<PAGE>
================================================================================
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. ______)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
PIONEER FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement,
if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------------
(3) Filing Party:
-------------------------------------------------------------------
(4) Date Filed:
-------------------------------------------------------------------
================================================================================
<PAGE>
[LETTERHEAD OF PIONEER FINANCIAL CORPORATION]
June 30, 1998
Dear Shareholder:
You are cordially invited to attend the Special Meeting of Shareholders of
Pioneer Financial Corporation ("Pioneer") to be held on Thursday, July 30, 1998
at 10:00 a.m. local time, at the main office of Pioneer Federal Savings Bank, 25
East Hickman Street, Winchester, Kentucky 40391. At the Special Meeting,
Pioneer's shareholders will be asked to approve the Share Exchange Agreement and
related Plan of Share Exchange among Pioneer, Pioneer Federal Savings Bank, the
directors of Pioneer, and Central Bancshares, Inc. This matter is more fully
described in the accompanying Notice of Special Meeting and Proxy Statement.
Shareholders owning a majority of Pioneer's shares must be present, in person
or by proxy, at the Special Meeting to constitute a quorum for the transaction
of business. If you will be unable to attend the Special Meeting, we urge you to
sign, date and return the enclosed proxy to Pioneer promptly. If you do attend
the Special Meeting, you may still vote in person even if you previously mailed
a proxy by giving written notice to the Secretary of Pioneer that you are
revoking your proxy.
We look forward to seeing you at the Special Meeting.
Sincerely,
Janet W. Prewitt
Chairman of the Board
<PAGE>
NOTICE OF SPECIAL MEETING
OF SHAREHOLDERS OF
PIONEER FINANCIAL CORPORATION
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of Pioneer
Financial Corporation ("Pioneer") will be held on Thursday, July 30, 1998 at
10:00 a.m. local time, at the main office of Pioneer Federal Savings Bank, 25
East Hickman Street, Winchester, Kentucky 40391, for the following purposes:
(1) To approve the Share Exchange Agreement and related Plan of Share
Exchange; and
(2) To transact such other business as may properly come before the
meeting.
The Board of Directors has fixed the close of business on June 26, 1998, as
the record date for determining those shareholders entitled to receive notice of
and to vote at the Special Meeting or any adjournments within 120 days
thereof.
THE ACCOMPANYING PROXY STATEMENT DESCRIBES THE RIGHTS OF PIONEER SHAREHOLDERS
TO DISSENT FROM THE SHARE EXCHANGE AND THE PROCEDURES WHICH MUST BE FOLLOWED IN
ORDER TO PERFECT SUCH RIGHTS.
By Order of the Board
of Directors
Janet W. Prewitt
Chairman of the Board
Winchester, Kentucky
June 30, 1998
<PAGE>
PROXY STATEMENT
OF
PIONEER FINANCIAL CORPORATION
FOR
Special Meeting of Shareholders
To be held on July 30, 1998
This proxy statement is being furnished to shareholders of Pioneer
Financial Corporation, a unitary thrift holding company ("Pioneer"), in
connection with the solicitation of proxies by the Board of Directors of Pioneer
from holders of Pioneer's outstanding common shares, $1.00 par value per share
("Pioneer Common Stock"), for use at a special meeting of shareholders (the
"Special Meeting") of Pioneer to be held on Thursday, July 30, 1998, at
10:00 a.m., local time, at the principal offices of Pioneer Federal Savings
Bank, a federally chartered savings bank (the "Bank") located at 25 East Hickman
Street, Winchester, Kentucky and at any adjournments thereof. At the Special
Meeting, shareholders of Pioneer will be asked to consider and approve the
proposed share exchange (the "Share Exchange") between Pioneer and Central
Bancshares, Inc., a Kentucky corporation ("Central"). The Share Exchange will
be effected under a Share Exchange Agreement and related Plan of Share Exchange
(together, the "Exchange Agreement") among Pioneer, the Bank, the directors of
Pioneer, and Central, pursuant to which each share of Pioneer Common Stock
outstanding immediately prior to the Effective Time of the Share Exchange,
except for shares with respect to which the holder has properly perfected the
holder's rights to dissent under Subtitle 13 of Chapter 271B of the Kentucky
Business Corporation Act, shall be acquired by Central and shall automatically
be converted into and exchanged for the right to receive a cash payment in the
amount of $98.50 and Pioneer will become a wholly-owned subsidiary of Central.
A copy of the Exchange Agreement is attached as Appendix A to this Proxy
Statement.
The presence, in person or by proxy, of the holders of a majority of the
outstanding shares of Pioneer Common Stock is necessary to constitute a quorum
at the Special Meeting. Shares of Pioneer Common Stock which are entitled to be
voted at the Special Meeting and are represented by properly executed proxies
will, unless such proxies have been revoked, be voted in accordance with the
instructions on such proxies. If no instructions are given to a properly
executed proxy, the respective shares will be voted in favor of the Exchange
Agreement and the holder of Pioneer Common Stock will be deemed to have waived
the appraisal rights of a dissenting shareholder. Any shareholder who has given
a proxy to the Board of Directors hereunder may revoke it at any time prior to
its exercise at the Special Meeting by delivering an instrument of revocation or
a duly executed proxy bearing a later date to the Secretary of Pioneer or by
attending such meeting and voting in person.
A holder of Pioneer Common Stock who, prior to the vote at the Special
Meeting, delivers to Pioneer a written demand for appraisal, who does not vote
in favor of the proposal to approve the Exchange Agreement, and who complies
with the other applicable requirements of Kentucky law, will have the right to
receive in cash the "fair value" of his or her shares of Pioneer Common Stock as
determined under Kentucky law.
This Proxy Statement and the accompanying proxy will be mailed or given to
shareholders of Pioneer on or about June 30, 1998.
<PAGE>
AVAILABLE INFORMATION
Pioneer is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Copies of such reports,
proxy statements and other information filed by Pioneer can be obtained, at
prescribed rates, from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. In addition, such reports, proxy
statements and other information can be inspected at the public reference
facilities referred to above and at certain of the Regional Offices of the
Commission as follows: the New York Regional Office, 7 World Trade Center, Suite
1300, New York, New York 10048 and the Chicago Regional Office, Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
THIS PROXY STATEMENT INCORPORATES DOCUMENTS PERTAINING TO PIONEER BY
REFERENCE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF SUCH
DOCUMENTS (EXCLUDING EXHIBITS) ARE AVAILABLE, WITHOUT CHARGE UPON REQUEST, FROM
NANCY LAWWILL, TREASURER, PIONEER FINANCIAL CORPORATION, 25 EAST HICKMAN STREET,
WINCHESTER, KENTUCKY 40391 (TELEPHONE (606) 744-3972). IN ORDER TO INSURE
TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY JULY 15,
1998.
-------------------
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by Pioneer with the Commission are
specifically incorporated herein by reference:
(1) Annual Report on Form 10-K for the year ended September 30, 1997, filed
pursuant to Section 13 of the Exchange Act;
(2) Quarterly Report on Form 10-Q for the first quarter ended December 31,
1997; and
(3) Quarterly Report on Form 10-Q for the second quarter ended March 31,
1998.
Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes hereof to the extent
that a statement contained herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed to constitute a part
hereof except as so modified or superseded.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS Page
----
<S> <C>
SUMMARY .................................................................................................. 1
The Special Meeting ............................................................................. 1
Vote Required ................................................................................... 1
Revocability of Proxy ........................................................................... 1
General Description of the Share Exchange ....................................................... 2
Adjustment to Exchange Consideration ............................................................ 2
Parties to the Share Exchange ................................................................... 2
Interests of Certain Persons in the Share Exchange .............................................. 3
Recommendation of the Board of Directors ........................................................ 3
Opinion of Financial Advisor .................................................................... 3
Effective Time of the Share Exchange ............................................................ 3
Conditions to the Share Exchange ................................................................ 4
Certain Federal Income Tax Consequences ......................................................... 4
Regulatory Requirements ......................................................................... 4
Surrender of Pioneer Common Stock Certificates .................................................. 4
Dissenters' Rights .............................................................................. 4
Other Matters to be Acted Upon .................................................................. 5
THE SPECIAL MEETING ...................................................................................... 6
THE SHARE EXCHANGE ....................................................................................... 7
Terms of the Share Exchange ..................................................................... 7
Adjustment to Exchange Consideration ............................................................ 7
Background of the Share Exchange ................................................................ 8
Reasons for the Share Exchange; Recommendation of the Board of Directors ........................ 9
Interests of Certain Persons in the Share Exchange .............................................. 9
Opinion of Financial Advisor .................................................................... 9
Surrender of Pioneer Common Stock Certificates................................................... 13
Conditions to the Share Exchange ................................................................ 13
Norton Releases ................................................................................. 14
Termination of the Exchange Agreement ........................................................... 14
Effective Time of the Share Exchange ............................................................ 14
Regulatory Requirements ......................................................................... 15
Certain Federal Income Tax Consequences.......................................................... 15
Accounting Treatment ............................................................................ 15
Dissenter's Rights .............................................................................. 15
PRICE RANGES OF PIONEER COMMON STOCK ..................................................................... 17
SELECTED FINANCIAL DATA OF PIONEER ....................................................................... 19
PRINCIPAL SHAREHOLDERS OF PIONEER ........................................................................ 20
BUSINESS OF PIONEER ...................................................................................... 20
General ......................................................................................... 20
Competition ..................................................................................... 21
Subsidiaries .................................................................................... 21
Personnel ....................................................................................... 22
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
MANAGEMENT OF PIONEER .................................................................................... 22
Directors and Executive Officers ................................................................ 22
PIONEER'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS .................................................................... 23
General ......................................................................................... 23
Asset/Liability Management ...................................................................... 24
Interest Rate Sensitivity Analysis .............................................................. 25
Average Balances, Interest, and Average Yields .................................................. 25
Comparison of the Results of Operations for the Six Months Ended March 31, 1998 and 1997 ........ 27
Comparison of Results of Operations for the Years Ended September 30, 1997 and 1996 ............. 28
Comparison of Results of Operations for the Years Ended September 30, 1996 and 1995 ............. 29
Comparison of Financial Condition at September 30, 1997 and 1996................................. 30
Non-Performing Assets ........................................................................... 31
Mortgage Banking Activity ....................................................................... 32
Liquidity and Capital Resources ................................................................. 32
Impact of Inflation and Changing Prices ......................................................... 34
Impact of New Accounting Standards .............................................................. 34
ADJOURNMENT OF THE SPECIAL MEETING ....................................................................... 35
LEGAL PROCEEDINGS ........................................................................................ 36
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ................................................................. 36
MISCELLANEOUS ............................................................................................ 36
APPENDICES
Share Exchange Agreement and related Plan of Share Exchange......................................... Appendix A
Subtitle 13 of Chapter 271B of the Kentucky Revised Statutes
Relating to Appraisal Rights............................................................... Appendix B
Opinion of Financial Advisor........................................................................ Appendix C
</TABLE>
No person is authorized to give any information or to make any
representations regarding the Share Exchange not contained in this Proxy
Statement and, if given or made, such information or representations should not
be relied upon as having been authorized by Pioneer. The delivery of this Proxy
Statement shall not, under any circumstances, create any implication that there
has been no change in the information set forth herein since the date hereof.
-ii-
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement. This summary is necessarily selective and incomplete and
is qualified in its entirety by the detailed information contained herein, the
Appendices hereto and the documents referred to herein, including the Exchange
Agreement attached hereto as Appendix A, to which reference is made for a
complete statement of the matters discussed below. Certain capitalized terms
used in this summary are defined elsewhere in this Proxy Statement.
The Special Meeting
The Special Meeting of shareholders of Pioneer will be held at the office
of the Bank located at 25 East Hickman Street, Winchester, Kentucky, on
Thursday, July 30, 1998 at 10:00 a.m., local time. At the Special Meeting,
Pioneer shareholders will be asked to vote upon a proposal to approve the
Exchange Agreement which has been approved and adopted by the Boards of
Directors of Pioneer and Central, whereby Pioneer will become a wholly-owned
subsidiary of Central. Holders of record of Pioneer Common Stock at the close of
business on June 26, 1998 (the "Record Date") will be entitled to notice of and
to vote at such meeting. See "THE SPECIAL MEETING."
---
Vote Required
Each share of Pioneer Common Stock outstanding at the close of business on
the Record Date will have one vote on the Share Exchange. As of the Record Date,
there were 208,233 shares of Pioneer Common Stock outstanding and entitled to
vote. The affirmative vote of the holders of at least 66 2/3% of such shares is
required to approve and adopt the Exchange Agreement. As of the Record Date, the
directors and officers of Pioneer were entitled to vote 23,423 shares, or
approximately 11.24% of the outstanding Pioneer Common Stock. Pioneer's
directors and officers have agreed in the Exchange Agreement to vote the shares
of Pioneer Common Stock beneficially owned by them, in favor of the Share
Exchange. See "THE SPECIAL MEETING; PRINCIPAL SHAREHOLDERS OF PIONEER."
---
Revocability of Proxy
The presence, in person or by proxy, of the holders of a majority of the
outstanding shares of Pioneer Common Stock is necessary to constitute a quorum
at the Special Meeting. Shares of Pioneer Common Stock which are entitled to be
voted at the Special Meeting and are represented by properly executed proxies
will, unless such proxies have been revoked, be voted in accordance with the
instructions on such proxies. If no instructions are given to a properly
executed proxy, the respective shares will be voted in favor of the Exchange
Agreement and the holder of Pioneer Common Stock will be deemed to have waived
the appraisal rights of a dissenting shareholder. In addition, if no voting
instructions are given, the shares will be voted for a proposal to adjourn the
Special Meeting. Any shareholder who has given a proxy to the Board of Directors
hereunder may revoke it at any time prior to its exercise at the Special Meeting
by delivering an instrument of revocation or a duly executed proxy bearing a
later date to the Secretary of Pioneer or by attending such meeting and voting
in person.
1
<PAGE>
General Description of the Share Exchange
Pursuant to the Exchange Agreement, Central will acquire for cash all of
the Pioneer Common Stock and Pioneer will become a wholly-owned subsidiary of
Central. By virtue of the Share Exchange (i) each share of Pioneer Common Stock
outstanding immediately prior to the Effective Time of the Share Exchange,
except for shares with respect to which the holder has properly perfected the
holder's rights to dissent under Subtitle 13 of Chapter 271B of the Kentucky
Revised Statutes, shall be acquired by Central and shall automatically be
converted into and exchanged for the right to receive a cash payment in the
amount of $98.50 (the "Exchange Consideration"); and (ii) Pioneer will become a
wholly-owned subsidiary of Central. After the Effective Time, it is anticipated
that the Bank will be merged with and into Central Bank & Trust Co. ("Central
Bank"). See "THE SHARE EXCHANGE."
---
Adjustment to Exchange Consideration
The Exchange Agreement provides that in the event the aggregate fees and
expenses of Professional Bank Services, Inc. and Stites & Harbison, financial
and legal advisors to Pioneer, incurred by Pioneer in connection with the
transactions contemplated under the Exchange Agreement, exceed $370,800, then
the Exchange Consideration shall be reduced by a cash amount equal to such
excess. It is not anticipated at this time that there will be any adjustment to
the Exchange Consideration.
Parties to the Share Exchange
Pioneer and the Bank. Pioneer is a corporation organized under the laws
--------------------
of Kentucky and is a unitary savings and loan holding company under the Home
Owners' Loan Act, as amended. It currently owns all of the issued and
outstanding shares of the Bank, a federally chartered stock savings bank,
headquartered in Winchester, Kentucky.
As of March 31, 1998, Pioneer reported assets of approximately $72.2
million, deposits of approximately $61.5 million, and shareholders' equity of
approximately $9.6 million. The Bank conducts its business through two offices.
The Bank's offices are located at 25 East Hickman Street and the corner of the
Bypass (Kentucky Highway 1958) and Fulton Road, both located in Winchester,
Kentucky. Pioneer's office is located at 25 East Hickman Street, Winchester,
Kentucky 40391, and its telephone number there is (606) 744-3972.
Central. Central Bancshares, Inc. is a bank holding company registered
-------
with the Board of Governors of the Federal Reserve System pursuant to the Bank
Holding Company Act of 1956, as amended. Central conducts a complete range of
commercial and personal banking activities in the Lexington, Fayette County
metropolitan area and in Nicholasville, Jessamine County, Kentucky through two
wholly owned subsidiaries: Central Bank & Trust Co. headquartered in Lexington,
Fayette County; and Central Bank, FSB headquartered in Nicholasville, Jessamine
County. As of March 31, 1998, Central, on a consolidated basis, had total assets
of approximately $607.7 million and total deposits of approximately $470.5
million.
2
<PAGE>
Central Bank provides a full range of banking services to the Lexington,
Fayette County area through its main office in Lexington, Kentucky and 11 full
service branch offices and 22 automatic teller machines located in Fayette
County. Commercial lending services provided to medium sized and small
businesses, real estate mortgage lending and individual consumer lending
services are the primary source of operating revenues. Central Bank had total
deposits of approximately $469.3 million at March 31, 1998, and is the largest
independent commercial banking operation in Fayette County, Kentucky.
Central Bank, FSB, organized in February, 1998, provides a broad array of
banking services to the Jessamine County area through its main office in
Nicholasville, Kentucky. Central Bank, FSB has no branch offices. Residential
real estate mortgage lending is the primary source of operating income for
Central Bank, FSB. Central Bank, FSB had total deposits of approximately $1.7
million at March 31, 1998.
Interests of Certain Persons in the Share Exchange
The current members of the board of directors of the Bank comprise the
board of directors of Pioneer. The current directors of the Bank have been asked
to serve as advisory directors for the Clark County branches of Central Bank and
Carl C. Norton is expected to serve as President of the Clark County branches of
Central Bank and Nancy M. Lawwill as Assistant Treasurer of Central Bank,
following the Effective Time of the Share Exchange and the merger of the Bank
with and into Central Bank. Mr. Norton's current Employment Agreement with
Pioneer and the Bank is expected to continue with Central Bank, along with a new
Amendment No. 1 to the Employment Agreement which amends the Employment
Agreement to add a noncompetition provision.
Recommendation of the Board of Directors
The Board of Directors of Pioneer has unanimously adopted and approved the
Exchange Agreement. The Board of Directors of Pioneer recommends that
shareholders vote for approval of the Exchange Agreement. The reasons for the
Board's recommendation are discussed further under the caption "THE SHARE
EXCHANGE -- Reasons for the Share Exchange; Recommendation of the Board of
Directors."
Opinion of Financial Advisor
Professional Bank Services, Inc. ("PBS") was retained by Pioneer to advise
the Board of Directors as to the fairness, from a financial perspective, of the
consideration to be received by the holders of Pioneer Common Stock in the Share
Exchange. PBS has delivered its written opinion to the Board of Directors that,
based upon the matters described therein, as of the date of such opinion, the
consideration to be received by the holders of Pioneer Common Stock pursuant to
the Share Exchange is fair, from a financial point of view, to such holders.
Effective Time of the Share Exchange
The Share Exchange shall become effective on the date and at the time that
the Articles of Share Exchange are filed with the Secretary of State of Kentucky
pursuant to the Kentucky Business Corporation Act, unless a later date and time
is specified as the effective time in the Plan of Share Exchange (the "Effective
Time"). It is anticipated that the Effective Time will be in July or August,
1998. See "THE SHARE EXCHANGE --Effective Time of the Share Exchange."
3
<PAGE>
Conditions to the Share Exchange
The respective obligations of Pioneer, the Bank and Central to consummate
the Share Exchange are subject to the satisfaction or waiver of certain
conditions, including, without limitation, approval of the Exchange Agreement by
the shareholders of Pioneer, prior approval by the Board of Governors of the
Federal Reserve System (the "Federal Reserve") and any other regulatory agency
having authority to review and approve the transactions contemplated by the
Exchange Agreement, absence of any action or proceedings challenging or seeking
to prohibit the Share Exchange and the execution and delivery of certain
documents. The Board of Directors of Pioneer is not aware of any facts or
circumstances which suggest that any of such conditions will not be satisfied or
waived. See "THE SHARE EXCHANGE -- Conditions to the Share Exchange; Regulatory
---
Requirements."
Certain Federal Income Tax Consequences
Under current federal income tax law, the Share Exchange will be taxable
to shareholders of Pioneer who exchange their shares of Pioneer Common Stock for
cash. As a result of the Share Exchange, a holder of Pioneer Common Stock
generally will recognize income for federal income tax purposes measured by the
excess of the cash received for his or her shares over the adjusted basis in the
shares exchanged therefor. See "THE SHARE EXCHANGE -- Certain Federal Income Tax
---
Consequences."
Regulatory Requirements
Central's acquisition of the common stock of Pioneer is subject to the
prior written approval of the Federal Reserve. This approval has not yet been
received. Central applied for such approval on June 9, 1998. See "THE SHARE
---
EXCHANGE -- Regulatory Requirements."
Surrender of Pioneer Common Stock Certificates
Promptly after the Effective Time, holders of Pioneer Common Stock will be
furnished with a transmittal letter and instructions for exchanging their
Pioneer Common Stock certificates for cash. Pioneer shareholders are urged to
surrender their Pioneer Common Stock certificates at the earliest practicable
date after receiving the transmittal letter and instructions. See "THE SHARE
---
EXCHANGE -- Surrender of Pioneer Common Stock Certificates."
Dissenters' Rights
A holder of Pioneer Common Stock who, prior to the vote at the Special
Meeting, delivers to Pioneer a written notice of intent to demand payment, who
does not vote in favor of the proposal to approve the Exchange Agreement, and
who complies with the other applicable requirements of Subtitle 13 of Chapter
271B of the Kentucky Business Corporation Act, will have the right to receive in
cash the "fair value" of his or her shares of Pioneer Common Stock if the Share
Exchange is effectuated. Failure to strictly comply with the provisions of
Subtitle 13 may result in the loss of a dissenting shareholder's appraisal
rights. See "THE SHARE EXCHANGE --Dissenters' Rights" and Subtitle 13 of Chapter
---
271B of the Kentucky Revised Statutes relating to shareholders' appraisal rights
which is attached as Appendix B to this Proxy Statement.
4
<PAGE>
Other Matters to be Acted Upon
A proposal to adjourn the Special Meeting may be considered in the event
there are an insufficient number of shares present in person or by proxy at the
Special Meeting to approve the proposed Share Exchange Agreement and related
Plan of Share Exchange.
5
<PAGE>
THE SPECIAL MEETING
The Board of Directors of Pioneer has fixed the close of business on
June 26, 1998 as the Record Date for purposes of determining those holders of
Pioneer Common Stock entitled to receive notice of and to vote at the Special
Meeting. Only those holders of record of Pioneer Common Stock at the close of
business on the Record Date will be entitled to vote at the Special Meeting. At
the close of business on the Record Date, there were 208,233 shares of Pioneer
Common Stock outstanding and entitled to vote at the Special Meeting, held of
record by 281 persons. Each holder of Pioneer Common Stock of record on the
Record Date will be entitled to cast one vote, in person or by proxy, per share
of Pioneer Common Stock at the Special Meeting.
The trustee of the Pioneer Federal Savings Bank Employee Stock Ownership
Plan ("ESOP"), First Lexington Trust Co., must vote all shares held in the ESOP
trust that are allocated to the ESOP benefit accounts of participating employees
in accordance with the instructions of the participating employees. Unallocated
shares, and allocated shares for which participants do not provide voting
direction, will be voted by the ESOP trustee as directed by the Administrative
Committee of the ESOP consisting of Bank employees Carl C. Norton, Bobby R.
Trent and Doris N. Estes.
The presence, in person or by proxy, of the holders of a majority of the
outstanding shares of Pioneer Common Stock is necessary to constitute a quorum
at the Special Meeting. Shares of Pioneer Common Stock which are entitled to be
voted at the Special Meeting and are represented by properly executed proxies
will, unless such proxies have been revoked, be voted in accordance with the
instructions on such proxies. If no instructions are given to a properly
executed proxy, the respective shares will be voted in favor of the Exchange
Agreement and the holder of Pioneer Common Stock will be deemed to have waived
the appraisal rights of a dissenting shareholder. In addition, if no voting
instructions are given, the shares will be voted in favor of a proposal to
adjourn the Special Meeting. Any shareholder who has given a proxy to the Board
of Directors hereunder may revoke it at any time prior to its exercise at the
Special Meeting by delivering an instrument of revocation or a duly executed
proxy bearing a later date to the Secretary of Pioneer or by attending such
meeting and voting in person.
As to any other matter which may properly be brought before the Special
Meeting, a vote may be cast pursuant to the accompanying proxy in accordance
with the judgment of the person or persons voting the proxy. The Board of
Directors of Pioneer does not know of any such other matters.
Pioneer will bear the expenses of soliciting proxies for the Special
Meeting, including the cost of preparing, reproducing and mailing this Proxy
Statement and the accompanying form of proxy. In addition to soliciting proxies
by mail, certain directors, officers and employees of Pioneer, without receiving
additional compensation therefor, may solicit proxies by telephone, by telegram
or in person. Arrangements also will be made with banks, brokerage firms and
other custodians, nominees and fiduciaries to forward solicitation materials to
the beneficial owners of Pioneer Common Stock held of record by such persons,
and Pioneer will reimburse such banks, brokerage firms, custodians, nominees and
fiduciaries for reasonable out-of-pocket expenses incurred by them in connection
therewith.
The Secretary will treat abstentions as shares that are present and
entitled to vote for purposes of determining the presence of a quorum, but as
unvoted for purposes of determining the approval of any matter submitted to the
shareholders for a vote. If a broker indicates on the proxy that it does not
have discretionary authority as to certain shares to vote on a particular
matter, those shares will not be considered as present and entitled to vote with
respect to that matter.
6
<PAGE>
The affirmative vote of the holders of 66 2/3% of the outstanding Pioneer
Common Stock is required for approval of the Exchange Agreement.
The Board of Directors of Pioneer believes the Exchange Agreement is in the
best interests of Pioneer and its community and its other constituencies and
unanimously recommends that shareholders vote for approval of the Exchange
Agreement.
THE SHARE EXCHANGE
The information contained in this Proxy Statement with respect to the Share
Exchange is a summary of all material provisions of the Exchange Agreement and
is qualified in its entirety by reference to the Exchange Agreement attached as
Appendix A hereto and incorporated herein by reference.
Terms of the Share Exchange
In accordance with the provisions of the Exchange Agreement and subject to
the approval of the holders of 66 2/3% of the outstanding shares of Pioneer
Common Stock and the fulfillment or waiver of certain other conditions, at the
Effective Time (i) each share of Pioneer Common Stock outstanding immediately
prior to the Effective Time of the Share Exchange, except for shares for which
dissenters' rights have been perfected pursuant to Kentucky Law, shall be
cancelled and exchanged for and converted into the right to receive a cash
payment in the amount of $98.50; and (ii) Pioneer will become a wholly-owned
subsidiary of Central.
After the Effective Time, the former holders of Pioneer Common Stock will
be entitled only to the conversion or exchange rights provided under the
Exchange Agreement or, if properly exercised, to their appraisal rights as
dissenting shareholders under the provisions of Subtitle 13 of Chapter 271B of
the Kentucky Business Corporation Act. Also, after the Effective Time, the
former holders of Pioneer Common Stock will no longer be entitled to dividends
or to enjoy the benefits of any capital appreciation.
Immediately prior to the closing of the Share Exchange transaction, Central
will deposit with the Bank, as exchange agent (the "Exchange Agent"), the
consideration necessary to consummate the Share Exchange. Promptly after the
Effective Time, the Exchange Agent will forward to each former holder of Pioneer
Common Stock a letter of transmittal providing for the transmission of the
certificate or certificates evidencing the shares of Pioneer Common Stock to be
converted or exchanged in accordance with the Exchange Agreement. Until so
surrendered, each certificate which evidenced shares of Pioneer Common Stock
immediately prior to the Effective Time shall be deemed for all purposes to
evidence ownership of the right to receive the cash for which such Pioneer
Common Stock will be exchanged. As a result of the Share Exchange, Pioneer will
become a wholly-owned subsidiary of Central, but will have no operations
following the merger of the Bank with and into Central Bank, promptly following
the Effective Time.
Adjustment to Exchange Consideration
The Exchange Agreement provides that in the event the aggregate fees and
expenses of Professional Bank Services, Inc. and Stites & Harbison, financial
and legal advisors to Pioneer, incurred by Pioneer in connection with the
transactions contemplated under the Exchange Agreement, exceed $370,800, then
the Exchange Consideration shall be reduced by a cash amount equal to such
excess. It is not anticipated at this time that there will be any adjustment to
the Exchange Consideration.
7
<PAGE>
Background of the Share Exchange
Changes in the financial service industry in recent years, coupled with the
passage of the Riegle Neal Interstate Bank and Branching Efficiency Act of 1994,
that provides for nationwide interstate banking, have led to an increased
consolidation of banks under large multi-bank holding companies through mergers
and acquisitions and an uncertain future for thrifts. These large bank holding
companies along with other financial institutions have increased competition
with thrifts and, ultimately, their ability to compete with large bank holding
companies and other financial institutions.
