<PAGE>
 
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549
                                   Form 10-K
(Mark One)

[XX]   ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) of  THE SECURITIES
       EXCHANGE ACT OF 1934 (Fee Required)

For the Year Ended: September 30, 1996

[  ]   TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) of THE SECURITIES
       EXCHANGE ACT OF 1934 (No Fee Required)

For the transition period from ______ to ______

                         Commission File Number 0-28076

                         PIONEER FINANCIAL CORPORATION
                         -----------------------------
             (Exact name of registrant as specified in its charter)

                 United States                        61-1273657
                 -------------                        ----------
          (State or other jurisdiction of            (I.R.S. Employer
           incorporation or organization)          Identification Number)

       25 East Hickman Street, Winchester, Kentucky                 40391
       --------------------------------------------                ------
      (Address of principal executive offices)                  (Zip Code)

                                 (606) 744-3972
                                 --------------
              (Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: not applicable.

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $1.00
                                                            -------------------
par value                                                   (Title of Class)
---------

Indicate by check mark whether the registrant:   (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports); and (2) has been subject to such filing
requirements for the past 90 days.  Yes X   No__
                                        -       

As of December 19, 1996, the aggregate market value of the shares of common
stock of the registrant outstanding was $8,641,670.  This figure is based on the
last known sales price of $41.50 per share, which sale took place during the
week of November 25, 1996.   The number of shares of the registrant's common
stock outstanding as of December 19, 1996 was 208,233 shares.

The aggregate market value of the shares of common stock held by non-affiliates
of the registrant was $6,574,597 as of December 19, 1996.

                      DOCUMENTS INCORPORATED BY REFERENCE
                      -----------------------------------

List hereunder the following documents incorporated by reference and the Part of
Form 10K into which the document is incorporated:

(1)  Portions of Annual Report to Stockholders for the year ended September 30,
     1996, is incorporated into Part II, Items 5-8 and Part III, Item 11 of this
     Form 10-K.

(2)  Portions of definitive proxy statement for the January 8, 1997 Annual
     Meeting of stockholders is incorporated into Part III, Items 10-13 of this
     Form 10-K.

                                       1
<PAGE>
 
                         PIONEER FINANCIAL CORPORATION

     Pioneer Financial Corporation (herein "Corporation"), a Kentucky
corporation, was organized in 1994 as a thrift holding company. On December 20,
1994, the stockholders of Pioneer Federal Savings Bank (herein "Pioneer Federal"
or "Bank") approved an agreement and Plan of Reorganization dated October 31,
1994, whereby the Bank became a wholly-owned subsidiary of Pioneer Financial
Corporation. In accordance with the Reorganization Plan, the stockholders of the
Bank exchanged their shares of common stock on a one for one basis for common
shares in Pioneer Financial Corporation. Pioneer Federal is the main asset of
Pioneer Financial, and the consolidated financial statements of the Corporation
and of the Bank are attached hereto.

     Pioneer Federal Savings Bank, with assets of more than $74.4 million at
September 30, 1996, is the larger of the two thrift institutions in Winchester,
Kentucky.  Pioneer Federal is a federally chartered stock savings bank which
conducts business from its corporate headquarters and home office in Winchester,
Clark County, Kentucky, and branch banking offices in Winchester and in Stanton,
Powell County, Kentucky.  Pioneer Federal was chartered in 1885 by the
Commonwealth of Kentucky as the Winchester Building and Savings Association.  In
1985, Pioneer Federal obtained a federal mutual savings bank charter and changed
its name to Pioneer Federal Savings Bank.  As of June 30, 1987, Pioneer Federal
completed its conversion from a federal mutual to a federal stock savings bank.
The Bank is a member of the Federal Home Loan Bank System, and its deposits are
insured by the Savings Association Insurance Fund ("SAIF"), which is
administered by the Federal Deposit Insurance Corporation ("FDIC").

                                     PART I

ITEM 1.  BUSINESS

GENERAL

     Pioneer Financial Corporation has no significant assets other than the
outstanding capital stock of the Bank.  The principal business of Pioneer
Financial Corporation is operating the Bank. Pioneer Federal is primarily
engaged in the business of attracting deposits from the general public and using
such deposits, together with other borrowings and funds, to make residential
mortgage loans, commercial real estate loans, consumer loans (including
automobile and personal loans), and other investments.

     The executive offices of the Corporation are located at 25 East Hickman
Street, Winchester, Kentucky 40391, and its telephone number is (606) 744-3972.

     The principal sources of funds for the Bank's lending activities are
deposits received from the general public, proceeds from the sale of loans,
principal repayments on loans, mortgage-backed securities and other investments,
as well as funds provided by operations. Another source of funding available to
the Bank is advances from the Federal Home Loan Bank of Cincinnati ("FHLB of
Cincinnati"). The Bank's primary sources of income are interest on loans,
interest on mortgage-backed securities, interest and dividends on investment
securities, commission income and fees charged in connection with its lending
and deposit activities and services. Its principal

                                       2
<PAGE>
 
expenses are interest paid on deposits and personnel costs incurred in the
operations of the Bank's offices.

     Pioneer Federal has a wholly-owned subsidiary, Pioneer Service Corporation,
which was formed for the purpose of holding stock in Intrieve, Incorporated.
Intrieve provides on line computer processing and inquiry service for Pioneer
Federal and numerous other thrift institutions in the region. Pioneer Federal
invested $16,000 in the stock of Pioneer Service Corporation, which is carried
on its books at cost.

     The executive offices of the Bank are located at 25 East Hickman Street,
Winchester, Kentucky  40391, and its telephone number is  (606) 744-3972.

MARKET AREA

     The Bank's primary market area consists of Clark and Powell Counties,
Kentucky which have populations of 30,000 and 12,000 respectively.  This area is
primarily rural with a large amount of agri-business.  The primary lending
concentration is in the Bank's market area, an area mainly comprised of the
cities of Winchester and Stanton.  Historically, the economy in the Bank's
market area has been dependent on agriculture, agriculture related industries
and manufacturing. The largest employers in the market area are East Kentucky
Power and the Clark County Board of Education.

     Economic growth in the Bank's market area remains dependent upon the local
economy.  In addition, the deposit and loan activity of the Bank is
significantly affected by economic conditions in its market area.

LENDING ACTIVITIES

     Generally, federally chartered thrift institutions may invest up to 10% of
assets in secured or unsecured non-real estate loans for commercial, corporate,
business or agricultural purposes, up to 30% of assets in consumer loans and up
to 10% of assets in tangible personal property in order to engage in equipment
leasing. In addition, commercial real estate loans are not required to be
secured by first liens.

     Under FIRREA, the aggregate amount of non-residential real estate loans
which a federal savings institution may make may not exceed 400% of the
institution's capital as determined under the capital standards mandated by
FIRREA.  Previously, such loans were permitted up to 40% of a savings
institution's assets.  On September 30, 1996, the Bank was permitted to make
non-residential real estate loans aggregating approximately $34 million.

     Geographic Lending Area.  All real estate mortgage loans originated by
Pioneer Federal are secured by real estate located within an 85 mile radius of
Winchester, Kentucky.  The Bank has concentrated its lending activity in the
Clark and Powell Counties area.  Within limits, the Bank may originate and
purchase participation or whole loans secured by real estate located in other
parts of the United States.

                                       3
<PAGE>
 
     General.  The principal lending activity of Pioneer Federal historically
has been the origination of single family conventional loans (i.e., loans that
are neither insured nor partially guaranteed by governmental agencies).  Second
mortgage loans, construction loans, loans on agricultural property, loans on
multi-family dwellings, and commercial real estate loans are also offered by the
Bank.  The vast majority of the Bank's real estate loans are made on existing
property.  A limited number of construction loans have been made.  The Bank is
not engaged in real estate development activities.

     Real Estate Loans. The loan-to-value ratio, maturity and other provisions
of the loans made by Pioneer Federal generally reflect the Bank's policy of
making the maximum loan permissible consistent with applicable regulations,
sound lending practices, market conditions and the Bank's underwriting
standards.

