets/1/............... 11.07% 12.72% 12.91% 12.05% 10.91%
Ratio of average interest
earning assets to average
interest bearing
liabilities/1/.................. 109.64% 112.01% 112.55% 111.74% 110.30%
- --------------------
/1/Average balances are based upon month-end balances.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
--------------------
General
In accordance with an agreement and plan of reorganization dated October 31,
1994 and approved by shareholders on December 20, 1994, Pioneer Federal Savings
Bank (Pioneer Federal or Bank) became a wholly-owned subsidiary of Pioneer
Financial Corporation (Company). The purpose of the discussion that follows is
to provide insight into the consolidated financial condition and results of
operation of Pioneer Financial Corporation and its subsidiary, Pioneer Federal
Savings Bank.
The primary business of the Company is the operation of the Bank. The assets of
the Company consist of all of the outstanding capital stock of the Bank, and a
note receivable from the Company's Employee Stock Ownership Plan (ESOP).
Therefore, this discussion relates primarily to the Bank.
Historically, the Bank has functioned as a financial intermediary, attracting
deposits from the general public, and using such deposits to make mortgage
loans, and to a lesser extent, consumer loans, and to purchase investment
securities with a significant concentration in mortgage-backed securities. As
such, its earnings have depended primarily on its net interest income, or
"spread," which is the difference between the amount it receives from interest
earned on loans and investments ("interest-earning assets") and the amount it
pays in interest on its deposits ("interest-bearing liabilities"). Results of
operations are also dependent upon the level of the Bank's non-interest income,
including fee income and service charges, and by the level of its non-interest
expenses, the most significant component of which is salaries and employee
benefits.
The operations of the Bank and the entire thrift industry are significantly
affected by prevailing economic conditions and the monetary, fiscal, and
regulatory policies of government agencies. Lending activities are influenced by
the demand for and supply of housing, competition among lenders, the level of
interest rates, and the availability of funds. Deposit flows and costs of funds
are likewise heavily influenced by prevailing market rates of interest on
competing investment alternatives, account maturities, and the levels of
personal income and savings in the Bank's market areas.
The Bank's interest earning assets have been historically concentrated in real
estate - collateralized instruments, principally single-family residential
loans, and to a lesser extent, loans secured by multi-family residential and
commercial properties, construction loans, home equity lines of credit, second
mortgages on single-family residences and consumer loans, both secured and
unsecured including loans secured by savings accounts. In addition, the Bank
invests in mortgage-backed securities, which are secured by single-family
residential loans and guaranteed by government agencies. The Bank also invests
in U.S. Government Treasury and Agency securities, Federal funds, and interest-
bearing deposits, primarily with the Federal Home Loan Bank of Cincinnati. The
Bank's source of funding for these investments has principally been deposits
placed with the Bank by consumers in the market area it serves.
Asset/Liability Management
Net interest income, the primary component of the Bank's net earnings, is
derived from the difference or "spread" between the yield on interest-earning
assets and the cost of the interest-bearing liabilities. The Bank has sought to
reduce its exposure to changes in interest rates by matching more closely the
effective maturities
6
or repricing characteristics of its interest-earning assets and interest-bearing
liabilities. The matching of the Bank's assets and liabilities may be analyzed
by examining the extent to which its assets and liabilities are interest-rate
sensitive and by monitoring the expected effects of interest rate changes on an
institution's net interest income and net portfolio value.
An asset or liability is interest-rate sensitive within a specific time period
if it will mature or reprice within that time period. If the Bank's assets
mature or reprice more quickly or to a greater extent than its liabilities, the
Bank's net portfolio value and net interest income would tend to increase during
periods of rising interest rates, but decrease during periods of falling
interest rates. If the Bank's assets mature or reprice more slowly or to a
lesser extent than its liabilities, the Bank's net portfolio value and net
interest income would tend to decrease during periods of rising interest rates.
The Bank's policy has been to mitigate the interest rate risk inherent in the
historical savings institution business of originating long-term loans funded by
short-term deposits by pursuing certain strategies designed to decrease the
vulnerability of its earnings to material and prolonged changes in interest
rates.
Management's principal strategy in managing the Bank's interest rate risk has
been to maintain short and intermediate term assets in the portfolio, including
locally originated adjustable rate mortgage loans. The Bank's policy is to not
actively offer long-term fixed rate loans. Fixed rate loans that are offered and
retained by the Bank are secured by one to four-family owner-occupied dwellings,
primarily for terms of no more than 15 years. Likewise, the interest rate
charged on the Bank's adjustable rate loans typically reprice after one, three,
or five years with maximum periodic interest rate adjustment limits ("caps"). At
September 30, 1997, the Bank had no loans that reprice after five years from
that date. In managing its portfolio investment and mortgage-backed and related
securities, the Bank seeks to purchase investment and mortgage-backed and
related securities that mature on a basis that approximates the estimated
maturities of the Bank's liabilities.
Management has attempted to lengthen the average maturity of its liabilities by
adopting a tiered pricing program for its certificates of deposit. The Bank
offers higher rates of interest on its longer term certificates in order to
encourage depositors to invest in certificates with longer maturities.
Interest Rate Sensitivity Analysis
The Bank's future financial performance depends to a large extent on how
successful it is in limiting the sensitivity of earnings and net asset value to
changes in interest rates. Such sensitivity may be analyzed by examining the
amount by which the market value of the Bank's portfolio equity changes given an
immediate and sustained change in interest rates. Based on the latest
information available, it is estimated that the Bank's market value of portfolio
equity at June 30, 1997 would decrease by approximately $1.0 million or 8% given
a 200-basis point immediate and sustained increase in interest rates. It is
estimated that the Savings Bank's market value of portfolio equity at June 30,
1997 would decrease by approximately $25,000 or 0% given a 200-basis point
immediate and sustained decrease in interest rates. There has been no material
change in the Company's consolidated net assets since June 30, 1997.
Average Balances, Interest, and Average Yields
The Bank's earnings depend primarily on its net interest income, the difference
between the income it receives on its loan portfolio and other investments and
its cost of money, consisting primarily of interest paid on savings deposits.
Net interest income is affected by (i) the difference between rates of interest
earned on its interest-earning assets and rates paid on its interest-bearing
liabilities (commonly known as "the spread"); and
7
(ii) the relative amounts of its interest-earning assets and interest-bearing
liabilities. When interest-earning assets approximate or exceed interest-bearing
liabilities, any positive spread will generate net interest income. Thrift
institutions have traditionally used interest rate spreads as a measure of net
interest income. Another indicator of an institution's net interest income is
its "net yield on interest-earning assets," which is net interest income divided
by average interest-earning assets.
The following table sets forth certain information relating to the Bank's
average interest-earning assets and interest-bearing liabilities and reflects
the average yield on assets and average cost of liabilities for the periods
indicated. Such yields and costs are derived by dividing income or expense by
the average monthly balance of assets or liabilities, respectively, for the
periods presented. During the periods indicated, nonaccruing loans are included
in the net loan category. Average balances are derived from month-end average
balances. Management does not believe that the use of month-end balances instead
of average daily balances has caused any material difference in the information
presented.
8
AVERAGE BALANCES AND YIELD/RATES
(in thousands of dollars)
-------------------
Year ended September 30,
----------------------------------------------------------------------
1997 1996
--------------------------------- -----------------------------------
Average Average Average Average
Balance/1/ Interest Yield/Rate Balance/1/ Interest Yield/Rate
---------- -------- ---------- ---------- -------- ----------
Interest Earning Assets:
Loans/2/...................................... $ 35,059 $ 3,111 8.87% $ 33,358 $ 3,057 9.16%
Investment securities......................... 2,588 117 4.52 5,352 384 7.17
Mortgage-backed securities.................... 25,856 1,704 6.59 30,064 1,783 5.93
Other investments............................. 8,763 461 5.26 8,333 435 5.22
-------- -------- -------- -------- -------- --------
Total interest earning assets............... 72,266 5,393 7.46 77,107 5,659 7.34
-------- --------
Non interest earning assets................... 2,715 2,704
-------- --------
Total assets................................ $ 74,981 $ 79,811
======== --------
Interest-bearing Liabilities:
Savings deposits.............................. $ 65,241 2,652 4.06 $ 68,118 2,816 4.13
FHLB advances 672 49 7.29 719 46 6.40
-------- -------- -------- --------
Total interest bearing liabilities 65,913 2,701 4.10 68,837 2,862 4.16
-------- --------
Non interest bearing liabilities.............. 769 825
Stockholders' equity.......................... 8,299 10,149
-------- --------
Total liabilities and stockholders' equity.. $ 74,981 $ 79,811
======== ========
Net interest income.............................. $ 2,692 $ 2,797
======== ========
Interest rate spread/3/.......................... 3.36% 3.18%
======== ========
Net interest margin/4/........................... 3.72% 3.63%
======== ========
Ratio of average interest-bearing assets to
average interest-bearing liabilities 109.64% 112.01%
======== ========
Year ended September 30,
---------------------------------------
1995
---------------------------------------
Average Average
Balance/1/ Interest Yield/Rate
---------- -------- ----------
Interest Earning Assets:
Loans/2/...................................... $ 31,622 $ 2,813 8.90%
Investment securities......................... 7,872 474 6.02
Mortgage-backed securities.................... 31,280 2,019 6.45
Other investments............................. 6,368 350 5.50
--------- -------- --------
Total interest earning assets............... 77,142 5,656 7.33
Non interest earning assets................... 2,275 --------
---------
Total assets................................ $ 79,417
=========
Interest-bearing Liabilities:
Savings deposits.............................. $ 67,794 2,569 3.79
FHLB advances 744 50 6.72
--------- -------- --------
Total interest bearing liabilities 68,538 2,619 3.82
Non interest bearing liabilities.............. 630 --------
Stockholders' equity.......................... 10,249
---------
Total liabilities and stockholders' equity.. $ 79,417
=========
Net interest income.............................. $ 3,037
========
Interest rate spread/3/.......................... 3.51%
========
Net interest margin/4/........................... 3.94%
========
Ratio of average interest-bearing assets to
average interest-bearing liabilities 112.56%
========
- -------------------------
/1/ Average balances are based on month-end balances.
/2/ Includes loans held for sale.
/3/ Represents the difference between the average yield on interest-earning
assets and the average cost of interest-bearing liabilities.
/4/ Represents net interest income as a percentage of the average balance of
interest-earnings assets for the same period.
9
Rate/Volume Analysis
The following table sets forth certain information regarding changes in interest
income and interest expense of the Savings Bank for the periods indicated. For
each category of interest-earning asset and interest-bearing liability
information is provided on changes attributable to (1) changes in volume
(changes in volume multiplied by old rate); (2) changes in rate (change in rate
multiplied by old volume); (3) changes in rate-volume (change in rate multiplied
by the change in volume).