From time to time, the Board of Directors has considered various strategic
alternatives for Pioneer in light of, and in response to, these trends in the
financial service industry. For instance, the Bank converted from a mutual to a
stock institution in July, 1987. In December, 1994, the shareholders of the
Bank approved a plan of reorganization whereby the Bank became a wholly owned
subsidiary of Pioneer. These considerations have prompted the Board of
Directors to consider whether an acquisition of Pioneer by another financial
institution was in the long-term best interest of Pioneer shareholders,
employees, customers and the communities Pioneer serves.
In the fall of 1997, the Board of Directors began to explore Pioneer's
strategic alternatives, including the possible sale of Pioneer to a larger bank
holding company. On September 16, 1997, representatives of PBS and Investment
Bank Services, Inc. ("IBS"), a registered broker/dealer subsidiary of PBS met
with the Board of Directors to review the changing dynamics of community banking
and more specifically, the current market value in Kentucky for thrifts. The
Board of Directors then authorized Ms. Prewitt and Mr. Norton to negotiate and
sign an agreement with PBS and IBS, appointing PBS and IBS as financial advisors
to Pioneer. The agreement allowed PBS and IBS to assess Pioneer's business,
value, and find a potential acquiror for Pioneer. This agreement was signed
October 22, 1997.
At a special meeting held on November 18, 1997, representatives of PBS met
with the Board of Directors to review PBS' analysis of Pioneer's business and
estimated value. PBS also identified a number of potential acquirors of Pioneer
and analyzed the ability of the potential acquirors to consummate a transaction
with Pioneer. The Board of Directors authorized PBS to provide various
potential acquirors, believed to have a high interest in a transaction with
Pioneer, with copies of a confidential package prepared by PBS describing
Pioneer and its business.
At a special meeting held on February 27, 1998, representatives of PBS,
along with representatives of Stites & Harbison ("Stites"), special counsel to
Pioneer, reported that ten of the potential acquirors, who were provided with
copies of PBS' confidential package, had submitted offers to acquire Pioneer.
After analyzing the terms of the ten offers, including the financial ability of
the offerers to consummate the transaction on such terms, the Board of Directors
directed Stites to continue discussions with representatives of Central and, if
appropriate, to facilitate due diligence investigations by the offerer. The
Board of Directors authorized PBS and Stites to pursue negotiation of a
definitive agreement with Central. As these discussions continued, Central and
Pioneer continued to refine the financial terms of the proposal to substantially
the terms contained in the acquisition proposal.
The definitive Exchange Agreement was presented to the full Board of
Directors, at a special meeting held on May 7, 1998. At the meeting
Representatives of PBS then presented an analysis of the financial terms of the
proposed Share Exchange and delivered PBS's opinion that the Share Exchange was
fair to Pioneer's shareholders from a financial point of view. Representatives
of Stites presented an analysis of the terms and conditions of the Exchange
Agreement. After further discussion and questions, the Board of Directors
unanimously approved the Exchange Agreement. Pioneer issued a press release
dated May 8, 1998, to announce the proposed Share Exchange between Pioneer and
Central.
8
<PAGE>
Reasons for the Share Exchange; Recommendation of the Board of Directors
The terms of the Exchange Agreement were the result of arm's length
negotiations between Pioneer and Central and their respective representatives.
In reaching its decision to approve the Exchange Agreement, Pioneer's Board of
Directors consulted with PBS and Stites and, without assigning any relative or
specific weights, considered a number of factors, including, but not limited to,
the following:
1. The financial terms of the Share Exchange. In this regard, the Board
of Directors considered that the Exchange Consideration is significantly higher
than prices at which Pioneer Common Stock has historically traded. A comparison
of the financial terms of recent thrift acquisitions indicated that the
financial terms of the Share Exchange compared favorably with other recent
transactions.
2. The effect on shareholder value of Pioneer's remaining an independent
entity. The Board considered the increased competition faced by community banks
in general from large bank holding companies and other financial institutions.
The Board believed this and other factors limited Pioneer's prospects for
significant growth in the future.
3. The opinion of PBS that the Share Exchange is fair to Pioneer's
shareholders from a financial point of view.
4. Current trends in the banking industry. The Board of Directors
considered the probability of nationwide interstate banking, the continued
erosion of traditional geographic and industry lines, and the likelihood of
further consolidation among thrifts and bank holding companies.
5. The competence, experience, and integrity of Central and its
management.
Based on these factors, and such other matters as members of the Board of
Directors deemed relevant, the Board of Directors has unanimously approved the
Exchange Agreement as being in the best interest of Pioneer, its shareholders,
employees, customers and the community served by Pioneer.
The Board of Directors of Pioneer unanimously recommends that shareholders
vote FOR approval of the Exchange Agreement.
Interests of Certain Persons in the Share Exchange
The current members of the board of directors of the Bank comprise the
board of directors of Pioneer. The current directors of the Bank have been
asked to serve as advisory directors of the Clark County branches of Central
Bank and Carl C. Norton is expected to serve as President of the Clark County
branches of Central Bank and Nancy M. Lawwill as Assistant Treasurer of Central
Bank, following the Effective Time of the Share Exchange and the merger of the
Bank with and into Central Bank. Mr. Norton's current Employment Agreement with
Pioneer and the Bank is expected to continue with Central Bank, along with a new
Amendment No. 1 to Employment Agreement which amends the Employment Agreement to
add a noncompetition provision.
Opinion of Financial Advisor
PBS was engaged by Pioneer to advise its Board of Directors as to the
fairness of the consideration, from a financial perspective, to be paid by
Central to the holders of Pioneer Common Stock as set forth in the Exchange
Agreement.
PBS is a bank consulting firm with offices in Louisville, Atlanta, Chicago,
Nashville and Washington, D.C. IBS is a registered broker/dealer and was
retained by Pioneer to serve as Pioneer's
9
<PAGE>
investment banker in order to evaluate and facilitate the possible sale of
Pioneer. As part of its investment banking business, PBS is regularly engaged
in reviewing the fairness of financial institution acquisition transactions from
a financial perspective and in the valuation of financial institutions and other
businesses and their securities in connection with mergers, acquisitions, estate
settlements, and other transactions. Neither PBS nor any of its affiliates has
a material financial interest in Pioneer or Central. PBS was selected to advise
Pioneer's Board of Directors based upon its familiarity with Kentucky financial
institutions and knowledge of the financial services industry as a whole.
PBS performed certain analyses described herein and presented the range of
values for Pioneer resulting from such analyses to the Board of Directors of
Pioneer in connection with its advice as to the fairness of the consideration to
be paid by Central.
A Fairness Opinion of PBS was delivered to the Board of Directors of
Pioneer on May 7, 1998, at a meeting of the Board of Directors and has been
updated as of the date of this Proxy Statement. A copy of the Fairness Opinion,
which includes a summary of the assumptions made and information analyzed in
deriving the Fairness Opinion, is attached as Appendix C to this Proxy Statement
and should be read in its entirety.
In arriving at its Fairness Opinion, PBS reviewed certain publicly
available business and financial information relating to Pioneer and Central.
PBS considered certain financial and stock market data of Pioneer and Central,
compared that data with similar data for certain other publicly-held thrift
holding companies and considered the financial terms of certain other comparable
thrift transactions in the states of Illinois, Indiana, Iowa, Kansas, Kentucky,
Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota and
Wisconsin (the "Regional Area") that had recently been effected. PBS also
considered such other information, financial studies, analyses and
investigations and financial, economic and market criteria that it deemed
relevant.
In connection with its review, PBS did not independently verify the
foregoing information and relied on such information as being complete and
accurate in all material respects. Financial forecasts prepared by PBS were
based on assumptions believed by PBS to be reasonable and to reflect currently
available information. PBS did not make an independent evaluation or appraisal
of the assets of Pioneer or Central. PBS took into consideration the results of
Pioneer's solicitation of indications of interest from other financial
institutions concerning their interest in a possible affiliation with Pioneer.
PBS reviewed the correspondence and information received from interested
financial institutions which were contacted. PBS reviewed all offers received
by Pioneer.
PBS reviewed and analyzed the historical performance of Pioneer and the
Bank contained in: audited Annual Reports and financial statements dated
September 30, 1995, 1996 and 1997 of the Bank; September 30, 1997 and December
31, 1997 Thrift Financial Report of Condition and Operations filed by the Bank;
December 31, 1997 consolidated unaudited financial statements of Pioneer;
historical common stock trading activity of Pioneer; and the premises and other
fixed assets. PBS reviewed and tabulated statistical data regarding the loan
portfolio, securities portfolio and other performance ratios and statistics.
Financial projections were prepared and analyzed as well as other financial
studies, analyses and investigations as deemed relevant for the purposes of this
opinion. In review of the aforementioned information, PBS took into account its
assessment of general market and financial conditions, its experience in other
similar transactions, and its knowledge of the financial services industry
generally.
In connection with rendering the Fairness Opinion and preparing its written
and oral presentation to Pioneer's Board of Directors, PBS performed a variety
of financial analyses, including those summarized herein. The summary does not
purport to be a complete description of the analyses performed by PBS in this
regard. The preparation of a Fairness Opinion involves various determinations
as to the most appropriate and relevant methods of financial analysis and the
application of these methods to the
10
<PAGE>
particular circumstances and therefore, such an opinion is not readily
susceptible to summary description. Accordingly, notwithstanding the separate
factors summarized below, PBS believes that its analyses must be considered as a
whole and that selecting portions of its analyses and of the factors considered
by it, without considering all analyses and factors, could create an incomplete
view of the evaluation process underlying its opinion. In performing its
analyses, PBS made numerous assumptions with respect to industry performance,
business and economic conditions and other matters, many of which are beyond
Pioneer's or Central's control. The analyses performed by PBS are not
necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such analyses. In
addition, analyses relating to the values of businesses do not purport to be
appraisals or to reflect the process by which businesses actually may be sold.
Acquisition Comparison Analysis. In performing this analysis, PBS reviewed
all thrift acquisition transactions in the Regional Area since 1990. There were
198 thrift acquisition transactions in the Regional Area announced since 1990
for which detailed financial information was available. The purpose of the
analysis was to obtain an evaluation range based on these Regional Area thrift
acquisition transactions. Median multiples of earnings and book value implied
by the comparable transactions were utilized in obtaining a range for the
acquisition value of Pioneer. In addition to reviewing recent Regional Area
thrift transactions, PBS performed separate comparable analyses for acquisitions
of thrifts which, like Pioneer, had an equity-to-asset ratio between 10.00% and
12.00%, had total assets between $50.0 and $100.0 million, had a return on
average equity ("ROAE") between 10.00% and 13.00%, were located in the state of
Kentucky, and thrift transactions effected in the Regional Area since January 1,
1995. In addition, median values for the 198 Regional Area acquisitions
expressed as multiples of both book value and earnings were 1.35 and 16.58,
respectively. The median multiples of book value and earnings for acquisitions
of Regional Area thrifts which, like Pioneer, had an equity-to-asset ratio
between 10.00% and 12.00% were 1.38 and 19.87, respectively. For acquisitions
of Regional Area thrifts with assets between $50.0 and $100.0 million the median
multiples were 1.39 and 16.67. For Regional Area acquisitions of thrifts with a
ROAE between 10.00% and 13.00%, the median multiples of book value and earnings
were 1.42 and 13.65, respectively. The median multiples of book value and
earnings for acquisitions of thrifts located in the state of Kentucky were 1.30
and 16.81, respectively. For thrift acquisitions in the Regional Area since
January 1, 1995, the median multiples of book value and earnings were 1.38 and
21.77, respectively.
In the proposed transaction, Pioneer shareholders will receive up to $98.50
in cash per Pioneer common share. The $98.50 per Pioneer common share
represents a multiple of Pioneer's adjusted September 30, 1997 book value and a
multiple of Pioneer's adjusted September 30, 1997 last twelve month earnings of
2.19X and 18.94X, respectively.
The market value of the proposed transaction's percentile ranking was
prepared and analyzed with respect to the above Regional Area comparable group.
Compared to all Regional Area thrift transactions, the acquisition value ranked
in the 97th percentile as a multiple of book value and in the 60th percentile as
a multiple of earnings. Compared to Regional Area thrift transactions where the
acquired institution had an equity-to-asset ratio between 10.00% and 12.00%, the
acquisition value ranked in the 100th percentile as a multiple of book value and
the 48th percentile as a multiple of earnings. For Regional Area thrift
acquisitions where the acquired institution had between $50.0 and $100.0 million
in assets, the acquisition value ranked in the 99th percentile as a multiple of
book value and the 56th percentile as a multiple of earnings. For Regional Area
thrift transactions where the acquired institution had a ROAE between 10.00% and
13.00%, the acquisition value ranked in the 97th percentile as a multiple of
book value and in the 76th percentile as a multiple of earnings. For thrift
transactions in the State of Kentucky, the acquisition value ranked in the 100th
percentile as a multiple of book value and in the 60th percentile as a multiple
of earnings. For Regional Area transactions effected since January 1, 1995, the
acquisition value ranked in the 98th percentile as a multiple of book value and
in the 27th percentile as a multiple of earnings.
11
<PAGE>
Adjusted Net Asset Value Analysis. PBS reviewed Pioneer's balance sheet
data to determine the amount of material adjustments required to the
shareholders' equity of Pioneer based on differences between the market value of
Pioneer's assets and their value reflected on Pioneer's financial statements.
PBS determined that one adjustment was warranted. PBS reflected a value of the
non-interest bearing demand deposits of approximately $666,000. The aggregate
adjusted net asset value of Pioneer was determined to be $10,035,000 or $48.19
per Pioneer common share.
Discounted Earnings Analysis. A dividend discount analysis was performed
by PBS pursuant to which a range of values of Pioneer was determined by adding
(i) the present value of estimated future dividend streams that Pioneer could
generate over a five-year period and (ii) the present value of the "terminal
value" of Pioneer's earnings at the end of the fifth year. The "terminal value"
of Pioneer's earnings at the end of the five-year period was determined by
applying a multiple of 16.58 times the projected terminal year's earnings. The
16.58 multiple represents the median price paid as a multiple of earnings for
all thrift transactions in the Regional Area since 1990.
Dividend streams and terminal values were discounted to present values
using a discount rate of 12%. This rate reflects assumptions regarding the
required rate of return of holders or buyers of Pioneer's common stock. The
aggregate value of Pioneer, determined by adding the present value of the total
cash flows, was $12,815,000 or $61.54 per share. In addition, using the five-
year projection as a base, a twenty-year projection was prepared assuming an
annual growth rate of 4.0%, and a return on assets of 1.45% for the entire
period beginning in year 2. Dividends were assumed to increase from 30.0% of
income in years one through five to 50% of income for years six through twenty.
This long-term projection resulted in a aggregate value of $8,082,000 or $38.81
per Pioneer common share.
Specific Acquisition Analysis. PBS valued Pioneer based on an acquisition
analysis assuming a "break-even" earnings scenario to an acquiror as to price,
current interest rates and amortization of the premium paid. Based on this
analysis, an acquiring institution would pay in aggregate $15,678,000, or $75.29
per share, assuming they were willing to accept no impact to their net income in
the initial year. This analysis was based on a funding cost of 6.5% adjusted
for taxes, amortization of the acquisition premium over 15 years and an adjusted
September 30, 1997 last twelve month earnings level of $1,083,000. This
analysis was repeated assuming a potential acquiror would attain non-interest
expense reductions of 10% in the transaction. Based on this analysis an
acquiring institution would pay in aggregate $16,653,000 or $79.97 per Pioneer
share.
The Fairness Opinion is directed only to the question of whether the
consideration to be received by Pioneer's shareholders under the Exchange
Agreement is fair and equitable from a financial perspective and does not
constitute a recommendation to any Pioneer shareholder to vote in favor of the
Exchange Agreement. No limitations were imposed on PBS regarding the scope of
its investigation or otherwise by Pioneer.
Based on the results of the various analyses described above, PBS concluded
that the consideration to be received by Pioneer's shareholders under the
Agreement is fair and equitable from a financial perspective to the shareholders
of Pioneer.
PBS and IBS will receive fees in the amount of $256,500 for all services
performed in connection with the sale of Pioneer and the rendering of the
Fairness Opinion. In addition, Pioneer has agreed to indemnify PBS, IBS and
their directors, officers and employees, from liability in connection with the
transaction, and to hold PBS and IBS harmless from any losses, actions, claims,
damages, expenses or liabilities related to any of PBS' or IBS' acts or
decisions made in good faith and in the best interest of Pioneer.
12
<PAGE>
Surrender of Pioneer Common Stock Certificates
To receive the cash to which a shareholder of Pioneer will be entitled as a
result of the Share Exchange, such holder must surrender his or her certificates
representing shares of Pioneer Common Stock to the Exchange Agent, together with
a duly executed transmittal form. Instructions regarding the transmission of
certificates, together with a transmittal form to be used for this purpose, will
be forwarded to Pioneer shareholders promptly following the Effective Time.
Until so surrendered, certificates representing shares of Pioneer Common Stock
immediately prior to the Effective Time will be deemed for all corporate
purposes to evidence the right to receive the cash which the holder thereof
would be entitled to receive upon surrender.
After the Effective Time, the Exchange Agent will mail or deliver to each
Pioneer shareholder of record at the Effective Time who has properly surrendered
his or her share certificates a check in the amount of cash to which he or she
is entitled. No interest will be paid or accrued in favor of any Pioneer
shareholder on the cash payable upon surrender of his or her share certificates.
All Pioneer shareholders are urged to surrender their share certificates at
the earliest possible date after receiving instructions from the Exchange Agent.
Shareholders should not forward certificates with the enclosed proxy.
Conditions to the Share Exchange
The obligation of each of Pioneer and Central to effect the Share Exchange
is subject to the satisfaction of various conditions. Such conditions include:
(a) approval of the Exchange Agreement by the holders of at least 66 2/3% of the
outstanding shares of Pioneer Common Stock; (b) receipt of approval by the
Federal Reserve and any other regulatory agency or other party having the
authority to review and approve the transactions contemplated by the Exchange
Agreement; (c) the absence of any action or proceeding challenging or seeking to
prohibit the Share Exchange; (d) the receipt by Pioneer of an opinion from PBS,
not subsequently withdrawn prior to vote of the shareholders of Pioneer Common
Stock on the Exchange Agreement, to the effect that the Share Exchange is fair
to Pioneer's shareholders from a financial point of view.
The obligation of Central to effect the Share Exchange is subject to the
satisfaction of various conditions. Such conditions include, in addition to
those set forth above: (a) performance of all covenants and agreements in all
material respects, and the continuing accuracy of all representations and
warranties in all material respects, by Pioneer and the Bank as set forth in the
Exchange Agreement; (b) the absence of any material adverse change in the
business, financial condition, assets, properties or operations of Pioneer or
the Bank since September 30, 1997; (c) receipt of an opinion of counsel to
Pioneer and the Bank in a form satisfactory to Central; (d) fulfillment of all
statutory requirements and receipt of all consents contemplated by the Exchange
Agreement; (e) absence of any liability under the environmental laws that would
have a material adverse effect on the financial condition of Pioneer and the
Bank taken as a whole; (f) resignations and releases of officers of Pioneer and
the Bank as designated by Central; (g) execution and delivery by Carl C. Norton
of Amendment No. 1 to his Employment Agreement and Janet W. Prewitt of a
Noncompetition Agreement; (h) receipt by Central of written confirmation from
the OTS to the effect that the Share Exchange shall not cause or constitute a
complete liquidation within the meaning of 12 C.F.R. Part 563b.3(f)(3); and (i)
receipt by Central of signed releases from Tom Norton, George Norton and their
children in substantially the form attached to the Exchange Agreement.
The obligation of Pioneer to consummate the Share Exchange is subject to
the satisfaction of various conditions. Such conditions include, in addition to
those set forth above: (a) performance of all covenants and agreements in all
material respects, and the continuing accuracy of all representations and
warranties in all material respects, by Central as set forth in the Exchange
Agreement; (b) receipt of an
13
<PAGE>
opinion of counsel to Central in a form satisfactory to Pioneer; and (c)
fulfillment of all statutory requirements and receipt of all consents
contemplated by the Exchange Agreement.
The regulatory approval necessary for consummation of the Share Exchange
has not yet been received. The Board of Directors of Pioneer is not aware of
any facts or circumstances which suggest that any of the conditions set forth
above will not be satisfied or waived.
Norton Releases
George Norton and Tom Norton, each a brother of Carl C. Norton, and certain
of their children and GT&C partnership, a partnership consisting of George
Norton, Tom Norton and Carl C. Norton (collectively, the "Nortons") were
beneficial owners of 6,022 shares of Pioneer Common Stock, in the aggregate,
which, on April 11, 1997, were sold to the ESOP at a purchase price of $41.50
per share. As a condition to the consummation of the Share Exchange, Central
has required that Pioneer and the Bank obtain releases from the Nortons in
exchange for a payment by Central to the Nortons in the aggregate amount of
$293,358 in cash (the "Cash Payment"). Carl C. Norton has waived any interest
he may have in the Cash Payment. The releases will not be delivered and the
Cash Payment will not be paid until the closing of the Share Exchange.
Termination of the Exchange Agreement
The Exchange Agreement provides that the Share Exchange may be terminated
and declared void and of no effect upon the occurrence of any one of the
following events: (i) Pioneer and Central may terminate the Exchange Agreement
if for any reason consummation of the transactions contemplated by the Exchange
Agreement is inadvisable in the opinions of both parties; (ii) either Pioneer or
Central may terminate, upon written notice to the other, if by September 30,
1998, any of the conditions to such party's obligations to effect the Share
Exchange, set forth in the Exchange Agreement, shall not have been satisfied,
or, if appropriate, waived; or (iii) either Pioneer or Central may terminate the
Exchange Agreement, upon written notice to the other, if, without fault of the
terminating party, the Share Exchange shall not have been consummated by
September 30, 1998.
In order to induce Central to enter into the Exchange Agreement, Pioneer,
the Bank and the directors of Pioneer have agreed that, except to the extent the
fulfillment of Pioneer Directors' fiduciary duties clearly requires such action,
Pioneer, the Bank and the directors of Pioneer shall and shall cause Pioneer's
and the Bank's executive officers, not, to solicit, authorize the solicitation
of, or enter into any discussions with any third party, (a) to purchase any
shares of the capital common stock or any option or warrant to purchase share of
the capital common stock or any option or warrant to purchase shares of the
capital common stock of Pioneer or the Bank or any securities convertible into
the capital common stock of Pioneer or the Bank or any other equity security of
either of them, (b) to make a tender or exchange offer for any shares of the
capital common stock of Pioneer or the Bank or any other equity security of
Pioneer or the Bank, (c) to purchase, lease or otherwise acquire all or a
substantial portion of the assets of Pioneer or the Bank, or (d) to merge,
consolidate or otherwise combine with Pioneer or the Bank. In the event that as
a result of a breach of this provision, at any time prior to the termination of
the Exchange Agreement, Pioneer's Board of Directors fails to recommend that
Pioneer's shareholders vote in favor of the Exchange Agreement or any of the
directors of Pioneer fail to vote their shares of Pioneer Common Stock in favor
of the Exchange Agreement, then Pioneer shall be obligated to pay Central a
termination fee of $500,000.00.
Effective Time of the Share Exchange
The Share Exchange shall become effective on the date and at the time that
the Articles of Share Exchange are filed with the Secretary of State of Kentucky
pursuant to the Kentucky Business Corporation
14
<PAGE>
Act, unless a later date and time is specified as the effective time in the
Articles of Share Exchange (the "Effective Time"). It is anticipated that the
Effective Time will be in July or August, 1998.
Regulatory Requirements
Central applied to the Federal Reserve for prior approval to acquire all of
Pioneer's Common Stock on June 9, 1998. This approval has not yet been
received.
Certain Federal Income Tax Consequences
The Exchange Agreement provides that each share of Pioneer Common Stock be
exchanged for cash in the amount of $98.50, to be paid by Central. Shareholders
of Pioneer whose stock is exchanged for cash under the Exchange Agreement will
be treated as selling their shares of Pioneer Common Stock for $98.50 per share
(or a lesser amount if the Exchange Consideration is adjusted). Shareholders
will recognize gain or loss, as the case may be, for federal income tax
purposes, equal to the difference between the amount realized (i.e., $98.50 per
share) in the transaction and the adjusted basis in each share of Pioneer Common
Stock exchanged. The gain or loss recognized by a shareholder will be a capital
gain or loss provided such shareholder's Pioneer Common Stock is a capital asset
in the hands of the shareholder at the Effective Time of the exchange of such
Pioneer Common Stock for cash.
Any shareholder of Pioneer who exercises his or her appraisal rights under
Kentucky law and receives cash from Pioneer rather than Central, in exchange for
his or her shares of Pioneer Common Stock will be treated as selling his or her
shares of Pioneer Common Stock and receiving the same income tax treatment as
described above.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY. SHAREHOLDERS OF PIONEER ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE SHARE EXCHANGE,
INCLUDING THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL AND OTHER TAX
LAWS.
Accounting Treatment
The Share Exchange will be accounted for as a purchase in accordance with
generally accepted accounting principles. Accordingly, from and after the
Effective Time, Pioneer's results of operations will be included in Central's
consolidated results of operations.
Dissenter's Rights
Any record holder of Pioneer Common Stock as of the Record Date has the
right to dissent from the Exchange Agreement pursuant to Section 271B.13-020 of
the Kentucky Revised Statutes and, upon consummation of the Share Exchange, the
right to be paid the "fair value" of his or her shares of Pioneer Common Stock
in cash by complying with the procedures set forth in Subtitle 13 of the
Kentucky Business Corporation Act. Generally, dissenters' rights are a
shareholder's sole remedy for objecting to the Exchange Agreement. A Pioneer
shareholder must dissent with respect to all of the shares of Pioneer Common
Stock beneficially owned by him or her. A copy of Subtitle 13 of the Kentucky
Business Corporation Act is attached to this Proxy Statement as Appendix B and
incorporated herein by reference. Set forth below is a summary of the
procedures relating to the exercise of dissenters' rights. This summary does
not purport to be a complete statement of Subtitle 13 of the Kentucky Business
Corporation Act and is qualified in its entirety by reference to Appendix B.
15
<PAGE>
To be entitled to exercise dissenters' rights, a Pioneer shareholder must
(i) deliver to Pioneer, before the vote on approval of the Exchange Agreement is
taken at the Special Meeting, a written notice of his or her intent to demand
payment for his or her shares if the Share Exchange is consummated, and (ii) not
vote his or her shares in favor of the proposal to approve the Exchange
Agreement at the Special Meeting. The written notice of intent must be given in
addition to and separate from any proxy or vote against approval of the Exchange
Agreement; neither a proxy nor a vote against approval of the Exchange Agreement
shall constitute such a written notice. If a Pioneer shareholder desires to
exercise dissenters' rights, it is recommended, although not required, that the
written notice be sent in advance of the Special Meeting by registered or
certified mail, return receipt requested, to Pioneer Financial Corporation, 25
East Hickman Street, Winchester, Kentucky 40391.
Pioneer shareholders electing to exercise their dissenters' rights under
Subtitle 13 of the Kentucky Business Corporation Act must not vote for approval
of the Exchange Agreement. A vote by a shareholder against approval of the
Exchange Agreement is not required in order for that shareholder to exercise
appraisal rights. However, if a shareholder returns a signed proxy but does not
specify a vote against approval of the Exchange Agreement or a direction to
abstain, the proxy, if not revoked, will be voted for approval of the Exchange
Agreement, which will have the effect of waiving that shareholder's dissenters'
rights.
Within 10 days after shareholder approval of the Exchange Agreement at the
Special Meeting (or any adjournment thereof), Pioneer will deliver a written
dissenters' notice to all Pioneer shareholders who satisfied the requirements of
(i) and (ii) above. Such dissenters' notice will: (a) state where demands for
payment must be sent and when and where certificates must be deposited; (b)
supply a form for demanding payment that includes the date of the first
announcement to news media or to Pioneer shareholders of the terms of the
Exchange Agreement and requires that any person asserting dissenters' rights
certify whether or not he or she acquired beneficial ownership of Pioneer Common
Shares prior to that date; (c) set a date by which Pioneer must receive a
payment demand, which may not be fewer than 30 nor more than 60 days after the
date Pioneer delivers notice to dissenting shareholders; and (d) be accompanied
by a copy of Subtitle 13 of the Kentucky Business Corporation Act.
Upon the Effective Time, or upon receipt of a payment demand, Pioneer will
pay each dissenter who demanded payment, certified acquisition of the beneficial
ownership of Pioneer Common Stock before the date described in (b) above, and
deposited his or her certificates in accordance with the terms of the
dissenters' notice, the amount Pioneer estimates to be the fair value of the
shares immediately before the Effective Time, plus accrued interest. The
payment will be accompanied by Pioneer's balance sheet as of the end of its 1997
fiscal year, together with statements of income and changes in shareholders'
equity for such year and the latest available interim financial statements, if
any. The payment will also be accompanied by a statement of Pioneer's estimate
of the fair value of Pioneer Common Shares, an explanation of how the interest
was calculated, and a statement of dissenters' rights to demand payment of his
or her estimate of fair value under Section 271B.13-280 of the Kentucky Revised
Statutes if dissatisfied with Pioneer's payment.