     Historically, Pioneer Federal made long-term real estate loans with fixed
rates of interest. Beginning in 1980, Pioneer Federal diversified its loan
portfolio by offering adjustable rate loans and short-term fixed rate loans with
a balloon payment.  Adjustable rate loans are those in which the interest rate
may change during the term of the loan.  Adjustable rate loans and shorter term,
fixed-rate loans allow the average yield received by the Bank on its total loan
portfolio to more closely reflect prevailing interest rates, so as to keep pace
with changes in interest rates paid on savings accounts.  Most fixed rate loans
that are offered and retained by the Bank are secured by one-to-four family
owner-occupied dwellings for terms of no more than 30 years with rates fixed up
to 5 years.  The Bank uses the secondary market for the purpose of offering
long-term fixed rate loans to its customers, while retaining the servicing of
these loans.  These types of loans are normally pre-sold to the Federal Home
Loan Mortgage Corporation (FHLMC).

     Pioneer Federal does not have a minimum loan amount requirement for its
real property loans. Due to the cost of underwriting and originating a loan,
however, the Bank charges a minimum origination fee for all mortgage loans.  See
"Loan Origination and Other Fees" on page 10.

     All improved real estate which serves as security for a loan from the Bank
must be insured in an amount acceptable to the Bank against fire, extended
coverage, vandalism, malicious mischief and other hazards.  Each such policy
contains a standard mortgage clause in favor of the Bank. Where applicable,
flood insurance is also required.  Such insurance must be maintained in an
amount not less than the Bank's insurable interest in the security.  Borrowers
of loans exceeding 80% of the value of the property given as collateral are
required to have private mortgage insurance in favor of the Bank with a company
acceptable to the Bank.

     Residential Real Estate Loans.  The Bank extends loans secured by liens on
residential real estate in an amount up to 80% (without private mortgage
insurance) or 95% (with private mortgage insurance) of the appraised value or
sales price of the security, whichever is less.  The maximum term of any loan on
a one-to-four family dwelling is 30 years.  The maximum loan amount as a
percentage of value and term for multi-family properties is handled on a case-
by-case basis.  The maximum term for loans on multi-family property is 30 years.

     Generally, second mortgages are taken by the Bank for single-family
residences which have an existing first mortgage held by the Bank.  Many second
mortgages are for home improvement

                                       4
<PAGE>
 
purposes. More and more frequently, in large part due to current tax laws, the
Bank takes a second mortgage on residential real property in cases where the
residential collateral would not be strictly necessary. These loans are
classified as consumer loans rather than as real estate loans as is consistent
with federal regulations. This is described in a separate paragraph.

     Pioneer Federal has a small number of VA-guaranteed and FHA- approved loans
in its loan portfolio.  The Bank has the necessary approvals to originate VA and
FHA loans in any county in the State of Kentucky.  The Bank's current policy is
to sell any VA or FHA loan which it originates.

     Construction Loans. Pioneer Federal offers construction loans (loans for
the temporary financing of real estate under construction) to individuals and
building contractors for building projects, generally homes and small office or
commercial buildings. Most construction loans are made for terms less than 12
months, have fixed rates of interest and provide for periodic disbursement of
loan funds based on receipts submitted by the builder during construction and
periodic site inspections by Bank personnel. These loans are primarily
refinanced to permanent loans when construction is completed. The application
process is identical to that required for mortgage loans. Additionally, however,
these borrowers are required to submit the lot or land location, the name of the
builder, copies of plans, specifications, and building cost estimates, which are
used by the Bank in determining the lending value of the subject property.
Construction loans are generally made for a single building although small
project, multi-building loans are occasionally made.

     Construction loans may be secured by collateral other than or in addition
to the real estate under construction (e.g. other real estate or assignments of
other types).  These loans are classified by the Bank as either real estate
loans (in the case of a first lien mortgage) or consumer loans (in the case of a
second lien mortgage or an assignment of another type where the value of the
real estate is not the primary collateral).  Pioneer Federal generally makes
construction loans only in those instances where it expects to have the
permanent loan on the property.  At September 30, 1996, Pioneer Federal had 14
construction loans outstanding, in the total amount of $1,808,092.  All of these
loans were for single-family residences.

     Commercial Loans.  The Bank offers loans secured by income-producing real
estate, primarily small office buildings, restaurants, and retail complexes.
Depending on the collateral taken for the loan, the Bank has, in the past,
classified loans which are secured by income-producing real estate as either
real estate loans or a type of consumer loan (e.g., second lien mortgage loan or
assignment loan).  Most of the loans secured by mortgages on commercial real
estate have terms of 10 to 25 years, with interest adjustable annually.  These
mortgage loans are limited to 75% of the value of the real estate, unless the
borrower would qualify for an unsecured loan, in which case a greater loan value
(up to 85%) may be approved.  Under FIRREA, the Bank is permitted to make non-
residential real estate loans up to 400% of capital; non-residential real estate
loans in excess of such amount must be approved by the Director of the Office of
Thrift Supervision (OTS).

     Consumer and Other Loans.  Federal regulations permit federally chartered
thrift institutions to make secured and unsecured consumer loans up to 30% of
the institution's assets. Though

                                       5
<PAGE>
 
federal thrift institutions have lending authority above the 30% category for
certain consumer loans, Pioneer Federal's policy is to limit its investment in
consumer loans to 20% of its assets. This limit has never been reached.  The
Bank makes both secured and unsecured consumer loans. A loan may be secured by a
lien on real estate but still be classified as a consumer or other loan rather
than as a real estate loan in accordance with federal regulations.

     The Bank is active in the origination of secured consumer loans for
automobiles, home improvements and other purposes with a variety of collateral
including automobiles, livestock and equipment. Pioneer Federal offers unsecured
consumer loans only to customers with whom Pioneer has had experience. Consumer
loans are approved by the President or Treasurer and any one of the following:
Loan Officer or Branch Manager of the Bank.

LOAN SOLICITATION AND PROCESSING

     The Bank actively solicits mortgage loan applications from existing
customers, customer referrals, and persons making telephone calls and visits to
its offices. Applications are not taken over the telephone although in some
instances a combination of verbal (by telephone) and written (by mail)
applications are received. Upon receipt of a loan application from a prospective
borrower, a credit report and verifications of employment and income are
obtained. An appraisal of the real estate intended to secure the proposed loan
is made by outside appraisers, all of whom have been approved by the Board of
Directors. At September 30, 1996 staff appraisers are not being used, but staff
appraisers are making periodic construction inspections and completion
certification inspections. Approved outside appraisers are used for all loans to
employees. Appraisals are prepared in accordance with regulatory guidelines and
follow accepted and established appraisal practices as reflected by nationally
recognized professional appraisal organizations. All appraisals include a
physical inspection of the property.

     All loan applicants are required to meet specified debt-to-income and
stable employment requirements, and possess an acceptable credit history. Loan
applications are presented to the Loan Committee for approval. All loan
applications for loans over $200,000 are presented to the Executive Committee of
the Board of Directors or to the full Board of Directors for approval.
Applicants are promptly notified of approval of a loan application. Written
notice of adverse action is provided as required by current regulations.

                                       6
<PAGE>
 
     Loan Portfolio Composition.  The following table sets forth selected data
relating to the composition of the Bank's loan portfolio by type of loan as of
the dates indicated.
<TABLE>
<CAPTION>
                                                At September 30,
                                            ------------------------
                                          1996                  1995
                                          ----                  ----
                                   Amount     Percent      Amount     Percent
                                   ------     -------      ------     -------
Type of Loans:                               (Dollars In Thousands)
-----------------------------
<S>                               <C>         <C>          <C>        <C>
REAL ESTATE:
One-to-four family residential    $21,253        58.63%     $20,069     60.01%
Multi-family and commercial         3,641        10.05%       3,265      9.76%
Agricultural                          565         1.56%         789      2.36%
Construction                        1,808         4.99%       2,055      6.14%

CONSUMER:
Commercial                          3,283         9.06%       2,219      6.64%
Loans secured by deposits           1,048         2.89%         973      2.91%
Home equity                         1,663         4.59%       1,175      3.51%
Other secured                       2,711         7.48%       2,687      8.03%
Unsecured                             271         0.75%         212      0.64%
                                  -------       ------      -------    ------
Total loans receivable             36,243       100.00%      33,444    100.00%
                                                ======                 ======
LESS:
Loans in process                     (403)                     (865)
Provisions for loan losses           (382)                     (352)
Deferred loan origination fees       (211)                     (201)
                                    -----                      ----
Loans, receivable net             $35,247                   $32,026
                                  =======                   =======

 
 </TABLE>

                                       7
<PAGE>
 
     Loan Maturity Schedule. The following table sets forth certain information
as of September 30, 1996 (the end of the most recent audit year reported)
regarding the dollar amount (in thousands of dollars) of loans maturing in the
Bank's portfolio based on contractual terms to maturity for both fixed-rate and
variable-rate instruments.