Year ended September 30,
----------------------------------------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995 1995 vs. 1994
Increase/(Decrease) Increase/(Decrease) Increase/(Decrease)
Due to Due to Due to
------------------------------- ------------------------------- ------------------------------
Volume Rate R/V Total Volume Rate R/V Total Volume Rate R/V Total
------ ------ ---- ------ ------ ---- ----- ----- ----- --- --- -----
Interest income:
Loan portfolio .............. 155.8 (96.7) (4.9) 54.1 157.5 82.2 4.5 244.2 46.6 48.0 0.8 95.4
Investments ................. (197.4) (142.8) 73.2 (267.0) (151.7) 90.5 (29.0) (90.2) 235.2 0.5 0.4 236.1
Mortgage-backed securities .. (249.9) 198.4 (27.8) (79.3) (78.4) (164.7) 6.3 (236.8) (289.3) 285.2 (40.0) (44.1)
Other interest income ....... 22.4 3.3 0.2 26.0 109.1 (17.8) (5.5) 85.8 30.7 111.4 16.1 158.2
------ ------ ---- ------ ------ ----- ----- ----- ----- ----- ---- -----
Total interest-earning assets (269.1) (37.8) 40.7 (266.2) 36.5 (9.7) (23.7) (3.0) 23.2 445.1 (22.7) 445.6
====== ====== ==== ====== ====== ===== ===== ===== ===== ===== ==== =====
Interest expense:
Savings deposit ............. (117.8) (47.7) 2.0 (163.5) 12.3 233.5 1.1 246.9 (14.5) 345.3 (2.2) 328.6
Borrowings and Federal
Home Loan Bank Advances .. (3.0) 6.4 (0.4) 3.0 (1.7) (2.4) 0.1 (4.0) (2.1) (0.2) 0.0 (2.3)
------ ------ ---- ------ ------ ----- ----- ----- ----- ----- ---- -----
Total interest-bearing
liabilities................ (120.8) (41.3) 1.6 (160.5) 10.6 231.1 1.2 242.9 (16.6) 345.1 (2.2) 326.3
====== ====== ==== ====== ====== ===== ===== ===== ===== ===== ==== =====
Net change in net interest
income (expense) ............ (148.3) 3.5 39.1 (105.7) 25.9 (240.9) (24.9) (239.9) 39.8 100.0 (20.5) 119.3
====== ====== ==== ====== ====== ===== ===== ===== ===== ===== ==== =====
Note: The total rate and volume variances have been allocated to rate and volume
changes depending on the degree of variance in each category for the year in
question. Changes in both rate and volume are allocated proportionately between
changes in rate and changes in volume. Average balances are derived from
month-end balances. Management does not believe that the use of month-end
balances instead of average daily balances has caused any material difference in
the information presented.
10
Comparison of Financial Condition at September 30, 1997 and 1996
The Company's consolidated assets increased by $400,000 to $74.8 million at
September 30, 1997 compared to $74.4 million at September 30, 1996. Short-term
investments consisting of interest-bearing deposits and Federal funds sold
increased a total of $3.4 million or 40.4% to $8.3 million at September 30,
1997. This increase was funded primarily by principal repayments on
mortgage-backed securities, and the maturity of other investment securities.
Investment securities, including both securities available-for-sale and
securities held-to-maturity totaled $28.6 million at September 30, 1997 compared
to $31.6 million at September 30, 1996.
The net loan portfolio decreased $700,000 or 2% to $34.5 million at September
30, 1997 compared to $35.2 million at September 30, 1996. The allowance for loan
losses totaled $391,000 and $382,000 at September 30, 1997 and 1996,
respectively. At September 30, 1997, the ratio of the allowance for loan losses
to loans was 1.13% compared to 1.06% at September 30, 1996. The Bank's
non-performing loans were $155,000 at September 30, 1997. The Bank's ratio of
allowance for loan losses to non-performing loans was 252.6% at September 30,
1997 compared to 171.3% at September 30, 1996. The determination of the
allowance for loan losses is based on management's analysis, which is done at a
minimum on a quarterly basis. Various factors are considered, including the
market value of the underlying collateral, growth and composition of the loan
portfolio, the relationship of the allowance for loan losses to outstanding
loans, historical loss experience, delinquency trends and prevailing economic
conditions. Although management believes its allowance for loan losses is
adequate, there can be no assurance that additional allowances will not be
required or that losses on loans will not be incurred.
Premises and equipment increased $200,000 to $1.4 million compared to $1.2
million. The increase was due to remodeling of the Bank's main office.
Deposits totaled $64.6 million at September 30, 1997 compared to $64.3 million
at September 30, 1996. In October of 1997 the Bank finalized the sale of its
Branch bank located in Stanton, Kentucky, which resulted in the transfer of $4.9
million in deposits to the purchaser. The Bank realized a net gain on the sale
of the Branch of approximately $600,000. The sale will allow management to
concentrate efforts and resources in their primary market area of Winchester,
Kentucky.
Stockholders' equity increased $500,000 to $8.7 million at September 30, 1997
compared to $8.2 million at September 30, 1996. The increase was due to net
income for fiscal year 1997 of $1.1 million less dividend payments of $300,000
and the net reduction of $225,000 from unallocated stock in the Employee Stock
Ownership Plan (ESOP). In fiscal year 1997, the Company made a loan of $250,000
to the ESOP Trust for the purpose of acquiring outstanding stock of the Company.
The ESOP Trust used the proceeds of the loan to acquire 6,022 shares of the
Company's common stock, which is collateral for the loan. The stock is released
from collateral in proportion to the principal repayments made on the loan and
allocated to the participants in the Plan. Under generally accepted accounting
principles, the stock is earned by participants over the expected amortization
period of the loan balance.
Comparison of Results of Operations for the Years Ended September 30, 1997 and
1996
Net Income. The Company's consolidated net income for the year ended September
30, 1997 was $1,067,000, compared to $707,000 for the year ended September 30,
1996. In comparing 1997 to 1996, the increase of $360,000 in net income resulted
from a reduction in non-interest expense of $520,000, a decrease
11
in the provision for loan losses of $57,000 plus an increase in non-interest
income of $44,000 offset by a reduction in net interest income of $105,000 and
an increase in income tax expense of $156,000.
Net Interest Income. Net interest income for the year ended September 30, 1997
was $2.7 million, compared to $2.8 million for the year ended September 30,
1996. The decrease of $105,000 in net interest income for the year ended
September 30, 1997 was due primarily to a decrease in the average balances of
interest earning assets offset in part by a decrease in the average balance of
interest-bearing liabilities for 1997 compared to 1996. The average balance of
interest earning assets in 1997 was $72.3 million with an average yield of
7.46%, compared to average balances of $77.1 million with an average yield of
7.34% for 1996. The average balance of interest-bearing liabilities in 1997 was
$66.0 million with an average cost of funds of 4.10% compared to average
balances of $68.9 million with an average cost of funds of 4.16% for 1996. The
decrease in the average balances of interest earning assets was due primarily to
a decrease in the last quarter of 1996 from the repurchase of stock for $2.7
million, plus a decrease in deposits of approximately $2.7 million, due to the
rotation of the local school board deposits.
Interest Income. Interest income decreased $266,000 from $5.7 million to $5.4
million, or by 4.7% during 1997 compared to 1996. This decrease resulted
primarily from the decrease in the average balance of interest earning assets
from $77.1 million in 1996 compared to $72.3 million in 1997. The average yield
on interest earning assets increased to 7.46% from 7.34% due to an increase in
the average balance of loans from $33.4 million to $35.1 million in 1997
compared to 1996. The increase in loans was funded by repayments of
mortgage-backed securities and the maturity of other investment securities as
part of management's strategy to obtain higher investment yields.
Interest Expense. Interest expense decreased $161,000 from $2.9 million to $2.7
million or by 5.6% during 1997 compared to 1996. This decrease resulted
primarily from a decrease in the average balance of interest-bearing liabilities
from $68.9 million in 1996 compared to $66.0 million in 1997.
Provision for Loan Losses. Bank management determined that no additional
provision for loan losses was required in 1997. The provision for loan losses in
1996 was $57,000. The decision to not provide an additional provision for loan
losses was based on the various factors management uses to evaluate the adequacy
of the allowance for loan losses, with the more significant factors being the
similar composition and size of the loan portfolio in 1997 and 1996, and
favorable delinquency trends, with relatively stable economic conditions.
Non-Interest Income. Non-interest income increased $44,000 for the year ended
September 30, 1997 compared to the same period in 1996. The increase is due to
the recognition in 1997 of the fair market value of mortgage servicing rights
for loans sold in the secondary market, which resulted in additional gains on
the sale of these loans totaling $100,000. The Bank began recognizing mortgage
servicing rights as the result of adopting Statement of Financial Accounting
Standards (SFAS) No. 122 Accounting for Mortgage Servicing Rights in 1997, which
was subsequently superseded by SFAS No. 125 Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. This increase
of $100,000 was offset in part by a decrease in loan fees of approximately
$22,000 and a decrease in the gain on the sale of securities of $33,000 in 1997
compared to 1996.
Non-Interest Expense. Non-interest expense decreased $500,000 from 2.1 million
in 1996 to $1.6 million in 1997. The decrease of $500,000 was primarily due to a
$522,000 decrease in Federal or other insurance premiums. This decrease was due
to a special SAIF premium assessment in 1996 of $435,000, plus a reduction in
the insurance rate paid on deposits in 1997 to approximately .06% as compared to
.23% in 1996.
12
Income Taxes. The Bank's effective income tax rate was 34.0% in 1997 and 35.3%
in 1996. The increase in income tax expense of $156,000 is due to the increase
in income for 1997 as compared to 1996.
Comparison of Results of Operations for the Years Ended September 30, 1996 and
1995
Net Income. Net income decreased by $371,000 or 34.4% to $707,000 for the year
ended September 30, 1996 as compared to $1,078,000 for the same period in 1995.
The net decrease was due to a decrease of $239,000 in net interest income, an
increase of $39,000 in the provision for loan losses, and an increase of
$316,000 in non-interest expense offset by an increase of $41,000 in
non-interest income, and a decrease of $182,000 in income tax expense.