A dissenting Pioneer shareholder, within 30 days of Pioneer's payment, must
notify Pioneer in writing of his or her own estimate of the fair value of his or
her shares and amount of interest due, and demand payment for the difference
between his or her estimate of fair value and the amount of Pioneer's payment if
(a) the dissenter believes that the amount paid by Pioneer is less than the fair
value of Pioneer Common Stock or that the interest due was incorrectly
calculated, (b) Pioneer fails to make payment within 60 days after the date set
for demanding payment, or (c) Pioneer, having failed to consummate the Share
Exchange, does not return the deposited certificates within 60 days after the
date set for demanding payment.
16
<PAGE>
If, within 60 days from delivery to Pioneer of the shareholder's demand for
payment of his or her estimate of fair value, such demand for payment remains
unsettled, Pioneer will commence a proceeding and petition the Circuit Court of
Clark County to determine the fair value of Pioneer Common Stock and accrued
interest. Pioneer will make all dissenters (whether or not Kentucky residents),
whose demands remain unsettled, parties to the proceeding as in an action
against their shares and all such parties will be served with a copy of the
petition. Non-resident Pioneer shareholders may be served by registered or
certified mail or by publication as provided by law. The failure of Pioneer to
commence an action pursuant to this paragraph will not limit or affect the
rights of dissenting Pioneer shareholders to otherwise commence an action as
permitted by law.
Each dissenting Pioneer shareholder who is a party to the proceeding is
entitled to the amount, if any, by which the court finds the fair value of his
or her shares, plus interest, exceeds the amount paid by Pioneer.
In an appraisal proceeding, the Clark Circuit Court shall determine all
costs of the proceeding, including the reasonable compensation and expenses of
appraisers appointed by the court. The court shall assess the costs against
Pioneer, except that the court may assess costs against all or some of the
dissenters, in amounts the court finds equitable, to the extent the court finds
the dissenters acted arbitrarily, vexatiously or not in good faith in demanding
payment. The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable as follows: (i)
against Pioneer and in favor of any or all dissenters' if the court finds
Pioneer did not substantially comply with the statutory requirements set forth
in Sections 271B.13-200 through 271B.13-280 of the Kentucky Revised Statutes; or
(ii) against either Pioneer or a dissenter, in favor of any other party, if the
court finds that the party against whom the fees and expenses are assessed acted
arbitrarily, vexatiously or not in good faith with respect to the rights
provided by Subtitle 13 of the Kentucky Business Corporation Act. If the court
finds that the services of counsel for any dissenter were of substantial benefit
to other dissenters similarly situated, and that the fees for those services
should not be assessed against Pioneer, the court may award to these counsel
reasonable fees to be paid out of the amounts awarded the dissenters who were
benefitted.
ANY HOLDER OF PIONEER COMMON STOCK CONTEMPLATING THE EXERCISE OF
DISSENTERS' RIGHTS WITH RESPECT TO HIS OR HER PIONEER COMMON STOCK IS URGED TO
REVIEW CAREFULLY THE PROVISIONS OF APPENDIX B BECAUSE DISSENTERS' RIGHTS MAY BE
LOST IF THE REQUIREMENTS OF SUBTITLE 13 OF THE KENTUCKY BUSINESS CORPORATION ACT
ARE NOT FULLY AND PRECISELY SATISFIED.
PRICE RANGES OF PIONEER COMMON STOCK AND DIVIDENDS
No established public trading market exists for Pioneer Common Stock, and
no brokerage firm makes a market in Pioneer Common Stock. Trading in shares of
Pioneer Common Stock has historically occurred locally in isolated privately-
negotiated transactions. In most instances, Pioneer generally has no knowledge
of the purchase price or other terms of the sale. The following table sets
forth for each quarterly period indicated information regarding those
transactions as to which management of Pioneer has knowledge of the prices paid.
Because of a lack of a public trading market for shares of Pioneer Common Stock,
the prices indicated may not reflect the prices which would be paid for such
shares on such a market.
17
<PAGE>
<TABLE>
<CAPTION>
PIONEER COMMON STOCK
CASH DIVIDENDS
LOW HIGH DECLARED
------ ------ --------------
<S> <C> <C> <C>
1996
First Quarter $50.00 $50.00 $0.33
Second Quarter 40.00 41.00 0.35
Third Quarter 40.00 40.00 0.35
Fourth Quarter 39.00 39.00 0.35
1997
First Quarter 41.50 41.50 0.35
Second Quarter * * 0.40
Third Quarter 40.00 42.50 0.40
Fourth Quarter 41.50 43.00 0.40
1998
First Quarter * * 0.40
Second Quarter 42.50 44.00 0.46
</TABLE>
* No information available
On February 26, 1998, the most recent date for which price information is
known to management of Pioneer for transactions in Pioneer Common Stock prior to
announcement of the Share Exchange, 300 shares of Pioneer Common Stock were sold
at a price of $43.00 per share. Subsequent to the public announcement of the
Share Exchange, 250 shares of Pioneer Common Stock were sold at a price of
$90.00 per share.
Pioneer may not declare or pay cash dividends on any share of Pioneer
Common Stock if the effect thereon would cause the Bank's net worth to reduced
below (1) the amount required for the liquidation account established in
connection with its stock conversion, or (2) the net worth and capital
distribution requirements imposed by the OTS and FDIC. See Note 8 of Notes to
---
Consolidated Financial Statement.
Pioneer agreed with Central in the Exchange Agreement that no further
dividends would be paid to holders of Pioneer Common Stock. Therefore, Pioneer
will not be paying its regular quarterly dividend to holders of Pioneer Common
Stock in June 1998 or thereafter, unless the Exchange Agreement is terminated.
18
<PAGE>
SELECTED FINANCIAL DATA OF PIONEER
The following selected financial data have been derived by Pioneer from its
financial statements for the five years ended September 30, 1997, and the six
months ended March 31, 1998 and 1997. The consolidated financial statements of
Pioneer as of September 30, 1997 and 1996 and for each of the three years in the
period ended September 30, 1997, and the report of Miller, Mayer, Sullivan &
Stevens, LLP, independent certified accountants thereon, are included elsewhere
in this Proxy Statement. In addition, the unaudited consolidated financial
statements of Pioneer for the six months ended March 31, 1998 and 1997, are
included elsewhere in this Proxy Statement. The selected financial data should
be read in conjunction with the consolidated financial statements and related
notes thereto included elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
Six Months Ended
March 31* Years Ended September 30*
---------------- --------------------------------------
1998 1997 1997 1996 1995 1994 1993
------- ------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement
Data:
Total Interest Income.... 1,545 1,560 5,393 5,659 5,656 5,210 5,819
Net Interest Income...... 1,292 1,423 2,692 2,797 3,037 2,918 3,301
Provision for loan 0 0 0 57 19 5 178
losses..................
Net income............... 832 548 1,067 707 1,078 1,032 1,271
Per Share Data:
Weighted average 203 208 205 256 272 272 272
common shares
outstanding.............
Book value per 47.04 41.48 43.08 39.59 38.68 35.99 33.35
common share............
Cash dividends declared .86 .75 1.57 1.38 1.29 1.15 .95
per common share........
Net income per 4.10 2.64 5.19 2.76 3.95 3.79 4.67
common share............
Balance Sheet Data:
Total assets............. 72,239 75,092 74,825 74,401 78,836 79,648 78,432
Total shareholders' 9,551 8,637 8,738 8,244 10,540 9,806 9,087
equity..................
</TABLE>
* In thousands, except per share data.
19
<PAGE>
PRINCIPAL SHAREHOLDERS OF PIONEER
Except as otherwise indicated, as of the close of business on
June 30, 1998, each of the following shareholders was known by Pioneer to
be the beneficial owner of more than five percent (5%) of Pioneer Common
Stock:
Amount and Nature of Percent
Name and Address Beneficial Ownership/(1)(2)/ of Class
- ---------------- ---------------------------- --------
Lee Ricketts 10,736(3) 5.16%
c/o Corner Drug Store
26 East Broadway
Winchester, Kentucky
All Executive Officers and
Directors as a Group
(8 persons) 23,423(4) 11.24%
- --------------------------
(1) The number of shares beneficially owned by each of the persons listed above
has been determined in accordance with applicable rules and regulations of
the Securities and Exchange Commission. For purposes of this Proxy
Statement, beneficial ownership of shares includes shares as to which a
person, directly or indirectly, through any contract, arrangement,
understanding, relationship or otherwise, has or shares voting power and/or
investment power. A person may also be considered to be the beneficial
owner of a security if he or she has the right to acquire beneficial
ownership of a security within 60 days, including but not limited to any
right to acquire ownership through the exercise of any option, warrant or
right or through the conversion of a security. Except as otherwise
indicated, the shareholder identified above has sole voting and investment
power with respect to the shares beneficially owned by him.
(2) Information with respect to beneficial ownership has been obtained from
Pioneer's shareholder records and from information provided by the above-
listed shareholder and executive officers and directors as a group.
(3) Mr. Ricketts holds 1,000 of these shares jointly with his wife, Lois
Ricketts. 4,842 of these shares are held in the name of Home Convalescent
Aid, Inc. of which Mr. Ricketts is an owner. 3,125 of these shares are held
in the name of Drug World d/b/a Corner Drug of which Mr. Ricketts is the
sole owner.
(4) In addition to these persons, the Bank has five advisory directors who own
20,190 shares of Pioneer Common Stock, in the aggregate, or approximately
9.69% of Pioneer Common Stock.
Pioneer's Board of Directors, who also encompass all of the executive
officers, have agreed in the Exchange Agreement to vote the shares owned by them
in favor of the Share Exchange.
BUSINESS OF PIONEER
General
Pioneer. Pioneer is a corporation organized under the laws of Kentucky and
is a unitary savings and loan holding company under the Home Owners Loan Act.
It currently owns all of the issued and outstanding shares of the Bank, a
federally chartered stock savings bank, headquartered in Winchester, Kentucky.
20
<PAGE>
As of March 31, 1998, Pioneer reported assets of approximately $72.2
million, deposits of approximately $61.5 million, and shareholders' equity of
approximately $9.6 million. Pioneer's office is located at 25 East Hickman
Street, Winchester, Kentucky 40391, and its telephone number there is (606) 744-
3972.
The Bank. The Bank conducts its business through two offices. The Bank's
offices are located at 25 East Hickman Street and the corner of the Bypass
(Kentucky Highway 1958) and Fulton Road, both located in Winchester, Kentucky.
Competition
The Bank faces strong competition in the attraction of savings deposits and
in the origination of real estate loans. Its most direct competition for
savings deposits has historically come from commercial banks and other thrifts
located in its primary lending area and Fayette County, Kentucky. The Bank
faces additional significant competition for investors' funds from offerors of
short-term money market securities and other corporate and government
securities. The Bank's competition for real estate loans comes primarily from
other thrifts, commercial banks and mortgage banking companies.
The Bank competes for loans principally through the interest rates and loan
fees it charges and the efficiency and quality of the services its provides
borrowers. It competes for savings by offering depositors a wide variety of
savings accounts, checking accounts, convenient office locations, convenient
hours of operation, tax-deferred retirement accounts, and other miscellaneous
services.
The Bank considers Clark County, Kentucky, to be its primary market area
for savings and mortgage loans. As of September 30, 1997, there were eight
other financial institutions located in this county; one of the eight is a
thrift institution. The Bank competes with much larger financial institutions
in Clark County and nearby Lexington, Kentucky. These competitors offer better
loan rates and broader customer services than the Bank from time to time due to
their size, financial resources and competitive strategy.
The Deregulation and Garn Acts and regulations implementing these Acts
significantly expanded the range of services which savings and loan associations
can offer to the public. These Acts, rate deregulation and high interest rates
in the early 1980's caused a dramatic increase in competition (e.g. money market
mutual funds, Treasury securities, municipal bonds, etc.) for savings dollars
and have increased competition with commercial banks in regard to loans,
checking accounts and other types of financial services. In addition, large
conglomerates and investment banking firms entered the market for financial
services during the past decade. The savings public became increasingly
sophisticated. Thus, the Bank encountered, and may continue to encounter,
increased competition in the financial services offered and Pioneer will have to
be innovative and knowledgeable about its market, as well as exert effective
controls over its costs, in order to remain competitive.
Subsidiaries
The Bank has one service corporation subsidiary, Pioneer Service
Corporation ("PSC"). In August, 1978, the Bank formed PSC and purchased all of
its stock for $16,000. PSC was formed by the Bank for the purpose of acquiring
stock in Intrieve, Incorporated. Intrieve is a non-profit corporation based in
Cincinnati, Ohio, which provides on-line computer processing and inquiry service
to the Bank and other savings and loan institutions in the region. To date, PSC
has conducted no business activities.
21
<PAGE>
Personnel
As of June 30, 1998, the Bank had 21 full-time employees and 6 part-time
employees. The employees are not represented by a collective bargaining unit.
The Bank believes it relationship with its employees is good.
MANAGEMENT OF PIONEER
Directors and Executive Officers
The following table contains certain information as of June 30, 1998,
with respect to Pioneer directors and executive officers. The current directors
of Pioneer are directors of the Bank. Each director normally holds office for a
term of three years and until his or her successor is elected and qualified.
All of the directors of Pioneer have served in such capacity for at least three
years. Executive officers serve at the discretion of the Board of Directors.
Following the Share Exchange and the merger of the Bank with and into Central
Bank, at or shortly following the Effective Time, Pioneer will become an
inactive corporation.
<TABLE>
<CAPTION>
Pioneer Common Stock
--------------------
Amount and Nature
of Beneficial Percent
Ownership/(1)/ of Class
----------------- --------
Name and Principal
Occupation or Employment
- ------------------------
<S> <C> <C>
Directors:
William M. Cress 1,050 *
Executive Vice President
Hinkle Contracting Corporation
Carl C. Norton 2,644(2) 1.27%
President and Secretary
of Pioneer
Janet W. Prewitt 7,350(3) 3.53%
Attorney, White, McCann
& Stewart; Chairman of
the Board and Asst. Secretary
of Pioneer; Chairman of the
Board of the Bank
Robert G. Strode 6,735(4) 3.23%
Retired Vice President
Ag-Gro Fertilizer Company
Thomas D. Muncie 2,850(5) 1.37%
President, Muncie Buick-
GMC Truck, Inc.
</TABLE>
22
<PAGE>
<TABLE>
<S> <C> <C>
Andrew James Ryan 70(6) *
President, Andy Ryan Pontiac
& Nissan, Inc.
Nancy M. Lawwill 2,100(7) 1.00%
Vice President, Secretary
& Treasurer of the Bank;
Vice President and Treasurer
of Pioneer
Wayne M. Martin 624(8) *
President and General Manager
WKYT-TV
All directors and executive 23,423 11.24%
officers as a group
(8 persons)
</TABLE>
_______________
* Less than 1%.
(1) For purposes of this Proxy Statement, beneficial ownership of shares
includes shares as to which a person, directly or indirectly, through any
contract, arrangement, understanding, relationship or otherwise, has or
shares voting power and/or investment power. Except as otherwise
indicated, each of the persons identified above has sole voting and
investment power with respect to the shares beneficially owned by him or
her.
(2) Mr. Norton holds these shares jointly with his wife Leslie F. Norton.
(3) Ms. Prewitt has the power to vote 2,000 of these shares pursuant to a Power
of Attorney given to her by Virginia C. White, Ms. Prewitt's mother.
(4) Mr. Strode holds 2,050 of these shares jointly with his wife, Nancy C.
Strode. Mr. Strode has the power to vote 1,200 of these shares as trustee,
along with the other trustee, of the Strode Trust. Mr. Strode has the
power to vote 185 of these shares as trustee of the E. Stratton Strode
Trust. Mr. Strode has the power to vote 3,300 of these shares as executor
of the Evelyn G. Strode Estate.
(5) 2,350 of these shares are held in the name of Patricia Summers Muncie, Mr.
Muncie's wife.
(6) Mr. Ryan holds these shares as custodian for his children.
(7) Ms. Lawwill holds 1,502 of these shares jointly with her husband, James W.
Lawwill. Mr. Lawwill holds 548 of these shares in the James W. Lawwill
IRA. Ms. Lawwill and Mr. Lawwill hold 50 of these shares as custodian for
Rebecca C. Prater.
(8) Mr. Martin holds 24 of these shares as custodian for his children.
PIONEER'S 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 the shareholders on December 20, 1994, the Bank became
a wholly-owned subsidiary of Pioneer. The purpose of the discussion that
follows is to provide insight into the consolidated financial condition and
results of operation of Pioneer and its subsidiary, the Bank.
23
<PAGE>
The primary business of Pioneer is the operation of the Bank. The assets
of Pioneer consist of all of the outstanding capital stock of the Bank, and a
note receivable from the 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 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 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 arc 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.
24
<PAGE>
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"). 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 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 an 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 200-basis point immediate and sustained increase in interest rates. It is
estimated that the 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.
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 (ii) the
relative amounts of its interest-bearing 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.
25
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCES AND YIELD/RATES
(in thousands of dollars)
Year Ended September 30
1997 1996 1995
--------------------------------- --------------------------------- ---------------------------------
Average Average Average Average Average Average
Balance/1/ Interest Yield/Rate Balance/1/ Interest Yield/Rate Balance/1/ Interest Yield/Rate
---------- -------- ----------- ---------- -------- ----------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning Assets:
Loans/2/ $35,059 $3.111 8.87% $33,358 $3,057 9.16% $31,622 $2,813 8.90%
Investment securities 2,588 117 4.52 5,352 384 7.17 7,872 474 6.02
Mortgage-backed 25,856 1,704 6.59 30,064 1,783 5.93 31,280 2,019 6.45
securities
Other investments 8,763 461 5.26 8,333 435 5.22 6,368 350 5.50
------- ------ ------ ------- ------ ------ ------- ------ ------
Total Interest 72,266 5,393 7.46 77,107 5,659 7.34 77,142 5,656 7.33
earning assets ------ ------ ------
Non-interest earning 2,715 2,704 2,275
assets ------- ------- -------
Total assets $74,981 $79,811 $79,417
======= ======= =======
Interest-bearing
Liabilities:
Savings deposits $65,241 2,652 4.06 $68,118 2,816 4.13 $67,794 2,569 3.79
FHLB advances 672 49 7.29 719 46 6.40 744 50 6.72
------- ------ ------- ------ ------- ------
Total 65,913 2,701 4.10 68,837 2,862 4.16 68,538 2,619 3.82
interest-bearing liabilities ------ ------ ------
Non-interest bearing 769 825 630
liabilities
Shareholders' equity 8,299 10,149 10,249
------- ------- -------
Total $74,981 $79,811 $79,417
liabilities and ======= ======= =======
shareholders'
equity
Net interest income $2,692 $2,797 $3,037
====== ====== ======
Interest Rate Spread/3/ 3.36% 3.18% 3.51%
====== ====== ======
Net Interest Margin/4/ 3.72% 3.63% 3.94%
====== ====== ======
Ratio of average 109.64% 112.01% 112.56%
interest-bearing assets ====== ====== ======
to average
interest-bearing
liabilities
</TABLE>
__________________
/1/Average balances are based on month-end balances.
/2/Includes loans held for sale.
/3/Represents the difference between the average yield on interest-earning
assets and the average cost of interest-bearing liabilities.
/4/Represents net interest income as a percentage of the average balance of
interest-earning assets for the same period.
26
<PAGE>
Comparison of the Results of Operations for the Six Months Ended March 31, 1998
and 1997
Net Income. Net income increased by $284,000 or 51.7% for the six months
ended March 31, 1998 as compared to the same period in 1997. The net increase
of $284,000 was due to an increase of $581,000 noninterest income offset by a
decrease of $132,000 in net interest income, an increase in non-interest expense
of $18,000 plus an increase in income tax expense of $147,000.
Interest Income. Interest income decreased $179,000 or 6.5% for the six
months ended March 31, 1998 compared to the same period in 1997. Interest
income was $2.6 million or 7.54% of average interest-earning assets for the six
months ended March 31, 1998 as compared to $2.8 million or 7.71% of interest-
earning assets for the six months ended March 31, 1997. The decrease in
interest income of $179,000 was due to a decrease of $3.1 million in the average
balance of interest-earning assets plus a decrease of 17 basis points on the
average rate earned on interest-earning assets for the six months ended March
31, 1998 compared to the same period in 1997.
Interest Expense. Interest expense decreased $48,000 or 3.6% for the six
months ended March 31, 1998 compared to the same period in 1997. Interest
expense was $1.3 million or 4.20% of average deposits and FHLB advances for the
six month period ended March 31, 1998 as compared to $1.3 million or 4.07% of
average deposit and FHLB advance for the six month period ended March 31, 1997.
The decrease of $48,000 was due to a $4.3 million decrease in the average
balance of deposits during the six month period ended March 31, 1998 compared to
the same period in 1997 offset by an increase of 13 basis points on the average
rate paid on deposits.
Provision for Loan Losses. There was no provision for loan losses for the
six month periods ended March 31, 1998 and 1997. Management considers many
factors in determining the necessary level of the allowance for loan losses,
including an analysis of specific loans in the portfolio, estimated value of the
underlying collateral, assessment of general trends in the real estate market,
delinquency trends, prospective economic and regulatory conditions, inherent
loss in the loan portfolio, and the relationship of the allowance for loan
losses to outstanding loans. There can be no assurance that management will not
decide to increase the allowance for loan losses or that regulators, when
reviewing the Bank's loan portfolio in the future, will not request the Bank to
increase such allowance, either of which could adversely affect the Bank's
earnings. Further, there can be no assurance that the Bank's actual loan losses
will not exceed its allowance for loan losses.
Non-Interest Income. Non-interest income amounted to $823,000 and $242,000
for the six months ended March 31, 1998 and 1997, respectively. For the six
month period ended March 31, 1998. the Bank recognized a gain of $568,000 from
the sale of its branch office in Stanton, Kentucky, which is included in non-
interest income.
Non-Interest Expense. Non-interest expense increased $18,000 to $851,000
for the six month period ended March 3l, 1998 compared to $833,000 for the same
period in 1997. Non-interest expense was 2.3% of average assets for the six
month period ended March 31, 1998 and 2.2% of average assets for the six month
period ended March 31, 1997. The increase of $18,000 was primarily due to an
increase of $45,000 in legal expenses offset by a decrease of $12,000 in
occupancy expenses and a decrease of $16,000 in federal and other insurance
premiums. The increase of $45,000 in legal expenses was primarily due to
professional services rendered pertaining to possible acquisition. The decrease
of $12,000 in occupancy expenses was due to expenses related to the Stanton
branch included in operations for the six months ended March 31, 1997 which were
not in operations for the six
27
<PAGE>
months ended March 31, 1998. The decrease of $16,000 in federal insurance
premiums was the result of the 1996 recapitalization of the SAIF insurance fund,
which resulted in lower assessments on the Bank's deposit base.
Income Tax Expense. The provision for income tax expense amounted to
$431,000 and $283,000 for the six month period ended March 3l, 1998 and 1997,
respectively, which as a percentage of income before income tax expense amounts
to 34.1% for 1998 and 1997.
Comparison of Results of Operations for the Years Ended September 30, 1997 and
1996
Net Income. Pioneer'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 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.
28
<PAGE>
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 Transfer
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.
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
29
<PAGE>
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 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.
Comparison of Financial Condition at September 30, 1997 and 1996
Pioneer'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
30
<PAGE>
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,
Shareholders' 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, Pioneer made a loan
of $250,000 to the ESOP Trust for the purpose of acquiring outstanding stock of
Pioneer. The ESOP Trust used the proceeds of the loan to acquire 6,022 shares
of Pioneer'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.
Non-Performing Assets
The following table sets forth information with respect to the Bank's non-
performing assets at the dates indicated. No loans were recorded as
restructured loans within the meaning of SFAS No. 15 at the dates indicated.
<TABLE>
<CAPTION>
March 31, September 30,
1998 1997
---------- --------------
(amounts in thousands)
Loans accounted for on a non-accrual basis:/1/
Real Estate:
<S> <C> <C>
Residential............................... $ 0 $ 3
Commercial................................ 0 0
----- -----
Consumer....................................... $ 0 $ 3
----- -----
Accruing loans which are contractually past due 90
days or more:
Real Estate:
Residential............................... 74 149
Commercial................................ 65 0
Consumer....................................... 0 0
</TABLE>
31
<PAGE>
<TABLE>
<S> <C> <C>
----- -----
Total..................................... 139 149
===== =====
Total of loans accounted for as non-accrual or as
accruing past due 90 days or more..................
$ 139 $ 155
===== =====
Percentage of total loans........................... .42% .45%
===== =====
Other non-performing assets/2/ $ 0 $ 0
===== =====
</TABLE>
/1/ Non-accrual status denotes loans which management believes may have
defined weaknesses whereby accrued interest is inadequately protected by
the current net worth and paying capacity of the obligor, or of the
collateral pledged.
/2/ Loans more than 90 days past due will continue to accrue interest when
there is not well defined weakness in the loan regarding net worth and
paying capacity of the obligor or of the collateral pledged which would
cause management to believe that interest accrued will be uncollectible.
At March 31, 1998, the Bank did not have any loans in non-accrual status.
Accordingly, all income earned for the six months ended March 31, 1998 on the
loans in the table above has been included in income.
At March 31, 1998, there were no loans identified by management which were
not reflected in the preceding table, but as to which known information about
possible credit problems of borrowers caused management to have serious doubts
as to the ability of the borrowers to comply with present loan repayment terms.
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.
Mortgage loans of $8.1 million were originated for sale during the six
month period ended March 31, 1998; the Bank retained the servicing for all loans
sold.
The portfolio of loans owned by others, but serviced by the Bank increased
4.6% to $54.6 million at March 31, 1998 compared to $52.2 million at September
30, 1997. All of the loans serviced by the Bank, but owned by others, were
originated by the Bank.
Liquidity and Capital Resources
Pioneer'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 Pioneer.
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.
32
<PAGE>
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 at September 30, 1997 was 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
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.
The Bank's principal sources of funds for operations are deposits from its
primary market area, principal and interest payments on loans, and proceeds from
maturing investment securities. The principal uses of funds by the Bank include
the origination of mortgage and consumer loans and the purchase of investment
securities.
The Bank is required by current OTS regulations to maintain specified
liquid assets of at least 4% of its net withdrawable accounts plus short-term
borrowings. Short-term liquid assets (those maturing in one year or less) may
not be less than 1% of the Bank's liquidity base. At March 31, 1998, the Bank's
liquidity was 21.34%. Management believes that the liquidity levels maintained
are adequate to meet potential deposit outflows, loan demand, and normal
operations.
The Bank must satisfy two capital standards, as set by the OTS. These
standards include a ratio of core capital to adjusted total assets of 4.0%, and
a combination of core and "supplementary" capital equal to 8.0% of risk-weighted
assets. At March 31, 1998, the Bank's capital was in excess of these
requirements.
At March 31, 1998, the Bank had outstanding commitments to originate loans
totaling $1.6 million, excluding $4.3 million in approved, but unused lines of
credit. Of the loan commitments, the Bank anticipates selling $1.4 million of
the loans approved, but not closed. Management believes that the Bank's sources
of funds are sufficient to fund all of its outstanding commitments.
Certificates of deposit, which are scheduled to mature in one year or less from
March 31, 1998, totaled $27.2 million. Management believes that a significant
percentage of such deposits will remain with the Bank.
33
<PAGE>
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. Pioneer 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 Pioneer.
Reporting of Comprehensive Income. In June 1997, the Financial Accounting
Standards Board issued Statements of Financial Accounting Standards No. 130,
Reporting of Comprehensive
34
<PAGE>
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.
Pioneer does not anticipate that adoption of SFAS 130 will have a material
effect on Pioneer.
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
shareholders. 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. Pioneer does not anticipate
that the adoption of SFAS 131 will have a material effect on Pioneer.
ADJOURNMENT OF THE SPECIAL MEETING
Approval of the Exchange Agreement requires the affirmative vote of 66 2/3%
of the total shares outstanding and entitled to vote at the Special Meeting. In
the event there is an insufficient number of shares present in person or by
proxy at the Special Meeting to approve and adopt the Exchange Agreement, the
Board of Directors intends to adjourn the Special Meeting to a later date. The
place and date to which the Special Meeting would be adjourned would be
announced at the Special Meeting, but, in order to avoid the necessity for
setting a new record date or providing formal written notice of the adjournment,
would in no event be more than 30 days after the date of the Special Meeting.
The effect of any such adjournment would be to permit Pioneer to solicit
additional proxies for approval of the Exchange Agreement. While such an
adjournment would not invalidate any proxies previously filed, including those
filed by shareholders voting against the subject proposal, it would give Pioneer
the opportunity to solicit additional proxies in favor of the Exchange
Agreement. As a result, such adjournment could be advantageous to shareholders
who favor the proposed Share Exchange to the potential disadvantage of those who
would disfavor such proposal.
The Board of Directors recommends a vote "FOR" the approval of the
adjournment under the circumstances described herein. Approval of the
adjournment requires the affirmative vote of the holders of a majority of the
votes cast in person or by proxy at the Special Meeting.