<TABLE>
<CAPTION>
 
                                                 Multi
                                                Family
                                              Agricultural
                               1-4 Family         and
                              Residential     Commercial     Construction   Consumer      Total 
                              -----------     ------------   ------------   --------      -----
                                                   (In Thousands)
<S>                           <C>           <C>             <C>             <C>          <C> 
Non-performing                 $      91     $        114    $          3   $     15     $   223
                              ----------     ------------    ------------   --------     -------
Amounts Due:
  Within 3 months                    173                            1,805      1,109       3,087
  3 months to 1 year                 169                4                      2,145       2,318
                              ----------     ------------    ------------   --------     -------
  Total due within one year          342                4           1,805      3,254       5,405
                              ----------     ------------    ------------   --------     -------
After 1 year:
  1 to 3 years                       313               16                      1,005       1,334
  3 to 5 years                       852              300                      2,923       4,075
  5 to 10 years                    2,988              884                        930       4,802
  10 to 20 years                   9,153            2,072                                 11,225
  Over 20 year                     7,513              816                        849       9,178
                              ----------     ------------    ------------   --------     -------
Total due after one year          20,819            4,088               0      5,707      30,614
                              ----------     ------------    ------------   --------     -------
Total amount due                 $21,252           $4,206          $1,808     $8,976     $36,242
                              ==========     ============    ============   ========     =======

Less:
Loans in process                                                                            (403)
Provision for loan losses                                                                   (382)
Deferred origination fees                                                                   (210)
                                                                                         -------
       Loans receivable, net                                                             $35,247
                                                                                         =======

 </TABLE>

                                       8
<PAGE>
 
     The following table sets forth the dollar amount (in thousands of dollars)
of all loans due after one year from September 30, 1996 (the end of the most
recent audit year reported) which have predetermined (or fixed) interest rates
and which have floating or adjustable interest rates. Loans which are
contractually due within one year after September 30, 1996 are not included in
this table.
<TABLE>
<CAPTION>
                                                        Floating or
                                        Fixed Rates  Adjustable Rates    Total
                                        -----------  ----------------   --------
                                                      (In Thousands)
 
<S>                                     <C>          <C>                <C>
One-to-four family residential              $ 7,578           $13,241    $20,819

Multi-family, agricultural and                1,049             3,039      4,088
commercial

Consumer                                      3,484             2,223      5,707

Construction                                      0                 0          0
                                          ---------     -------------   --------

                                            $12,111           $18,503    $30,614

                                          =========     =============   ========
</TABLE>
     Interest rates on adjustable-rate loans are adjusted according to one of
four indices: the National Average Contract Interest Rate for Purchase of
Previously Occupied Homes, the National Average Cost of Funds to SAIF-Insured
Institutions, the weekly average yield on U.S. Treasury bills adjusted to a
constant maturity of one year, and the Prime Rate published in the Wall Street
Journal. Adjustments on loans are made in accordance with federal regulations.
Maximum and minimum interest rates ("ceilings" and "floors") vary as do the
amounts by which rates can change at any one time ("caps").

     Loan Purchases and Sales. Historically, Pioneer Federal was primarily a
portfolio lender. The secondary market, however, has provided Pioneer Federal
with a method by which to offer long term, fixed rate mortgages to its customers
without incurring additional interest rate risk. Since the Spring of 1986, the
Bank has utilized the secondary market to meet its customers' needs and manage
the interest rate risk of the Bank.

     The Bank uses standard FHLMC/FNMA loan documents on all first mortgage
residential loans to enable the Bank to make sales in the secondary market when
market conditions warrant. Pioneer Federal retains the servicing of nearly all
of its loans sold in the secondary market, and collects servicing fees.  The
fees received from this activity are included in "loan and other service fees,
net" in the financial statements incorporated by reference in this filing.  See
"Loan Origination and Other Fees" below.

                                       9
<PAGE>
 
     Loan Commitments.  Commitments for approved mortgage loans are made orally
or in writing. Loan commitments are made for permanent financing of property
under construction, and such commitments are usually outstanding for a period of
six to twelve months prior to the closing of the loan.  Pioneer exercises
virtually all commitments it issues.  As of September 30, 1996 Pioneer Federal
had $2.3 million in loans approved but not closed; none of these were evidenced
by written commitments.  The Bank anticipated selling $1.2 million of the loans
approved but not closed.  As of September 30, 1996 Pioneer Federal had no formal
commitments to sell loans.

     Loan Origination and Other Fees. In addition to interest earned on loans,
the Bank receives loan origination fees. Loan fees are a percentage of the
principal amount of the mortgage loan which are charged to the borrower for
origination of the loan. Beginning in fiscal 1988, under FASB #91, loan
origination fees are recognized as an adjustment of the loan's yield over the
life of the loan by the interest method to the extent that they exceed costs
incurred in the origination of the loan.

     Pioneer Federal's loan origination fees are charged according to amount,
term, loan-to-value, type of loan and market conditions on conventional
residential mortgages and commercial real estate loans. The total amount of
deferred loan fees at September 30, 1996 was $210,000. Any deferred loan fees
not previously accounted for are recognized as income at the time the loan is
sold or paid off.

     Loan origination and commitment fees are volatile sources of income. Such
fees vary with the volume and type of loans and commitments made and with
competitive conditions in mortgage markets, which in turn respond to the demand
for and availability of money. The Bank has experienced a decrease in loan fee
income during periods of rising interest rates due to the resulting lack of
demand for mortgage loans.

     The Bank receives other fees and charges relating to existing loans, which
include late charges, fees collected in connection with a change in borrower or
other loan modifications, and servicing fees for loans collected for others.
These fees and charges have not constituted a material source of income in the
past.  Loan service fees as a percentage of net interest income were 6.5%, 6.0%
and 5.3% for fiscal 1996, 1995, and 1994, respectively.

     Asset Classification, Allowance for Losses and Non-Performing Assets.
Pioneer Federal's collection procedures provide that when a loan is 30 or more
days delinquent the borrower is contacted by mail and payment is requested (in
cases of past delinquent history the borrower is contacted prior to being 30
days delinquent).  If the delinquency continues, further efforts are made to
contact the borrower and resolve the problem.  In certain instances, the Bank
may modify the loan or grant a limited moratorium on loan payments to enable the
borrower to reorganize his financial affairs.  If the loan continues in a
delinquent status for 90 days or more, the Bank may initiate foreclosure
proceedings.  Any property acquired as the result of foreclosure or by deed in
lieu of foreclosure is classified as "real estate held for resale" until such
time as it is sold or otherwise disposed of by the Bank.

     Federal regulations require savings institutions to classify their assets
on the basis of quality on a regular basis.  An asset is classified as
substandard if it is determined to be inadequately

                                       10
<PAGE>
 
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any.  An asset is classified as doubtful if full
collection is highly questionable or improbable.  An asset is classified as loss
if it is considered uncollectible, even if a partial recovery could be expected
in the future.  The regulations also provide for a special mention designation,
described as assets which do not currently expose a savings institution to a
sufficient degree of risk to warrant classification but do possess credit
deficiencies or potential weaknesses deserving management's close attention.
Assets classified as substandard or doubtful require a savings institution to
establish general allowances for loan losses.  If an asset or portion thereof is
classified loss, a savings institution must either establish a specific
allowance for loss in the amount of the asset classified loss, or charge off
such amount.  Federal examiners may disagree with a savings institution's
classifications.  If a savings institution does not agree with an examiner's
classification of an asset, it may appeal this determination to the OTS Regional
Director.  Pioneer Federal regularly reviews its assets to determine whether any
assets require classification or re-classification.  The Board of Directors
reviews and approves all classifications. At September 30, 1996, Pioneer Federal
had loans designated special mention of $1,204,000 and classified assets
consisting of loans classified as substandard of $284,000, none as doubtful and
$18,000 as loss.