Net Interest Income. Net interest income for the year ended September 30, 1996
was $2.8 million, compared to $3.0 million for the year ended September 30,
1995. The decrease of $240,000 for the year ended September 30, 1996 was
primarily due to a higher cost of funds in 1996 compared to 1995. Average
interest-bearing liabilities in 1996 amounted to $68.9 million, with the average
interest rate paid amounting to 4.16%, compared to the average balance of
interest-bearing liabilities in 1995 of $68.5 million with an average interest
rate paid of 3.82%. Interest expense for 1996 was $2.9 million compared to $2.6
million in 1995. Interest income was $5.7 million in 1996 and 1995.
Interest Income. Interest income was $5.7 million for the years ended September
30, 1996 and 1995. For the year ended September 30, 1996, interest income was
7.34% of average interest earning assets as compared to 7.33% for the year ended
September 30, 1995.
Interest Expense. Interest expense was $2.9 million, or 4.16% of average
interest-bearing liabilities for the year ended September 30, 1996 as compared
to $2.6 million, or 3.82% of average interest-bearing liabilities for the
corresponding period in 1995. The increase in interest expense was primarily the
result of an increase of 34 basis points in the average rate paid on deposits
and an increase of approximately $300,000 in average interest-bearing deposits
in 1996 compared to 1995.
Provision for Loan Losses. The provision for loan losses was approximately
$57,000 and $19,000 for the years ended September 30, 1996 and 1995,
respectively. Management considers many factors in determining the necessary
levels of the allowance for loan losses, including an analysis of specific loans
in the portfolio, estimated value of the underlying collateral, assessment of
general trends in the real estate market, delinquency trends, prospective
economic conditions, inherent loss in the loan portfolio and the relationship of
the allowance for loan losses to outstanding loans. At September 30, 1996, the
allowance for loan losses represented 1.06% of total loans compared to 1.05% at
September 30, 1995.
Non-Interest Income. Non-interest income amounted to $445,000 and $404,000 for
the years ended September 30, 1996 and 1995, respectively. Non-interest income
increased $41,000 in the 1996 period compared to the same period in 1995. The
increase was due to an additional net gain on the sale of securities and loans
of $26,000 plus an increase of $15,000 in service fees on loans and deposits for
the year ended September 30, 1996 as compared to the corresponding period in
1995.
Non-Interest Expense. Non-interest expense increased $316,000 or 17.8% to $2.1
million for the year ended September 30, 1996 compared to $1.8 million for the
same period in 1995. Non-interest expense was 2.6% and 2.2% of average assets
for the years ended September 30, 1996 and 1995, respectively. The increase of
$316,000 was primarily due to an increase of $444,000 in federal insurance
premiums offset by $101,000
13
decrease in legal fees and a $30,000 decrease in other operating expenses. The
increase of $444,000 in federal insurance premiums was primarily due to a
special assessment of $435,000 assessed by the FDIC to recapitalize the Savings
Association Insurance Fund (SAIF), pursuant to legislation signed by the
President on September 30, 1996. The decrease of $101,000 in legal expenses was
due to special services provided during 1995, which was not a recurring expense,
plus reimbursement of $44,000 in legal fees pursuant to a legal settlement in
fiscal year 1996. The decrease of $30,000 in other operating expenses was
primarily due to a $23,000 decrease in loan related expenses net of
reimbursements.
Income Tax Expense. The provision for income tax expense amounted to
approximately $386,000 and $568,000 for the years ended September 30, 1996 and
1995, respectively. The provision for income tax expense as a percentage of
income before income tax expense amounted to 35.3% and 34.5% for 1996 and 1995,
respectively.
Mortgage Banking Activity
Net loans decreased from $35.2 million at September 30, 1996 to $34.5 million at
September 30, 1997. The Bank's portfolio of loans, owned by others but serviced
by the Bank, increased 3.8% from $50.3 million at September 30, 1996 to $52.2
million at September 30, 1997. The Bank originated all of the loans which it
services.
Liquidity and Committed Resources
The Company's primary source of liquidity is dividends paid by the Bank. The
Bank is subject to certain regulatory limitations with respect to the payment of
dividends to the Company.
The Bank's primary sources of funds are deposits and proceeds from principal and
interest payments on loans and mortgage-backed securities. Additional sources of
liquidity are advances from the FHLB of Cincinnati and other borrowings. At
September 30, 1997, the Bank had outstanding advances from the FHLB of
Cincinnati totaling $652,000.
OTS regulations require that the Bank maintain specified levels of liquidity.
Liquidity is measured as a ratio of cash and certain investments to withdrawable
savings. The minimum level of liquidity required by the regulations is presently
5.0%. As of September 30, 1997, the Bank's liquidity ratio under applicable
federal regulations was 29.13% as compared to 24.8% at September 30, 1996. At
September 30, 1997, the Bank had $29.8 million in certificates of deposit
maturing within one year, and $8.9 million maturing between one and three years.
Management believes, based on past experience, that the Bank will retain much of
the deposits or replace them with new deposits.
As of September 30, 1997, the Bank had $2.6 million in loans approved, but not
closed; none of these were evidenced by written commitments. The Bank
anticipated selling $1.2 million of the loans approved, but not closed.
The Bank is required to maintain specified amounts of capital pursuant to
federal law and regulations promulgated by OTS. The capital standards generally
require the maintenance of regulatory capital sufficient to meet a tangible
capital requirement, a core capital requirement, and a risk-based capital
requirement. At September 30, 1997, the Bank's tangible and core capital totaled
$8.6 million. This amount exceeded the tangible capital requirement of $1.1
million by $7.5 million, and the core capital requirement of $2.2 million
14
by $6.4 million on that date. At September 30, 1997, the Bank's risk-based
capital totaled $9.0 million, which exceeded its risk-based capital requirement
by $6.6 million.
Impact of Inflation and Changing Prices
The financial statements and notes thereto presented herein have been prepared
in accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of money
over time and due to inflation.
The impact of inflation is reflected in the increased cost of the Bank's
operations.
Unlike most industrial companies, nearly all the assets and liabilities of the
Bank are monetary in nature. As a result, changes in interest rates have a
greater impact on the Bank's performance than do the effects of general levels
of inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the price of goods and services.
Impact of New Accounting Standards
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. In June 1996, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
("SFAS 125"). SFAS 125 provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that focuses on
control. Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished. This statement is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996, and is to be applied prospectively. Earlier
or retroactive application is not permitted. The Bank adopted the provisions of
SFAS 125 in January 1997. The impact of the Bank adopting this statement
amounted to an increase in net income of $66,000 for the year ended September
30, 1997.
Accounting for Earnings Per Share. In February 1997, the FASB issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS
128 establishes standards for computing and presenting earnings per share (EPS)
and applies to entities with publicly held common stock or potential common
stock. This statement simplifies the standards for computing earnings per share
previously found in APB Opinion No. 15, Earnings Per Share, and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS and requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation.
SFAS 128 is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods; earlier application is not
permitted. This statement requires restatement of all prior-period EPS data
presented. The Company will adopt the statement at the end of the first quarter
in fiscal year 1998. Basic and diluted earnings per share under SFAS 128 would
be identical to earnings per share as presented in the financial statements, and
therefore, will not have any material effect on the Company.
15
Reporting of Comprehensive Income. In June 1997, the Financial Accounting
Standards Board issued Statements of Financial Accounting Standards No. 130,
Reporting of Comprehensive Income ("SFAS 130"), which establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of financial statements. This
statement also requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
This statement is effective for fiscal years beginning after December 15, 1997.
Earlier application is permitted. Reclassification of financial statements for
earlier periods provided for comparative purposes is required. The Company does
not anticipate that adoption of SFAS 130 will have a material effect on the
Company.
Disclosure about Segments and Related Information. In June 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information
("SFAS 131"), which establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to stockholders. This
statement also establishes standards for related disclosures about products and
services, geographic areas, and major customers. This statement requires the
reporting of financial and descriptive information about an enterprise's
reportable operating segments.
This statement is effective for financial statements for periods beginning after
December 15, 1997. In the initial year of application, comparative information
for earlier years is to be restated. The Company does not anticipate that the
adoption of SFAS 131 will have a material effect on the Company.
Dividends on and Price Range of Common Stock. During fiscal year 1997, the
Company declared dividends in the following amounts:
December 15, 1996............................................35(cent) per share
March 15, 1997...............................................40(cent) per share
June 16, 1997................................................40(cent) per share
September 15, 1997...........................................40(cent) per share
Under OTS regulations, the Bank may not pay cash dividends on its common stock
if, as a result thereof, its regulatory capital would be reduced below its
regulatory requirement. The Bank exceeded all of the minimum regulatory capital
requirements during the entire fiscal year.
The Company's stock sold for $41.50 per share at the beginning of the fiscal
year; the Company's stock sold for up to $41.50 per share at midyear, and the
last sale during the fiscal year was at $43.00 per share.
Certifying Accountant. Miller, Mayer, Sullivan, & Stevens, LLP has been
appointed as the Company's independent auditor for the fiscal year ending
September 30, 1997 pursuant to the recommendation of the Audit Committee of the
Board of Directors. A representative of Miller, Mayer, Sullivan, & Stevens, LLP
is expected to be present at the annual meeting with an opportunity to make a
statement if he desires to do so and to answer appropriate questions with
respect to the firm's audit of the Company's consolidated financial statements
and records for the fiscal year ended September 30, 1997.
16
[LETTERHEAD OF MILLER, MAYER, SULLIVAN & STEVENS LLP APPEARS HERE]
Board of Directors
Pioneer Financial Corporation
Winchester, Kentucky
We have audited the accompanying consolidated balance sheets of Pioneer
Financial Corporation and Subsidiary as of September 30, 1997 and 1996 and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the years in the three year period ended September 30, 1997. These
consolidated financial statements are the responsibility of the management of
Pioneer Financial Corporation (Company). Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pioneer Financial
Corporation and Subsidiary as of September 30, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three year
period ended September 30, 1997 in conformity with generally accepted accounting
principles.