35
<PAGE>
LEGAL PROCEEDINGS
Although the Bank is, from time to time, involved in various legal
proceedings in the normal course of business, there are no material pending
legal proceedings to which the Bank or Pioneer is a party, or to which any of
their property is subject.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The annual financial statements of Pioneer accompanying this Proxy
Statement have been audited by Miller, Mayer, Sullivan & Stevens, LLP,
independent certified public accountants, for the periods indicated in their
report thereon which is included herein. Miller, Mayer, Sullivan & Stevens LLP
has served as Pioneer's independent certified public accountants since 1988. In
the event the Share Exchange is not consummated, it is expected that Miller,
Mayer, Sullivan & Stevens, LLP will be asked to serve as Pioneer's independent
certified public accountants for fiscal year 1998.
It is anticipated that representatives of Miller, Mayer, Sullivan & Stevens
LLP will be present at the Special Meeting and will have the opportunity to make
a statement if they desire to do so and will be available to respond to
appropriate questions.
MISCELLANEOUS
The Board of Directors of Pioneer does not anticipate any other business to
come before the Special Meeting. If other matters incidental to the proposed
Share Exchange should come before the Special Meeting or any adjournments
thereof, a vote may be cast pursuant to the accompanying proxy in accordance
with the judgment of the person or persons voting the proxy. The Board of
Directors urges each shareholder who does not intend to be present and to vote
at the Special Meeting to complete, sign and return the enclosed proxy as
promptly as possible.
BY ORDER OF THE BOARD OF DIRECTORS
CARL C. NORTON, SECRETARY
36
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
I N D E X T O F I N A N C I A L S T A T E M E N T S
--------------------
Page
Independent Auditors' Report.............................................. F-1
Consolidated Balance Sheets as of September 30, 1997 and 1996............. F-2
Consolidated Statements of Income for the Years Ended September 30, 1997,
1996, and 1995....................................................... F-3
Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 1997, 1996, and 1995................................... F-4
Consolidated Statements of Cash Flows for the Years Ended September 30,
1997, 1996, and 1995................................................. F-5
Notes to Consolidated Financial Statements................................ F-7
Consolidated Balance Sheets as of March 31, 1998 (unaudited) and
September 30, 1997................................................... F-31
Consolidated Statements of Income (unaudited) for the Three and Six
Months Ended March 31, 1998 and March 31, 1997....................... F-32
Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended
March 31, 1998 and March 31, 1997.................................... F-33
Notes to Unaudited Consolidated Financial Statements...................... F-34
37
<PAGE>
MILLER, MAYER, SULLIVAN & STEVENS LLP
CERTIFIED PUBLIC ACCOUNTANTS
"INNOVATORS OF SOLUTION TECHNOLOGY"(SM)
INDEPENDENT AUDITORS' REPORT
Board of Directors
Pioneer Financial Corporation
Winchester, Kentucky
We have audited the accompanying consolidated balance sheets of Pioneer
Financial Corporation and Subsidiary as of September 30, 1997 and 1996 and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the years in the three year period ended September 30, 1997. These
consolidated financial statements are the responsibility of the management of
Pioneer Financial Corporation (Company). Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pioneer Financial
Corporation and Subsidiary as of September 30, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three year
period ended September 30, 1997 in conformity with generally accepted accounting
principles.
Miller, Mayer, Sullivan & Stevens LLP
Lexington, Kentucky
October 31, 1997
(606) 223-3095
2365 HARRODSBURG ROAD LEXINGTON, KENTUCKY 40504-3399 FAX: (606) 223-2143
F-1
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and 1996
---------------
<TABLE>
<CAPTION>
ASSETS 1997 1996
----------- -----------
<S> <C> <C>
Cash and due from banks $ 1,188,974 $ 732,573
Interest bearing deposits 1,138,456 1,529,881
Federal funds sold 7,151,000 3,211,000
Certificates of deposit 194,000
Securities available-for-sale, at fair value 5,949,386 7,601,611
Securities held-to-maturity, fair value of 22,621,995 23,972,497
$22,608,182 and $23,520,598 for 1997 and
1996, respectively
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 208,233 208,233
authorized; 208,233 shares, issued and outstanding
for 1997 and 1996, respectively
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) (224,922)
stock
Net unrealized appreciation on securities 102 25,801
available-for-sale, net of tax of $53 in 1997
and $13,292 in 1996
----------- -----------
Total stockholders' equity 8,738,198 8,244,635
----------- -----------
Total liabilities and stockholders' equity $74,825,464 $74,401,137
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
for the years ended September 30, 1997, 1996, and 1995
---------------
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Interest on loans $3,110,644 $3,057,393 $2,812,782
Interest and dividends on securities 1,821,596 2,167,280 2,493,348
Other interest income 460,739 434,493 349,560
---------- ---------- ----------
Total interest income 5,392,979 5,659,166 5,655,690
---------- ---------- ----------
Interest expense:
Interest on deposits 2,652,734 2,815,403 2,569,375
Interest on borrowings 48,512 46,360 49,526
---------- ---------- ----------
Total interest expense 2,701,246 2,861,763 2,618,901
---------- ---------- ----------
Net interest income 2,691,733 2,797,403 3,036,789
Provision for loan losses 57,433 19,000
---------- ---------- ----------
Net interest income after provision
for loan losses 2,691,733 2,739,970 3,017,789
---------- ---------- ----------
Non-interest income:
Loan and other service fees, net 381,132 409,519 394,470
Gain (loss) on sale of securities 33,310 1,822
Gain on sale of loans 108,494 2,698 7,546
---------- ---------- ----------
489,626 445,527 403,838
---------- ---------- ----------
Non-interest expense:
Compensation and benefits 892,855 863,508 848,817
Occupancy expenses, net 172,074 190,194 203,789
Office supplies and expenses 97,386 110,441 103,926
Federal and other insurance premiums 94,633 616,705 172,036
Legal expenses 7,634 3,827 104,953
Data processing expenses 143,000 136,616 141,176
State franchise tax 65,545 64,790 64,409
Other operating expenses 98,907 106,117 136,875
---------- ---------- ----------
1,572,034 2,092,198 1,775,981
---------- ---------- ----------
Income before income tax expense 1,609,325 1,093,299 1,645,646
Income tax expense 542,380 386,317 568,143
---------- ---------- ----------
Net income $1,066,945 $ 706,982 $1,077,503
========== ========== ==========
Earnings per share $ 5.19 $ 2.76 $ 3.95
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended September 30, 1997, 1996, and 1995
---------------
<TABLE>
<CAPTION>
Common Additional Retained Net Unrealized Unallocated Total
Stock Paid-In Earnings Appreciation on Employee Stockholders'
Capital Securities Stock Equity
Available-for-Sale Ownership
Plan Stock
---------- ------------ ------------ ------------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1994 $272,477 $2,351,858 $ 7,181,168 $ 9,805,503
Net Income 1,077,503 1,077,503
Declaration of dividend (351,495) (351,495)
Cumulative effect October 1, 1994 of 64,189 64,189
change in accounting for securities
Change in net unrealized gain on (55,922) (55,922)
securities available-for-sale, net of
deferred income taxes
---------- ------------ ------------ ------------------ ------------ --------------
Balance, September 30, 1995 272,477 2,351,858 7,907,176 8,267 10,539,778
Net Income 706,982 706,982
Declaration of dividend (353,533) (353,533)
Stock repurchase (64,244 shares) (64,244) (554,426) (2,047,456) (2,666,126)
Change in net unrealized gain on 17,534 17,534
securities available-for-sale, net of
deferred income taxes
---------- ------------ ------------ ------------------ ------------ --------------
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 25,699
securities available-for-sale, net of
deferred income taxes
---------- ------------ ------------ ------------------ ------------ --------------
Balance, September 30, 1997 $208,233 $1,797,432 $ 6,957,353 $ 102 $(224,922) $ 8,738,198
========== ============ ============ ================== ============ ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended September 30, 1997, 1996, and 1995
---------------
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
Operating activities
Net income $ 1,066,945 $ 706,982 $ 1,077,503
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 57,433 19,000
Amortization of investment premium
(discount) 77,724 168,615 108,179
Amortization of organizational cost 13,507 13,507 12,382
Provision for depreciation 48,522 53,365 79,900
ESOP benefit expense 24,991
Amortization of loan fees (95,694) (92,303) (48,617)
FHLB stock dividend (46,500) (27,400) (36,900)
Securities (gain)loss, net (33,310) (1,822)
Loans originated for sale (10,554,724) (10,162,642) (7,457,985)
Proceeds from loans held for sale 10,663,218 10,165,340 7,465,531
Gain on sale of loans (108,494) (2,698) (7,546)
Change in:
Prepaid expense (122,060) 46,028 (57,523)
Interest receivable 79,444 139,885 (58,475)
Interest payable 12,497 15,914 5,886
Accrued liabilities (376,592) 627,438 55,866
Income taxes payable 137,381 (118,385) 11,364
------------ ------------ -----------
Net cash provided by operating
activities 820,165 1,557,769 1,166,743
------------ ------------ -----------
Investing activities
Net (increase) decrease in loans 699,494 (2,998,846) (2,800,413)
Principal repayments, mortgage-backed
securities 5,288,984 6,486,307 3,995,015
Purchase of premises and equipment (284,799) (51,941) (18,494)
Redemption of FHLB stock 55,200 91,800
Proceeds from sale of securities
available-for-sale 4,488,932
Purchase of securities
available-for-sale (3,614,506) (5,679,519)
Purchase of securities
held-to-maturity (8,991,996) (10,484,665) (8,074,208)
Maturity of securities
held-to-maturity 6,635,575 14,578,264 7,548,430
Maturity of certificates of deposit 194,000 94,000
------------ ------------ -----------
Net cash provided (used) by
investing activities 3,541,258 4,063,813 (448,457)
------------ ------------ -----------
</TABLE>
Continued
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
for the years ended September 30, 1997, 1996, and 1995
---------------
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
Financing activities
Net increase (decrease) in demand
deposits, NOW accounts and savings
accounts (365,680) (1,678,188) (4,229,812)
Net increase (decrease) in certificates
of deposit 615,663 (1,074,568) 2,632,198
Cash dividends (322,762) (353,533) (351,495)
Federal Home Loan Bank Advance,
repayments (46,573) (43,632) (14,606)
Net increase (decrease) in custodial
accounts 12,818 3,392 5,492
Stock repurchase (2,666,126)
ESOP stock purchase (249,913)
---------- ----------- -----------
Net cash provided (used) by
financing activities (356,447) (5,812,655) (1,958,223)
---------- ----------- -----------
Increase (decrease) in cash and cash
equivalents 4,004,976 (191,073) (1,239,937)
Cash and cash equivalents, beginning of
year 5,473,454 5,664,527 6,904,464
---------- ----------- -----------
Cash and cash equivalents, end of year $9,478,430 $ 5,473,454 $ 5,664,527
========== =========== ===========
Supplemental Disclosures
Cash payments for:
Interest on deposits $2,688,749 $ 2,811,085 $ 2,563,490
Income taxes $405,000 $505,000 $627,000
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
1. Summary of Significant Accounting Policies
On December 20, 1994, the stockholders of Pioneer Federal Savings Bank
(Bank) approved an agreement and Plan of Reorganization dated October 31,
1994, whereby the Bank through a reverse merger became a wholly owned
subsidiary of Pioneer Financial Corporation (Company), a unitary savings
and loan holding company. In accordance with the Reorganization Plan,
stockholders of the Bank exchanged their shares of common stock on a one
for one basis for common shares in the Company's common stock, which
represented 100% of the outstanding stock of the Company.
The Company is a corporation organized under the laws of Kentucky. The
Company is a savings and loan holding company whose activities are
primarily limited to holding the stock of the Bank. The Bank is a federally
chartered stock savings bank and a member of the Federal Home Loan Bank
System. As a member of this system, the Bank is required to maintain an
investment in capital stock of the Federal Home Loan Bank of Cincinnati
(FHLB) in an amount equal to at least the greater of 1% of its outstanding
loan and mortgage-backed securities or .3% of total assets as of December
31 of each year.
The Bank conducts a general banking business in central Kentucky which
primarily consists of attracting deposits from the general public and
applying those funds to the origination of loans for residential, consumer,
and nonresidential purposes. The Bank's profitability is significantly
dependent on net interest income which is the difference between interest
income generated from interest-earning assets (i.e. loans and investments)
and the interest expense paid on interest-bearing liabilities (i.e.
customer deposits and borrowed funds). Net interest income is affected by
the relative amount of interest-earning assets and interest-bearing
liabilities and the interest received or paid on these balances. The level
of interest rates paid or received by the Bank can be significantly
influenced by a number of environmental factors, such as governmental
monetary policy, that are outside of management's control.
The consolidated financial information presented herein has been prepared
in accordance with generally accepted accounting principles (GAAP) and
general accounting practices within the financial services industry. In
preparing consolidated financial statements in accordance with GAAP,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues
and expenses during the reporting period. Actual results could differ from
such estimates.
The following is a summary of the Company's significant accounting policies
which have been consistently applied in the preparation of the accompanying
consolidated financial statements.
F-7
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and the Bank. All significant intercompany
accounts and transactions have been eliminated.
Loan Origination Fees. The Bank accounts for loan origination fees in
accordance with Statement of Accounting Standards (SFAS) SFAS No. 91
"Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Cost of Leases." Pursuant to the
provisions of SFAS No. 91, origination fees received from loans, net of
direct origination costs, are deferred and amortized to interest income
using the level-yield method, giving effect to actual loan prepayments.
Additionally, SFAS No. 91 generally limits the definition of loan
origination costs to the direct costs attributable to originating a loan,
i.e., principally actual personnel costs. Fees received for loan
commitments that are expected to be drawn upon, based on the Bank's
experience with similar commitments, are deferred and amortized over the
life of the loan using the level-yield method. Fees for other loan
commitments are deferred and amortized over the loan commitment period on a
straight-line basis.
Investment Securities. On October 1, 1994, the Bank adopted Statement of
Financial Accounting Standards (SFAS) No. 115 "Accounting for Certain
Investments in Debt and Equity Securities." SFAS No. 115 requires that
all investments in debt securities and all investments in equity securities
that have readily determinable fair values be classified into three
categories. Securities that management has positive intent and ability to
hold until maturity are classified as held-to-maturity. Securities that
are bought and held specifically for the purpose of selling them in the
near term are classified as trading securities. All other securities are
classified as available-for-sale. Securities classified as trading and
available-for-sale are carried at market value. Unrealized holding gains
and losses for trading securities are included in current income.
Unrealized holding gains and losses for available-for-sale securities are
reported as a net amount in a separate component of stockholders' equity
until realized. Investments classified as held-to-maturity are carried at
amortized cost. The cumulative effect of this change was to increase
stockholders' equity by $97,256, net of deferred taxes of $33,067, as of
October 1, 1994.
Securities that management has the intent and ability to hold to maturity
are classified as held-to-maturity, and carried at cost, adjusted for
amortization of premium or accretion of discount over the term of the
security, using the level yield method. Included in this category of
investments is the FHLB stock which is a restricted stock carried at cost.
Securities available-for-sale are carried at market value. Adjustments
from amortized cost to market value are recorded in stockholders' equity
net of deferred income tax until realized. The identified security method
is used to determine gains or losses on sales of securities.
Regulations require the Bank to maintain an amount of cash and U.S.
government and other approved securities equal to a prescribed percentage
(5% at September 30, 1997 and 1996) of deposit accounts (net of loans
secured by deposits) plus short-term borrowings. At September 30, 1997 and
1996, the Bank met these requirements.
F-8
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
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.
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
F-9
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
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, 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.
F-10
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
The Company files a consolidated federal income tax return with the Bank.
The current income tax expense or benefit is allocated to each Corporation
included in the consolidated tax return based on their tax expense or
benefit computed on a separate return basis.
Effect of Implementing New Accounting Standards. In 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. In addition, earnings per share for the year ended
September 30, 1997 has been adjusted to $5.19 per common share based on the
weighted average common shares outstanding for the year of 205,628
shares.
F-11
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
2. Investment Securities
The cost and estimated fair value of securities held by the Bank as of
September 30, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1997
--------------------------------------------------
Amortized Gross Gross Fair Value
Cost Unrealized Unrealized
Gains Losses
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Securities,
available-for-sale:
SBA Pools $ 2,657,013 $ 9,608 $ 2,647,405
Mortgage-Backed Securities 3,292,217 9,764 3,301,981
----------- ------- ------- -----------
$ 5,949,230 $ 9,764 $ 9,608 $ 5,949,386
=========== ======= ======= ===========
Securities,
held-to-maturity:
Debt Securities:
U.S. Government and
Federal Agencies $ 4,005,625 $ 615 $ $ 4,006,240
Municipal 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 555,300 555,300
of Cincinnati, capital
stock - 5,553 shares
----------- ------- ------- -----------
$22,621,995 $20,015 $33,828 $22,608,182
=========== ======= ======= ===========
</TABLE>
F-12
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
<TABLE>
<CAPTION>
1996
----------------------------------------------------
Amortized Gross Gross Fair Value
Cost Unrealized Unrealized
Gains Losses
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Securities,
available-for-sale:
SBA Pools $ 3,068,229 $ 8,043 $ $ 3,076,272
Mortgage-Backed Securities 4,494,290 44,614 13,565 4,525,339
----------- ------- -------- -----------
$ 7,562,519 $52,657 $ 13,565 $ 7,601,611
=========== ======= ======== ===========
Securities,
held-to-maturity:
Debt Securities:
U.S. Government and
Federal Agencies $ 500,000 $ $ 1,565 $ 498,435
Municipal Bonds 817,221 1,024 818,245
----------- ------- -------- -----------
1,317,221 1,024 1,565 1,316,680
----------- ------- -------- -----------
Mortgage-Backed
Securities 22,146,476 74,622 525,980 21,695,118
----------- ------- -------- -----------
Federal Home Loan Bank 508,800 508,800
of Cincinnati, capital
stock - 5,088 shares
----------- ------- -------- -----------
$23,972,497 $75,646 $527,545 $23,520,598
=========== ======= ======== ===========
</TABLE>
The amortized cost and estimated market value of debt securities at September
30, 1997, by contractual maturity, are as follows:
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
------------- --------------
<S> <C> <C>
Due in one year or less $ 3,105,937 $ 3,105,930
Due after one year through five years 1,499,190 1,498,828
Due after five years through ten years
Due after ten years 118,034 127,789
----------- -----------
$ 4,723,161 $ 4,732,547
=========== ===========
</TABLE>
Effective October 1, 1994, the Bank changed its policy in accounting for debt
and equity securities to conform with the requirements of SFAS No. 115
"Accounting for Certain Investments in Debt and Equity Securities." The
unrealized gain on securities available-for-sale of $155 net of deferred income
taxes of $53 has been recorded as a separate component of stockholders' equity
as of September 30, 1997.
For the year ended September 30, 1997, the Bank received $6,635,575 from the
maturity and call of U.S. Government instruments, debt securities backed by U.S.
Government agencies, and mortgage-backed securities, all of which were
classified as securities held-to-maturity.
F-13
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
For the year ended September 30, 1996, the Bank received $14,578,264 from
the maturity and call of U.S. Government instruments and debt securities
backed by U.S. Government agencies, all of which were classified as
securities held-to-maturity. The Bank recognized a gain of $33,310 on the
call of a Federal National Mortgage Association (FNMA) bond.
For the year ended September 30, 1995, the Bank received $548,050 from the
sale of equity securities and $3,940,882 from the sale of mortgage-backed
securities, all of which were classified as securities available-for-sale.
The Bank recognized a gain of $506,267 on the sale of the equity securities
and a $504,445 loss on the sale of the mortgage-backed securities.
The Bank has pledged mortgage-backed securities totaling $3,605,000 to
secure certain municipal deposits as of September 30, 1997.
3. Loans Receivable
Loans receivable, net at September 30, 1997 and 1996 consists of the
following:
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Loans secured by first lien mortgages on real estate:
Residential, one-to-four family properties $20,503,214 $21,252,055
Multi-family and commercial properties 1,088,140 2,127,870
Agricultural loans 545,793 565,313
Construction loans 1,074,654 1,808,092
Other loans:
Commercial loans 5,818,338 4,796,056
Loans secured by deposits 964,993 1,048,311
Home equity loans 2,000,421 1,662,736
Other secured loans 3,562,910 2,710,992
Signature loans, unsecured 250,893 271,109
------------ -----------
35,809,356 36,242,534
Loans in process (731,545) (403,128)
Allowance for loan losses (391,341) (382,469)
Deferred loan origination fees (195,599) (209,516)
------------ -----------
Loans receivable, net $34,490,871 $35,247,421
============ ===========
</TABLE>
The Bank services loans sold to other associations or governmental agencies
of approximately $52,235,331, $50,317,000, and $50,138,000, as of September
30, 1997, 1996, and 1995, respectively.
F-14
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
The Bank provides an allowance to the extent considered necessary to provide
for losses that may be incurred upon the ultimate realization of loans. The
changes in the allowance for loss on loans is analyzed as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------
1997 1996 1995
----------- --------- --------
<S> <C> <C> <C>
Balance at beginning or period $382,469 $352,244 $347,618
Additions charged to operations 57,433 19,000
Charge-offs (4,069) (36,901) (18,433)
Recoveries 12,941 9,693 4,059
----------- --------- --------
Balance at end of period $391,341 $382,469 $352,244
=========== ========= ========
</TABLE>
At September 30, 1997, the Bank had identified impaired loans totaling
$5,206. The allowance for loan losses included $5,206 related to these
impaired loans. At September 30, 1996, the Bank had identified impaired loans
totaling $18,000. The allowance for loan losses at September 30, 1996
included $18,000 related to those impaired loans. The average amount of
impaired loans for the year ended September 30, 1997 and 1996 was $11,600 and
$34,800, respectively. Interest income received and recognized on impaired
loans totaled $599 and $2,324 for the year ended September 30, 1997 and 1996,
respectively.
The following is a summary of non-performing loans (in thousands) for the
years ended September 30, 1997, 1996, and 1995, respectively:
<TABLE>
<CAPTION>
September 30,
---------------------
1997 1996 1995
------- ----- -----
<S> <C> <C> <C>
Non-accrual loans $ 6 $ 18 $ 41
Loans past due 90 days or more 149 205 151
------- ----- -----
Total non-performing loan balances $ 155 $ 223 $ 192
======= ===== =====
</TABLE>
If interest on non-accrual loans had been accrued, such income would have
been approximately $4,436, $5,035, and $2,391 for 1997, 1996, and 1995,
respectively.
Loans to executive officers and directors, including loans to affiliated
companies of which executive officers and directors are principal owners, and
loans to members of the immediate family of such persons at September 30,
1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
September 30,
---------------------
1997 1996
---------- ---------
<S> <C> <C>
Balance at beginning or period $ 203,576 $ 132,127
Additions during year 247,373 222,827
Repayments (135,159) (151,378)
---------- ---------
Balance at end of period $ 315,790 $ 203,576
========== =========
</TABLE>
F-15
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
4. Premises and Equipment
Office premises and equipment at September 30, 1997 and 1996 includes the
following:
<TABLE>
<CAPTION>
Description Useful 1997 1996
----------- Life
----------- ----------- -----------
<S> <C> <C> <C>
Land, buildings, and improvements 30-45 years $ 1,850,235 $ 1,637,310
Furniture, fixtures, and equipment 5-10 years 790,986 720,748
----------- ----------- -----------
Balance at end of period 2,641,221 2,358,058
Less accumulated depreciation (1,228,957) (1,182,071)
----------- -----------
$ 1,412,264 $ 1,175,987
=========== ===========
</TABLE>
Depreciation expense for the years ended September 30, 1997, 1996, and 1995
amounted to $48,522, $53,365, and $79,900, respectively.
5. Deposits
Deposit accounts at September 30, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
September 30,
--------------------------
1997 1996
------------- -----------
<S> <C> <C>
Demand deposit accounts, non-interest bearing $ 2,889,357 $ 2,463,426
Passbook accounts with a weighted average rate of 9,482,320 9,757,570
2.95% and 2.94% at September 30, 1997 and 1996,
respectively
NOW and MMDA deposits with a weighted average rate 12,907,666 13,424,027
of 2.55% and 2.48% at September 30, 1997 and 1996,
respectively
------------- -----------
25,279,343 25,645,023
Certificate of deposits with a weighted average 39,305,805 38,690,142
interest rate of 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 $ 6,991,246 $ 6,064,944
of $100,000)
============= ===========
</TABLE>
F-16
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
Certificates of deposit by maturity at September 30, 1997 and 1996 (in
thousands) are as follows:
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 1-2 Years 2-3 Years After 3 Total
One Year Years
---------- ---------- ---------- ------- -------
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.
F-17
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------
6. Advances from Federal Home Loan Bank
The advances from the Federal Home Loan Bank consist of the following:
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.
F-18
<PAGE>
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 $547,171 $371,722 $559,520
rate
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%
========= ======== ========
F-19
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
Net deferred tax assets included in other assets at September 30, 1997 and net
deferred tax liabilities included in other liabilities at September 30, 1996
consisted of the following:
1997 1996
-------- ---------
Deferred tax assets: $124,409 $
Allowance for loan losses
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 maintenance of regulatory
capital sufficient to meet each of three tests, hereinafter described as the
F-20
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
tangible capital requirement, the core capital requirement and the risk-based
capital requirement. The tangible capital requirement provides for minimum
tangible capital (defined as stockholders' equity less all intangible assets)
equal to 1.5% of adjusted total assets. The core capital requirement provides
for minimum core capital (tangible capital plus certain forms of supervisory
goodwill and other qualifying intangible assets such as capitalized mortgage
servicing rights) equal to 3.0% of adjusted total assets. The risk-based
capital requirement provides for the maintenance of core capital plus general
loss allowances equal to 8.0% of risk-weighted assets. In computing risk-
weighted assets, the Savings Bank multiplies the value of each asset on its
statement of financial condition by a defined risk-weighting factor, e.g.,
one-to-four family residential loans carry a risk-weighted factor of 50%.
As of September 30, 1997, the Bank's regulatory capital exceeded all minimum
regulatory capital requirements as shown in the following table:
<TABLE>
<CAPTION>
Regulatory Capital
-------------------------------------------------------------
Tangible Core Risk-based
Capital Percent Capital Percent Capital Percent
----------- ------- --------- ------- ------------ --------
(in thousands)
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Capital under generally accepted $ 8,638 % $ 8,638 % $ 8,638 %
accounting principles
Adjustments: -0- -0- -0-
Net unrealized appreciation on
securities available-for-sale
General valuation allowances 378
---------- -------- -----------
Regulatory capital computed 8,638 11.5 8,638 11.5 9,016 29.8
Minimum capital requirement 1,123 1.5 2,245 3.0 2,419 8.0
---------- ------ -------- ------ ----------- ------
Regulatory capital-excess $ 7,515 10.0% $ 6,393 8.5% $ 6,597 21.8%
========== ====== ======== ====== =========== ======
</TABLE>
Retained Earnings Restriction. Retained earnings includes tax bad debt
reserves of $1,598,000 accumulated prior to December 31, 1987 for which no
Federal income tax has been provided. These tax bad debt reserves are only
taxable in certain circumstances, such as if the Bank converted to an
institution that did not qualify as a bank for tax purposes (see Note 7).
Liquidation Account. Upon conversion to a capital stock savings bank,
eligible account holders who continued to maintain their deposit accounts in
the Bank were granted priority in the event of the future liquidation of the
Bank through the establishment of a special "Liquidation Account" in an
amount equal to the consolidated net worth of the Bank at September 30, 1986.
The Liquidation Account was $2,531,513 at September 30, 1986 and is reduced
in proportion to reductions in the balance of eligible account holders as
determined on each subsequent fiscal year end. The existence of the
Liquidation Account will not restrict the use or application of net worth
except with respect to the cash payment of dividends.
F-21
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
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 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
F-22
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
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.
F-23
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
12. Financial Instruments with Off-Balance Sheet Risk and Concentration of
Credit Risk
The Bank is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include mortgage commitments outstanding which
amounted to approximately $2,634,854 and $1,107,600 for the year ended
September 30, 1997 and 1996, respectively plus unused lines of credit
granted to customers totaling $2,242,683 and $1,689,376 at September 30,
1997 and 1996, respectively. The mortgage loan commitments 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 205,628, 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), both assets
and liabilities recognized and not recognized in the statements of financial
condition, for which it is practicable to estimate fair value.
F-24
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
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.
F-25
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
The estimated fair value of the Company's financial instruments at September
30, 1997 are as follows:
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
F-26
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
15. Pioneer Financial Corporation Financial Information (Parent Company Only)
The parent company's principal assets are its investment in the Bank and
cash balances on deposit with the Bank. The following are condensed
financial statements for the parent company as of and for the year ended
September 30, 1997.
Pioneer Financial Corporation
Condensed Statement of Financial Condition
September 30, 1997
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
==========
F-27
<PAGE>
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
==========
F-28
<PAGE>
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
===========
F-29
<PAGE>
PIONEER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
16. Pioneer Service Corporation
On August 30, 1978, the Savings Bank formed Pioneer Service Corporation, a
wholly owned subsidiary, by purchasing its stock for $16,000. The
Subsidiary was created to hold stock in a not for profit corporation that
provides on line computer processing and inquiry service for the Bank and
other savings and loan institutions.
Summary balance sheets for the wholly owned subsidiary, Pioneer Service
Corporation are as follows:
PIONEER SERVICE CORPORATION
Balance Sheets, September 30, 1997 and 1996
ASSETS 1997 1996
--------- ----------
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 Peoples Exchange Bank 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.