     Management will continue to actively monitor Pioneer Federal's asset
quality and will establish loan loss reserves and will charge off loans and
properties acquired in settlement of loans against the allowances for losses on
such loans and such properties when appropriate, and will provide specific loss
allowances when necessary.  Although management believes it uses the best
information available to make determinations with respect to the allowances for
losses, future adjustments may be necessary if economic conditions differ
substantially from the economic conditions in the assumptions used in making the
initial determinations.

     Pioneer Federal's methodology for establishing the allowances for losses
takes into consideration probable losses that have been identified in connection
with specific assets as well as losses that have not been identified but can be
expected to occur.  Management conducts regular reviews of Pioneer Federal's
assets and evaluates the need to establish allowances on the basis of these
reviews.  Allowances are established by the Board of Directors on a quarterly
basis based on an assessment of risk in Pioneer Federal's assets taking into
consideration the composition and quality of the portfolio, delinquency trends,
current charge-offs and loss experience, the state of the real estate market,
regulatory reviews conducted in the regulatory examination process and economic
conditions generally.  Allowances will be provided for individual assets, or
portions of assets, when ultimate collection is considered improbable by
management based on the current payment status of the assets and the fair value
or net realizable value of the security.  At the date of foreclosure or other
repossession, Pioneer Federal would transfer the property to real estate
acquired in settlement of loans at the lower of cost or fair value.  Any portion
of the outstanding loan balance in excess of fair value would be charged off
against the allowance for loan losses.  If, upon ultimate disposition of the
property, net sales proceeds exceed the net carrying value of the property, a
gain on sale of real estate would be recorded.  Any losses realized on sale
would be charged to the allowance for loan losses on real estate acquired
through foreclosure.  Historically, management has emphasized the Bank's loss
experience over other factors in establishing a provision for loan losses.

                                       11
<PAGE>
 
     In December 1993 the banking regulatory agencies, including the OTS,
adopted a policy statement regarding maintenance of an adequate allowance for
loan and lease losses and an effective loan review system.  This policy includes
an arithmetic formula for checking the reasonableness of an institution's
allowance for loan loss estimate compared to the average loss experience of the
industry as a whole.  Examiners will review an institution's allowance for loan
losses and compare it against the sum of (i) 50% of the portfolio that is
classified doubtful; (ii) 15% of the portfolio that is classified as
substandard; and (iii) for the portions of the portfolio that have not been
classified (including those loans designated as special mention), estimated
credit losses over the upcoming twelve months given the facts and circumstances
as of the evaluation date.  This amount is considered neither a "floor" nor a
"safe harbor" of the level of allowance for loan losses an institution should
maintain, but examiners will view a shortfall relative to the amount as an
indication that they should review management's policy on allocating these
allowances to determine whether it is reasonable based on all relevant factors.

                                       12
<PAGE>
 
     The following table sets forth an analysis of the Bank's allowance for
possible losses for the periods indicated.
<TABLE>
<CAPTION>
                                                At or For the Year
                                                Ended September 30,
 
                                                 1996        1995
                                               --------    --------
                                              (Dollars In Thousands)

<S>                                           <C>         <C>
Total loans outstanding                         $36,243     $33,444
                                                =======     =======
Average loans outstanding                       $33,358     $31,622
                                                =======     ======= 

Allowance balance (at beginning of period)      $   352     $   348
 
Provision (credit):
 Residential                                         57          19
 Consumer
Net Charge-offs (recoveries):
 Residential                                         31           7
 Consumer                                            (4)          8
                                                -------     ------- 
Allowance balance (at end of period)            $   382     $   352
                                                =======     ======= 
Allowance for loan losses as a percent
 of total loans outstanding                        1.05%       1.05%
 
Net loans charged off as a percent of
 average loans outstanding                         0.08%       0.05%
 
</TABLE>

                                       13
<PAGE>
 
     The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated.  Management believes that the
allowance can be allocated by category only on an approximate basis.  The
allocation of the allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses in
any category.

<TABLE>
<CAPTION>
                                                          At September 30,

                                            1996                    1995
                                           -----                    -----
                                                Percent of               Percent of
                                                 Loans to                 Loans to
                                       Amount  Total Loans     Amount   Total Loans
                                       ------  -----------     ------   -----------
At end of period allocated to:                      (Dollars In Thousands)
<S>                                    <C>     <C>            <C>       <C>       
                   
 
Real estate mortgage:
     One-to-four-family residential      $224       58.63%      $212         60.01%
     Multi-family and commercial           38       10.05%        34          9.76%
     Agricultural                           6        1.56%         8          2.36%
     Construction (1)                      19        4.99%        22          6.14%
     Consumer (2)                          95       24.77%        76         21.73%
                                       ------      ------    -------       --------
Total allowance for loan losses          $382      100.00%      $353        100.00%
                                       ======      =======   =======       ========
</TABLE>
(1) Includes $2,500 specific reserve attributable to a particular loan and not
    available for other loan losses.
(2) Includes $15,500 specific reserve attributable to particular loans and not
    available for other loan losses.

     Numerous financial institutions throughout the United States have incurred
losses in recent years due to significant increases in loss provisions and
charge-offs resulting largely from higher levels of loan delinquencies and
foreclosures.  Depressed real estate market conditions have adversely affected
the economies of various regions and have had a severe impact on the financial
condition and businesses of many of the financial institutions doing business in
these areas. Considerable uncertainty exists as to the future improvement or
deterioration of the real estate markets in these regions, or of its ultimate
impact on these financial institutions.

     As a result of declines in real estate market values and significant losses
experienced by many financial institutions, there has been a greater level of
scrutiny undertaken by regulatory authorities of the loan portfolios of
financial institutions as part of examinations of such

                                       14
<PAGE>
 
institutions by the FDIC, OTS or other federal or state regulators.  Results of
recent examinations indicate that these regulators may be applying more
conservative criteria in evaluating real estate acquired in settlement of such
loans.  While management believes Pioneer Federal has established its existing
loan loss allowances in accordance with generally accepted accounting
principles, there can be no assurances that regulators, in reviewing Pioneer
Federal's assets, will not make Pioneer Federal increase its loan loss
allowance, thereby negatively affecting Pioneer Federal's reported financial
condition and results of operations.

                                       15
<PAGE>
 
     The following table sets forth information with respect to the Bank's non-
performing assets for the periods indicated.  During the periods shown, the Bank
had no restructured loans within the meaning of Statement of Financial
Accounting Standards No. 15.
<TABLE>
<CAPTION>
                                                                                    At September 30,
                                                                                   1996         1995
                                                                                ----------   ----------
                                                                                (Dollars In Thousands)
<S>                                                                             <C>          <C>
Loans accounted for on a non-accrual basis (1):       
 Residential                                                                         $   3        $  23
 Consumer                                                                               15           18
                                                                                   -------      -------
Total                                                                                   18           41
                                                                                   -------      -------
Accruing loans which are contractually past due 90 days or more (2):
Mortgage loans:
 Permanent loans secured by 1-to-4 family dwelling units                                91          151
 Construction                                                                            0            0
 All other mortgage loans                                                              114            0
                                                                               
Consumer                                                                       
                                                                                   -------      -------
Total                                                                                  205          151
                                                                                   -------      -------
Total non-accrual and accrual loans                                                    223          192
                                                                               
Real estate owned (3)                                                          
                                                                                   -------      -------
Total non-performing assets                                                          $ 223        $ 192
                                                                                   =======      =======
                                                                         
Total non-performing loans to loans                                                   0.62%        0.57%
Total non-performing loans to total assets                                            0.30%        0.24%
Total non-performing assets to total assets                                           0.30%        0.24%
                                                                         
</TABLE>                                                                 
                                                                         
(1)  Non-accrual status denotes loans which management believes may have defined
 weaknesses whereby accrued interest is inadequatel y protected by the current
 net worth and paying capacity of the obligor, or of the collateral pledged.