/s/ Miller, Mayer, Sullivan, & Stevens, LLP
Lexington, Kentucky
October 31, 1997
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and 1996
---------------
ASSETS 1997 1996
----------- ----------
Cash and due from banks $ 1,188,974 $ 732,573
Interest bearing deposits 1,138,456 1,529,881
Federal funds sold 7,151,000 3,211,000
Certificates of deposit 194,000
Securities available-for-sale, at fair value 5,949,386 7,601,611
Securities held-to-maturity, fair value of $22,608,182
and $23,520,598 for 1997 and 1996, respectively 22,621,995 23,972,497
Loans receivable, net 34,490,871 35,247,421
Loans held for sale 152,750
Accrued interest receivable 455,824 535,269
Premises and equipment, net 1,412,264 1,175,987
Other assets 263,944 200,898
----------- -----------
Total assets $74,825,464 $74,401,137
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $64,585,148 $64,335,165
Advances from Federal Home Loan Bank 652,225 698,798
Advance payments by borrowers for taxes and insurance 39,607 26,788
Other liabilities 810,286 1,095,751
----------- -----------
Total liabilities 66,087,266 66,156,502
----------- -----------
Stockholders' equity
Common stock, $1 par value, 500,000 shares authorized; 208,233 shares,
issued and outstanding for 1997 and 1996, respectively 208,233 208,233
Additional paid-in capital 1,797,432 1,797,432
Retained earnings, substantially restricted 6,957,353 6,213,169
Unallocated Employee Stock Ownership Plan (ESOP) stock (224,922)
Net unrealized appreciation on securities available-for-sale,
net of tax of $53 in 1997 and $13,292 in 1996 102 25,801
----------- -----------
Total stockholders' equity 8,738,198 8,244,635
----------- -----------
Total liabilities and stockholders' equity $74,825,464 $74,401,137
=========== ===========
The accompanying notes are an integral
part of the consolidated financial statements.
18
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
for the years ended September 30, 1997, 1996, and 1995
---------------
1997 1996 1995
---------- ---------- ----------
Interest income:
Interest on loans $3,110,644 $3,057,393 $2,812,782
Interest and dividends on securities 1,821,596 2,167,280 2,493,348
Other interest income 460,739 434,493 349,560
---------- ---------- ----------
Total interest income 5,392,979 5,659,166 5,655,690
---------- ---------- ----------
Interest expense:
Interest on deposits 2,652,734 2,815,403 2,569,375
Interest on borrowings 48,512 46,360 49,526
---------- ---------- ----------
Total interest expense 2,701,246 2,861,763 2,618,901
---------- ---------- ----------
Net interest income 2,691,733 2,797,403 3,036,789
Provision for loan losses 57,433 19,000
---------- ---------- ----------
Net interest income after provision for loan losses 2,691,733 2,739,970 3,017,789
---------- ---------- ----------
Non-interest income:
Loan and other service fees, net 381,132 409,519 394,470
Gain (loss) on sale of securities 33,310 1,822
Gain on sale of loans 108,494 2,698 7,546
---------- ---------- ----------
489,626 445,527 403,838
---------- ---------- ----------
Non-interest expense:
Compensation and benefits 892,855 863,508 848,817
Occupancy expenses, net 172,074 190,194 203,789
Office supplies and expenses 97,386 110,441 103,926
Federal and other insurance premiums 94,633 616,705 172,036
Legal expenses 7,634 3,827 104,953
Data processing expenses 143,000 136,616 141,176
State franchise tax 65,545 64,790 64,409
Other operating expenses 98,907 106,117 136,875
---------- ---------- ----------
1,572,034 2,092,198 1,775,981
---------- ---------- ----------
Income before income tax expense 1,609,325 1,093,299 1,645,646
Income tax expense 542,380 386,317 568,143
---------- ---------- ----------
Net income $1,066,945 $ 706,982 $1,077,503
========== ========== ==========
Earnings per share $ 5.12 $ 2.76 $ 3.95
========== ========== ==========
The accompanying notes are an integral
part of the consolidated financial statements.
19
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended September 30, 1997, 1996, and 1995
---------------
Net
Unrealized Unallocated
Appreciation Employee
Additional on Securities Stock Total
Common Paid-In Retained Available- Ownership Stockholders'
Stock Capital Earnings for-Sale Plan Stock Equity
--------- ----------- ----------- ------------- ---------- ------------
Balance, September 30, 1994 $ 272,477 $ 2,351,858 $ 7,181,168 $ 9,805,503
Net Income 1,077,503 1,077,503
Declaration of dividend (351,495) (351,495)
Cumulative effect October 1, 1994 of 64,189 64,189
change in accounting for securities
Change in net unrealized gain on (55,922) (55,922)
securities available-for-sale, net of
deferred income taxes
--------- ----------- ----------- --------- ---------- -----------
Balance, September 30, 1995 272,477 2,351,858 7,907,176 8,267 10,539,778
Net Income 706,982 706,982
Declaration of dividend (353,533) (353,533)
Stock repurchase (64,244 shares) (64,244) (554,426) (2,047,456) (2,666,126)
Change in net unrealized gain on
securities available-for-sale, net
of deferred income taxes 17,534 17,534
--------- ----------- ----------- --------- ---------- -----------
Balance, September 30, 1996 208,233 1,797,432 6,213,169 25,801 8,244,635
Net income 1,066,945
Declaration of dividend (322,761)
Unallocated ESOP stock (249,913)
ESOP shares earned in 1997 24,991
Change in net unrealized gain on securities
available-for-sale, net of deferred income
taxes 25,699
--------- ----------- ----------- --------- ---------- -----------
Balance, September 30, 1997 $ 208,233 $ 1,797,432 $ 6,957,353 $ 102 $ (224,922) $ 8,738,198
========= =========== =========== ========= ========== ===========
The accompanying notes are an integral
part of the consolidated financial statements.
20
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended September 30, 1997, 1996, and 1995
---------------
1997 1996 1995
------------- ------------- ------------
Operating activities
Net income $ 1,066,945 $ 706,982 $ 1,077,503
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 57,433 19,000
Amortization of investment premium (discount) 77,724 168,615 108,179
Amortization of organizational cost 13,507 13,507 12,382
Provision for depreciation 48,522 53,365 79,900
ESOP benefit expense 24,991
Amortization of loan fees (95,694) (92,303) (48,617)
FHLB stock dividend (46,500) (27,400) (36,900)
Securities (gain)loss, net (33,310) (1,822)
Loans originated for sale (10,554,724) (10,162,642) (7,457,985)
Proceeds from loans held for sale 10,663,218 10,165,340 7,465,531
Gain on sale of loans (108,494) (2,698) (7,546)
Change in:
Prepaid expense (122,060) 46,028 (57,523)
Interest receivable 79,444 139,885 (58,475)
Interest payable 12,497 15,914 5,886
Accrued liabilities (376,592) 627,438 55,866
Income taxes payable 137,381 (118,385) 11,364
------------ ------------ -----------
Net cash provided by operating activities 820,165 1,557,769 1,166,743
------------ ------------ -----------
Investing activities
Net (increase) decrease in loans 699,494 (2,998,846) (2,800,413)
Principal repayments, mortgage-backed securities 5,288,984 6,486,307 3,995,015
Purchase of premises and equipment (284,799) (51,941) (18,494)
Redemption of FHLB stock 55,200 91,800
Proceeds from sale of securities available-for-sale 4,488,932
Purchase of securities available-for-sale (3,614,506) (5,679,519)
Purchase of securities held-to-maturity (8,991,996) (10,484,665) (8,074,208)
Maturity of securities held-to-maturity 6,635,575 14,578,264 7,548,430
Maturity of certificates of deposit 194,000 94,000
------------ ------------ -----------
Net cash provided (used) by investing activities 3,541,258 4,063,813 (448,457)
------------ ------------ -----------
Continued
The accompanying notes are an integral
part of the consolidated financial statements.
21
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
for the years ended September 30, 1997, 1996, and 1995
---------------
1997 1996 1995
---------- ---------- ----------
Financing activities
Net increase (decrease) in demand deposits, (365,680) (1,678,188) (4,229,812)
NOW accounts and savings accounts
Net increase (decrease) in certificates of deposit 615,663 (1,074,568) 2,632,198
Cash dividends (322,762) (353,533) (351,495)
Federal Home Loan Bank Advance, repayments (46,573) (43,632) (14,606)
Net increase (decrease) in custodial accounts 12,818 3,392 5,492
Stock repurchase (2,666,126)
ESOP stock purchase (249,913)
---------- ---------- ----------
Net cash provided (used) by financing activities (356,447) (5,812,655) (1,958,223)
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents 4,004,976 (191,073) (1,239,937)
Cash and cash equivalents, beginning of year 5,473,454 5,664,527 6,904,464
---------- ---------- ----------
Cash and cash equivalents, end of year $9,478,430 $5,473,454 $5,664,527
========== ========== ==========
Supplemental Disclosures
Cash payments for:
Interest on deposits $2,688,749 $2,811,085 $2,563,490
Income taxes $ 405,000 $ 505,000 $ 627,000
The accompanying notes are an integral
part of the consolidated financial statements.
22
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
1. Summary of Significant Accounting Policies
On December 20, 1994, the stockholders of Pioneer Federal Savings Bank
(Bank) approved an agreement and Plan of Reorganization dated October
31, 1994, whereby the Bank through a reverse merger became a wholly
owned subsidiary of Pioneer Financial Corporation (Company), a unitary
savings and loan holding company. In accordance with the Reorganization
Plan, stockholders of the Bank exchanged their shares of common stock
on a one for one basis for common shares in the Company's common stock,
which represented 100% of the outstanding stock of the Company.
The Company is a corporation organized under the laws of Kentucky. The
Company is a savings and loan holding company whose activities are
primarily limited to holding the stock of the Bank. The Bank is a
federally chartered stock savings bank and a member of the Federal Home
Loan Bank System. As a member of this system, the Bank is required to
maintain an investment in capital stock of the Federal Home Loan Bank
of Cincinnati (FHLB) in an amount equal to at least the greater of 1%
of its outstanding loan and mortgage-backed securities or .3% of total
assets as of December 31 of each year.
The Bank conducts a general banking business in central Kentucky which
primarily consists of attracting deposits from the general public and
applying those funds to the origination of loans for residential,
consumer, and nonresidential purposes. The Bank's profitability is
significantly dependent on net interest income which is the difference
between interest income generated from interest-earning assets (i.e.
loans and investments) and the interest expense paid on
interest-bearing liabilities (i.e. customer deposits and borrowed
funds). Net interest income is affected by the relative amount of
interest-earning assets and interest-bearing liabilities and the
interest received or paid on these balances. The level of interest
rates paid or received by the Bank can be significantly influenced by a
number of environmental factors, such as governmental monetary policy,
that are outside of management's control.
The consolidated financial information presented herein has been
prepared in accordance with generally accepted accounting principles
(GAAP) and general accounting practices within the financial services
industry. In preparing consolidated financial statements in accordance
with GAAP, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the
financial statements and revenues and expenses during the reporting
period. Actual results could differ from such estimates.
The following is a summary of the Company's significant accounting
policies which have been consistently applied in the preparation of the
accompanying consolidated financial statements.
23
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
Principles of Consolidation. The consolidated financial statements
include the accounts of the Company and the Bank. All significant
intercompany accounts and transactions have been eliminated.
Loan Origination Fees. The Bank accounts for loan origination fees in
accordance with Statement of Accounting Standards (SFAS) SFAS No. 91
"Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Cost of Leases."