F-30
<PAGE>
PIONEER FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
---------------
<TABLE>
<CAPTION>
As of As of
March 31, September 30,
ASSETS 1998 1997
------------ --------------
(unaudited)
<S> <C> <C>
Cash $ 969,908 $ 1,188,974
Interest bearing deposits 2,429,181 1,138,456
Federal Funds sold 6,775,000 7,151,000
Available-for-sale securities 5,193,291 5,949,386
Held-to-maturity securities 21,244,311 22,621,995
Loans receivable, net 33,262,531 34,490,871
Loans held for sale 269,500 152,750
Accrued interest receivable 423,347 455,824
Premises and equipment, net 1,357,457 1,412,264
Prepaid expenses and other assets 315,280 263,944
----------- -----------
Total assets $72,239,806 $74,825,464
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $61,480,165 $64,585,148
FHLB Advances 661,587 652,225
Advance payments by borrowers for taxes and
insurance 17,713 39,607
Federal income tax payable 211,065 216,675
Other liabilities 317,893 593,611
----------- -----------
Total liabilities 62,688,423 66,087,266
----------- -----------
Stockholders' equity:
Common stock, $1 par value, 500,000 shares
authorized;
208,233 shares issued and outstanding 208,233 208,233
Additional paid-in capital 1,797,432 1,797,432
Retained earnings, substantially restricted 7,616,085 6,957,353
Unallocated Employee Stock Ownership Plan
(ESOP) stock (179,365) (224,922)
Net unrealized appreciation on
available-for-sale securities 108,998 102
----------- -----------
Total stockholders' equity 9,551,383 8,738,198
----------- -----------
Total liabilities and stockholders' equity $72,239,806 $74,825,464
=========== ===========
</TABLE>
F-31
<PAGE>
PIONEER FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
---------------
<TABLE>
<CAPTION>
For the Three-Month Periods For the Six-Month Periods
Ended March 31, Ended March 31,
--------------------------- -------------------------
1998 1997 1998 1997
------------ ------------- ------------ ----------
<S> <C> <C> <C> <C>
Interest income:
Interest on loans $ 780,324 $ 785,449 $1,545,615 $1,560,361
Interest and dividends on
securities 437,316 532,646 878,884 1,053,518
Other interest income 80,361 78,365 152,888 142,781
---------- ------------ ---------- ----------
Total interest income 1,298,001 1,396,460 2,577,387 2,756,660
---------- ------------ ---------- ----------
Interest expense:
Interest on deposits 620,595 652,846 1,263,435 1,306,309
Interest on FHLB advances 10,954 11,314 21,675 26,545
---------- ------------ ---------- ----------
Total interest expense 631,549 664,160 1,285,110 1,332,854
---------- ------------ ---------- ----------
Net interest income 666,452 732,300 1,292,277 1,423,806
Provision for loan losses
Net interest income
after provision
for loan losses 666,452 732,300 1,292,277 1,423,806
---------- ------------ ---------- ----------
Non-interest income:
Loan and other service
fees, net 90,334 95,997 164,335 189,936
Gain (loss) on sale of
fixed assets (654)
Gain (loss) on sale of
branch 567,614
Gain (loss) on sale of
loans 71,025 26,495 91,998 52,168
---------- ------------ ---------- ----------
Total non-interest income 161,359 122,492 823,293 242,104
---------- ------------ ---------- ----------
Non-interest expense:
Compensation and benefits 184,668 211,923 456,612 454,127
Occupancy expense 43,652 61,827 86,852 102,473
Office supplies and
postage 23,568 29,238 52,666 51,002
Federal and other
insurance premiums 12,402 6,309 32,351 44,425
Advertising 1,898 9,414 8,349 14,812
Data processing expense 31,375 34,703 76,269 68,335
State franchise tax 15,150 16,386 31,680 32,772
Legal fees 45,191 8,097 55,492 9,750
Other operating expense 12,520 26,962 51,537 55,786
---------- ------------ ---------- ----------
Total non-interest
expense 370,424 404,859 851,808 833,482
---------- ------------ ---------- ----------
Income before income tax
expense 457,387 449,933 1,263,762 832,428
Provision for income taxes 156,914 160,720 431,085 283,492
---------- ------------ ---------- ----------
Net income $ 300,473 $ 289,213 $ 832,677 $ 548,936
========== ============ ========== ==========
Earnings per common share $ 1.48 $ 1.39 $ 4.10 $ 2.64
========== ============ ========== ==========
Earnings per common share
assuming dilution $ 1.48 $ 1.39 $ 4.10 $ 2.64
========== ============ ========== ==========
</TABLE>
F-32
<PAGE>
PIONEER FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
---------------
<TABLE>
<CAPTION>
For the Six-Months Ending
March 31,
---------------------------
1998 1997
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 832,677 $ 548,936
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses
Amortization of investment premium (discount) 29,068 (38,694)
Amortization of organizational cost 6,754 6,754
Provision for depreciation 31,201 26,410
Gain on sale of branch (567,614)
Amortization of loan fees (60,918) (51,958)
FHLB stock dividend (20,200) (18,200)
Loans originated for sale (8,062,196) (4,617,359)
Proceeds from loans held for sale 8,154,194 4,623,979
Loans held for sale (gain) loss (91,998) (6,620)
ESOP benefit expense 8,494
Change in:
Income taxes payable (61,708) 8,787
Interest receivable 32,477 33,661
Interest payable (11,733) (33,282)
Accrued liabilities (263,985) (624,867)
Prepaid expense (58,090) 127,274
----------- -----------
Net cash provided by operating activities (103,577) (15,179)
----------- -----------
Cash flows from investing activities:
Net (increase) decrease in loans 1,172,508 761,098
Matured certificates of deposit 96,000
Matured held-to-maturity securities 4,500,000 6,759,561
Purchase of held-to-maturity securities (4,644,116) (4,986,379)
Purchase of premises and equipment (33,780) (49,769)
Purchase of available-for-sale securities
Sale of available-for-sale securities
Principal repayments on securities 2,434,018 2,385,712
----------- -----------
Net cash (used) by investing activities 3,428,630 4,966,223
----------- -----------
Cash flows from financing activities:
Net increase (decrease) in demand deposits, NOW
accounts and savings accounts (1,086,201) 917,427
Net increase (decrease) in certificates of
deposit (2,018,783) 64,273
Proceeds from FHLB advance 34,000
Payments on FHLB advances (24,638) (22,927)
Cash dividend payments (173,902) (156,175)
Net increase (decrease) in custodial accounts (21,894) (9,505)
Proceeds from sale of branch 625,000
Payment on ESOP loan 37,024
----------- -----------
Net cash provided (used) by financing
activities (2,629,394) 793,093
----------- -----------
Increase (decrease) in cash and cash equivalents 695,659 5,744,137
Cash and cash equivalents, beginning of period 9,478,430 5,473,454
----------- -----------
Cash and cash equivalents, end of period $10,174,089 $11,217,591
=========== ===========
</TABLE>
Supplemental disclosures:
The Bank made income tax payments during the six month periods ended March 31,
1998 and 1997, respectively of $475,000 and $155,000.
The Bank paid $1,296,843 and $1,339,591 in interest on deposits and other
borrowings during the six month periods ended March 31, 1998 and 1997,
respectively.
F-33
<PAGE>
Notes to Unaudited Condensed Consolidated Financial Statements
1. Basis of Presentation
Pioneer Financial Corporation (the "Company") was formed at the direction
of Pioneer Federal Savings Bank (the "Bank") to become the holding company
of the Bank, which was completed on December 24, 1994 under an Agreement
and Plan of Reorganization, dated October 31, 1994. Since the
Reorganization, the Company's primary assets have been the outstanding
capital stock of the Bank, and its sole business is that of the Bank.
Accordingly, the consolidated financial statements and discussions herein
include both the Company and the Bank.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
("GAAP") for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by GAAP for complete
financial statements. In the opinion of management, all adjustments
(consisting of only normal recurring accruals) necessary for fair
presentation have been included. The results of operations and other data
for the six month period ended March 31, 1998 are not necessarily
indicative of results that may be expected for the entire fiscal year
ending September 30, 1998.
2. Earnings Per Share
Earnings per common share for the three month periods ended March 31, 1998
and 1997 amounted to $1.48 and $1.39 per share, respectively, based on
weighted average common stock shares outstanding of 203,411 and 208,233,
respectively. Earnings per common share for the six months period ended
March 31, 1998 and 1997 amounted to $4.10 and $2.64 per share, based on
weighted average common stock shares outstanding of 203,179 and 208,233,
respectively. Shares of common stock held by the ESOP are considered
outstanding when they are committed to be released.
3. Dividends
The Company paid dividends of $0.46 per share or $93,017 for the three
month period ended March 31, 1998 compared to $0.40 per share or $83,293
for the same period in 1997. The Company paid dividends of $0.86 per share
of $173,902 for the six month period ended March 31, 1998 compared to $0.75
per share or $156,175 for the same period in 1997.
4. Possible Year 2000 Computer Program Problems
A great deal of information has been disseminated about the global computer
crash that may occur in the year 2000. Many computer programs that can only
distinguish the final two digits of the year entered (a common programming
practice in earlier years) are expected to read entries for the year 2000
as the year 1900 and compute payment, interest, or delinquency based on the
wrong date or are expected to be unable to compute payment, interest, or
delinquency. Rapid and accurate data processing is essential to the
operations of the Company. Data processing is also essential to most other
financial institutions and many other companies.
F-34
<PAGE>
All of the material data processing applications of the Company that could
be affected by this problem are provided by a third party service bureau.
The service bureau used by the Company has advised the Company that it
expects to resolve this potential problem before the year 2000. However, if
the service bureau is unable to resolve this problem in time, the Company
would likely experience significant data processing delays, mistakes, and
failures. These delays, mistakes, and failures could have a significant
adverse impact on the financial condition and results of operations of the
Company.
F-35
<PAGE>
Appendix A
SHARE EXCHANGE AGREEMENT
------------------------
This is a Share Exchange Agreement (this "Agreement") dated May 7, 1998, among
(a) Central Bancshares, Inc. ("Central"), a Kentucky corporation, (b) Pioneer
Financial Corporation ("Pioneer"), a Kentucky corporation, and (c) Pioneer
Federal Savings Bank (the "Bank"), a federally chartered savings bank wholly
owned by Pioneer with its principal office in Winchester, Kentucky. William M.
Cress, Carl C. Norton, Janet White Prewitt, Robert G. Strode, Thomas D. Muncie,
Andrew James Ryan, Nancy M. Lawwill, and Wayne M. Martin, all of the directors
of Pioneer (collectively referred to herein as the "Pioneer Directors" or the
"Board of Directors of Pioneer") join in this Agreement for the limited purposes
set forth in Sections 6.02 and 9.10.
SECTION 1
The Exchange
1.01 Plan of Exchange. Upon the terms and conditions set forth in this
----------------
Agreement, the Plan of Share Exchange in the form attached hereto as Annex 1.01
----------
(the "Plan of Exchange") and the Kentucky Business Corporation Act (the "Act"),
Central shall acquire all the outstanding shares of Pioneer in a statutory share
exchange (the "Exchange"). The form of Plan of Exchange is incorporated by this
reference into, and made part of, this Agreement.
1.02 Pioneer Capital Stock. The authorized capital stock of the Pioneer
---------------------
consists solely of 500,000 shares of common stock, of a par value of $1.00 per
share ("Pioneer Common Stock"), of which 208,233 shares are issued and
outstanding.
1.03 Bank Capital Stock. The authorized capital stock of the Bank consists
------------------
solely of 299,000 shares of common stock, of a par value of $1.00 per share
("Bank Common Stock"), of which 5,000 shares are issued and outstanding and
owned by Pioneer.
1.04 Exchange Consideration. Except as modified pursuant to Section 1.05
----------------------
below, at the Effective Time (as defined in Section 2.02), each share of Pioneer
Common Stock issued and outstanding, except for shares ("Dissenting Shares")
with respect to which the holder has properly perfected the holder's rights to
dissent under Subtitle 13, Chapter 271B of Kentucky Revised Statutes (KRS
271B.13-010 to .13-310) (the "Dissenters' Rights Statute"), shall be acquired by
Central and shall automatically be converted into and exchanged for the right to
receive a cash payment up to $98.50, without interest, for a total exchange
consideration for all shares of Pioneer Common Stock issued and outstanding at
the Effective Time of not more than $20,510,950 (the "Exchange Consideration").
1.05 Modification of Exchange Consideration. In the event, as of the Closing
--------------------------------------
Date (as defined in Section 2.01), (i) the aggregate fees and expenses of
Investment Bank Services, Incorporated ("IBS") and Stites & Harbison incurred by
Pioneer in connection with the transactions contemplated hereunder, exceed
$370,800, then the Exchange Consideration shall be reduced by a cash amount
equal to such excess.
A-1
<PAGE>
SECTION 2
The Closing and the Effective Time
----------------------------------
2.01 The Closing. A "Closing" shall take place at the offices of Brown, Todd
-----------
& Heyburn PLLC, 2700 Lexington Financial Center, Lexington, Kentucky, at a time
and date mutually agreed to by Central and Pioneer, which time and date shall
not be later than ten (10) business days after the first day on which all of the
conditions set forth in Section 7.01 of the Agreement are satisfied or waived in
writing or at such other time and date as Pioneer and Central may agree to in
writing (the "Closing Date"). At the Closing, (a) Central, Pioneer, and the
Bank shall each provide to the other such proof or indication of satisfaction of
the conditions set forth in Section 7 as the other may have reasonably
requested; (b) the certificates, letters, and opinions required by Section 7
shall be delivered; (c) the parties shall execute Articles of Share Exchange
appropriate for filing with the Secretary of State of the Commonwealth of
Kentucky; and (d) Central, Pioneer, and the Bank shall execute and deliver to
the others all other instruments and assurances, and do all things, reasonably
necessary and proper to effect the Exchange and other transactions contemplated
hereby.
2.02 The Effective Time. Central shall deliver the Articles of Share
------------------
Exchange to the Secretary of State of the Commonwealth of Kentucky for filing as
promptly as possible following the Closing. The Exchange shall be effective at
11:59:59 P.M., Lexington, Kentucky, time on the date Articles of Share Exchange
are filed with the Secretary of State of the Commonwealth of Kentucky (the
"Effective Time").
SECTION 3
Basic Terms of the Exchange
---------------------------
3.01 Statutory Share Exchange. As provided by Section 271B.11-060(2) of the
------------------------
Act, at the Effective Time:
(a) Each outstanding share of Pioneer Common Stock shall, ipso facto,
and without any action on the part of holder thereof, be exchanged for the right
to receive the Exchange Consideration as provided in the Plan of Exchange and
the former holders of the outstanding shares of Pioneer Common Stock shall be
entitled only to the exchange rights provided in the Articles of Share Exchange
or the Dissenters' Rights Statute; and
(b) Central shall acquire and be issued a number of shares of Pioneer
Common Stock equal to the number of shares of Pioneer Common Stock that was
outstanding immediately prior to the Effective Time, which shares of Pioneer
Common Stock so acquired by Central shall constitute all of the issued and
outstanding Pioneer Common Stock at the Effective Time.
3.02 Surrender of Certificates.
-------------------------
(a) As soon as practicable after the Effective Time, Pioneer Federal
Savings Bank, Winchester, Kentucky, as exchange agent (the "Exchange Agent"),
shall deliver to each former holder of Pioneer Common Stock (except holders of
Dissenting Shares), who has validly surrendered to the Exchange Agent the
certificate or certificates formerly representing such holder's shares of
Pioneer Common Stock together with a letter of transmittal in the customary form
and other documentation that reasonably may be required by Central or the
Exchange Agent, a check for an amount equal to the product of the Exchange
Consideration and the number of shares of Pioneer Common Stock represented by
the
A-2
<PAGE>
certificate or certificates so surrendered. Central agrees to make available to
the Exchange Agent immediately prior to Closing an amount of cash sufficient to
cause payment of the Exchange Consideration to be made for any certificates
formerly representing shares of Pioneer Common Stock surrendered for payment in
accordance with this Section 3.02. No interest shall accrue or be paid with
respect to the Exchange Consideration. As soon as practicable (but no more than
five (5) business days) after the Effective Time, Central will cause the
Exchange Agent to mail to each record holder of Pioneer Common Stock at the
Effective Time a form of letter of transmittal which, among other matters, shall
specify how surrender of the stock certificates shall be effected. There shall
be no obligation to deliver the Exchange Consideration in respect of any shares
of Pioneer Common Stock until (and then only to the extent that) the holder
thereof validly surrenders its certificate or certificates representing the
shares of Pioneer Common Stock for exchange as provided in this Section 3.02,
or, in lieu thereof, delivers to the Exchange Agent an appropriate affidavit of
loss and an indemnity agreement and/or bond as may be required in any such case
by Central in its reasonable discretion (which discretion Central may delegate
to the Exchange Agent). If any payment for shares of Pioneer Common Stock is to
be made in a name other than that in which the certificate for Pioneer Common
Stock surrendered for exchange is registered, it shall be a condition to the
payment that the certificate so surrendered shall be properly endorsed or
otherwise in proper form for transfer, that all signatures shall be guaranteed
by a member firm of any national securities exchange in the United States or the
National Association of Securities Dealers, Inc., or by a commercial bank or
trust company having an office in the United States, and that the person
requesting the payment shall either (i) pay to the Exchange Agent any transfer
or other taxes required by reason of the payment to a person other than the
registered holder of the certificate surrendered or (ii) establish to the
satisfaction of the Exchange Agent that such taxes have been paid or are not
payable. From and after the Effective Time, there shall be no transfers on the
stock transfer books of Pioneer of any shares of Pioneer Common Stock
outstanding immediately prior to the Effective Time.
3.03 No Further Rights. At and after the Effective Time, each holder of a
-----------------
certificate that represented shares of Pioneer Common Stock immediately prior to
the Effective Time shall cease to have any rights as a shareholder of the
Pioneer, except for the right to surrender such Certificate in exchange for the
payment provided pursuant to Section 3.01 or to perfect his rights under the
Dissenters' Rights Statute.
3.04 Closing of Transfer Books. The stock transfer books of Pioneer shall be
-------------------------
closed at the close of business on the business day immediately preceding the
date of the Closing. Central shall be entitled to rely upon the stock transfer
books of Pioneer to establish the identity of those persons entitled to receive
the consideration specified in this Agreement for their shares of Pioneer Common
Stock, which books shall be conclusive as to the record ownership of such
shares. In the event of a dispute with respect to the ownership of any such
shares, Central shall be entitled to deposit any consideration represented
thereby in escrow with the Clark County, Kentucky Circuit Court and thereafter
be relieved with respect to any claims to such consideration.
3.05 Pioneer's Articles of Incorporation and Bylaws. The Exchange shall not
----------------------------------------------
amend, alter or otherwise affect Pioneer's Articles of Incorporation or Bylaws,
both as amended and in effect at the Effective Time.
3.06 Pioneer's Board of Directors and Officers. At the Effective Time, the
-----------------------------------------
directors of Pioneer and the Bank immediately prior to the Effective Time shall
all resign and the persons designated by Central shall become the directors of
Pioneer, each such director to hold office, subject to the applicable provisions
of Pioneer's Articles of Incorporation and Bylaws, until the next annual meeting
of Pioneer's shareholders and until his successor is elected and qualifies. At
the Effective Time, all the
A-3
<PAGE>
officers of Pioneer immediately prior to the Effective Time shall likewise
resign and the persons designated by Central shall become the officers of
Pioneer, each such officers to serve at the pleasure of the Pioneer's new Board
of Directors. Following the Effective Time, the officers of the Bank shall
serve at the pleasure of the Bank's new Board of Directors as designated by
Central.
SECTION 4
Representations and Warranties of Pioneer and the Bank
------------------------------------------------------
Except as set forth in the Disclosure Letter delivered by Pioneer and the Bank
to Central concurrently herewith, Pioneer represents and warrants to Central
each of the following with respect to both Pioneer and the Bank and the Bank
represents and warrants each of the following only to the extent such
representations and warranties relate to the Bank:
4.01 Organization and Qualification. Pioneer is a Kentucky corporation, duly
------------------------------
organized, validly existing and in good standing under the laws of the
Commonwealth of Kentucky. The Bank is a federally chartered savings bank, duly
organized, validly existing and in good standing under the laws of the United
States. The Bank and Pioneer have all requisite corporate power and authority
to own and lease their property and to conduct their businesses as they are now
being conducted. Neither the character of the property owned or leased by
Pioneer or the Bank, nor the nature of the activities conducted by Pioneer or
the Bank makes necessary qualification by Pioneer or the Bank as a foreign
association in any jurisdiction. The Bank is a member in good standing of the
Federal Home Loan Bank of Cincinnati (the "FHLB") and all eligible accounts of
deposit in the Bank are insured by the Savings Association Insurance Fund
("SAIF"), as administered by the Federal Deposit Insurance Corporation ("FDIC"),
to the fullest extent permitted by law. Pioneer is a duly registered Savings
and Loan Holding Company, and in good standing under the Home Owners' Loan Act.
4.02 Authorization. Pioneer and the Bank have the full right, corporate
-------------
power and authority to enter into, execute, deliver and perform, subject to
approval by Pioneer's shareholders, their obligations under this Agreement.
Except for the approval by the shareholders of Pioneer, the execution, delivery
and performance of this Agreement by Pioneer and the Bank has been duly
authorized and approved by all requisite corporate action. The Board of
Directors of Pioneer has unanimously adopted this Agreement and the Plan of
Exchange. This Agreement constitutes a valid and legally binding obligation of
Pioneer and the Bank. Neither Pioneer nor the Bank has a legal obligation,
absolute or contingent, to any other individual, firm, partnership, corporation
or other entity ("Person") (i) to sell any substantial part of its assets, or to
sell any of its assets, except in the ordinary course of business; (ii) to
effect any merger, share exchange, consolidation or other reorganization; (iii)
to enter into any agreement with respect thereto or (iv) to take any other
similar action inconsistent with the transactions contemplated by this
Agreement. Neither the execution, delivery, or performance of this Agreement,
nor the consummation of the transactions contemplated hereby will: (a) violate,
conflict with, or result in a breach of any provision of the Articles of
Incorporation or Charter, as appropriate, or the Bylaws of Pioneer or the Bank;
or (b) (i) materially violate, conflict with, or result in a breach of any
provision of, (ii) constitute a default (or an event which, with notice or lapse
of time or both, would constitute a material default) under, (iii) result in the
termination of or accelerate the performance required by, or (iv) result in the
creation of any lien, security interest, charge or encumbrance upon any of the
properties or material assets of Pioneer or the Bank under any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, deed of trust,
lease, license, agreement or other instrument or obligation which binds Pioneer
or the Bank or any assets of Pioneer or the Bank which violation, conflict,
breach, default, termination or acceleration of performance, lien, security
interest, charge or encumbrance would have a material adverse effect on
A-4
<PAGE>
Pioneer and the Bank, taken as a whole; or (c) subject to receipt of
governmental approvals required to consummate the transactions contemplated by
this Agreement, violate any order, writ, injunction, decree, statute, rule or
regulation of any governmental body applicable to Pioneer or the Bank or any
assets of Pioneer or the Bank, the violation of which is, either separately or
in the aggregate, material to the financial condition or properties of Pioneer
or the Bank.
4.03 Subsidiaries. Other than Pioneer's interest in the Bank, neither
------------
Pioneer nor the Bank has ever owned an interest greater than or equal to five
percent (5%) of the equity or voting securities of any class of any Person.
4.04 Capital Stock. All of the statements concerning the capital stock of
-------------
Pioneer and the Bank set forth in Sections 1.02 and 1.03 are true. All of the
outstanding capital stock of Pioneer and the Bank has been validly issued, fully
paid and is nonassessable. None of the outstanding shares of Pioneer Common
Stock or Bank Common Stock have been issued in violation of the preemptive
rights of any person. Pioneer owns, legally and beneficially, all issued and
outstanding shares of capital stock of the Bank; such stock is registered in the
name of Pioneer, and Pioneer has, and at the Effective Time shall have, good and
marketable title to such stock, free and clear of all pledges, liens, charges,
encumbrances, security interests, claims, undertakings, rights of first refusal,
options or other restrictions of any nature whatsoever. Other than the Pioneer
Federal Savings Bank Employee Stock Ownership Plan (the " Pioneer ESOP") and
this Agreement, there are no outstanding options, warrants, contracts, or
commitments to which Pioneer or the Bank are parties entitling any Person to
purchase or otherwise acquire from Pioneer or the Bank any shares of capital
stock of Pioneer or the Bank or any securities convertible into or exchangeable
for any of shares of the capital stock of Pioneer or the Bank. Neither Pioneer
nor the Bank has any obligation of any nature whatsoever with respect to any
unissued shares or shares which have been acquired, redeemed or converted. All
Pioneer Common Stock allocable under the Pioneer ESOP has been allocated.
Neither Pioneer nor the Bank has any outstanding contractual obligation to
repurchase, redeem or otherwise acquire any of their outstanding shares. A
current, complete and accurate list of the share holders of Pioneer indicating
the name, address (city and state only) and number of shares held of record for
each shareholder has been delivered to Central. Since December 31, 1996,
neither Pioneer nor the Bank has:
(a) directly or indirectly redeemed, purchased or otherwise acquired any
of its shares;
(b) declared, set aside or paid any dividend or other distribution in
respect of any of its shares; or
(c) issued or granted any right or option (other than this Agreement and
the ESOP) to purchase or otherwise acquire any of their shares.
4.05 Corporate Documents, Books, Records and Permits. Pioneer has delivered
-----------------------------------------------
to Central true and complete copies of its Articles of Incorporation and the
Charter of the Bank , and of its Bylaws and the Bylaws of the Bank, as amended
(certified as of the date hereof by the Secretary of Pioneer and the Bank, as
appropriate). All of the foregoing and all of the corporate minutes and stock
transfer records of the Bank are current, complete and correct in all material
respects. Each of Pioneer and the Bank possesses all licenses, franchises,
approvals, certificates, permits and other governmental authorizations necessary
for the continued conduct of its business without material interference or
interruption.
4.06 Financial Statements. Pioneer has delivered to Central true and
--------------------
complete copies of (i) the audited consolidated statement of financial condition
and the related statements of income, retained
A-5
<PAGE>
earnings and cash flows of Pioneer for the year ended September 30, 1995 (the
"1995 Pioneer Financial Statements"); (ii) the audited consolidated statement of
financial condition and the related statements of income, retained earnings and
cash flows of Pioneer for the year ended September 30, 1996 (the "1996 Pioneer
Financial Statements"); and (iii) the audited consolidated balance sheet and the
related consolidated statements of income, stockholders' equity and cash flows
of Pioneer for the year ended September 30, 1997 (the "1997 Pioneer Financial
Statements"). The 1995, 1996 and 1997 Pioneer Financial Statements have been
audited by Miller, Mayer, Sullivan & Stevens LLP, certified public accountants.
Pioneer has delivered, or for periods not yet complete as of the date of this
Agreement, shall deliver in accordance with Section 6.10, for the monthly and
quarterly periods ending during the period beginning on October 1, 1997, and
ending on the last day of the month next preceding the month in which the
Effective Time occurs, true and complete copies of the quarterly and monthly
unaudited balance sheets and related statements of income, stockholders' equity
and cash flows of Pioneer (collectively, the "Pioneer Unaudited Financial
Statements"). The 1995, 1996, and 1997 Pioneer Financial Statements, and the
Pioneer Unaudited Financial Statements (collectively, the "Pioneer Financial
Statements") have been or, as the context requires, shall have been prepared in
conformity with generally accepted accounting principles applied on a basis
consistent with prior years. The Pioneer Financial Statements present, or, as
the context requires, shall present, fairly the financial position of the Bank
and Pioneer as of their respective dates and the results of the operations of
the Bank and Pioneer for the respective periods covered thereby in conformity
with generally accepted accounting principles applied on a consistent basis; in
compliance as to form in all material respects with the applicable requirements
of the Securities Act of 1933, as amended (the "Securities Act") and the
applicable published rules and regulations of the Securities and Exchange
Commission (the "SEC") thereunder. All loans, discounts and financing leases
reflected on Pioneer Financial Statements have been, or, as the context
requires, shall have been (a) made for good, valuable and adequate consideration
in the ordinary course of business of the Bank, (b) evidenced by notes or other
evidences of indebtedness which are true, genuine and what they purport to be,
and (c) adequately reserved against in an amount sufficient in the reasonable
opinion of management to provide for all losses reasonably anticipated in the
ordinary course of business as of the date thereof based on information
available as of their respective dates under generally accepted accounting
principles. Neither Pioneer nor the Bank has or will have, nor are any of their
assets subject to, nor will any of their assets be subject to, any liability,
commitment, indebtedness or obligation (of any kind whatsoever, whether
absolute, accrued, contingent, matured or unmatured) which (a) is material and
not reflected and adequately reserved against in the 1997 Pioneer Financial
Statements, or (b) has been or shall be incurred subsequent to the date of the
1997 Pioneer Financial Statements other than those incurred in the ordinary
course of business and not in violation of any provision of this Agreement.