(2)  Loans more than 90 days past due will continue to accrue interest when
there is no well-defined weakness in the loan regarding net worth and paying
capacity of the obligor or of the collateral pledged which would cause
management to believe that interest accrued will be uncollectible.

(3)  Other non-performing assets represent property acquired by the Bank through
foreclosure, or repossession.  This property is carried at the lower of its
fair market value or the carrying value of the related loan.

                                       16
<PAGE>
 
NON-ACCRUAL LOANS:

   Non-accrual loans at September 30, 1996 consist of one fixed-rate 
construction loan on residential property classified as loss and three fixed-
rate consumer loans classified as loss. The Savings Bank had no other non-
performing assets as of September 30, 1996.

INVESTMENT ACTIVITIES

   Income from investment in securities provides the second largest source of
income for Pioneer Federal after interest on loans.  Pioneer Federal is required
under federal regulations to maintain a minimum amount of liquid assets (which
may be invested in specified short-term securities) and is also permitted to
make certain other investments. The balance of investments in excess of
regulatory requirements are in a variety of instruments including short-term
instruments (such as Municipal Bonds, Federal Home Loan Bank Bonds and
Certificates of Deposit) and longer-term, higher rate instruments (such as
mortgage-backed securities). Investment decisions are made by authorized
officers of the Bank.

   The Bank invests in investment securities in order to diversify its assets,
manage cash flow, obtain yield and maintain the minimum levels of liquid assets
required by regulatory authorities. Such investments generally include purchases
of mortgage-backed securities, federal government and agency securities and
qualified deposits in other financial institutions.
                                        
   At September 30, 1996, the Bank's investment securities totaled $31.6
million, of which $25.2 million were invested in mortgage-backed securities
primarily issued by Government agencies. These types of investments are
interest rate sensitive, and in addition, are subject to prepayment risk.
Prepayment risk is the risk that the principal of the security will be prepaid
in advance of the normal maturity, and any remaining premium or discount
incurred from the purchase of the investment could have a negative impact on the
yield earned on those investments.

   It is management's intention, and Pioneer Federal has the ability, to hold
the majority of its investment security portfolio to maturity. In accordance
with SFAS No. 115, effective October 1, 1995, the Bank began classifying
securities as either held to maturity, available for sale, or available for
trade. Securities classified as held to maturity are carried at their amortized
cost. Securities classified as trading securities are carried at fair value with
any unrealized gain or loss included in net income. Securities classified as
available for sale are carried at fair value, with the net unrealized gain or
loss carried as a separate component of stockholders' equity. At September 30,
1996, the unrealized holding gains of $39,092, less the applicable deferred tax
of $13,291, is included as a separate component of stockholders' equity pursuant
to SFAS No. 115. The balance of investment securities are classified as held to
maturity, which are being held at cost, adjusted for amortization of premiums
and accretion of discounts over the term of the security using the level yield
method. For further information, see Note 2 of Notes to Consolidated Financial
Statements (page 32 of Exhibit 13 here to).

                                       17
<PAGE>
 
   The following table sets forth the carrying value of the Bank's investment
securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
                                              At September 30,
                                           ----------------------
                                              1996        1995
                                           ---------   ---------

                                           (Dollars In Thousands)
<S>                                        <C>         <C>
Investment securities available-for-sale:
 Mortgage-backed securities                   $ 3,076     $ 3,283
 SBA Pools                                      4,525       2,186
                                            ---------   ---------
Total                                           7,601       5,469
                                            ---------   ---------
Investment securities held-to-maturity:
 Mortgage-backed securities                    22,147      27,310
 U.S. Government and federal agencies             500       5,043
 Federal Home Loan Bank of Cincinnati,
  capital stock                                   509         537
 Municipal bonds                                  817         317
                                            ---------   ---------
Total                                          23,973      33,207
                                            ---------   ---------
Total investment securities                   $31,574     $38,676
                                            =========   =========
 
</TABLE>

                                       18
<PAGE>
 
The following table sets forth the scheduled maturities, carrying values, market
value and average yields for the Bank's investment portfolio at September 30,
1996.
<TABLE>
<CAPTION>
 
 
                  -One Year or Less-   -One to Five Years-     -Five to 10 Years-  -More than 10 Years-  -Total Investments-       
                   Carrying  Average   Carrying     Average    Carrying   Average   Carrying  Average     Carrying  Market  Average 
                    Value     Yield     Value        Yield      Value      Yield     Value     Yield       Value     Value   Yield
                   -------   -------   -------     ---------   -------   --------   -------   -------     -------   ------  -------
<S>                <C>       <C>       <C>         <C>          <C>       <C>        <C>       <C>         <C>       <C>     <C> 
Securities 
Available-for-Sale                                         (Dollars in Thousand)

Mortgage-backed    $    0     0.00%    $    0          0.00%   $    0      0.00%    $ 4,525     7.39%     $ 4,525   $ 4,525    7.39%
 securities
SBA Pools               0     0.00%         0          0.00%        0      0.00%      3,076     6.78%       3,076     3,076    6.78%
                  -------   ------    -------      ---------  -------   -------     -------   ------      -------    ------   ------
  Total                 0     0.00%         0          0.00%        0      0.00%      7,601     7.14%       7,601     7,601    7.14%
                  -------   ------    -------      ---------  -------   -------     -------   ------      -------    ------   ------

Securities 
Held-to-Maturity:
 
Mortgage-backed     1,235     6.78%     8,512          6.26%    1,204      8.97%     11,196     6.78%      22,147    21,695    6.70%
 securities
U.S. Govt. and          0     0.00%       500          6.56%        0      0.00%          0     0.00%         500       498    6.56%
 federal agencies 
FHLB Stock              0     0.00%         0          0.00%        0      0.00%        509     7.16%         509       509    7.16%
Municipal bonds       100     5.20%       599          5.24%        0      0.00%        118     6.20%         817       818    5.37%
                  -------   ------    -------      ---------  -------   -------     -------   ------      -------    ------   ------
  Total             1,335     6.66%     9,611          6.21%    1,204      8.97%     11,823     6.79%      23,973    23,520    6.66%
                  -------   ------    -------      ---------  -------   -------     -------   ------      -------    ------   ------
Total Investment   $1,335     6.66%    $9,611          6.21%   $1,204      8.97%    $19,424     6.93%     $31,575   $31,121    6.78%
  Securities      =======   ======    =======      =========  =======   =======     =======   ======      =======    ======   ======

</TABLE>

                                                                                

                                       19
<PAGE>
 
     Pioneer Federal is a member of the Federal Home Loan Bank System.  As a
member of the System it is required to maintain an investment in capital stock
of the Federal Home Loan Bank. No ready market exists for such stock and it has
no quoted market value.  For disclosure purposes, such stock is assumed to have
a market value which is equal to cost, which amounted to $508,800 at September
30, 1996.

SOURCES OF FUNDS

     Deposits are the major source of the Bank's funds for lending and other
investment purposes. In addition to deposits, Pioneer Federal derives funds from
loan principal repayments.  Loan repayments are a relatively stable source of
funds, while deposit inflows and outflows are significantly influenced by
general interest rates and money market conditions. Borrowings from the Federal
Home Loan Bank may be used on a short-term basis to compensate for a reduction
in the availability of funds from other sources. They may also be used on a
longer term basis for general business purposes.

     Deposits.    Consumer and commercial deposits are attracted principally
from within the Bank's primary market area through the offering of a broad
selection of deposit instruments including NOW accounts, passbooks, certificates
of deposit and retirement savings plans.  The flow of deposits is influenced
significantly by general economic conditions, changes in money market and
prevailing interest rates and competition.

     Pioneer Federal's policies are designed primarily to attract deposits from
local residents through Pioneer Federal's branch network rather than from
outside Pioneer Federal's market area.  Pioneer Federal does not accept deposits
from brokers due to their rate sensitivity.  Pioneer Federal's interest rates,
maturities, service fees and withdrawal penalties on deposits are established by
management on a periodic basis.  Management determines deposit interest rates
and maturities based on Pioneer Federal's liquidity requirements, the rates paid
by Pioneer Federal's competitors, Pioneer Federal's growth goals and applicable
regulatory restrictions and requirements.