Pursuant to the provisions of SFAS No. 91, origination fees received
from loans, net of direct origination costs, are deferred and amortized
to interest income using the level-yield method, giving effect to
actual loan prepayments. Additionally, SFAS No. 91 generally limits the
definition of loan origination costs to the direct costs attributable
to originating a loan, i.e., principally actual personnel costs. Fees
received for loan commitments that are expected to be drawn upon, based
on the Bank's experience with similar commitments, are deferred and
amortized over the life of the loan using the level-yield method. Fees
for other loan commitments are deferred and amortized over the loan
commitment period on a straight-line basis.
Investment Securities. On October 1, 1994, the Bank adopted Statement
of Financial Accounting Standards(SFAS) No. 115 "Accounting for Certain
Investments in Debt and Equity Securities." SFAS No. 115 requires that
all investments in debt securities and all investments in equity
securities that have readily determinable fair values be classified
into three categories. Securities that management has positive intent
and ability to hold until maturity are classified as held-to-maturity.
Securities that are bought and held specifically for the purpose of
selling them in the near term are classified as trading securities. All
other securities are classified as available-for-sale. Securities
classified as trading and available-for-sale are carried at market
value. Unrealized holding gains and losses for trading securities are
included in current income. Unrealized holding gains and losses for
available-for-sale securities are reported as a net amount in a
separate component of stockholders' equity until realized. Investments
classified as held-to-maturity are carried at amortized cost. The
cumulative effect of this change was to increase stockholders' equity
by $97,256, net of deferred taxes of $33,067, as of October 1, 1994.
Securities that management has the intent and ability to hold to
maturity are classified as held-to-maturity, and carried at cost,
adjusted for amortization of premium or accretion of discount over the
term of the security, using the level yield method. Included in this
category of investments is the FHLB stock which is a restricted stock
carried at cost. Securities available-for-sale are carried at market
value. Adjustments from amortized cost to market value are recorded in
stockholders' equity net of deferred income tax until realized. The
identified security method is used to determine gains or losses on
sales of securities.
Regulations require the Bank to maintain an amount of cash and U.S.
government and other approved securities equal to a prescribed
percentage (5% at September 30, 1997 and 1996) of
(Continued)
24
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
deposit accounts (net of loans secured by deposits) plus short-term
borrowings. At September 30, 1997 and 1996, the Bank met these
requirements.
Office Properties and Equipment. Office properties and equipment are
stated at cost less accumulated depreciation. Depreciation is computed
using the straight line method and the double declining balance method
over the estimated useful lives of the related assets. The gain or loss
on the sales of property and equipment is recorded in the year of
disposition.
Real Estate Owned. Real estate owned is generally comprised of property
acquired through foreclosure or deed in lieu of foreclosure. Foreclosed
real estate is initially recorded at fair value, net of selling
expenses, establishing a new cost basis. Expenses relating to holding
property, including interest expense, are not capitalized. These
expenses are charged to operations as incurred. Valuations are
periodically performed by management, and an allowance for losses is
established by a charge to operations if the carrying value of a
property exceeds its net realizable value.
Loans Receivable. Mortgage loans held for sale are valued at the lower
of cost or market, as calculated on an aggregate loan basis. All other
loans are stated at the principal amount outstanding. The Bank has
adequate liquidity and capital, and it is generally management's
intention to hold such assets to maturity.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on the Bank's past
loan loss experience, known and inherent risks in the portfolio,
adverse situations that may affect the borrower's ability to pay,
estimated value of any underlying collateral, and current economic
conditions. While management uses the best information available,
future adjustments may be necessary if conditions differ substantially
from assumptions used in management's evaluation. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the allowance for loan losses and may require
additions to the allowances based on their judgment about information
available to them at the time of their examination.
Interest earned on loans receivable is recorded in the period earned.
Uncollectible interest on loans that are contractually past due is
charged off or an allowance is established based on management's
periodic evaluation. The allowance is established by a charge to
interest income equal to all interest previously accrued, and income is
subsequently recognized only to the extent cash payments are received
until, in management's judgment, the borrower's ability to make
periodic interest and principal payments is back to normal, in which
case the loan is returned to accrual status.
(Continued)
25
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
In June 1993, the FASB issued SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan." This promulgation, which was amended by SFAS
No. 118 as to certain income recognition and disclosure provisions,
became effective as to the Company in fiscal 1996. The new accounting
standards require that impaired loans be measured based upon the
present value of expected future cash flows discounted at the loan's
effective interest rate, or as an alternative, at the loan's observable
market price or fair value of the collateral. The Bank's current
procedures for evaluating impaired loans result in carrying such loans
at the lower of cost or fair value.
The Bank adopted SFAS No. 114, as subsequently amended, on October 1,
1995, without material effect on consolidated financial condition or
results of operations.
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable
to collect all amounts due according to the contractual terms of the
loan agreement. In applying the provisions of SFAS No. 114, the Bank
considers its investment in one-to-four family residential loans and
consumer installment loans to be homogenous and therefore excluded from
separate identification for evaluation of impairment. With respect to
the Bank's investment in impaired multi-family and nonresidential
loans, such loans are collateral dependent, and as a result, are
carried as a practical expedient at the lower of cost or fair value.
Collateral dependent loans when put in non-accrual status are
considered to constitute more than a minimum delay in repayment and are
evaluated for impairment under SFAS No. 114 at that time.
Deposits. The Bank's deposits are insured by the Savings Association
Insurance Fund ("SAIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC"). On September 30, 1996, the President
signed legislation, which among other things, recapitalized the Savings
Association Insurance Fund through a special assessment on savings
financial institutions, such as the Bank. The special assessment
amounted to $435,000 for the Bank and is included in the Federal and
other insurance premium expense for the year ended September 30, 1996.
As a result of the recapitalization of the SAIF, the Bank's assessment
rate for insurance on deposits, beginning in 1997, was reduced from 23%
to approximately 6% on deposits under $100,000.
Income Taxes. The Company accounts for federal income taxes in
accordance with the provisions of SFAS No. 109, "Accounting for Income
Taxes." SFAS No. 109 established financial accounting and reporting
standards for the effects of income taxes that result from the
Company's activities within the current and previous years. Pursuant to
the provisions of SFAS No. 109, a deferred tax liability or deferred
tax asset is computed by applying the current statutory tax rates to
net taxable or deductible differences between the tax basis of an asset
or liability and its reported amount in the financial statements that
will result in taxable or deductible amounts in future periods.
Deferred tax assets are recorded only to the extent that the amount of
net deductible temporary differences or carryforward attributes may be
utilized against current period earnings,
(Continued)
26
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
carried back against prior years earnings, offset against taxable
temporary differences reversing in future periods, or utilized to the
extent of management's estimate of future taxable income. A valuation
allowance is provided for deferred tax assets to the extent that the
value of net deductible temporary differences and carryforward
attributes exceeds management's estimates of taxes payable on future
taxable income. Deferred tax liabilities are provided on the total
amount of net temporary differences taxable in the future.
The Company files a consolidated federal income tax return with the
Bank. The current income tax expense or benefit is allocated to each
Corporation included in the consolidated tax return based on their tax
expense or benefit computed on a separate return basis.
Effect of Implementing New Accounting Standards. In June of 1996, the
FASB issued SFAS No. 125 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," which superseded
SFAS No. 122, "Accounting for Mortgage Servicing Rights," and amended
SFAS No. 65 "Accounting for Certain Mortgage Baning Activities." SFAS
No. 125 requires the Company to recognize, as separate assets, rights
to service mortgage loans for others; however, these servicing rights
are acquired. SFAS No. 125 was effective for the Company on January 1,
1997, and applied prospectively to mortgage banking transactions
occurring after that date.
The Company recognized mortgage servicing rights of $105,716 for the
year ended September 30, 1997. Amortization of the mortgage servicing
rights totaled $6,087 for the same period. The Bank sells certain
residential loans, primarily fixed rate loans secured by single family
residences in the secondary market. The fair value of the mortgage
servicing rights was determined by quoted prices in the secondary
market. The mortgage servicing rights on the loans sold in the
secondary market are grouped by their primary risk characteristics,
which is the interest rate. The mortgage servicing rights are being
amortized in proportion to and over the period of net servicing income
earned on the related loans being serviced. At September 30, 1997,
there was no allowance recognized for impairment of the recorded
balance of mortgage servicing rights.
Cash and Cash Equivalents. For purposes of reporting consolidated cash
flows, the Bank considers cash, balances with banks, federal funds
sold, and interest bearing deposits in other financial institutions
with original maturities of three months or less to be cash
equivalents. Cash and cash equivalents includes approximately $8.2
million on deposit with other banks which is not covered by FDIC
insurance.
Reclassification. Certain presentations of accounts previously reported
have been reclassified in these consolidated financial statements. Such
reclassifications had no effect on net income or retained income as
previously reported.
(Continued)
27
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
2. Investment Securities
The cost and estimated fair value of securities held by the Bank as of
September 30, 1997 and 1996 are summarized as follows:
1997
-------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
------------ ----------- ----------- ------------
Securities, available-for-sale:
SBA Pools $ 2,657,013 $ 9,608 $ 2,647,405
Mortgage-Backed Securities 3,292,217 9,764 3,301,981
----------- ----------- ----------- ------------
$ 5,949,230 $ 9,764 $ 9,608 $ 5,949,386
=========== =========== =========== ============
Securities, held to maturity:
Debt Securities:
U.S. Government and Federal Agencies $ 4,000,625 $ 615 $ $ 4,006,240
Municipals Bonds 717,536 8,771 726,307
----------- ----------- ----------- ------------
4,723,161 9,386 4,732,547
----------- ----------- ----------- ------------
Mortgage-Backed Securities 17,343,534 10,629 33,828 17,320,335
----------- ----------- ----------- ------------
Federal Home Loan Bank of Cincinnati,
capital stock - 5,553 555,300 555,300
----------- ----------- ----------- ------------
$22,621,995 $ 20,015 $ 33,828 $ 22,608,182
=========== =========== =========== ============
(Continued)
28
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
1996
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
----------- ------------- ------------ ------------
Securities, available-for-sale:
SBA Pools $3,068,229 $8,043 $ $3,076,272
Mortgage-Backed Securities 4,494,290 44,614 13,565 4,525,339
----------- ----------- ----------- -----------
$7,562,519 $52,657 $13,565 $7,601,611
=========== =========== =========== ===========
Securities, held-to-maturity:
Debt Securities:
U.S. Government and Federal Agencies $500,000 $ $1,565 $498,435
Municipal Bonds 817,221 1,024 818,245
----------- ----------- ----------- -----------
1,317,221 1,024 1,565 1,316,680
----------- ----------- ----------- -----------
Mortgage-Backed Securities 22,146,476 74,622 525,980 21,695,118
----------- ----------- ----------- -----------
Federal Home Loan Bank of Cincinnati,
capital stock - 5,088 shares 508,800 508,800
----------- ----------- ----------- -----------
$23,972,497 $ 75,646 $ 527,545 $23,520,598
=========== =========== =========== ===========
The amortized cost and estimated market value of debt securities at
September 30, 1997, by contractual maturity, are as follows:
Estimated
Amortized Market
Cost Value
---------- -----------
Due in one year or less $3,105,937 $3,105,930
Due after one year through five years 1,499,190 1,498,828
Due after five years through ten years
Due after ten years 118,034 127,789
---------- ----------
$4,723,161 $4,732,547
========== ==========
Effective October 1, 1994, the Bank changed its policy in accounting
for debt and equity securities to conform with the requirements of SFAS
No. 115 "Accounting for Certain Investments in Debt and Equity
Securities." The unrealized gain on securities available-for-sale of
$155 net of deferred income taxes of $53 has been recorded as a
separate component of stockholders' equity as of September 30, 1997.