4.07 SEC Documents. All other reports, registration statements, definitive
-------------
proxy statements or information statements filed or to be filed by Pioneer
subsequent to December 31, 1995 under the Securities Act, or under Sections
13(a), 13(c), 14 and 15(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") (collectively, the "Pioneer SEC Documents"), with the SEC
(i) complied or will comply in all material respects as to form with the
applicable requirements under the Securities Act or the Exchange Act, as the
case may be, and (ii) did not and will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements made therein, in light of the circumstances
under which they were made, not misleading; and each of the balance sheets
contained in or incorporated by reference into any such SEC Document (including
the related notes and schedules thereto) fairly presents and will fairly present
the financial position of Pioneer as of its date, and each of the statements of
income and changes in stockholders' equity and cash flows or equivalent
statements in such SEC Documents (including any related notes and schedules
thereto) fairly presents and will fairly present the results of operations,
changes in stockholders' equity and changes in cash flows, as the case may be,
of Pioneer for the periods to which they relate, in
A-6
<PAGE>
each case, in accordance with generally accepted accounting principles
consistently applied during the periods involved.
4.08 Regulatory Reports. Except to the extent prohibited by law, Pioneer
------------------
has delivered to Central true and complete copies of all financial and/or
condition reports ("OTS Reports") of the Bank as filed with the Office of Thrift
Supervision (the "OTS") (a) for each year-end since September 30, 1994, (b) for
each calendar quarter since December 31, 1996, and (c) reports, applications and
other documents which either the Bank or Pioneer has filed with the OTS, FDIC,
FHLB, the Board of Governors of the Federal Reserve System (the "Federal
Reserve"), and/or the SEC since December 31, 1994.
4.09 Absence of Certain Changes or Events. Since September 30, 1997,
------------------------------------
there have been no events or conditions of any character (whether actual or, to
the best knowledge of Pioneer and the Bank, threatened) pertaining to the
financial condition, businesses or assets of Pioneer or the Bank, separately or
in the aggregate, that have materially adversely affected, or can reasonably be
expected to affect materially and adversely, Pioneer's and the Bank's financial
condition, businesses or assets taken as a whole, or to cause either of their
businesses to be carried on materially less profitably than prior to this
Agreement. Since September 30, 1997, neither Pioneer nor the Bank has:
(a) borrowed any money, incurred any liability or obligation, or lent
any money or pledged any of its credit in connection with any aspect of any of
its business other than in the ordinary course of business;
(b) mortgaged or otherwise subjected to any liens, encumbrances or
other liabilities any of its assets or business, other than in the ordinary
course of business;
(c) sold, assigned or transferred any of its assets or business other
than in the ordinary course of business;
(d) suffered any damage, destruction or loss, whether or not covered
by insurance, materially and adversely affecting the financial condition,
business or assets;
(e) made or suffered any amendments, termination of or default under
any contract, agreement, license or other instrument which materially and
adversely affects the financial condition, business or assets;
(f) received notice or had knowledge that any material labor trouble
exists among any of its employees or that any group, organization or union has
tried to organize any of its employees;
(g) received notice or had knowledge that any of its substantial
credit or deposit customers has terminated or intends to terminate its
relationship, which termination would have a materially adverse effect on its
earnings;
A-7
<PAGE>
(h) received any notice asserting or threatening to assert that
either is in material violation of any statute, law, regulation or order
applicable to the business or assets of either of them, which violation would
have a materially adverse effect on their financial condition taken as a whole,
if true;
(i) failed to operate its business in the ordinary course so as to
preserve the business organization intact, and to preserve the goodwill of its
customers and others with whom it has business relations;
(j) incurred any material extraordinary losses or, except in
accordance with customary banking or mortgage servicing practices, waived any
material rights in connection with any aspect of its business, whether or not in
the ordinary course of business;
(k) canceled any material debts owed to either of them; or any
material claims, or paid any noncurrent, material obligations or liabilities;
(l) made any capital expenditure or capital additions or betterments,
including any such expenditure, addition or betterment effected through a
capital lease, exceeding $10,000.00;
(m) paid or agreed to pay, conditionally or otherwise, any bonus,
extra compensation, pension or severance pay to any of its present or former (i)
directors, (ii) officers, or (iii) employees who are being compensated on an
annual basis at a rate exceeding $20,000 per year; or increased by an amount in
excess of five percent (5%) any of their compensation (including salaries, fees,
bonuses, profit sharing, incentive, pension, retirement or other similar
payments);
(n) renewed, amended, become bound by or entered into any agreement,
contract, commitment or transaction other than in the ordinary course of
business;
(o) changed any accounting practice followed or employed in preparing
the Pioneer Financial Statements;
(p) made any loans, given any discounts or entered into any financing
leases which have not been (i) made for good, valuable and adequate
consideration in the ordinary course of business, (ii) evidenced by notes or
other forms of indebtedness which are true, genuine and what they purport to be,
and (iii) adequately reserved against in an aggregate amount sufficient in the
opinion of management to provide for all charge-offs reasonably anticipated in
the ordinary course of business; or
(q) entered into any agreement, contract or commitment applicable as
of the date hereof to do any of the foregoing.
4.10 Taxes. Pioneer and the Bank (i) have timely filed all federal,
-----
state, foreign and local income, franchise, excise, sales, intangibles, real and
personal property, employment and other tax returns, tax information returns and
reports required to be filed; (ii) have paid, or made
A-8
<PAGE>
adequate provision in the opinion of management for the payment of, all taxes,
interest payments and penalties (whether or not reflected in returns as filed)
due and payable (and/or accruable for all periods ending on or before the date
of this Agreement) to any city, county, state, foreign country, the United
States or any other taxing authority; and (iii) are not delinquent in the
payment of any tax or governmental charge of any nature. The federal income tax
returns of Pioneer and the Bank have been examined by and settled with the
Internal Revenue Service, or the statute of limitations with respect to such
years has expired for all years through September 30, 1994, and no audit,
examination or investigation is presently being conducted or is threatened by
any taxing authority. No unpaid tax deficiencies or additional liabilities of
any sort have been proposed by any governmental representative with respect to
Pioneer or the Bank. No agreements for the extension of time for the assessment
of any amounts of tax have been entered into by or on behalf of Pioneer or the
Bank. Pioneer and the Bank have withheld (and timely paid to the appropriate
governmental entity) proper and accurate amounts from their employees for all
periods in material compliance with all tax withholding provisions (including,
without limitation, income, social security and employment tax withholding for
all forms of compensation) of applicable federal, state, foreign and local laws.
Pioneer and the Bank have delivered to Central true and correct copies of all
federal and state income tax returns filed by any of them for all tax periods
commencing after September 30, 1994.
4.11 Title to Assets. On September 30, 1997, Pioneer and the Bank had
---------------
and, except with respect to assets disposed of for adequate consideration in the
ordinary course of business since September 30, 1997, now have, good and
marketable title to all properties and assets reflected on the 1997 Pioneer
Financial Statements, free and clear of all mortgages, liens, pledges,
easements, restrictions, encroachments, governmental regulations, security
interests, charges or encumbrances of any nature, except as disclosed in the
1997 Pioneer Financial Statements and for:
(a) the mortgages and encumbrances which secure indebtedness which is
properly reflected on the Pioneer Financial Statements;
(b) liens for taxes accrued but not yet payable;
(c) liens arising as a matter of law in the ordinary course of
business as to which there is no known default; and
(d) such imperfections of title and encumbrances, if any, as do not
materially detract from the value or interfere with the present use or sale of
any of their properties and assets.
Section 4.11 of the Disclosure Letter lists all leases, other than "financing
leases," of personal property to which Pioneer and/or the Bank is a party.
Pioneer has delivered to Central true and correct copies of all leases referred
to in Section 4.11 of the Disclosure Letter, together with all amendments and
modifications thereof. With respect to each lease of personal property to which
Pioneer and/or the Bank is a party, except for leases in which either Pioneer or
the Bank is lessor entered into as a "financing lease,":
A-9
<PAGE>
(a) such lease is in full force and effect in accordance with its
terms;
(b) all rents and additional rents due to date have been paid;
(c) the lessee under each of the leases has been in peaceable
possession since the commencement of the original term of the lease; and
(d) no event of default, or event, occurrence, condition or act,
which with the giving of notice, the lapse of time or the happening of any
further event, occurrence, condition or act would become a material default
under such lease, exists.
With respect to any real property owned in fee by Pioneer or the Bank, which
real property is set forth on Section 4.11 of the Disclosure Letter, Pioneer and
the Bank further represent and warrant to Central as follows:
(a) all work to be performed by Pioneer or the Bank with respect to
all improvements to the property owned by either of them has been fully
completed and paid for by them;
(b) all permits and certificates with respect to construction of
improvements on the property owned by Pioneer or the Bank have been obtained and
the property has been properly zoned for use and occupancy as a banking or other
business facility; and
(c) all improvements to the property have been made in accordance
with plans and specifications approved by Pioneer or the Bank, as appropriate,
copies of which will be delivered to Central upon request.
4.12 Environmental Hazards. Neither Pioneer nor the Bank has (i) used,
---------------------
stored, manufactured, or suffered to exist (collectively, "NOPizedUtilized") any
hazardous or toxic substance, material or constituent (collectively, a
"Hazardous Substance") within the meaning of any applicable federal, state or
local law or regulation pertaining to environmental or chemical hazards or
pollution (collectively, the "Environmental Laws"), including, without
limitation, the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended, 42 U.S.C. (S)9601 et seq., and any regulations
promulgated thereunder, on, in or under any of their property, whether currently
or previously owned or leased by Pioneer or the Bank, or (ii) transported or
disposed, or caused or permitted any Person to transport or dispose, of any
Hazardous Substance, in each case ((i) and (ii) above), other than in material
compliance with all Environmental Laws and other than at the locations
identified on the Disclosure Letter. To the best of Pioneer's and the Bank's
knowledge, no other Person has Utilized Hazardous Sub stances at any time on, in
or under any of Pioneer's or the Bank's property, whether currently or
previously owned or leased by either of them. Neither Pioneer nor the Bank is
subject to any asserted or unasserted liabilities, nor are any of the properties
of Pioneer or the Bank, whether currently or previously owned or leased by
Pioneer or the Bank, subject to any asserted or unasserted lien, under any of
the Environmental Laws. Neither Pioneer nor the Bank has ever materially
violated any of the Environmental Laws, and each of them is presently in
compliance in all material respects with all Environmental Laws. Without
limiting the generality of the
A-10
<PAGE>
foregoing, no asbestos, PCBs or other Hazardous Substance or any petroleum
product or constituents thereof is present on, in or under any of the property
of Pioneer or the Bank, whether currently or previously owned or leased. To the
best of Pioneer's and the Bank's knowledge, no loans of any of Pioneer or the
Bank are secured by property where any Hazardous Substances have ever been
Utilized in material violation of Environmental Laws, and none of the borrowers
of Pioneer or the Bank have materially violated any of the Environmental Laws or
have any of their property subject to a lien under any of the Environmental
Laws. Neither Pioneer nor the Bank has ever permitted any property currently or
previously owned or leased by either of them to be used as a landfill or dump
site. There are no underground storage tanks or underground pipelines located
on any property owned or leased by Pioneer or the Bank. No underground storage
tanks have ever been located on any property currently or previously owned or
leased by either of them.
4.13 Litigation, Pending Proceedings and Compliance with Laws. For
--------------------------------------------------------
purposes of this Agreement, "Claims" shall mean all material claims of any kind
or actions, suits, proceedings, arbitrations or investigations asserted by or
against either Pioneer or the Bank, whether actual or threatened, against or
affecting Pioneer Common Stock, the common capital stock of the Bank or Bank's
business, prospects, conditions (financial or otherwise) or assets or against
any officer, director or employee of the Bank (where such Claims against any
officer, director or employee of Pioneer or the Bank arise or might arise in
connection with actions taken or omitted or alleged to have been taken or
omitted by such officer, director or employee in his or her capacity as an
officer, director or employee). Section 4.13 of the Disclosure Letter sets
forth all Claims, including a summary of the basis and background of all Claims.
There are no Claims (a) which would prevent the performance of this Agreement or
any of the transactions contemplated hereby or declare the same unlawful or
cause the rescission thereof, (b) which would prevent the transfer of good and
marketable title of Pioneer Common Stock free and clear of all encumbrances, or
(c) which would materially and adversely affect or impair the business or
condition, financial or otherwise, or the earnings of Pioneer and the Bank taken
as a whole. Pioneer and the Bank have complied with and are not in any default
in any material respect under (and have not been charged with, nor are
threatened with or under investigation with respect to, any charge concerning
any material violation of any provision of) any material federal, state or local
law, regulation, ordinance, rule or order (whether executive, judicial,
legislative or administrative) or any order, writ, injunction or decree of any
court, agency or instrumentality. There are no material uncured violations or
violations with respect to which material refunds or restitution may be required
cited in any report concerning Pioneer or the Bank as a result of examination by
any regulatory authority.
4.14 Regulatory Compliance. Neither Pioneer nor the Bank has ever been a
---------------------
party to (a) any enforcement action instituted by, or (b) any memorandum of
understanding or cease and desist order with, any federal or state regulatory
agency, and no such action, memorandum or order has been threatened, and neither
Pioneer nor the Bank has received any report of examination from any federal or
state regulatory agency which requires that Pioneer or the Bank address any
problem or take any action which has not already been addressed or taken in a
manner satisfactory to the regulatory agency.
A-11
<PAGE>
4.15 Employee Relations. Neither Pioneer nor the Bank (a) is a party to,
------------------
or negotiating, and have no obligations under, any agreement, collective
bargaining or otherwise, with any party relating to the compensation or working
conditions of any employees' of Pioneer or the Bank; (b) is obligated under any
agreement to recognize or bargain with any labor organization or union on behalf
of their employees; or (c) has been charged or threatened with a charge of any
unfair labor practice. There are no existing or threatened labor strikes, slow
downs, disputes, grievances or disturbances affecting or which might affect
operations at, or deliveries from or into, any facility of Pioneer or the Bank.
No work stoppage against Pioneer or the Bank or its business is pending or
threatened, and no such work stoppage has ever occurred. Neither Pioneer nor
the Bank has committed any act or failed to take any required action with
respect to any of its employees which has resulted or which may result in a
material violation of ERISA (as that term is defined in Section 4.16 below), or
similar legislation as it affects any employee benefit or welfare plan of
Pioneer or the Bank; the Immigration Reform and Control Act of 1986; the
National Labor Relations Act, as amended; Title VII of the Civil Rights Act of
1964, as amended; the Occupational Safety and Health Act; Executive Order 11246;
the Fair Labor Standards Act; the Rehabilitation Act of 1973; and all
regulations under such Acts, and all other federal, state and local laws,
regulations and executive orders relating to the employment of labor, including
any provisions thereof relating to wages, hours, collective bargaining, the
payment of Social Security and similar taxes, unemployment and workmens'
compensation laws, any labor relations laws, or any governmental regulations
promulgated thereunder, as the same affect relationships or obligations of
Pioneer and the Bank with respect to any of the their employees, and which will
or reasonably could result in any material liability, penalty, fine or the like
being imposed upon Pioneer or the Bank. Neither Pioneer nor the Bank is liable
for any arrearage of wages or taxes or penalties for failure to comply with any
of the foregoing, and there are no proceedings before any court, governmental
agency, instrumentality or arbitrator relating to such matters, including any
unfair labor practice claims, either pending or threatened.
4.16 Employee Benefit Plans.
----------------------
(a) For purposes of this Section 4.16, the term "employee benefit
plan(s)" shall have the meaning ascribed to it in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and the
regulations promulgated thereunder, and the term "employee pension benefit
plan(s)" shall have the meaning ascribed to it in Section 3(2) of ERISA.
(b) Section 4.16 of the Disclosure Letter sets forth a complete list
of all employee benefit plans, policies and practices (whether or not subject to
ERISA) applicable to employees of Pioneer and the Bank, including, without
limitation, plans, funds or programs providing medical, surgical or hospital
care or benefits; benefits in the event of sickness, accident, disability, death
or unemployment; vacation benefits; apprenticeship or other training programs;
day care centers; scholarship funds; prepaid legal services; benefits described
in Section 302(c) of the Labor Management Relations Act; retirement income;
income deferral for periods extending to the termination of covered employment
or beyond; severance pay arrangements; and supplemental retirement income
payments which take into account increases in the cost of living. Each employee
benefit plan, policy or practice which is funded through a policy of insurance
is
A-12
<PAGE>
indicated by the word "insured" placed by the listing of the plan on Section
4.16 of the Disclosure Letter.
(c) True and complete copies of all (i) employee benefit plans and
related trust agreements; (ii) policies and practices; (iii) summary plan
descriptions; (iv) most recent allocation or actuarial reports prepared for each
employee pension benefit plan; (v) insurance policies; and (vi) communications
to or from the Internal Revenue Service (the "IRS") (including the most recent
Form 5500 filed with the IRS and the most recent determination letter received
from the IRS), the Pension Benefit Guaranty Corporation (the "PBGC") or the
United States Department of Labor and other governmental filings with respect to
the employee benefit plans have been delivered by Pioneer to Central.
(d) Except as specifically provided in the documents described in
this Section 4.16 and delivered to Central, or as otherwise described on Section
4.16 of the Disclosure Letter, there are no amendments, modifications,
extensions, changes in benefits or benefit structures, or other alterations
which are currently in effect or which Pioneer or the Bank have undertaken to
become effective in the future to any of the employee benefit plans, policies or
practices.
(e) Each employee benefit plan has been executed, managed and
administered in material compliance with the applicable provisions of ERISA, the
Code, and the regulations promulgated thereunder, and all other applicable laws.
Neither Pioneer nor the Bank has knowledge of any fact which would adversely
affect the qualified status of any of the employee benefit plans, or of any
threatened or pending claim against any of the employee benefit plans or their
fiduciaries by any participant, beneficiary or government agency.
(f) Pioneer and the Bank have fully complied with the notice and
continuation requirements of Sections 601 through 608 of ERISA and the proposed
regulations thereunder. All reports, statements, returns and other information
required to be furnished or filed with respect to the employee benefit plans
have been timely furnished, filed or both in accordance with Sections 101
through 105 of ERISA and Sections 6057 through 6059 of the Code, and they are
true, correct and complete in all material respects. Records with respect to
the employee benefit plans have been maintained in material compliance with
Section 107 of ERISA. Neither Pioneer, the Bank nor any other fiduciary (as
that term is defined in Section 3(21) of ERISA) with respect to any of the
employee benefit plans has any material liability for any breach of any
fiduciary duties under Sections 404, 405 or 409 of ERISA.
(g) Neither Pioneer nor the Bank has, with respect to any of the
employee benefit plans, nor has any administrator of any of the employee benefit
plans, the related trusts or any trustee thereof, engaged in any prohibited
transaction which would subject Pioneer, the Bank, any of the employee benefit
plans, any administrator or trustee or any party dealing with any of the
employee benefit plans or any such trusts, to a tax or penalty on prohibited
transactions imposed by ERISA, Section 4975 of the Code, or to any other
liability under ERISA.
(h) All employee pension benefit plans maintained by or covering
employees of Pioneer and the Bank which are intended to be qualified under
Section 401(a) or 403(a) of the
A-13
<PAGE>
Code, and the related trusts which are intended to be exempt under Section
501(a) of the Code, are, and have been since adoption, so qualified, and are
identified on Section 4.15 of the Disclosure Letter as "qualified plans," and
the date of the most recent determination letter from the IRS confirming the
qualification of each such plan is set out on Section 4.16 of the Disclosure
Letter.
(i) Except as set forth on Section 4.16 of the Disclosure Letter,
none of the employee pension benefit plans nor any of the related trusts has
been terminated. There are no employee pension benefit plans subject to Section
302 of ERISA or Section 412 of the Code.
(j) None of the employee pension benefit plans is, and Pioneer and
the Bank have never contributed to, a "multiemployer plan," as that term is
defined in Section 3(37) of ERISA (as particularly amended by The Multiemployer
Pension Plan Amendments Act of 1980).
(k) Pioneer and the Bank have provided to Central the information
reasonably necessary to determine the accounting treatment which may be accorded
any of the retiree welfare benefits currently in force under proposed Financial
Accounting Standards Board guidelines.
(l) Any trust or fund maintained by or contributed to by Pioneer, the
Bank or its employees to fund an employee benefit plan (other than an employee
pension benefit plan) is qualified as an exempt organization under Section
501(c)(9) of the Code and the regulations thereunder as a Voluntary Employee's
Benefit Association (a "VEBA"). Any "welfare benefit fund" within the meaning
of Section 419(a) of the Code (including, but not limited to, any VEBA),
provided by or pursuant to a plan of Pioneer or the Bank has been maintained in
accordance with Section 419 of the Code and no contributions have been made to
such a fund in excess of the "qualified costs" of the benefits provided for a
taxable year (within the meaning of Section 419(b) of the Code), except as set
forth on Section 4.16 of the Disclosure Letter.
4.17 Insurance Policies. Pioneer and the Bank maintain insurance policies
------------------
and bonds in force in such amounts and against such liabilities and hazards as
customarily are maintained by similar businesses of comparable size. Neither
Pioneer nor the Bank is liable for any material, retroactive premium
adjustments. All policies are valid, enforceable and in full force and effect,
and neither Pioneer nor the Bank has received any notice of premium increases or
cancellations. Neither Pioneer nor the Bank knows of any grounds for or any
consideration of any such premium increase or cancellation notice or other
indication of premium increases or cancellations, with respect to any of their
insurance policies or bonds. All notices of cancellation received by either
Pioneer or the Bank and all claims made by Pioneer or the Bank under their
respective insurance policies and bonds since December 31, 1995, or made prior
thereto but remaining unresolved, are described on Section 4.17 of the
Disclosure Letter. Neither Pioneer nor the Bank has failed to make a timely
claim or file a timely notice with respect to any matter giving rise to a
material claim or potential material claim under their insurance policies and
bonds.
A-14
<PAGE>
4.18 Agreements. As of the date of this Agreement, neither Pioneer nor
----------
the Bank is a party to:
(a) any collective bargaining agreement; any employment agreement,
contract, or commitment; or any bonus plan or commission;
(b) any loan or other agreement pursuant to which Pioneer or the Bank
has borrowed money or any obligation of guaranty or indemnification arising from
any agreement, contract or commitment which involves, singularly or in the
aggregate, a potential material liability, except letters of credit entered into
in the ordinary course of business;
(c) any agreement, contract or commitment which is either outside of
the ordinary course of business or which is or may be materially adverse to the
business, financial condition or earnings of Pioneer and the Bank taken as a
whole;
(d) any agreement, contract or commitment containing any covenant
materially limiting the freedom of either Pioneer or the Bank to engage in any
line of business in any geographic area or to compete with any Person;
(e) any agreement, contract, or commitment relating to capital
expenditures and involving future payments which, together with future payments
under all other agreements, con tracts or commitments relating to the same
capital project, exceed $10,000.00;
(f) any agreement, contract or commitment relating to the acquisition
of substantially all of the assets, shares or capital stock of any business
enterprise, except agreements, contracts or commitments in which assets, shares
or capital stock are security for a loan or similar obligation created in the
ordinary course of business;
(g) any agreement, contract or commitment (other than for 1 to 4
family residential loans made in the ordinary course of business), which
involves payments, consideration or obligations in the aggregate of $5,000.00 or
more per agreement, contract or commitment, which (i) will not be performed
within 30 days or less, or (ii) cannot be terminated within 30 days or less
without payment of a penalty of more than $1,000.00.
Neither Pioneer nor the Bank has breached, nor is there any pending or
threatened claim that either Pioneer or the Bank has materially breached any of
the terms or conditions of (a) any agreement, contract or commitment set forth
in the Disclosure Letter delivered to Central pursuant to this Agreement or (b)
any other agreement, contract or commitment, the breach of which singularly or
in the aggregate could result in the imposition of damages in a material amount.
4.19 Brokers' or Finders' Fees. Other than the fee payable by Pioneer to
-------------------------
IBS pursuant to a letter agreement dated October 3, 1997, no agent, broker or
other Person acting on behalf of Pioneer or the Bank or under either of their
authority is or shall be entitled to any commission, broker's or finder's fee
from Central, Pioneer or the Bank in connection with any of the transactions
contemplated by this Agreement.
A-15
<PAGE>
4.20 Potential Competing Interests. To the best of Pioneer's and the
-----------------------------
Bank's knowledge, no shareholder of Pioneer who owns more than one percent (1%)
of the outstanding shares of Pioneer Common Stock, nor any director, officer or
employee of either Pioneer or the Bank, nor any member of any such person's
family, have any direct or indirect (1% or more) interest in any Person which
competes or conflicts with, or is engaged in any business of the kind being
conducted by, either Pioneer or the Bank or which does business or engages in
commerce with, or provides goods or services to, either Pioneer or the Bank.
Neither Pioneer nor the Bank uses any real or personal property in which any
shareholder of Pioneer or any director, officer or employee of either Pioneer or
the Bank, or any member of any such person's family, have a direct or indirect
(1% or more) interest.
4.21 EKH Stock Repurchase. Pioneer has redeemed all shares of Pioneer
--------------------
Common Stock formerly owned by persons identified as the EKH Group in a Stock
Redemption Agreement dated June 17, 1996, among Pioneer, the Bank and the EKH
Group, and received complete releases of any and all possible claims EKH Group
may have or have had against Pioneer or the Bank.
4.22 Proxy Statement. The Proxy Statement, at the date of mailing to
---------------
shareholders of Pioneer and at the time of the meeting of such shareholders to
be held in connection with the Exchange, will not contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided that Pioneer
makes no representation as to the accuracy of any information provided by
Central for inclusion in the Proxy Statement. The Proxy Statement will comply
as to form in all material respects with the provisions of the Exchange Act and
the rules and regulations thereunder.
4.23 Accuracy of Statements.
----------------------
(a) Neither this Agreement, the Disclosure Letter, nor any annex,
schedule or document delivered as or in connection with an annex or schedule
furnished or to be furnished by Pioneer or the Bank to Central in connection
with this Agreement or any of the transactions contemplated hereby contains or
shall contain an untrue statement of a material fact or omits or shall omit to
state a material fact necessary to make the statements contained herein or
therein, in light of the circumstances in which they are made, not misleading.
(b) None of the information supplied by Pioneer or the Bank for
inclusion in the Proxy Statement will, at the date of mailing to stockholders of
Pioneer and at the time of the meeting of the stockholders of Pioneer to be held
in connection with the Exchange, contain any untrue statement of a material fact
or omit to state any material fact necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The Proxy Statement (except for such portions thereof that relate
only to Central) will comply as to form in all material respects with the
provisions of the Exchange Act, and the rules and regulations thereunder.
A-16
<PAGE>
SECTION 5
Representations and Warranties of Central
-----------------------------------------
Central represents and warrants to Pioneer as follows:
5.01 Organization and Qualification. Central is a Kentucky corporation
------------------------------
duly organized and validly existing under the laws of the Commonwealth of
Kentucky, has paid all fees due and owing to the Office of the Kentucky
Secretary of State, has delivered to that office its most recent annual report
as required by the Kentucky Business Corporation Act, and has not filed articles
of dissolution with the Office of the Kentucky Secretary of State. Central has
all requisite corporate power and authority to own and lease their property and
to carry on their businesses as they are now being conducted. Central is duly
registered as a bank holding company under the Bank Holding Company Act of 1956,
as amended.
5.02 Authorization. Central has the full right, corporate power and
-------------
authority to enter into, execute, deliver and perform its obligations under this
Agreement. The execution, delivery and performance of this Agreement by Central
have been duly authorized and approved by all requisite corporate action and no
other corporate acts or proceedings on the part of Central are necessary to
authorize this Agreement or the transactions contemplated hereby. This
Agreement constitutes the valid and legally binding obligation of Central.
Neither the execution, delivery, or performance of this Agreement, nor the
consummation of the transactions contemplated hereby will: (a) violate, conflict
with, or result in a breach of any provision of the Articles of Incorporation
or the Bylaws of Central Subsidiary; (b)(i) materially violate, conflict with,
or result in a breach of any provision of, (ii) constitute a material default
(or an event which, with notice or lapse of time or both, would constitute a
material default) under, (iii) result in the termination of or accelerate the
performance required by, or (iv) result in the creation of any lien, security
interest, charge or encumbrance upon any of the material properties or material
assets of Central under any of the terms, conditions or provisions of any
material note, bond, mortgage, indenture, deed of trust, lease, license,
agreement or other instrument or obligation which binds Central or any material
assets of Central, which violation, conflict, breach, default, termination or
acceleration of performance, lien, security interest, charge or encumbrance
would have a material adverse effect on Central and its subsidiaries, taken as a
whole; or (c) subject to the receipt of governmental approvals required to
consummate the transactions contemplated by this Agreement, violate any order,
writ, injunction, decree, statute, rule or regulation of any governmental body
applicable to Central.
5.03 Regulatory Compliance. Neither Central nor any of its subsidiaries
---------------------
are currently a party to any enforcement action instituted by, or any memorandum
of understanding, formal agreement, or cease and desist order with, any federal
or state regulatory agency, and no such action, memorandum, agreement or order
has been threatened against Central or any of its subsidiaries. Neither Central
nor any of its subsidiaries have received any report of examination from any
federal or state regulatory agency which requires Central or any of its
subsidiaries to address any significant problem or take any significant action
which has not already been addressed or taken in a manner satisfactory to the
regulatory agency.