                                       20
<PAGE>
 
     Savings deposits in Pioneer Federal Savings Bank as of September 30,
1996, were   represented by the various types of savings programs described
below.

<TABLE>
<CAPTION>
 
                                                                          Minimum   Balance as of   Percentage
                                                              Interest    Balance   September 30,    of Total
Category                                           Term        Rate(1)    Amount      1996 (2)       Deposits
---------------------------------               ----------    --------    -------   -------------   ---------  
<S>                                             <C>           <C>          <C>      <C>             <C>
NOW Accounts                                           None      1.98%         300        $ 14,008        21.77%
Regular Savings                                        None      2.94%         100           9,758        15.16%
Money Market Accounts                                  None      2.93%       2,500           1,912         2.97%

Certificated of Deposit:
Fixed Term, Fixed Rate                            7-31 days      4.00%       *                  10         0.02%
Fixed Term, Fixed Rate                            91 days        4.08%       1,000             413         0.64%
Fixed Term, Fixed Rate                            6 month        4.42%       1,000           4,231         6.61%
Fixed Term, Fixed Rate                            6 month        4.39%       1,000           2,286         3.55%
Fixed Term, Fixed Rate                            12 months      4.96%         500           7,803        12.12%
Fixed Term, Fixed Rate                            12 months      4.88%         500             276         0.43%
Fixed Term, Fixed Rate                            12 months      4.50%       *                   2         0.01%
IRA, Fixed Term, Fixed Rate                       18 months      5.80%         100           1,861         2.89%
IRA, Fixed Term, Variable Rate                    18 months      5.60%         100           3,596         5.59%
Fixed Term, Fixed Rate                            18 months      5.31%       1,000           7,826        12.16%
Fixed Term, Fixed Rate                            24 months      5.41%       1,000           5,310         8.25%
Fixed Term, Fixed Rate                            30 months      5.50%       *                  32         0.05%
Fixed Term, Fixed Rate                            36 months      5.66%       1,000           2,866         4.45%
Fixed Term, Fixed Rate                            48 months      4.82%       *                  27         0.04%
Fixed Term, Fixed Rate                            60 months      5.14%       5,000           1,990         3.09%
Fixed Term, Fixed Rate                            72 months      5.77%       *                 128         0.20%
                                                                                     -------------     ---------  
                                                                                          $ 64,335       100.00%
                                                                                     =============     =========
 
</TABLE>
(1) Represents weighted average interest rates
(2) In thousands
*   This type of certificate was no longer offered at September 30, 1996

                                       21
<PAGE>
 
     The following is a description of the types of accounts offered by the
Bank.

     PASSBOOK ACCOUNTS.  A minimum deposit of $100 is required to open a
Passbook savings account.  If the balance falls below $100 a maintenance fee of
$3.00 per month is charged (excluding minors' accounts).  This account allows
for unlimited deposits and three withdrawals per month.  If more than nine
withdrawals are requested per quarter, a $2 per withdrawal fee is collected.  A
dormant charge of $5 per quarter is assessed if there has been no activity on
the account for 2 years and the balance is under $500 at quarter end.  Simple
interest is credited quarterly and is calculated from the date of funds being
deposited to the date of withdrawal.

     NOW ACCOUNTS.  NOW accounts are checking accounts.  Pioneer offers four
types of NOW accounts.  The SETTLERS account allows up to 50 checks to be
written monthly without charge; after that there is a 20 cent charge for each
check written.  A monthly service fee is not charged if a minimum balance of
$300 is maintained; if the account drops below $300 a $5 per month maintenance
fee is charged. The SETTLERS account is a non-interest bearing account. The
PIONEER account allows unlimited checking. This account pays money market rates
when a minimum balance of $1000 is maintained. If the balance drops below $1000
a $7.50 per month maintenance fee is charged. The FOUNDERS account is for
customers over age 55. This account pays interest if a balance of $1000 or
greater is maintained. A monthly service charge of $3 is assessed if the balance
falls below $100. The FOUNDERS account allows unlimited checking. The WINCHESTER
account is for non-profit community organizations. This account allows unlimited
checking and pays interest when a minimum balance of $1000 is maintained. If the
balance falls below $100, a $3 monthly maintenance fee is charged.

     MONEY MARKET DEPOSIT ACCOUNTS ("MMDAS").  The Garn Act authorized, in late
1982, a new type of money market deposit account intended to have rates that are
competitive with money market rates.  In accordance with regulatory limitations,
the main features of the Bank's MMDA include the following: (1) $2,500 minimum
balance (interest reverts to the NOW account rate when the account balance drops
below the minimum balance requirement, with $7.50 monthly maintenance fee if
balance falls below $1000); (2) no limit on the rate the Bank may pay on the
account; (3) six preauthorized or automatic third party transfers in an amount
in excess of $500 are permitted, three of which may be by check, with $2.00 per
withdrawal over six; (4) no restrictions on the size and frequency of
withdrawals by mail or in person; (5) no restriction on additional deposits to
the account; and (6) no minimum maturity or early withdrawal penalty.

     INDIVIDUAL RETIREMENT ACCOUNTS ("IRAS").  The Bank offers tax-deferred
Individual Retirement Accounts.  Pioneer Federal offers certificates established
solely for IRA accounts which have a maturity of 18 months.

     The Bank currently offers IRAs which have both fixed and floating interest
rates.

     CERTIFICATES OF DEPOSIT ("CDS").  Pioneer Federal offers certificates of
deposit with terms ranging from three months to five years.  The required
minimum investment varies with the different terms of the certificates. Interest
on the certificates is simple interest, payable monthly, quarterly, or at
maturity. The interest rates on these certificates are set weekly by the Bank
and are fixed for the term of the certificate.

                                       22
<PAGE>
 
     The following table indicates the amount (in thousands) of the certificates
of deposit of $100,000 or more by time remaining until maturity at September 30,
1996.
<TABLE>
<CAPTION>
 
<S>                                          <C>
     Three months or less:                   $  940
     More than three through six months:      1,218
     More than six through twelve months:     1,452
     Over twelve months:                      2,455
                                             ------
                                             $6,065
                                             ======
</TABLE> 

     The following table sets forth the average balances and interest rates
based on month-end balances for demand deposits, passbook savings and time
deposits as of the dates indicated.
<TABLE>
<CAPTION>
 
                                                Year Ended September 30,
                                           1996                        1995 
                                         Average  Average   Average  Average
                                         Balance    Rate    Balance    Rate
                                         -------  -------   -------  -------
                                                (Dollars in Thousands)
<S>                                      <C>      <C>       <C>      <C>
Deposit Category:
 
Demand Accounts (1)                       $18,783     2.93%  $18,398     2.15%
Passbook Accounts                           9,838     2.20%   10,705     2.87%
Certificates                               39,497     5.37%   38,691     4.88%
                                          -------   -------  -------   -------
                                          $68,118     4.13%  $67,794     3.79%
                                          =======   =======  =======   =======
</TABLE> 
(1) Non-interest bearing deposits are not in excess of 10% of total deposits.


BORROWINGS

     Savings deposits historically have been the primary source of funds for the
Bank's lending and investment activities and for its general business
activities. The Bank is authorized, however, to use advances from the FHLB of
Cincinnati to supplement its supply of lendable funds and to meet deposit
withdrawal requirements. Advances from the FHLB are secured by a portion of the
Bank's mortgage loans.

     The FHLB of Cincinnati functions as a central reserve bank providing credit
for savings institutions and certain other member financial institutions.  As a
member, the Bank is required to

                                       23
<PAGE>
 
own capital stock in the FHLB and is authorized to apply for advances on the
security of such stock and certain of its home mortgages and other assets
(principally, securities which are obligations of, or guaranteed by, the United
States),  provided certain standards related to credit worthiness have been met.
See "Regulation of the Bank -- Federal Home Loan Bank System."

COMPETITION

     The Bank faces strong competition in the attraction of savings deposits and
in the origination of real estate loans.  Its most direct competition for
savings deposits has historically come from commercial banks and other thrifts
located in its primary lending area and Fayette County, Kentucky.  The Bank
faces additional significant competition for investors' funds from offerors of
short-term money market securities and other corporate and government
securities.  The Bank's competition for real estate loans comes principally from
other thrifts, commercial banks and mortgage banking companies.