For the year ended September 30, 1997, the Bank received $6,635,575
from the maturity and call of U.S. Government instruments, debt
securities backed by U.S. Government agencies, and mortgage-backed
securities, all of which were classified as securities
held-to-maturity.
(Continued)
29
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
For the year ended September 30, 1996, the Bank received $14,578,264
from the maturity and call of U.S. Government instruments and debt
securities backed by U.S. Government agencies, all of which were
classified as securities held-to-maturity. The Bank recognized a gain
of $33,310 on the call of a Federal National Mortgage Association
(FNMA) bond.
For the year ended September 30, 1995, the Bank received $548,050 from
the sale of equity securities and $3,940,882 from the sale of
mortgage-backed securities, all of which were classified as securities
available-for-sale. The Bank recognized a gain of $506,267 on the sale
of the equity securities and a $504,445 loss on the sale of the
mortgage-backed securities.
The Bank has pledged mortgage-backed securities totaling $3,605,000 to
secure certain municipal deposits as of September 30, 1997.
3. Loans Receivable
Loans receivable, net at September 30, 1997 and 1996 consists of the
following:
1997 1996
------------ ------------
Loans secured by first lien mortgages on real estate:
Residential, one-to-four family properties $ 20,503,214 $ 21,252,055
Multi-family and commercial properties 1,088,140 2,127,870
Agricultural loans 545,793 565,313
Construction loans 1,074,654 1,808,092
Other loans:
Commercial loans 5,818,338 4,796,056
Loans secured by deposits 964,993 1,048,311
Home equity loans 2,000,421 1,662,736
Other secured loans 3,562,910 2,710,992
Signature loans, unsecured 250,893 271,109
------------ ------------
35,809,356 36,242,534
Loans in process (731,545) (403,128)
Allowance for loan losses (391,341) (382,469)
Deferred loan origination fees (195,599) (209,516)
------------ ------------
Loans receivable, net $ 34,490,871 $ 35,247,421
============ ============
The Bank services loans sold to other associations or governmental
agencies of approximately $52,235,331, $50,317,000, and $50,138,000, as
of September 30, 1997, 1996, and 1995, respectively.
(Continued)
30
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
The Bank provides an allowance to the extent considered necessary to
provide for losses that may be incurred upon the ultimate realization of
loans. The changes in the allowance for loss on loans is analyzed as
follows:
Year Ended September 30,
------------------------------------------
1997 1996 1995
-------- -------- --------
Balance at beginning or period $382,469 $352,244 $347,618
Additions charged to operations 57,433 19,000
Charge-offs (4,069) (36,901) (18,433)
Recoveries 12,941 9,693 4,059
-------- -------- --------
Balance at end of period $391,341 $382,469 $352,244
======== ======== ========
At September 30, 1997, the Bank had identified impaired loans totaling
$5,206. The allowance for loan losses included $5,206 related to these
impaired loans. At September 30, 1996, the Bank had identified impaired
loans totaling $18,000. The allowance for loan losses at September 30,
1996 included $18,000 related to those impaired loans. The average amount
of impaired loans for the year ended September 30, 1997 and 1996 was
$11,600 and $34,800, respectively. Interest income received and
recognized on impaired loans totaled $599 and $2,324 for the year ended
September 30, 1997 and 1996, respectively.
The following is a summary of non-performing loans (in thousands) for
the years ended September 30, 1997, 1996, and 1995, respectively:
September 30,
----------------------------------------
1997 1996 1995
------ ------ ------
Non-accrual loans $6 $18 $41
Loans past due 90 days or more 149 205 151
------ ------ ------
Total non-performing loan balances $ 155 $ 223 $ 192
====== ====== ======
If interest on non-accrual loans had been accrued, such income would
have been approximately $4,436, $5,035, and $2,391 for 1997, 1996, and
1995, respectively.
Loans to executive officers and directors, including loans to
affiliated companies of which executive officers and directors are
principal owners, and loans to members of the immediate family of such
persons at September 30, 1997 and 1996 are summarized as follows:
September 30,
-------------------------
1997 1996
-------- --------
Balance at beginning or period $203,576 $132,127
Additions during year 247,373 222,827
Repayments (135,159) (151,378)
-------- --------
Balance at end of period $315,790 $203,576
======== ========
(Continued)
31
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
4. Premises and Equipment
Office premises and equipment at September 30, 1997 and 1996 includes
the following:
Useful
Description Life 1997 1996
----------- ----------- ---------- ----------
Land, buildings, and improvements 30-45 years $1,850,235 $1,637,310
Furniture, fixtures, and equipment 5-10 years 790,986 720,748
----------- ---------- ----------
Balance at end of period 2,641,221 2,358,058
Less accumulated depreciation (1,228,957) (1,182,071)
---------- ----------
$1,412,264 $1,175,987
========== ==========
Depreciation expense for the years ended September 30, 1997, 1996, and
1995 amounted to $48,522, $53,365, and $79,900, respectively.
5. Deposits
Deposit accounts at September 30, 1997 and 1996 are summarized as
follows:
September 30,
-------------------------
1997 1996
----------- -----------
Demand deposit accounts, non-interest bearing $ 2,889,357 $ 2,463,426
Passbook accounts with a weighted average rate of 2.95% and 2.94% at 9,482,320 9,757,570
September 30, 1997 and 1996, respectively
NOW and MMDA deposits with a weighted average rate of 2.55% and 2.48% 12,907,666 13,424,027
at September 30, 1997 and 1996, respectively
----------- -----------
25,279,343 25,645,023
Certificate of deposits with a weighted average interest rate of 39,305,805 38,690,142
5.30% and 5.24% at September 30, 1997 and 1996, respectively
----------- -----------
Total Deposits $64,585,148 $64,335,165
=========== ===========
Jumbo certificates of deposit (minimum denomination of $100,000) $ 6,991,246 $ 6,064,944
=========== ===========
(Continued)
32
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
Certificates of deposit by maturity at September 30, 1997 and 1996 (in
thousands) are as follows:
September 30,
-----------------
1997 1996
------- -------
Less than 1 year $29,823 $25,659
1-2 years 7,477 10,291
2-3 years 1,511 1,421
Maturing in years thereafter 495 1,319
------- -------
$39,306 $38,690
======= =======
Certificates of deposit by maturity and interest rate category at
September 30, 1997 (in thousands) are as follows:
Amount Due
----------------------------------------------------
Less Than After 3
One Year 1-2 Years 2-3 Years Years Total
--------- --------- --------- ------- --------
2.01--4.00% $ 317 $ $ $ $ 317
4.01--6.00% 27,858 6,482 697 205 35,242
6.01--8.00% 1,648 995 814 290 3,747
------- ------ ------ ---- -------
$29,823 $7,477 $1,511 $495 $39,306
======= ====== ====== ==== =======
Interest expense on deposits for the periods indicated are as follows:
Years Ended September 30,
------------------------------------
1997 1996 1995
---------- ---------- ----------
Money market and NOW account $ 348,167 $ 415,846 $ 395,111
Savings Accounts 276,786 288,054 307,751
Certificates 2,027,781 2,111,503 1,866,513
---------- ---------- ----------
$2,652,734 $2,815,403 $2,569,375
========== ========== ==========
The Bank maintains arrangements for clearing NOW and MMDA accounts with
the Federal Home Loan Bank of Cincinnati. The Bank is required to
maintain adequate collected funds in its Demand Account to cover
average daily clearings. The Bank was in compliance with this
requirement at September 30, 1997 and 1996.
(Continued)
33
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
6. Advances from Federal Home Loan Bank
The advances from the Federal Home Loan Bank consist of the following:
September 30,
-------------------
Maturity Date Interest Rate 1997 1996
------------- ------------- -------- --------
1/1/2006 6.80% $173,573 $186,460
2/1/2007 6.35% 337,153 362,467
4/1/2007 7.50% 116,283 124,282
7/1/2025 5.50% 25,216 25,589
-------- --------
$652,225 $698,798
======== ========
The following summarizes the amounts due on FHLB advances by year for
each of the next five fiscal years and thereafter.
Fiscal Year Amount
----------- ------
1998 $49,835
1999 53,261
2000 56,923
2001 60,839
2002 65,026
Subsequent to 2002 366,341
--------
$652,225
========
At September 30, 1997 and 1996, the Bank had a cash management advance
line of credit with the Federal Home Loan Bank of Cincinnati that allows
the Bank to borrow up to $4,000,000 for a maximum thirty day period at a
fixed rate or for a maximum of ninety days at a variable rate. No
commitment fees are paid under the agreement. There were no borrowings
against this line of credit at September 30, 1997.
These advances are collateralized by Federal Home Loan Bank stock
totaling $555,300 and a blanket agreement against certain real estate
loans amounting to $978,338.
7. Income Taxes
Effective January 1, 1993, the Bank adopted SFAS No. 109 "Accounting for
Income Taxes" which requires an asset and liability approach to
accounting for income taxes.