A-17
<PAGE>
5.04 Accuracy of Statements.
----------------------
(a) Neither this Agreement nor any annex, schedule or document
delivered as or in connection with an annex or schedule furnished or to be
furnished by Central to Pioneer in connection with this Agreement or any of the
transactions contemplated hereby contains or shall contain an untrue statement
of a material fact or omits or shall omit to state a material fact necessary to
make the statements contained herein or therein, in light of the circumstances
in which they are made, not misleading.
(b) None of the information supplied by Central for inclusion in the
Proxy Statement will, at the date of mailing to stockholders of Pioneer and at
the time of the meeting of the stockholders of Pioneer to be held in connection
with the Exchange, contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading.
5.05 Brokers' or Finders' Fees. No agent, broker or other Person acting on
-------------------------
behalf of Central or under its authority is or shall be entitled to any
commission, broker's or finder's fee from Central, Pioneer or the Bank in
connection with any of the transactions contemplated by this Agreement.
SECTION 6
Covenants and Conduct of the Parties
------------------------------------
Each of the parties to this Agreement shall comply with their respective
covenants in this Section 6 from the date hereof through the Closing Date:
6.01 Investigations. Pioneer and the Bank shall give Central and its
--------------
employees, accountants, attorneys and other authorized representatives full
access during all reasonable times to all their premises, properties, books and
records (including without limitation, all corporate minutes and stock transfer
records), and furnish Central with such financial and operating data, analyses
and other information of any kind respecting their business and properties as
Central shall from time to time request. Any investigation shall be conducted
in a manner which does not unreasonably interfere with the operation of
Pioneer's or the Bank's business. In the event of termination of this
Agreement, Central shall, upon request, return to Pioneer all documents, work
papers and other material (and all copies thereof) obtained from Pioneer and the
Bank in connection with the transactions contemplated hereby. Central shall use
its best efforts to cause its employees, accountants, attorneys and other
authorized representatives, to hold in strict confidence all data and
information obtained by it from Pioneer (unless such data or information is or
becomes readily ascertainable from public or published information or trade
sources); and Central shall not, and shall use its best efforts to ensure that
such employees, accountants, attorneys and other authorized representatives do
not, disclose such information to others; provided, that Central may file or
otherwise submit such data and information to any regulatory authority in
connection with obtaining regulatory approval to facilitate or consummate the
transactions contemplated by this Agreement without any liability to Pioneer or
the Bank from Central.
A-18
<PAGE>
6.02 Shareholder and Director Approvals. The Board of Directors of
----------------------------------
Pioneer has unanimously adopted and determined advisable and shall submit to
Pioneer's shareholder(s) for approval of this Agreement and the Plan of Exchange
at a meeting of shareholders duly called for those purposes by Pioneer's Board
of Directors. Pioneer and the Pioneer Directors shall take any all action
necessary, in accordance with applicable law and Pioneers Articles of
Incorporation and Bylaws, to convene a meeting Pioneer's shareholders as
promptly as practicable for the purpose of considering and voting upon this
Agreement and the Plan of Exchange; provided, however, the meeting of
shareholders of Pioneer shall take place on a date at least twenty-one business
days following the mailing of a notice of such meeting accompanied by the Proxy
Statement. The notice and Proxy Statement distributed in connection with the
shareholder approval and adoption of this Agreement and the Plan of Exchange
shall comply with Pioneer's Articles of Incorporation and Bylaws and with all
applicable corporate and securities laws. Unless inconsistent with its
fiduciary responsibilities, the Board of Directors of Pioneer shall recommend to
the shareholders of Pioneer that all such shareholders vote for approval and
adoption of this Agreement and the Plan of Exchange, and each Pioneer Director
shall use his best efforts to obtain such shareholder approval. The Disclosure
Letter sets forth the names of each Pioneer Director together with the number of
shares of Pioneer Common Stock held by each of them as of the date of this
Agreement. Each of the Pioneer Directors (a) shall continue to own and shall
not assign, transfer, or otherwise dispose of, or in any way further encumber,
his or her shares of Pioneer Common Stock except as contemplated by this
Agreement and shall at all times from the record date for the aforesaid
shareholders' meeting, through such meeting, have the full right, power and
authority to vote his shares of Pioneer Common Stock free of restrictions,
arrangements or limitations thereon, (b) shall, unless inconsistent with his
fiduciary duties, in his or her capacity as a shareholder of Pioneer, vote all
of the shares of Pioneer Common Stock listed on the Disclosure Letter in favor
of approval of the Plan of Exchange (or, upon request of Central, shall promptly
grant a revocable proxy to Central to vote all of his or her shares of Pioneer
Common Stock in favor of approval of the Plan of Exchange), and (d) shall take
any and all other shareholder action necessary to accomplish the transactions
contemplated by this Agreement.
6.03 Consents. Pioneer and Central shall each use its best efforts to
--------
procure upon reasonable terms and conditions all consents and approvals,
completion of all filings, all registrations and certificates, and satisfaction
of all other requirements prescribed by law which are necessary for the
consummation of the Exchange.
6.04 Conduct of Business in the Ordinary Course. Pioneer and the Bank
------------------------------------------
shall conduct their business only in the ordinary course. By way of
amplification and not limitation, except as otherwise provided herein, neither
the Bank nor Pioneer shall without the prior written consent of Central, which
consent shall not be unreasonably withheld:
(a) issue or cause to be issued any shares of capital stock or any
options, warrants, or other rights to subscribe for or purchase any shares of
capital stock or any securities convertible into or exchangeable for shares of
capital stock of Pioneer or the Bank;
(b) declare, set aside, or pay any dividend or distribution (whether
in cash, shares or otherwise) with respect to the shares of capital stock of
Pioneer or the Bank and none shall be provided for in Pioneer's Disclosure
Letter;
A-19
<PAGE>
(c) except for the payment of directors' fees of $400.00 per regularly
scheduled monthly meeting and $25.00 for each committee meeting attended, make
any payment to any of Pioneer's or the Bank's directors;
(d) directly or indirectly redeem, purchase, or otherwise acquire any
shares or capital stock;
(e) effect a split, reverse split, reclassification, or other change
of any shares of capital stock, or other reorganization or recapitalization;
(f) amend the Charter or Articles of Incorporation, as appropriate, or
Bylaws of Pioneer or the Bank;
(g) except in the ordinary course of business or as provided in
Section 6.04(g) of the Pioneer Disclosure Letter, consistent with past practice
and upon prior consultation with Central, increase the compensation payable or
to become payable to any of their directors, officers or employees (including
any salary, bonus, insurance, pension, or other benefit plan, payment or
arrangement made to, for or with any of such officers or employees) regardless
of whether such increase was authorized prior to the execution of this
Agreement;
(h) except in the ordinary course of business, borrow or agree to
borrow any amount of funds or incur any obligation or liability, or directly or
indirectly guarantee or agree to guarantee any obligations of others except
letters of credit entered into in the ordinary course of business;
(i) except with respect to (a) any agreement, contract or commitment
that (when taken together with any other agreements, contracts or commitments
from the same vendor or its affiliates) involves less than $10,000.00, or (b)
the making of a loan or a commitment therefor, enter into any agreement,
contract or commitment, which, if entered into before the date of this
Agreement, would be required to be listed in a schedule delivered to Central
pursuant to the terms of, or in connection with, this Agreement, or which would
modify, amend or terminate any agreement required to be listed in any such
schedules;
(j) except in the ordinary course of business, place or suffer to
exist on any of the assets or properties of Pioneer or the Bank any mortgage,
pledge, lien, charge, or other encumbrance;
(k) cancel, unless paid in full, any material indebtedness owing to
Pioneer or the Bank or any claims which Pioneer or the Bank may possess, or
waive any material rights of substantial value or discharge or satisfy any
material noncurrent liabilities;
(l) sell or otherwise dispose of a substantial part of any of
Pioneer's or the Bank's assets, or sell or agree to sell any of their assets
except in the ordinary course of business;
(m) commit any act or omit to do any act which would cause a material
breach of any material agreement, contract or commitment which is listed in a
schedule delivered to
A-20
<PAGE>
Central pursuant to the terms of, or in connection with, this Agreement, or
which would have an adverse effect on the business, financial condition, or
earnings of Pioneer and the Bank taken as a whole;
(n) violate any law, statute, rule, governmental regulation, order, or
undertaking which violation might have an adverse effect on the business,
financial condition, or earnings of the Pioneer or the Bank;
(o) fail to maintain Pioneer's or the Bank's books, accounts and
records in the usual manner on a basis consistent with that heretofore employed
except for changes required by generally accepted accounting principles or by
the OTS, FDIC or any other state or federal agency having jurisdiction over
Pioneer or the Bank;
(p) fail to charge off on Pioneer's or the Bank's books loan or other
losses in accordance with generally accepted accounting principles and the
pertinent regulations and policies of the OTS, FDIC and other savings bank
regulatory authorities with jurisdiction concerning the write-off of loans and
other losses;
(q) fail to pay, or to make adequate provisions for the payment of,
all taxes (current or deferred), interest payments and penalties (whether or not
reflected in any returns as filed) due and payable (and/or accruable for all
periods prior to the Closing Date, including that portion of their fiscal year
prior to and including the Closing Date) to any city, county, state, foreign
country, the United States, or any other taxing authority;
(r) except in the ordinary course of business and subject to Section
6.06 of this Agreement, sell or dispose of any bonds, shares of capital stock or
other investment securities;
(s) establish, or apply for permission to establish, any banking or
business office facility not in use on the date of this Agreement;
(t) issue any letters of credit other than in the ordinary course of
business or voluntarily increase in a material amount any contingent liabilities
whether under letters of credit or otherwise; or
(u) make any loans, give any discounts or enter into any financing
leases which are not (i) made for good, valuable and adequate consideration in
the ordinary course of business, (ii) evidenced by notes or other forms of
indebtedness which are true, genuine and what they purport to be, and (iii) in
the aggregate together with the loan portfolio of Pioneer and the Bank,
adequately reserved against, in accordance with generally accepted accounting
principles, in an amount, in the aggregate, sufficient in the opinion of
management to provide for all charge-offs reasonably anticipated in the ordinary
course of business.
6.05 Reserves. The Pioneer Unaudited Financial Statements shall reflect a
--------
monthly charge-off, based on a review of the current status of the loan
portfolio, in accordance with generally accepted accounting principles and the
pertinent regulations and policies of the OTS, FDIC and other regulatory
authorities concerning the write-off of loans. Immediately prior to
A-21
<PAGE>
the Effective Time, Pioneer shall establish such additional provisions for loan
losses as may be necessary in the sole determination of Central to conform
Pioneer's and the Bank's loan allowance practices and methods to those of
Central (as such practices and methods are to be applied to the Bank from and
after the Effective Time).
6.06 Preservation of Business and Investment Decisions. Pioneer and the
-------------------------------------------------
Bank shall use their best efforts to preserve the possession and control of all
of their respective assets, to preserve the goodwill of their respective
customers and others with whom they have business relations, and to do nothing
knowingly to impair the ability to keep and preserve its respective businesses
existing on the date of this Agreement. Without in any way limiting the
foregoing, neither Pioneer nor the Bank shall make any significant investment
decision, including, without limitation, engaging in any interest rate swaps,
futures or options transactions, or purchases or sales of any marketable
securities other than overnight Federal Reserve Funds, U.S. Treasury securities
of a term of one year or less, without first consulting with the Chief Financial
Officer of Central or her designee.
6.07 Notification of Material Changes and Litigation. Pioneer shall
-----------------------------------------------
provide Central with prompt written notice, accompanied by a detailed
description and analysis, (a) of any material adverse change or, to the best of
their knowledge, potentially material adverse change in the condition, earnings
or businesses of Pioneer or the Bank, (b) of any event or condition of any
character (whether actual or threatened) materially and adversely affecting or
that has a substantial possibility of materially and adversely affecting, any
of their financial conditions, earnings, businesses or assets, and (c) of all
claims, regulatory proceedings and litigation (whether actual or threatened and
whether or not material) against or possibly involving Pioneer or the Bank or
(where such actual or threatened claims, regulatory proceedings or litigation
arise in connection with actions taken or alleged to be taken by any officer,
employee or director in his or her capacity as an officer, employee or director)
any officer, employee or director of Pioneer or the Bank. Such adverse or
potentially adverse material changes or such claims, proceedings or litigation
shall include, without limitation, any adverse or potentially adverse material
change in or any litigation arising in connection with any item or matter
reported on any schedule, annex or document delivered by Pioneer or the Bank to
Central in connection with this Agreement.
6.08 Cooperation. Pioneer and Central shall each cooperate, and Pioneer
-----------
and Central shall cause their subsidiary(is) to cooperate, fully, completely and
promptly with the other in connection with satisfying all conditions set forth
in this Agreement and effecting the transactions contemplated by this Agreement.
6.09 Regulatory Filings. Each party will cooperate with the other in the
------------------
preparation and filing of and will use its best efforts to prepare and file
within 30 days of the date hereof, all applications, notices and/or other
documents required to be filed to obtain the regulatory approvals and consents
required from the Federal Reserve, OTS, FDIC, Federal Trade Commission ("FTC"),
United States Department of Justice ("DOJ"), and any other applicable state or
federal authority for the consummation of the Exchange. Prior to filing any
such application or notice, each party shall provide the other with the
opportunity to review and comment on such application or other document. Except
to the extent prohibited by law, from the date of this Agreement until the
Closing Date, Pioneer and the Bank shall deliver to Central
A-22
<PAGE>
contemporaneously with their filing a copy of all applications, reports and
other documents hereafter filed with the SEC, the FTC, the DOJ, the Federal
Reserve, the KDFI, the FDIC, the OTS, the FHLB, or the Kentucky Secretary of
State, and all "comment" letters and other correspondence from any of the
foregoing regulatory agencies in connection with such filings promptly after
receipt thereof.
6.10 Pioneer Financial Statements and SEC Reports. Pioneer shall deliver
--------------------------------------------
to Central as soon as they become available but in any event promptly, the
Pioneer Unaudited Financial Statements. Pioneer shall deliver to Central,
promptly after filing, a copy of all reports and other documents filed by
Pioneer with the SEC.
6.11 Discussion with Other Purchasers. Except to the extent the
--------------------------------
fulfillment of the Pioneer Directors' fiduciary duties clearly requires such
action, Pioneer, the Bank, and the Pioneer Directors shall and shall cause
Pioneer's and the Bank's executive officers not, to solicit, authorize the
solicitation of, or enter into any discussions with any third party (a "Third
Party"), (a) to purchase any shares of the capital common stock or any option or
warrant to purchase shares of the capital common stock of Pioneer or the Bank or
any securities convertible into the capital common stock of Pioneer or the Bank
or any other equity security of either of them; (b) to make a tender or exchange
offer for any shares of the capital common stock of Pioneer or the Bank or any
other equity security of Pioneer or the Bank, (c) to purchase, lease or
otherwise acquire all or a substantial portion of the assets of Pioneer or the
Bank; or (d) to merge, consolidate or otherwise combine with Pioneer or the Bank
(a "Third Party Sale").
6.12 Publicity. Except as required by legal process or by operation of
---------
applicable law or as provided below, neither Pioneer, the Bank nor Central shall
disclose or publish, and each of Pioneer, the Bank and Central shall use their
best efforts to cause their officers and employees and the officers and
employees of their affiliates to not disclose or publish, any information
concerning this Agreement or the transactions contemplated by this Agreement.
Only Pioneer and Central may make public announcements regarding this Agreement
and the transactions contemplated herein and each shall have an opportunity to
review any public announcement prior to its release by the other.
6.13 Proxy Statement. As promptly as practicable after the date hereof,
---------------
Pioneer shall prepare the Proxy Statement to be mailed to the shareholders of
Pioneer in connection with the Exchange. Central and Pioneer shall cooperate
with each other in order to facilitate the preparation, filing and clearance of
the Proxy Statement under the Securities Laws. Each of Central and Pioneer will
promptly advise the other if it determines that any information furnished by it
to the other specifically for use in the Proxy Statement included therein, is or
becomes false or misleading in any material respect. In no event shall either
party hereto be liable for, and each party shall indemnify and hold the other
harmless from, any untrue statement of a material fact or omission to state a
material fact in the Proxy Statement made in reliance upon, and in conformity
with, written information concerning the other party furnished by such other
party specifically for use in the Proxy Statement.
6.14 Merger of Bank. Pioneer and the Bank covenant and agree that they
--------------
will take any and all actions requested by Central to merge the Bank into and
with Central Bank, FSB, and
A-23
<PAGE>
shall provide to Central any and all information needed to file a merger
application with the OTS; provided, however, that merger shall not be effective
until after the Effective Time.
6.15 Year 2000 Compliance. Pioneer and the Bank shall take any and all
--------------------
actions reasonably requested by banking regulators to insure that Pioneer and
the Bank are in compliance with all applicable regulations of banking and other
governmental authorities with respect to the operation of the Pioneer's and the
Bank's computer and data systems on or after January 1, 2000 and will advise
Central of the status of, and provide Central copies of any correspondence to or
from banking regulators related to, the foregoing matters.
6.16 FHLB Accounts. Pioneer and the Bank acknowledge that the Bank's
-------------
reconciliation of the FHLB Demand General Ledger Account (the "FHLB Demand
Account") reflects a number of outstanding reconciling items. Pioneer and the
Bank further acknowledge that the Bank's FHLB Advance General Ledger Account
(the "FHLB Advance Account") does not reconcile to FHLB records. Pioneer and
the Bank covenant to take any and all actions necessary to (i) (1) clear (i.e.,
----
determine the nature of the item and appropriate disposition) of all current
reconciling items as promptly as practicable following the date hereof, and (2)
maintain the reconciliations in good order, with no reconciling items older than
60 days, through the Closing Date; and (ii) reconcile and clear any outstanding
items necessary to resolve the outage in the FHLB Advance Account. Pioneer and
the Bank further agree to maintain a log reflecting all journal entries
necessary to clear outstanding items. From the date hereof through the Closing,
Central shall have the right upon reasonable notice to supervise and/or review
the progress of the Bank in connection with the clearing of the FHLB Demand
Account and the FHLB Advance Account.
6.17 Liquidation Account. Immediately after the Effective Time, Central
-------------------
agrees to cause the Bank to maintain the liquidation account of Bank established
pursuant to 12 C.F.R. Part 563b.3(f).
SECTION 7
Conditions of Exchange
----------------------
7.01 Conditions to Obligations. The obligations of Pioneer and Central to
-------------------------
consummate the Exchange shall be subject to the satisfaction of the following
conditions on or before the Closing Date:
(a) Shareholder Approval. This Agreement and the Plan of Exchange
--------------------
shall have been approved by the shareholders of Pioneer.
(b) Regulatory Approval. The Federal Reserve and the OTS shall each,
-------------------
upon application duly made, have given its approval to the Exchange and the
transactions contemplated hereby, and all mandatory and statutory waiting
periods shall have expired. Central and Pioneer shall have obtained all
appropriate orders, consents, approvals and clearances in form and substance
determined in good faith to be reasonably satisfactory to all of them, from all
regulatory agencies and other governmental authorities whose order, consent,
approval, absence
A-24
<PAGE>
of disapproval, or clearance is required by law for the consummation of the
transactions contemplated by this Agreement, and the terms of all requisite
orders, consents, approvals and clearances shall permit the effectuation of the
Exchange. Central and Pioneer shall have made all appropriate filings with the
FTC and DOJ under the Hart Scott Rodino Antitrust Improvements Act, as amended.
(c) No Proceedings.
--------------
(i) (A) No action or proceeding shall have been instituted
before a court or other governmental body by any governmental agency or public
authority or other Person to restrain or prohibit the transactions contemplated
by this Agreement or to obtain damages or other relief in connection with the
execution of this Agreement or the consummation of the transactions contemplated
hereby; and
(B) No governmental agency shall have notified any of
Central, Pioneer or the Bank to the effect that consummation of the transactions
contemplated by this Agreement would constitute a violation of any law and that
it intends to commence proceedings to restrain consummation of the Exchange;
(ii) Provided, however, that (a) the occurrence of an event
described in clause (i)(A) or (i)(B) of this subsection shall not be deemed to
create a failure of a condition pursuant to this Section 7.01, unless the Board
of Directors of Pioneer or Central shall have determined, and given written
notice to the other of its determination that the occurrence of the event makes
consummation of the Exchange unwise in its opinion, and (b) if any action or
proceeding described in clause (i)(A) of this subsection has been concluded,
with an outcome which would not result in damages, restrain, prohibit or declare
illegal the consummation of the transactions contemplated by this Agreement,
then the action or proceeding shall not be deemed to create a failure of a
condition pursuant to this subsection 7.01(c).
(d) Fairness Opinion. Pioneer shall have received an opinion from
----------------
Professional Bank Services, Inc., dated as of a date no later than the date of
the Proxy Statement mailed to Pioneer shareholders in connection with the
Exchange and not subsequently withdrawn prior to the vote of Pioneer
shareholders on the Plan of Exchange, to the effect that the Exchange is fair to
Pioneer's shareholders from a financial point of view.
7.02 Conditions to Obligations of Central. The obligations of Central to
------------------------------------
effect the Exchange shall be subject to the satisfaction of the following
conditions, in addition to those set forth in Section 7.01, on or before the
Closing Date:
(a) Representations, Warranties and Covenants. The representations
-----------------------------------------
and warranties of Pioneer and the Bank herein contained shall be true in all
material respects as stated herein, both when made and with the same effect as
though made again as of the Closing Date except to the extent of changes
permitted by the terms of this Agreement or except for breaches of
representations or warranties which would not have a material adverse effect on
the business, financial condition or operations of Pioneer and the Bank taken as
a whole. Pioneer, the Bank, and the Pioneer Directors shall have performed all
obligations and complied with all covenants
A-25
<PAGE>
required by this Agreement to be performed or complied with by each of them
prior to the Closing Date or except for failures to perform or comply which
would not have a material adverse effect on the business, financial condition or
operations of Pioneer and the Bank taken as a whole. In addition, Pioneer shall
have delivered to Central its certificate dated as of the Closing Date and
signed by its President and by its Assistant Secretary, to the effect that,
except as disclosed in the certificate, they do not know of any failure or
material breach of any representation, warranty, or covenant made by Pioneer,
the Bank or the Pioneer Directors or of any conditions to Central's obligations
to effect the Exchange.
(b) No Material Adverse Change. There shall not have occurred any
--------------------------
material adverse change since September 30, 1997, in the financial condition,
business, assets, or results of operations of Pioneer or the Bank.
(c) Opinion of Counsel. Central shall have received from Stites &
------------------
Harbison an opinion dated as of the Closing Date in form and substance
reasonably satisfactory to Central and to the effect attached hereto in Annex
-----
7.02(c).
- -------
(d) Statutory Requirements. All statutory requirements for the valid
----------------------
consummation by Central of the transactions contemplated by this Agreement shall
have been fulfilled; all authorizations, consents and approvals of all federal,
state, local and foreign governmental agencies and authorities required to be
obtained in order to permit consummation by Central of the transactions
contemplated by this Agreement and to permit the business presently carried on
by Pioneer and the Bank to continue unimpaired in all material respects
immediately following the Effective Time shall have been obtained.
(e) Environmental Matters. Notwithstanding any representations or
---------------------
warranties of Pioneer or the Bank or any liability or unasserted liability under
the Environmental Laws listed on the Disclosure Letter, neither Pioneer nor the
Bank, nor any of their assets shall be subject to any liability under the
Environmental Laws that would have a material adverse effect on the financial
condition of Pioneer and the Bank taken as a whole.
(f) Resignations and Releases of Officers. Central shall have
-------------------------------------
received executed releases and resignations from the officers of the Bank and
Pioneer designated by Central prior to the Closing providing that as a condition
to such officers receiving the closing bonuses described in Pioneer's Disclosure
Letter that such officers release Pioneer, the Bank and Central from all claims
arising out of their employment by Pioneer and/or the Bank and that such
officers resign effective at the Effective Time from all positions they then
hold with Pioneer and the Bank. The foregoing releases and resignations shall
be in form and substance reasonably satisfactory to Central.
(g) Employment and Noncompetition Agreements. Carl C. Norton shall
----------------------------------------
have executed and delivered an Amendment No. 1 to Employment Agreement dated as
of the Closing Date, and Janet W. Prewitt shall have executed and delivered a
Noncompetition Agreement dated as of the Closing Date, in each case, in
substantially the forms attached hereto as Annex 7.02(g).
-------------
A-26
<PAGE>
(h) Liquidation Account. Central shall have received written
-------------------
confirmation from the OTS is a form reasonably satisfactory to Central's counsel
to the effect that the Exchange shall not cause or constitute a complete
liquidation within the meaning of 12 C.F.R. Part 563b.3(f)(3).
(i) Norton Settlement. Central shall have received signed releases
-----------------
from Tom Norton, George Norton and their children in substantially the form
attached hereto as Annex 7.02(i).
-------------
7.03 Conditions to Obligations of Pioneer. The obligations of Pioneer to
------------------------------------
effect the Exchange shall be subject to the satisfaction of the following
conditions, in addition to those set forth in Section 7.01, on or before the
Closing Date:
(a) Representations, Warranties and Covenants. The representations
-----------------------------------------
and warranties of Central herein contained shall be true and correct in all
material respects as stated herein, both when made and with the same effect as
though made again as of the Closing Date except to the extent of changes
permitted by the terms of this Agreement or except for breaches of
representations or warranties which would not have a material adverse effect on
the consummation of the transactions contemplated herein. Central shall have
performed all obligations and complied with all covenants required by this
Agreement to be performed or complied with by Central prior to the Closing Date.
In addition, Central shall have delivered to Pioneer its certificate dated as of
the Closing Date and signed by its Chief Executive Officer and by its Assistant
Secretary, to the effect that, except as disclosed in the certificate, they do
not know of any failure or material breach of any representation, warranty, or
covenant made by Central or of any conditions to Pioneer's obligation to effect
the Exchange.
(b) Opinion of Counsel for Central. Pioneer shall have received an
------------------------------
opinion dated as of the Closing Date from Brown, Todd & Heyburn PLLC, counsel
for Central, in form and substance reasonably satisfactory to Pioneer to the
effect attached hereto in Annex 7.03(b).
-------------
(c) Statutory Requirements. All statutory requirements for the valid
----------------------
consummation by Pioneer and the Bank of the transactions contemplated by this
Agreement shall have been fulfilled; all authorizations, consents and approvals
of all federal, state, local, and foreign governmental agencies and authorities
required to be obtained in order to permit consummation by Pioneer and the Bank
of the transactions contemplated by this Agreement shall have been obtained.
SECTION 8
Termination of Agreement
------------------------
(a) This Agreement may be terminated at any time before the Effective
Time:
(i) Mutual Consent. By Central and Pioneer, if for any reason
--------------
consummation of the transactions contemplated by this Agreement is inadvisable
in the opinions of both Central and Pioneer.
A-27
<PAGE>
(ii) Conditions to Central's Obligations Not Met. By Central,
-------------------------------------------
upon written notice to Pioneer, if by September 30, 1998, any of the conditions
set forth in Sections 7.01 or 7.02 shall have not been satisfied or, if
appropriate, waived.
(iii) Conditions to Pioneer or the Bank Obligations Not Met. By
-----------------------------------------------------
Pioneer, upon written notice to Central, if by September 30, 1998, any of the
conditions set forth in Sections 7.01 or 7.03 shall not have been satisfied or,
if appropriate, waived.
(iv) Termination Date. By either Central or Pioneer if,
----------------
without fault of the terminating party, the Exchange shall not have been
consummated by September 30, 1998.
(b) Effect of Termination. Upon rightful termination of this
---------------------
Agreement by either Central or Pioneer pursuant to this Section 8, except for
this Section 8 and Sections 4.19, 9.03, and 9.09 and that certain
confidentiality letter between the parties dated January 27, 1998 (the
"Confidentiality Agreement"), which shall survive to the fullest extent
permitted by law, this Agreement shall be void and of no further effect, and
there shall be no liability by reason of this Agreement, or the termination
thereof on the part of Central, Pioneer or the Bank or the respective directors,
officers, employees, agents or shareholders of any of them, unless such rightful
termination results from a party's intentional or reckless misrepresentation or
intentional or reckless breach of any covenant or representation or warranty
contained herein. In such event the terminating party shall have all remedies
available to it at law or in equity.
SECTION 9
Miscellaneous
-------------
9.01 Deliveries and Notices. Any deliveries, notices or other
----------------------
communications required or permitted hereunder shall be deemed to have been duly
made or given (i) if delivered in person, or (ii) if sent by registered mail,
return receipt requested, postage prepaid, and addressed as follows:
(a) If to Pioneer:
Pioneer Financial Corporation
25 East Hickman Street
P.O. Box 597
Winchester, Kentucky 40391
Attn: Janet White Prewitt, Chairman
Carl C. Norton, President & C.E.O.
with a copy to:
Stites & Harbison
250 West Main Street, Suite 250
Lexington, Kentucky 40507
Attn: Walter R. Byrne, Jr.
A-28
<PAGE>
(b) If to Central:
Central Bancshares, Inc.