     The Bank competes for loans principally through the interest rates and loan
fees it charges and the efficiency and quality of the services it provides
borrowers.  It competes for savings by offering depositors a wide variety of
savings accounts, checking accounts, convenient office locations, convenient
hours of operation, tax-deferred retirement accounts, and other miscellaneous
services.

     The Bank considers Clark and Powell Counties, Kentucky, to be its primary
market area for savings and mortgage loans.  As of September 30, 1996, there
were six other financial institutions located in these counties; one of the six
is a thrift institution.  Management believes that Pioneer Federal has good
community identification in the area, and feels that local ownership of the Bank
is an important factor contributing to the Bank's success.  Nonetheless, the
Bank competes with much larger financial institutions in Clark County and nearby
Lexington, Kentucky.  These competitors offer better loan rates and broader
customer services than the Bank from time to time due to their size, financial
resources and competitive strategy.

     The Deregulation and Garn Acts and regulations implementing these Acts
significantly expanded the range of services which savings and loan associations
can offer to the public. These Acts, rate deregulation and high interest rates
in the early 1980's caused a dramatic increase in competition (e.g. money market
mutual funds, Treasury securities, municipal bonds, etc.) for savings dollars
and have increased competition with commercial banks in regard to loans,
checking accounts and other types of financial services. In addition, large
conglomerates and investment banking firms entered the market for financial
services during the past decade. The savings public became increasingly
sophisticated. Thus the Bank encountered, and may continue to encounter,
increased competition in the financial services offered and Pioneer will have to
be innovative and knowledgeable about its market, as well as exert effective
controls over its costs, in order to remain competitive.

SUBSIDIARIES

     Pioneer Federal Savings Bank has one service corporation subsidiary,
Pioneer Service Corporation ("PSC").  In August, 1978, Pioneer Federal formed
PSC and purchased all of its

                                       24
<PAGE>
 
stock for $16,000.  PSC was formed by the Bank for the purpose of acquiring
stock in Intrieve, Incorporated.  Intrieve is a non-profit corporation based in
Cincinnati, Ohio, which provides on-line computer processing and inquiry service
to Pioneer Federal and other savings and loan institutions in the region.  To
date, PSC has conducted no business activities.

PERSONNEL

     As of September 30, 1996, the Bank had 25 full-time employees, and 11 part-
time employees. The employees are not represented by a collective bargaining
unit.  The Bank believes its relationship with its employees to be good.

IMPACT OF INFLATION AND CHANGING PRICES

     The Consolidated Financial Statements, and Notes thereto, presented herein
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars without considering the changes in relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of the Bank's operations. Unlike most industrial
companies, nearly all the assets and liabilities of the Bank are monetary in
nature. As a result, interest rates have greater impact on the Bank's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the price
of goods and services.

ESOP LOAN

     The Bank has received the approval of the OTS for a special one time
capital distribution of $250,000 to the Corporation.  The Executive Committee of
the Board of Directors of the Bank approved the one time capital distribution on
December 12, 1996 and the distribution was made on December 13, 1996.
Management's intent is to have the corporation make a $250,000 loan to the
Employee Stock Ownership Plan (ESOP) Trust for the purpose of acquiring Company
stock. The loan will be repaid from annual contributions made to the ESOP by the
Bank.


COMPANY REGULATION

     General.  The Corporation is a unitary savings and loan holding company
subject to regulatory oversight by the OTS.  As such, the Corporation is
required to register and file reports with the OTS and is subject to regulation
and examination by the OTS.  In addition, the OTS will have enforcement
authority over the Corporation and its non-savings association subsidiaries,
should such subsidiaries be formed, which also permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings association.  This regulation and oversight is intended primarily for
the protection of the depositors of the Bank and not for the benefit of
stockholders of the Corporation.  The Corporation is also required to file
certain reports with, and otherwise comply with the rules and regulations of,
the OTS and the Securities and Exchange Commission ("SEC").

                                       25
<PAGE>
 
     QTL Test.  As a unitary savings and loan holding company, the Corporation
generally will not be subject to activity restrictions, provided the Bank
satisfies the QTL test (See Qualified Thrift Lender Test, page 29).  If the
Corporation acquires control of another savings association as a separate
subsidiary, it would become a multiple savings and loan holding company, and the
activities of the Corporation, and any of its subsidiaries (other than the Bank
or any other SAIF-insured savings association) would become subject to
restrictions applicable to bank holding companies unless such other associations
each also qualify as a QTL or were acquired in a supervised acquisition.

     Restrictions on Acquisitions.  The Corporation must obtain approval from
the OTS before acquiring control of any other SAIF-insured association.  Such
acquisitions are generally prohibited if they result in a multiple savings and
loan holding company controlling savings associations in more than one state.
However, such interstate acquisitions are permitted based on specific state
authorization or in a supervisory acquisition of a failing savings association.

     Federal law generally provides that no "person", acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control", as that term is defined in OTS regulations, of a federally insured
savings institution without giving at least 60 days written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition.
Such an acquisition of control may be disapproved if it is determined, among
other things, that:  (i) the acquisition would substantially lessen competition;
(ii) the financial condition of the acquiring person might jeopardize the
financial stability of the savings institution or prejudice the interest of its
depositors; or (iii) the competency, experience, or integrity of the acquiring
person or the proposed management personnel indicates that it would not be in
the interest of the depositors or the public to permit the acquisition of
control by such person.

     The Bank Holding Company Act of 1956 ("BHCA") authorizes the Federal
Reserve Board to approve an application by a bank holding company to acquire
control of a savings association. Furthermore, a bank holding company that
controls a savings association is authorized to merge or consolidate the assets
and liabilities of the savings association with, or transfer assets and
liabilities to, any subsidiary bank which is a member of the BIF with the
approval of the appropriate federal banking agency and the Federal Reserve
Board.  Generally, federal savings associations can acquire or be acquired by
any insured depository institution.

     Federal Securities Law.  The Corporation's Common Stock is registered with
the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange
Act").  The Corporation is subject to the information, proxy solicitation,
insider trading restrictions and other requirements under the Exchange Act.  The
Commission maintains a web site which contains reports, proxy and information
statements and other information pertaining to registrants that file
electronically with the commission, including the Corporation.  The web site
address is as follows: (http://www.sec.gov).

BANK REGULATION

     General.  As a federally chartered, SAIF-insured savings bank, Pioneer
Federal is subject to regulation and examination by the OTS and the FDIC.
Lending activities and other investments

                                       26
<PAGE>
 
must comply with various federal statutory and regulatory requirements.  The
Bank is also subject to certain reserve requirements promulgated by the Federal
Reserve Board.

     The OTS, in conjunction with the FDIC, regularly examines the Bank and
prepares reports for the consideration of the Bank's Board of Directors on any
deficiencies that they find in the Bank's operations.  The Bank's relationship
with its depositors and borrowers is also regulated to a great extent by federal
law.

     Pioneer Federal must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions.  This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the Savings Association
Insurance Fund ("SAIF") and depositors.  The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes.  Any change in such regulations, whether
by the OTS, the FDIC or the United States Congress, could have a material
adverse impact on the Company and the Bank and their operations.

     Insurance of Deposit Accounts.  The Bank's deposit accounts are insured by
the SAIF to a maximum of $100,000 for each insured member (as defined by law and
regulation).  The FDIC has the authority, should it initiate proceedings to
terminate an institution's deposit insurance, to suspend the insurance of any
such institution without tangible capital.  However, if a savings association
has positive capital when it includes qualifying intangible assets, the FDIC
cannot suspend deposit insurance unless capital declines materially, the
institution fails to enter into and remain in compliance with an approved
capital plan, or the institution is operating in an unsafe or unsound manner.

     Regardless of an institution's capital level, insurance of deposits may be
terminated by the FDIC upon a finding that the institution has engaged in unsafe
or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC or the institution's primary regulator.  The
management of the Bank is unaware of any practice, condition or violation that
might lead to termination of its deposit insurance.