(Continued)
34
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
The provision for income taxes for the periods indicated consist of the
following:
Year Ended September 30,
------------------------------------------
1997 1996 1995
---------- ---------- ----------
Federal income tax expense:
Current expense $ 741,031 $ 377,730 $ 526,821
Deferred tax benefit (198,651) 8,587 41,322
---------- ---------- ----------
$ 542,380 $ 386,317 $ 568,143
========== ========== ==========
Deferred income taxes result from temporary differences in the recognition of
income and expenses for tax and financial statement purposes. The source of
these temporary differences and the tax effect of each are as follows:
Year Ended September 30,
------------------------------------------
1997 1996 1995
---------- ---------- ----------
FHLB stock $ 12,784 $ 3,598 $ (878)
Allowance for loan losses (230,498) 12,153 44,860
Other, net 19,063 (7,164) (2,660)
---------- ---------- ----------
Net deferred tax (benefit) expense $(198,651) $ 8,587 $ 41,322
========== ========== ==========
For the periods indicated, total income tax expense differed from the amounts
computed by applying the U.S. Federal income tax rate of 34% to income before
income taxes as follows:
Year Ended September 30,
------------------------------------------
1997 1996 1995
---------- ---------- ----------
Expected income tax expense at federal tax rate $ 547,171 $ 371,722 $ 559,520
Other, net (4,791) 14,595 8,623
---------- ---------- ----------
Total income tax expense $ 542,380 $ 386,317 $ 568,143
========== ========== ==========
Effective income tax rate 33.7% 35.3% 34.5%
========== ========== ==========
(Continued)
35
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
Net deferred tax assets included in other assets at September 30, 1997 and net
deferred tax liabilities included in other liabilities at September 30, 1996
consisted of the following:
1997 1996
---------- ----------
Deferred tax assets:
Allowance for loan losses $ 124,409 $
Deferred loan fee income 61,057 71,235
---------- ----------
185,466 71,235
---------- ----------
Deferred tax liabilities:
FHLB stock 99,670 86,886
Allowance for loan losses 106,089
Other, net 11,946 16,300
---------- ----------
111,616 209,275
---------- ----------
Net deferred taxes (asset) payable $ 73,850 $(138,040)
========== ==========
For the years ended September 30, 1996 and 1995, the Bank was allowed a
special bad debt deduction limited generally to eight percent (8%) of
otherwise taxable income and subject to certain limitations based on
aggregate loans and savings account balances at the end of the year. If the
amounts qualifying as deductions under the Internal Revenue Code provision
were later used for purposes other than bad debt losses, they would be
subject to Federal income tax at the then current corporation rate.
In 1996, the Internal Revenue Service repealed this special provision for
thrift institutions, such as the Bank, for determining the allowable tax
bad debt reserves. Effective for tax years ending December 31, 1996 or
after, fiscal year September 30, 1997 for the Bank, all thrift institutions
are taxed as other banking institutions. Institutions under $500 million in
assets are allowed to use the reserve method of determining their bad debt
deduction based on their actual experience while larger institutions (over
$500 million) must use the specific charge off method in determining their
deduction. Tax bad debt reserves accumulated since December 31, 1987 must
be included in taxable income of the Bank prorated over a six year period,
beginning in the tax year effected by the change. This change did not have
a material impact on the Bank as a deferred tax liability was provided for
these accumulated reserves. The accumulated tax bad debt reserves as of
December 31, 1987, which amounts to approximately $1,598,000 is only
subject to being taxed at a later date under certain circumstances, such as
the Bank converting to a type of institution that is not considered a bank
for tax purposes. These financial statements do not include any deferred
tax liability related to the accumulated tax bad debt reserves as of
December 31, 1987.
8. Stockholders' Equity and Regulatory Capital
Regulatory Capital. The Bank is subject to minimum regulatory capital
requirements promulgated by the Office of Thrift Supervision (OTS). Such
minimum capital standards generally require the
(Continued)
36
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
maintenance of regulatory capital sufficient to meet each of three tests,
hereinafter described as the tangible capital requirement, the core capital
requirement and the risk-based capital requirement. The tangible capital
requirement provides for minimum tangible capital (defined as stockholders'
equity less all intangible assets) equal to 1.5% of adjusted total assets.
The core capital requirement provides for minimum core capital (tangible
capital plus certain forms of supervisory goodwill and other qualifying
intangible assets such as capitalized mortgage servicing rights) equal to
3.0% of adjusted total assets. The risk-based capital requirement provides
for the maintenance of core capital plus general loss allowances equal to
8.0% of risk-weighted assets. In computing risk-weighted assets, the
Savings Bank multiplies the value of each asset on its statement of
financial condition by a defined risk-weighting factor, e.g., one-to-four
family residential loans carry a risk-weighted factor of 50%.
As of September 30, 1997, the Bank's regulatory capital exceeded all
minimum regulatory capital requirements as shown in the following table:
Regulatory Capital
---------------------------------------------------------------------------------
Tangible Core Risk-based
Capital Percent Capital Percent Capital Percent
------------ ----------- ------------ ---------- ------------- -----------
(in thousands)
---------------------------------------------------------------------------------
Capital under generally $ 8,638 % $ 8,638 % $ 8,638 %
accepted accounting principles
Adjustments: -0- -0- -0-
Net unrealized appreciation
on securities available-for-sale
General valuation allowances 378
Regulatory capital computed 8,638 11.5 8,638 11.5 9,016 29.8
Minimum capital requirement 1,123 1.5 2,245 3.0 2,419 8.0
----------- ------------ ------------ ------------ ------------- -----------
Regulatory capital-excess $ 7,515 10.0% $ 6,393 8.5% $ 6,597 21.8%
=========== ============ ============ ============ ============= ===========
Retained Earnings Restriction. Retained earnings includes tax bad debt
reserves of $1,598,000 accumulated prior to December 31, 1987 for which
no Federal income tax has been provided. These tax bad debt reserves are
only taxable in certain circumstances, such as if the Bank converted to
an institution that did not qualify as a bank for tax purposes (see
Note 7).
Liquidation Account. Upon conversion to a capital stock savings bank,
eligible account holders who continued to maintain their deposit accounts
in the Bank were granted priority in the event of the future liquidation
of the Bank through the establishment of a special "Liquidation Account"
in an amount equal to the consolidated net worth of the Bank at September
30, 1986. The Liquidation Account was $2,531,513 at September 30, 1986
and is reduced in proportion to reductions in the balance of eligible
account holders as determined on each subsequent fiscal year end. The
existence
(Continued)
37
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
of the Liquidation Account will not restrict the use or application of
net worth except with respect to the cash payment of dividends.
Dividend Restrictions: The payment of cash dividends by the Bank on its
Common Stock is limited by regulations of the OTS. Interest on savings
accounts will be paid prior to payments of dividends on common stock.
The Bank may not declare or pay a cash dividend to the Company in excess
of 100% of its net income to date during the current calendar year plus
the amount that would reduce by one-half the Bank's capital ratio at the
beginning of the year without prior OTS approval. Additional limitation
on dividends declared or paid, or repurchases of the Bank stock are tied
to the Bank's level of compliance with its regulatory capital
requirements.
9. Stock Repurchase
During the fiscal year ended September 30, 1996, pursuant to a Stock
Purchase Agreement approved by the Board of Directors and the Office of
Thrift Supervision, the Company purchased 64,244 shares of the Company's
outstanding stock, of which 58,069 shares were owned by a group of
stockholders collectively known as the "EKH Group." The 64,244 shares of
common stock were purchased in July of 1996 at a total cost of
$2,666,126.
10. Retirement Benefits
Profit Sharing Plan. On December 17, 1985, the Board of Directors of the
Bank adopted an employee pension benefit plan (referred to as a "401K
Profit Sharing Plan") as described under the Employees' Retirement
Income Security Act of 1974. The Plan became effective December 19,
1985. The Plan covers all full-time employees who have attained the age
of 20 1/2 years and have been employed six months prior to the
anniversary date of the Plan. Under the Plan, the Bank makes
discretionary contributions based on profits, in accordance with Section
401(k) of the Internal Revenue Code. The Bank did not make any
contributions to the Plan for the years ended September 30, 1997, 1996,
and 1995.
Employee Stock Ownership Plan. On October 31, 1994, the Board of
Directors of the Bank established an Employee Stock Ownership Plan (the
"ESOP") in which employees meeting age and service requirements are
eligible to participate. The ESOP is effective beginning January 1,
1994. The ESOP Plan covers all employees who have attained the age of 20
1/2 with six months service prior to the entry date. Contributions to
the Plan are determined by the Board of Directors for each plan year and
can be made in the form of company stock, cash, or other consideration.
On April 11, 1997 the Board of Directors of the Company authorized a
loan to the ESOP Trust in the amount of $249,913. The ESOP Trust used
the proceeds of the loan to acquire 6,022 shares of the Company's
outstanding stock from persons affiliated with the Bank. The loan is to
be repaid in ten annual installments, beginning December 1, 1997.
Interest is based on the prime rate published
(Continued)
38
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
in the Wall Street Journal and is adjusted annually. The stock is
pledged as collateral on the loan. The Bank is expected to make annual
contributions sufficient to meet the debt service requirements. As the
debt is repaid, ESOP shares which were initially pledged as collateral
are released from collateral, based on the proportion of debt service
paid in that year, and allocated to Plan participants.
The Company accounts for its ESOP in accordance with the Statement of
Position 93-6, "Employers Accounting for Employee Stock Ownership Plans"
(Statement). The Statement prescribes the accounting treatment for
initially leveraged ESOPs, which requires among other things that:
a. For ESOP shares committed to be released in a period to
compensate employees directly, employers should recognize
compensation costs equal to the average fair value (as determined
on a monthly basis) of the shares committed to be released;
b. Dividends on unallocated shares used to repay ESOP loans are
not considered dividends for financial reporting purposes;
c. For an internally leveraged ESOP, the Company loan receivable
and the ESOP note payable as well as the related income/expense
are not reflected in the consolidated financial statements;
d. For earnings per share computations, ESOP shares that have
been committed to be released should be considered outstanding.
ESOP shares that have not been committed to be released should
not be considered outstanding.
ESOP compensation was $24,991, $30,512, and $24,425 for the years ended
September 30, 1997, 1996, and 1995, respectively. For 1997, 602 shares
were committed to be released from collateral. At September 30, 1997,
there were 5,420 unallocated ESOP shares having a fair value of
$224,922.
11. Related Parties
Mrs. Janet White Prewitt serves the Company as Chairman of the Board of
Directors. Mrs. Prewitt is an equity partner in the law firm of White,
McCann, and Stewart that serves as general counsel to Pioneer Federal
Savings Bank. The fees paid to the Law Firm for fiscal years 1997, 1996,
and 1995, were $90,948, $103,969, and $77,385, respectively. (See Note 4
for a summary of loans to officers and directors). In addition, White,
McCann, and Stewart receives commissions on title insurance premiums
related to real estate mortgages originated by the Bank. These
commissions amounted to $10,858, $29,889, and $14,915 for the years
ended September 30, 1997, 1996, and 1995, respectively.