300 West Vine Street
P.O. Box 1360
Lexington, Kentucky 40507
Attn: Luther Deaton, Jr., President
with copy to:
Brown, Todd & Heyburn PLLC
2700 Lexington Financial Center
Lexington, Kentucky 40507-1749
Attn: Paul E. Sullivan
or if sent to such substituted address as Pioneer or Central has given to the
other in writing.
9.02 Waivers. No waivers or failure to insist upon strict compliance with
-------
any obligation, covenant, agreement or condition of this Agreement shall operate
as a waiver of, or an estoppel with respect to, any subsequent or other failure.
9.03 Expenses. Except as otherwise provided below, each party shall assume
--------
and pay its own legal, accounting and other expenses incurred in connection with
the transactions contemplated by this Agreement.
9.04 Headings, Counterparts, and Pronouns. The headings in this Agreement
------------------------------------
have been included solely for ease of reference and shall not be considered in
the interpretation or construction of this Agreement. This Agreement may be
executed in one or more counterparts, each of which shall be deemed an original,
but all of which together shall constitute one and the same instrument.
Wherever from the context it appears appropriate, pronouns stated in the
masculine, feminine or neuter in this Agreement shall include the masculine,
feminine and neuter.
9.05 Annexes and Schedules. The annexes and Disclosure Letter to this
---------------------
Agreement are incorporated herein by this reference and expressly made a part
hereof.
9.06 Entire Agreement. Except for the Confidentiality Agreement, all prior
----------------
negotiations and agreements, by and between Central and Pioneer are superseded
by this Agreement, and there are no representations, warranties, understandings
or agreements between the parties other than those expressly set forth herein or
in an annex or Disclosure Letter delivered or to be delivered in connection
herewith.
9.07 Governing Law. This Agreement shall be governed by, and construed and
-------------
interpreted in accordance with, the laws of the Commonwealth of Kentucky.
9.08 Disclosure. To the extent Pioneer or any executive officer or
----------
director of Pioneer is approached by any Third Party with respect to any of the
transactions referenced in subsections
A-29
<PAGE>
(a)-(d) of Section 6.11 of this Agreement or to the extent fiduciary duty
clearly requires the directors of Pioneer to enter into discussions with a Third
Party regarding the foregoing ("Required Discussions"), Pioneer shall disclose
to Central immediately that it, its executive officers or directors were
contacted or have entered into discussions and the continuing details related
thereto.
9.09 Termination Fee. In the event that, as a result of a breach of
---------------
Section 6.11 of this Agreement or the Required Discussions, at any time prior to
the termination of this Agreement Pioneer's Board of Directors fails to
recommend that Pioneer's shareholders vote in favor of this Agreement and the
Plan of Exchange or any of the Pioneer Directors fail to vote their shares of
Pioneer Common Stock in favor of this Agreement and Plan of Exchange, then
Pioneer shall promptly pay Central a termination fee of $500,000.00.
9.10 Pioneer Directors. The Board of Directors of Pioneer join in this
-----------------
Agreement solely in order to make the covenants referred to or provided to be
done and performed by them under Section 6.02 of this Agreement. Each Pioneer
Director acknowledges that, in consideration for making such covenants and
performing such tasks, he or she shall benefit from a smooth and orderly
transition in the ownership and control of Pioneer.
9.11 Nonsurvival of Representations and Warranties. All representations
---------------------------------------------
and warranties contained in this Agreement by any party hereto or set forth in
any certificate or instrument delivered by or on behalf of the parties hereto
pursuant to this Agreement shall expire at the Effective Time.
9.12 Termination of Pioneer ESOP. Notwithstanding any other provision
---------------------------
herein which may appear to the contrary, the parties acknowledge that the
Pioneer ESOP may be required under applicable law to remain in existence and
operation for some period after the Effective Time. Central shall cause the
Pioneer ESOP to be terminated for the benefit of the Pioneer ESOP participants
as soon as practicable after the Effective Time and in a manner consistent with
applicable law and regulations.
A-30
<PAGE>
IN WITNESS WHEREOF, Pioneer, the Bank and Central have executed and
delivered multiple originals of this Agreement on the date set forth in the
preamble hereto.
CENTRAL BANCSHARES, INC. PIONEER FINANCIAL CORPORATION
By /s/ Luther Deaton, Jr. By /s/ Janet W. Prewitt
---------------------------------- --------------------------
Luther Deaton, Jr., President & CEO
Title: Chairman of the Board
Attested by /s/ Gary Coyle By: /s/ Carl C. Norton
-------------------------- --------------------------
Gary Coyle, Secretary
Title: President
A-31
PIONEER FEDERAL SAVINGS BANK
By /s/ Janet W. Prewitt
----------------------------
Title: Chairman of the Board
Attested by /s/ Carl C. Norton
-----------------------
Title: President
* * * * *
A-31
<PAGE>
The undersigned directors join in this Agreement for the purposes set forth
in Section 9.10.
/s/ William M. Cress
------------------------
WILLIAM M. CRESS
/s/ Carl C. Norton
----------------------
CARL C. NORTON
/s/ Janet W. Prewitt
-----------------------
JANET W. PREWITT
/s/ Robert G. Strode
-----------------------
ROBERT G. STRODE
/s/ Thomas D. Muncie
-----------------------
THOMAS D. MUNCIE
/s/ Andrew James Ryan
------------------------
ANDREW JAMES RYAN
/s/ Nancy M. Lawwill
----------------------
NANCY M. LAWWILL
/s/ Wayne M. Martin
----------------------
WAYNE M. MARTIN
A-32
<PAGE>
ANNEX 1.01
Plan of Share Exchange
----------------------
1. Names. The name of the corporation whose shares shall be acquired is
-----
Pioneer Financial Corporation (the "Pioneer"). The name of the acquiring
corporation is Central Bancshares, Inc. (the "Central").
2. Terms and Conditions. The terms and conditions of the exchange (the
--------------------
"Exchange") are set forth in this Plan of Share Exchange and in a Share Exchange
Agreement dated May 7, 1998, between Central and Pioneer, and joined in by
Pioneer's directors (the "Agreement").
3. Pioneer Capital Stock. The authorized capital stock of the Pioneer
---------------------
consists solely of 500,000 shares of common stock, of a par value of $1.00 per
share ("Pioneer Common Stock"), of which 208,233 shares are issued and
outstanding.
4. Manner and Basis of Exchanging Shares. The manner and basis of
-------------------------------------
exchanging the shares of Pioneer Common Stock for cash, as set forth in the
Agreement, are as follows:
(a) As provided by Section 271B.11-060(2) of the Kentucky Business
Corporation Act (the "Act"), and except as may be modified in accordance with
Section 1.05 of the Agreement, when the Exchange takes effect at the Effective
Time (as defined below):
(i) Each outstanding share of Pioneer Common Stock shall,
ipso facto, and without any action on the part of the holder thereof,
be exchanged for the right to receive up to $98.50 in cash, without
interest (the "Exchange Consideration") and the former holders of the
shares of Pioneer Common Stock shall be entitled only to the exchange
rights provided in this Plan of Share Exchange and the Agreement or to
their rights under Subtitle 13, Chapter 271B of Kentucky Revised
Statutes (KRS 271B.13-010 to .13-310) (the "Dissenters' Rights
Statute"); and
(ii) Central shall acquire and be issued a number of shares
of Pioneer Common Stock equal to the number of shares of Pioneer
Common Stock that was outstanding immediately prior to the Effective
Time, which shares of Pioneer Common Stock so acquired by Central
shall constitute all of the issued and outstanding Pioneer Common
Stock at the Effective Time.
(b) As soon as practicable after the Effective Time, Pioneer
Federal Savings Bank, Winchester, Kentucky, as exchange agent (the "Exchange
Agent"), shall deliver to each holder of Pioneer Common Stock (except holders of
Dissenting Shares, as defined below) converted into the right to receive the
Exchange Consideration pursuant to paragraph 4(a)(i) above, who has validly
surrendered to the Exchange Agent the certificate or certificates representing
such shares of Pioneer Common Stock together with a letter of transmittal in the
A-33
<PAGE>
customary form and other documentation that reasonably may be required by
Central or the Exchange Agent, a check for an amount equal to the product of the
Exchange Consideration and the number of shares of Pioneer Common Stock
represented by the certificate or certificates so surrendered.
(c) At and after the Effective Time, each holder of a Certificate
that represented shares of Pioneer Common Stock immediately before the Effective
Time shall cease to have any rights as a shareholder of the Pioneer, except for
the right to surrender such Certificate in exchange for the payment provided
pursuant to paragraph 4(a)(i) above or to perfect his rights under the
Dissenters' Rights Statute.
5. Dissenters' Rights.
------------------
(a) Notwithstanding any provision contained herein or in the
Agreement to the contrary, shares of Pioneer Common Stock held by a holder who
has demanded and perfected his demand for payment in accordance with Dissenters'
Rights Statute and as of the Effective Time has not effectively withdrawn or
lost his right to such payment ("Dissenting Shares") shall not be exchanged for
a right to the Exchange Consideration for each Dissenting Share, but the holder
thereof shall only be entitled to such rights as are granted by Dissenters'
Rights Statute.
(b) Notwithstanding the provisions of subsection (a) of this
paragraph 5, if any holder of shares of Pioneer Common Stock who demands payment
under the Dissenters' Rights Statute shall effectively withdraw or lose (through
failure to perfect or otherwise) his right to such payment, then as of the
Effective Time or the occurrence of such event, whichever last occurs, each of
such holder's shares of Pioneer Common Stock shall automatically be exchanged
for only the right to receive the Exchange Consideration from Central as
otherwise provided herein.
6. Effective Time. Central shall deliver the Articles of Exchange to the
--------------
Secretary of State of the Commonwealth of Kentucky for filing as promptly as
possible following the Closing. The Exchange shall be effective at 11:59:59
P.M., Lexington, Kentucky, time on the date Articles of Share Exchange are filed
with the Secretary of State of the Commonwealth of Kentucky (the "Effective
Time").
7. Directors and Officers. At the Effective Time, the directors of
----------------------
Pioneer immediately prior to the Effective Time shall all resign and the persons
designated by Central shall become the directors of Pioneer, each such director
to hold office, subject to the applicable provisions of Pioneer's Articles of
Incorporation and Bylaws, until the next annual meeting of Pioneer's
shareholders and until his successor is elected and qualifies. At the Effective
Time, all the officers of Pioneer immediately prior to the Effective Time shall
likewise resign and the persons designated by Central shall become the officers
of Pioneer, each such officers to serve at the pleasure of the Pioneer's new
Board of Directors.
8. Articles and Bylaws. The Exchange shall not amend, alter or otherwise
-------------------
affect the Pioneer's Articles of Incorporation or Bylaws, both as amended and in
effect at the Effective Time.
* * * * *
A-34
<PAGE>
Appendix B
SUBTITLE 13. DISSENTERS' RIGHTS
RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
271B.13-010. Definitions. -- As used in this subtitle:
(1) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving or acquiring corporation by merger
or share exchange of that issuer.
(2) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under KRS 271B.13-020 and who exercises that right when and in
the manner required by KRS 271B.13-200 to 271B.13-280.
(3) "Fair value," with respect to a dissenter's shares, means the
value of the shares immediately before the effectuation of the corporate action
to which the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable. In
any transaction subject to the requirements of KRS 271B.12-210 or exempted by
KRS 271B.12-220(2), "fair value" shall be at least an amount required to be paid
under KRS 271B.12-220(2) in order to be exempt from the requirements of KRS
271B.12-210.
(4) "Interest" means interest from the effective date of the
corporate action until the date of payment, at the average rate currently paid
by the corporation on its principal bank loans or, if none, at a rate that is
fair and equitable under all the circumstances.
(5) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation.
(6) "Beneficial shareholder" means the person who is a beneficial
owner of shares held in a voting trust or by a nominee as the record
shareholder.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder. (Enact. Acts 1988, ch. 23 (S) 123, effective January 1, 1989.)
271B.13-020. Right to dissent.
(1) A shareholder shall be entitled to dissent from, and obtain
payment of the fair value of his shares in the event of, any of
the following corporate actions:
(a) Consummation of a plan of merger to which the corporation
is a party:
1. If shareholder approval is required for the merger
by KRS 271B.11-030 or the articles of incorporation and the
shareholder is entitled to vote on the merger; or
2. If the corporation is a subsidiary that is merged
with its parent under KRS 271B.11-040;
B-1
<PAGE>
(b) Consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired, if
the shareholder is entitled to vote on the plan;
(c) Consummation of a sale or exchange of all, or substantially all,
of the property of the corporation other than in the usual and
regular course of business, if the shareholder is entitled to
vote on the sale or exchange, including a sale in dissolution,
but not including a sale pursuant to court order or a sale for
cash pursuant to a plan by which all or substantially all of the
net proceeds of the sale will be distributed to the shareholders
within one (1) year after the date of sale;
(d) An amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares
because it:
1. Alters or abolishes a preferential right of the shares to a
distribution or in dissolution;
2. Creates, alters, or abolishes a right in respect of
redemption, including a provision respecting a sinking fund
for the redemption or repurchase, of the shares;
3. Excludes or limits the right of the shares to vote on any
matter other than a limitation by dilution through issuance
of shares or other securities with similar voting rights; or
4. Reduces the number of shares owned by the shareholder to a
fraction of a share if the fractional share so created is to
be acquired for cash under KRS 271B.6-040;
(e) Any transaction subject to the requirements of KRS 271B.12-210 or
exempted by KRS 271B.12-220(2); or
(f) Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws, or a resolution of
the board of directors provides that voting or nonvoting
shareholders are entitled to dissent and obtain payment for their
shares.
(2) A shareholder entitled to dissent and obtain payment for his shares
under this chapter shall not challenge the corporate action creating
his entitlement unless the action is unlawful or fraudulent with
respect to the shareholder or the corporation.
(Enact. Acts 1988, ch. 23 (S) 124, effective January 1, 1989.)
271B.13-030. Dissent by nominee and beneficial owners. -- (1) A record
shareholder may assert dissenters' rights as to fewer than all the shares
registered in his name only if he shall dissent with respect to all shares
beneficially owned by any one (1) person and notify the corporation in writing
of the name and address of each person on whose behalf he asserts dissenters'
rights. The rights of a partial dissenter under this subsection shall be
determined as if the shares as to which he dissents and his other shares were
registered in the names of different shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to shares
held on his behalf only if:
B-2
<PAGE>
(a) He submits to the corporation the record shareholder's written
consent to the dissent not later than the time the beneficial shareholder
asserts dissenters' rights; and
(b) He does so with respect to all shares of which he is the
beneficial shareholder or over which he has power to direct the vote.
(Enact. Acts 1988, ch. 23, (S) 125, effective January 1, 1989.)
PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS
271B.13-200. Notice of dissenters' rights. -- (1) If proposed corporate
action creating dissenters' rights under KRS 271B.13-020 is submitted to a vote
at a shareholders' meeting, the meeting notice must state that shareholders are
or may be entitled to assert dissenters' rights under this subtitle and the
corporation shall undertake to provide a copy of this subtitle to any
shareholder entitled to vote at the shareholders' meeting upon request of that
shareholder.
(2) If corporate action creating dissenters' rights under KRS 271B.13-
020 is taken without a vote of shareholders, the corporation shall notify in
writing all shareholders entitled to assert dissenters' rights that the action
was taken and send them the dissenters' notice described in KRS 271B.13-220
(Enact. Acts 1988, ch. 23 (S) 126, effective January 1, 1989.)
271B.13-210. Notice of intent to demand payments. -- (1) If proposed
corporate action creating dissenters' rights under KRS 271B.13-020 is submitted
to a vote at a shareholders' meeting, a shareholder who wishes to assert
dissenters' rights:
(a) Shall deliver to the corporation before the vote is taken written
notice of his intent to demand payment for his shares if the proposed action is
effectuated; and
(b) Shall not vote his shares in favor of the proposed action.
(2) A shareholder who does not satisfy the requirements of subsection
(1) of this section shall not be entitled to payment for his shares under this
chapter. (Enact. Acts 1988, ch. 23, (S) 127, effective January 1, 1989.)
271B.13-220. Dissenters' notice. -- (1) If proposed corporate action
creating dissenters' rights under KRS 271B.13-020 is authorized at a
shareholders' meeting, the corporation shall deliver a written dissenters'
notice to all shareholders who satisfied the requirements of KRS 271B.13-210.
(2) The dissenters' notice shall be sent no later than ten (10) days
after the date the proposed corporate action was authorized by the shareholders,
or, if no shareholder authorization was obtained, by the board of directors, and
shall:
(a) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(b) Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
(c) Supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the terms of the proposed
corporate action and requires that the person asserting dissenters' rights
certify whether or not he acquired beneficial ownership of the shares before
that date;
B-3
<PAGE>
(d) Set a date by which the corporation must receive the payment demand,
which date may not be fewer than thirty (30), nor more than sixty (60) days
after the date the notice provided in subsection (1) of this section is
delivered; and
(e) Be accompanied by a copy of this subtitle. (Enact. Act 1988, ch. 23,
(S) 128, effective January 1, 1989.)
271B.13-230. Duty to demand payment. -- (1) A shareholder who is sent a
dissenters' notice described in KRS 271B.13-220 shall demand payment, certify
whether he acquired beneficial ownership of the shares before the date required
to be set forth in the dissenters' notice pursuant to subsection (2)(c) of KRS
271B.13-220, and deposit his certificates in accordance with the terms of the
notice.
(2) The shareholder who demands payment and deposits his share
certificates under subsection (1) of this section shall retain all other rights
of a shareholder until these rights are cancelled or modified by the taking of
the proposed corporate action.
(3) A shareholder who does not demand payment or deposit his share
certificates where required, each by the date set in the dissenters' notice,
shall not be entitled to payment for his shares under this subtitle. (Enact.
Acts 1988, ch. 23 (S) 129, effective January 1, 1989.)
271B.13-240. Share restrictions. -- (1) the corporation may restrict the
transfer of uncertificated shares from the date the demand for their payment is
received until the proposed corporate action is taken or the restrictions
released under KRS 271B.13-260.
(2) The person for whom dissenters' rights are asserted as to
uncertificated shares shall retain all other rights of a shareholder until these
rights are cancelled or modified by the taking of the proposed corporate action.
(Enact. Acts 1988, ch. 23, (S) 130, effective January 1, 1989.)
271B.13-250. Payment. -- (1) Except as provided in KRS 271B.13-270, as
soon as the proposed corporate action is taken, or upon receipt of a payment
demand, the corporation shall pay each dissenter who complied with KRS 271B.13-
230 the amount the corporation estimates to be the fair value of his shares,
plus accrued interest.
(2) The payment shall be accompanied by:
(a) The corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen (16) months before the date of payment, an income
statement for that year, a statement of changes in shareholders' equity for that
year, and the latest available interim financial statements, if any;
(b) A statement of the corporation's estimate of the fair value of the
shares;
(c) An explanation of how the interest was calculated; and
(d) A statement of the dissenter's right to demand payment under KRS
271B.13-280. (Enact. Acts 1988, ch. 23, (S) 131, effective January 1, 1989.)
271B.13-260. Failure to take action. -- (1) If the corporation does not
take the proposed action within sixty (60) days after the date set for demanding
payment and depositing share certificates, the corporation shall return the
deposited certificates and release the transfer restrictions imposed on
uncertificated shares.
B-4
<PAGE>
(2) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it shall send a new
dissenters' notice under KRS 271B.13-220 and repeat the payment demand
procedure. (Enact. Acts 1988, ch. 23, (S) 132, effective January 1, 1989.)
271B.13-270. After-acquired shares. -- (1) A corporation may elect to
withhold payment required by KRS 271B.13-250 from a dissenter unless he was the
beneficial owner of the shares before the date set forth in the dissenters'
notice as the date of the first announcement to news media or to shareholders of
the terms of the proposed corporate action.
(2) To the extent the corporation elects to withhold payment under
subsection (1) of this section, after taking the proposed corporate action, it
shall estimate the fair value of the shares, plus accrued interest, and shall
pay this amount to each dissenter who agrees to accept it in full satisfaction
of his demand. The corporation shall send with its offer a statement of its
estimate of the fair value of the shares, an explanation of how the interest was
calculated, and a statement of the dissenter's right to demand payment under KRS
271B.13-280. (Enact. Acts 1988, ch 23, (S) 133, effective January 1, 1989.)
271B.13-280. Procedure if shareholders dissatisfied with payment or offer.
- -- (1) A dissenter may notify the corporation in writing of his own estimate
of the fair value of his shares and amount of interest due, and demand payment
of his estimate (less any payment under KRS 271B.13-250), or reject the
corporation's offer under KRS 271B.13-270 and demand payment of the fair value
of his shares and interest due, if:
(a) The dissenter believes that the amount paid under KRS 271B.13-250 or
offered under KRS 271B.13-270 is less than the fair value of his shares or that
the interest due is incorrectly calculated;
(b) The corporation fails to make payment under KRS 271B.13-250 within
sixty (60) days after the date set for demanding payment; or
(c) The corporation, having failed to take the proposed action, does not
return the deposited certificates or release the transfer restrictions imposed
on uncertificated shares within sixty (60) days after the date set for demanding
payment.
(2) A dissenter waives his right to demand payment under this section
unless he shall notify the corporation of his demand in writing under subsection
(1) of this section within thirty (30) days after the corporation made or
offered payment for his shares. (Enact. Acts 1988, ch 23, (S) 134, effective
January 1, 1989.)
271B.13-300. Court action. -- (1) If a demand for payment under KRS
271B.13-280 remains unsettled, the corporation shall commence a proceeding
within sixty (60) days after receiving the payment demand and petition the court
to determine the fair value of the shares and accrued interest. If the
corporation does not commence the proceeding within the sixty (60) day period,
it shall pay each dissenter whose demand remains unsettled the amount demanded.
(2) The corporation shall commence the proceeding in the circuit court
of the county where a corporation's principal office (or, if none in this state,
its registered office) is located. If the corporation is a foreign corporation
without a registered office in this state, it shall commence the proceeding in
the county in this state where the registered office of the domestic corporation
merged with or whose shares were acquired by the foreign corporation was
located.
(3) The corporation shall make all dissenters (whether or not residents
of this state) whose demands remain unsettled parties to the proceeding as in an
action against their shares and all parties shall
B-5
<PAGE>
be served with a copy of the petition. Nonresidents may be served by registered
or certified mail or by publication as provided by law.
(4) The jurisdiction of the court in which the proceeding is commenced
under subsection (2) of this section shall be plenary and exclusive. The court
may appoint one (1) or more persons as appraisers to receive evidence and
recommend decision on the question of fair value. The appraisers have the
powers described in the order appointing them, or in any amendment to it. The
dissenters shall be entitled to the same discovery rights as parties in other
civil proceedings.
(5) Each dissenter made a party to the proceeding shall be entitled to
judgment:
(a) For the amount, if any, by which the court finds the fair value of
his shares, plus interest, exceeds the amount paid by the corporation; or
(b) For the fair value, plus accrued interest, of his after-acquired
shares for which the corporation elected to withhold payment under KRS 271B.13-
270. (Enact. Acts 1988, ch. 23 (S) 135, effective January 1, 1989.)
271B.13-310. Court costs and counsel fees. -- (1) The court in an
appraisal proceeding commenced under KRS 271B.13-300 shall determine all costs
of the proceeding, including the reasonable compensation and expenses of
appraisers appointed by the court. The court shall assess the costs against the
corporation, except that the court may assess costs against all or some of the
dissenters, in amounts the court finds equitable, to the extent the court finds
the dissenters acted arbitrarily, vexatiously, or not in good faith in demanding
payment under KRS 271B.13-280.
(2) The court may also assess the fees and expenses of counsel and
experts for the respective parties, in amounts the court finds equitable;
(a) Against the corporation and in favor of any or all dissenters, if
the court finds the corporation did not substantially comply with the
requirements of KRS 271B.13-200 to 271B.13-280; or
(b) Against either the corporation or a dissenter, in favor of any other
party, if the court finds that the party against whom the fees and expenses are
assessed acted arbitrarily, vexatiously, or not in good faith with respect to
the rights provided by this subtitle.
(3) If the court finds that the services of counsel for any dissenter
were of substantial benefit to other dissenters similarly situated, and that the
fees for those services should not be assessed against the corporation, the
court may award to these counsel reasonable fees to be paid out of the amounts
awarded the dissenters who were benefited. (Enact. Acts 1988, ch. 23, (S) 136,
effective January 1, 1989.)
B-6
<PAGE>
Appendix C
May 7, 1998
Board of Directors
Pioneer Financial Corporation
25 East Hickman Street
Winchester, Kentucky 40391
Dear Members of the Board:
You have requested our opinion as investment bankers as to the fairness, from a
financial perspective, to the common shareholders of Pioneer Financial
Corporation, Winchester, Kentucky (the "Company") of the proposed share exchange
of the Company with Central Bancshares, Inc., Lexington, Kentucky ("Central").
In the proposed share exchange, Company shareholders will receive $98.50 in cash
for each share of the Company, as further defined in the Share Exchange
Agreement between Central and the Company (the "Agreement") representing an
aggregate value of $20,510,950.50.
Professional Bank Services, Inc. ("PBS") is a bank consulting firm and as part
of its investment banking business is continually engaged in reviewing the
fairness, from a financial perspective, of bank acquisition transactions and in
the valuation of banks and other businesses and their securities in connection
with mergers, acquisitions, estate settlements and other purposes. We are
independent with respect to the parties of the proposed transaction.
For purposes of this opinion, PBS performed a review and analysis of the
historic performance of the Company and its wholly owned subsidiary Pioneer
Federal Savings Bank, Winchester, Kentucky (the "Bank") contained in: (i)
December 31, 1997 and September 30, 1997 Thrift Financial Report of Condition
and Operations filed by the Bank; (ii) September 30, 1997, 1996 and 1995 audited
annual reports of the Company and unaudited financial data of the Company and
Bank as of December 31, 1997; and (iii) September 30, 1997 Uniform Thrift
Performance Report of the Bank. We have reviewed and tabulated statistical data
regarding the loan portfolio securities portfolio and other performance ratios
and statistics. Financial projections were prepared and analyzed as well as
other financial studies, analyses and investigations as deemed relevant for the
purposes of this opinion. In review of the aforementioned information, we have
taken into account our assessment of general market and financial conditions,
our experience in other transactions, and our knowledge of the banking industry
generally. We have also taken into consideration other offers received by the
Company.
C-1
<PAGE>
Board of Directors
Pioneer Financial Corporation
May 7, 1998
Page Two
We have not compiled, reviewed or audited the financial statements of the
Company or Central, nor have we independently verified any of the information
reviewed; we have relied upon such information as being complete and accurate in
all material respects. We have not made independent evaluation of the assets of
the Company or Central.
Based on the foregoing and all other factors deemed relevant, it is our opinion
as investment bankers, that, as of the date hereof, the consideration proposed
to be received by shareholders of the Company under the Agreement is fair and
equitable from a financial perspective.
Very truly yours,
PROFESSIONAL BANK SERVICES, INC.
By: /s/ Christopher L. Hargrove
Christopher L. Hargrove
President
CLH/pjr
C-2
<PAGE>
June 30, 1998
Board of Directors
Pioneer Financial Corporation
25 East Hickman Street
Winchester, Kentucky 40391
Dear Members of the Board:
To our knowledge, nothing of a material nature has occurred since the issuance
of our Fairness Opinion (the "Opinion") to the common shareholders of Pioneer
Financial Corporation, Winchester, Kentucky (the "Company") dated May 7, 1998,
that would cause us to alter or rescind the Opinion. The Opinion is related to
the fairness from a financial point of view, to the common shareholders of the
Company, regarding the proposed transaction outlined in the Share Exchange
Agreement between Central Bancshares, Inc., Lexington, Kentucky and the Company.
Very truly yours,
PROFESSIONAL BANK SERVICES, INC.
/s/ Christopher L. Hargrove
Christopher L. Hargrove
President
CLH/pjr
<PAGE>
PIONEER FINANCIAL CORPORATION
WINCHESTER, KENTUCKY
PROXY
This proxy is solicited on behalf of the Board of Directors.
The undersigned hereby appoints Carolyn Vermillion and John Rompf as proxies,
with full power of substitution, and authorizes them, and each of them, to vote
and act with respect to all matters submitted to a vote of the Special Meeting
of Shareholders of Pioneer Financial Corporation ("Pioneer") to be held on
Thursday, July 30, 1998, at 10:00 a.m. local time, at the main office of Pioneer
Federal Savings Bank, 25 East Hickman Street, Winchester, Kentucky, and at any,
and all adjournments thereof.
The Board of Directors recommends a vote FOR the following proposal:
PROPOSAL to APPROVE the Share Exchange Agreement and related Plan of Share
Exchange
[_] FOR [_] AGAINST [_] ABSTAIN
In their discretion, the proxies are authorized to vote upon such other matters
as may properly come before the Special Meeting. The proxies shall vote as
specified herein. If a choice is not specified, they shall vote for approval of
the Share Exchange Agreement and Related Plan of Share Exchange.
Date: _________________, 1998.
Signature _________________________________
Signature _________________________________
(Name should be signed exactly as shown on stock certificate. Title should be
added if signing in a representative capacity.)
PLEASE MARK, DATE, AND SIGN THIS PROXY AND RETURN IT PROMPTLY TO PIONEER IN THE
ACCOMPANYING ENVELOPE.