(Continued)
39
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
12. Financial Instruments with Off-Balance Sheet Risk and Concentration of
Credit Risk
The Bank is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include mortgage commitments
outstanding which amounted to approximately $2,634,854 and $1,107,600
for the year ended September 30, 1997 and 1996, respectively plus unused
lines of credit granted to customers totaling $2,242,683 and $1,689,376
at September 30, 1997 and 1996, respectively. The mortgage loan
committments at September 30, 1997 and 1996 included fixed rate loan
commitments of $610,955 and $370,000, respectively. In addition, at
September 30, 1997 and 1996, respectively, the Bank had made loan
commitments for real estate loans secured by first mortgages totaling
$1,235,202 and $1,169,350, which it anticipated selling in the secondary
market. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheets.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments and
consumer lines of credit are represented by the contractual amount of
those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments. Since many of the loan commitments may expire without being
drawn upon, the total commitment amount does not necessarily represent
future requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained
upon extension of credit is based on management's credit evaluation of
the counterparty. Collateral held varies, but primarily includes
residential real estate.
The Bank has concentrated its lending activity within a 90 mile radius
of Winchester, Kentucky. Therefore, a substantial portion of its
debtors' ability to honor their contracts is dependent on the economy of
this area.
13. Earnings Per Share
Earnings per share for the year ended September 30, 1997, 1996, and 1995
was calculated by dividing net income $1,066,945, $706,982, and
$1,077,503 by the weighted average number of shares of common stock
outstanding during the year, which were 208,233, 256,417, and 272,477
shares for the years ended September 30, 1997, 1996, and 1995,
respectively.
14. Disclosures about Fair Value of Financial Instruments
In December 1991, the FASB issued SFAS No. 107, "Disclosures About Fair
Value of Financial Instruments." This statement extends the existing
fair value disclosure practices for some instruments by requiring all
entities to disclose the fair value of financial instruments (as
defined),
(Continued)
40
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
both assets and liabilities recognized and not recognized in the
statements of financial condition, for which it is practicable to
estimate fair value.
There are inherent limitations in determining fair value estimates, as
they relate only to specific data based on relevant information at that
time. As a significant percentage of the Bank's financial instruments do
not have an active trading market, fair value estimates are necessarily
based on future expected cash flows, credit losses, and other related
factors. Such estimates are accordingly, subjective in nature,
judgmental and involve imprecision. Future events will occur at levels
different from that in the assumptions, and such differences may
significantly affect the estimates.
The statement excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Accordingly,
the aggregate fair value amounts presented do not represent the
underlying value of the Company. Additionally, the tax impact of the
unrealized gains or losses has not been presented or included in the
estimates of fair value.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments.
Cash and Cash Equivalents. The carrying amounts reported in the
statement of financial condition for cash and short-term instruments
approximate those assets' fair values.
Investment Securities. Fair values for investment securities are based
on quoted market prices, where available. If quoted market prices are
not available, fair values are based on quoted market prices of
comparable instruments. No active market exists for the Federal Home
Loan Bank capital stock. The carrying value is estimated to be fair
value since if the Bank withdraws membership in the Federal Home Loan
Bank, the stock must be redeemed for face value.
Loans Receivable. The fair value of loans was estimated by discounting
the future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for the same
remaining maturities.
Deposits. The fair value of savings deposits and certain money market
deposits is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated using the
rates currently offered for deposits of similar remaining maturities.
Loan Commitments and Unused Home Equity Lines of Credit. The fair value
of loan commitments and unused home equity lines of credit is estimated
by taking into account the remaining terms of the agreements and the
present credit-worthiness of the counterparties.
(Continued)
41
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
The estimated fair value of the Company's financial instruments at
September 30, 1997 are as follows:
Carrying Fair
Amount Value
----------- -----------
Assets
Cash and cash equivalents $ 9,478,430 $ 9,478,430
Securities available-for-sale 5,949,386 5,949,386
Securities held-to-maturity 22,621,995 22,608,182
Loans receivable, net 34,490,871 34,932,118
Liabilities
Deposits 64,585,148 64,916,792
FHLB advances 652,225 443,565
Unrecognized Financial Instruments
Loan commitments 2,634,854
Unused lines of credit 2,242,683
(Continued)
42
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
15. Pioneer Financial Corporation Financial Information (Parent Company
Only)
The parent company's principal assets are its investment in the Bank and
cash balances on deposit with the Bank. The following are condensed
financial statements for the parent company as of and for the year ended
September 30, 1997.
Pioneer Financial Corporation
Condensed Statement of Financial Condition
September 30, 1997
Assets:
Cash and due from banks $ 24,679
Investment in subsidiary 8,636,473
Organizational cost, net 28,140
Other assets 48,906
--------------
Total assets $ 8,738,198
==============
Liabilities and Stockholders' Equity:
Liabilities $
--------------
Stockholders' equity:
Common stock 208,233
Additional paid-in capital 1,797,432
Retained earnings 6,957,353
Unallocated Employee Stock Ownership Plan (ESOP) stock (224,922)
Net unrealized appreciation on securities available-for-sale 102
--------------
Total liabilities and stockholders' equity $ 8,738,198
==============
(Continued)
43
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
Pioneer Financial Corporation
Condensed Statement of Income
year ended September 30, 1997
Income:
Cash dividends from Bank $ 572,762
--------------
Expense:
Amortization of organizational expense 13,508
Other operating 2,181
--------------
15,689
--------------
Income before income tax benefit 557,073
Income tax benefit 5,334
--------------
Net income before equity in undistributed net income of subsidiary 562,407
Equity in undistributed net income of subsidiary 1,077,300
--------------
Net income $ 1,639,707
==============
(Continued)
44
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
Pioneer Financial Corporation
Condensed Statement of Cash Flows
year ended September 30, 1997
Operating activities:
Net income $ 1,639,707
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed net income of subsidiary (1,077,300)
Amortization of organizational cost 13,508
Increase in receivables (5,334)
--------------
Net cash provided by operating activities 570,581
--------------
Investing activities:
Net cash provided (used) by investing activities
Financing activities:
Dividends paid (322,762)
Loan to Employee Stock Ownership Plan (ESOP) (249,913)
--------------
Net cash used by financing activities (572,675)
--------------
Decrease in cash and cash equivalents (2,094)
Cash and cash equivalents at beginning of period 26,773
--------------
Cash and cash equivalents at end of period $ 24,679
==============
(Continued)
45
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
16. Pioneer Service Corporation
On August 30, 1978, the Savings Bank formed Pioneer Service Corporation,
a wholly owned subsidiary, by purchasing its stock for $16,000. The
Subsidiary was created to hold stock in a not for profit corporation
that provides on line computer processing and inquiry service for the
Bank and other savings and loan institutions.
Summary balance sheets for the wholly owned subsidiary, Pioneer Service
Corporation are as follows:
PIONEER SERVICE CORPORATION
Balance Sheets, September 30, 1997 and 1996
--------------------
1997 1996
-------- --------
ASSETS
Cash $ 653 $ 653
Investments 15,000 15,000
-------- --------
$ 15,653 $ 15,653
======== ========
STOCKHOLDERS' EQUITY
Common stock $ 16,000 $ 16,000
Paid-in capital 1,000 1,000
Deficit (1,347) (1,347)
-------- --------
$ 15,653 $ 15,653
======== ========
The Service Corporation incurred expenses of $-0- and $30 for the years
ended September 30, 1997 and 1996, respectively.
17. Subsequent Events
On May 23, 1997, the Bank entered into a purchase and assumption
agreement with People's Exchange Bank of Beattyville, Kentucky, Inc. to
sell and assign certain assets and certain deposit liabilities of its
branch office in Stanton, Kentucky. This agreement was finalized and
settled on October 29, 1997. Deposit accounts transferred to the
purchaser amounted to $4,930,683. In addition, the Bank sold loans
totaling $34,370, which were secured by deposits transferred in the
Agreement, plus property and equipment having a book value of $50,000.
The transaction resulted in a net gain to the Bank of approximately
$575,000.
46
CORPORATE INFORMATION
OFFICES
Executive offices: Branch offices:
25 East Hickman Street Pioneer Drive Pendleton Street
Winchester, KY 40391 Winchester, KY 40391 Stanton, KY 40380
(606) 744-3972 (606) 744-3896 (Branch closed 10/97)
DIRECTORS
William M. Cress Robert G. Strode
Exec. Vice President, Retired Vice President,
Hinkle Contracting Corporation, Ag-Gro Fertilizer Company
Stanton, KY
Ewart W. Johnson Nancy M. Lawwill
Retired, Lexington, KY Vice President, Treasurer
and Assistant Secretary,
Pioneer Federal
Nora M. Linville Wayne M. Martin
Secretary, Pioneer Federal President and General
and Retired Executive Manager, WKYT-TV,
Vice President Lexington, KY
Thomas D. Muncie Carl C. Norton
President, Muncie Buick-GMC President and Secretary,
Truck, Inc. Pioneer Financial;
President, Pioneer Federal
Janet W. Prewitt Andrew James Ryan
Board Chair, Pioneer Financial President, Andy Ryan
and Pioneer Federal; Asst. Pontiac-Nissan, Inc.
Secretary, Pioneer Financial;
and Attorney, White, McCann
& Stewart
ADVISORY DIRECTORS
Clifford R. Langley Beckner Shimfessel
Winchester, KY Retired Clark County Clerk
Willard M. Martin
Retired Housing Authority
Executive Director
47
OTHER OFFICERS AND SIGNIFICANT EMPLOYEES
Janet R. Tutt Lisa Earlywine
Assistant Treasurer Loan Officer
Doris Estes Bobby R. Trent
Branch Manager/ Compliance/Security
Loan Officer
Dianna Davis
Vicki Rupard Branch Manager/Loan Officer,
Loan Officer Stanton Branch (now closed)
AUDITORS LEGAL COUNSEL
Miller, Mayer, Sullivan & Stevens LLP White, McCann & Stewart
2365 Harrodsburg Road 125 S. Main Street
Lexington, KY 40504 Winchester, KY 40391
ANNUAL MEETING
The Annual Meeting of the shareholders of Pioneer Financial Corporation
will be held on Wednesday, January 14, 1998, at 10:00 a.m. at the main office,
25 East Hickman Street, Winchester, Kentucky.
FORM 10-K
A COPY OF THE CORPORATION'S FORM 10-K AS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION WILL BE FURNISHED WITHOUT CHARGE TO STOCKHOLDERS AS OF THE
RECORD DATE UPON WRITTEN REQUEST TO THE SECRETARY, PIONEER FINANCIAL
CORPORATION, 25 EAST HICKMAN STREET, WINCHESTER, KENTUCKY 40391.
48