     On September 30, 1996, H.R. 1362 was signed into law by the President.
Title II of H.R. 1362 is titled the Economic Growth and Paperwork Reduction Act
of 1996 (the "Act").   Among its many provisions, the Act provides for resolving
the BIF/SAIF premium disparity.  Before September 30, 1996, most insured
depository institutions holding BIF-assessable deposits pay the statutory
minimum of $2,000 for deposits insurance on these deposits while most insured
depository institutions with SAIF-assessable deposits paid 23 basis points per
$100 of these deposits for deposit insurance.  The Bank paid, as of September
30, 1996,  an insurance premium to the FDIC equal to 0.23% of its total
deposits.

                                       27
<PAGE>
 
     The BIF/SAIF legislation provides for a one-time assessment to recapitalize
the SAIF.  The assessment will be based upon the amount of SAIF-assessable
deposits held by an institution as of March 31, 1995 (with certain exceptions).
The assessment is effective on September 30, 1996 and is payable on November 27,
1996.

     The BIF/SAIF legislation does not specify an actual assessment but states
that the total assessment will be equal to the amount necessary to recapitalize
the SAIF as of October 1, 1996. A recent report of the America's Community
Bankers estimated the assessment at approximately 65.7 basis points per $100 of
SAIF-assessable deposits as of March 31, 1995.  The BIF/SAIF legislation
provides that the amount of the special assessment is deductible under Section
162 of the Internal Revenue Code (the "Code") in the year the assessment is
paid.  The BIF/SAIF legislation also provides section 172(f) of the Code will
not apply to deductions taken under section 162 of the Code for the special
assessment.  The Bank estimated the amount of the assessment to be approximately
$435,000 before tax benefit, and such amount was accrued on September 30, 1996.

     Regulatory Capital Requirements.  OTS capital regulations require savings
institutions to meet three capital standards: (1) tangible capital equal to 1.5%
of total adjusted assets, (2) a leverage ratio (core capital) equal to at least
3% of total adjusted assets, and (3) a risk-based capital requirement equal to
8.0% of total risk-weighted assets.

     Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), plus purchased mortgage servicing rights
valued at the lower of the maximum percentage established by the OTS or the
amount includable in core capital.  Core capital is defined as common
stockholders' equity (including retained earnings), noncumulative perpetual
preferred stock and majority interests in the equity accounts of consolidated
subsidiaries, and qualifying supervisory good will, less nonqualifying
intangible assets.

     The OTS leverage ratio regulation establishes a core capital ratio of at
least 3% for those savings associations in the strongest financial and
managerial condition based on the "CAMEL" rating system currently in use by the
OTS.  Those savings associations receiving a CAMEL rating of "1", the best
possible rating on a scale of 1 to 5, will be required to maintain a ratio of
core capital to adjusted total assets of 3%.  All other savings associations
will be required to maintain minimum core capital of at least 4% of total
adjusted assets, with a maximum core capital ratio requirement of 5%.  In
determining the required minimum core capital ratio, the OTS would assess the
quality of risk management and the level of risk in each savings association on
a case-by-case basis.  The OTS has not indicated the standards it will use in
establishing the appropriate core capital requirement for savings associations
not rated "1" under the CAMEL rating system.

     The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital (which is defined as core capital plus
supplementary capital) of 8.0% of risk-weighted assets.  The components of
supplementary capital include, among other items, cumulative perpetual preferred
stock, perpetual subordinated debt, mandatory convertible subordinated debt,
intermediate-term preferred stock and the portion of the allowance for loan
losses not designated for specific loan losses.  The portion of the allowances
for loan and lease losses includable in supplementary capital is limited to a
maximum of 1.25% of risk-weighted

                                       28
<PAGE>
 
assets.  Overall, supplementary capital is limited to 100% of core capital.  A
savings association must calculate its risk-weighted assets by multiplying each
asset and off-balance sheet item by various risk factors as determined by the
OTS, which range from 0% for cash to 100% for delinquent loans, property
acquired through foreclosure, commercial loans and other assets.

     As of September 30, 1996, the Bank had tangible, core and risk-based
capital of $8.1 million, $8.1 million and $8.5 million, respectively, which
amounts significantly exceed all applicable fully phased-in regulatory capital
requirements of the OTS.

     OTS regulations set forth the methodology for calculating an Interest Rate
Risk (IRR) component which is added to the risk-based capital requirements for
OTS regulated thrift institutions.  Generally, savings associations with a
greater than "normal" level of interest rate exposure will be subject to a
deduction from total capital for purposes of calculating their risk-based
capital requirement.  Specifically, interest rate exposure will be measured as
the decline in net portfolio value due to a 200 basis point change in market
interest rates. The IRR component to be deducted from total capital is equal to
one-half the difference between an institution's measured exposure and the
"normal" level of exposure (which is defined as two percent of the estimated
economic value of its assets).  Institutions, such as the Bank, with less than
$300 million in assets and a risk-based capital ratio in excess of 12% are
exempt from deducting the IRR component.

     In addition, pursuant to the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), the OTS must revise the risk-based capital
regulations to include a credit risk component and a nontraditional activities
component, the purpose of which will be to increase the minimum capital
requirements for savings associations with higher credit risks.

     Dividend and Other Capital Distribution Limitations.  OTS regulations
impose limitations upon all capital distributions by savings institutions, such
as cash dividends, payments to repurchase or otherwise acquire its shares,
payments to shareholders of another institution in a cash-out merger, and other
distributions charged against capital.  The rule establishes three tiers of
institutions, based primarily on an institution's capital level.  OTS
regulations require the Bank to give the OTS 30 days advance notice of any
proposed declaration of dividends to the Corporation, and the OTS has the
authority under its supervisory powers to prohibit the payment of dividends to
the Corporation.  In addition, the Bank may not declare or pay a cash dividend
on its capital stock if the effect thereof would be to reduce the regulatory
capital of the Bank below the amount required for the liquidation account
established pursuant to the Bank's conversion. Finally, under the FDICIA, a
savings association is prohibited from making a capital distribution if, after
making the distribution, the savings association would be undercapitalized (not
meet any one of its minimum regulatory capital requirements).

     Qualified Thrift Lender Test.  The Home Owner's Loan Act, as amended
("HOLA"), requires savings institutions to meet a QTL test.  If the Bank
maintains an appropriate level of Qualified Thrift Investments ("QTIs")
(primarily residential mortgages and related investments, including certain
mortgage-related securities ) and otherwise qualifies as a QTL, it will continue
to enjoy full borrowing privileges from the FHLB of Cincinnati.  The required
percentage of QTIs is 65% of portfolio assets (defined as all assets minus
intangible assets, property used by the institution in

                                       29
<PAGE>
 
conducting its business and liquid assets equal to 10% of total assets).
Certain assets are subject to a percentage limitation of 20% of portfolio
assets.  In addition, savings associations may include shares of stock of the
FHLBs, Federal National Mortgage Association ("FNMA"), and FHLMC as qualifying
QTIs.  Compliance with the QTL test is determined on a monthly basis in nine out
of every 12 months.  As of September 30, 1996, the Bank was in compliance with
its QTL requirement with 85.73% of its assets invested in QTIs.

     A savings association that does not meet a QTL test must either convert to
a bank charter or comply with the following restrictions on its operations: (i)
the savings association may not engage in any new activity or make any new
investment, directly or indirectly, unless such activity or investment is
permissible for a national bank; (ii) the branching powers of the savings
association shall be restricted to those of a national bank; (iii) the savings
association shall not be eligible to obtain any advances from its FHLB; and (iv)
payment of dividends by the savings association shall be subject to the rules
regarding payment of dividends by a national bank.  Upon the expiration of three
years from the date the savings association ceases to be a QTL, it must cease
any activity and not retain any investment not permissible for a national bank
and immediately repay any outstanding FHLB advances (subject to safety and
soundness considerations.)

     Transactions With Affiliates.  Generally, restrictions on transactions with
affiliates require that transactions between a savings association or its
subsidiaries and its affiliates be on terms as favorable to the Bank as
comparable transactions with non-affiliates.  In addition, certain of these
transactions are restricted to an aggregate percentage of the Bank's capital,
and collateral in a specified amount must usually be provided by affiliates to
receive loans from the Bank.  Affiliates of the Bank include the Corporation and
any company which would be under common control with the Bank.  In addition, a
savings association may not lend to any affiliate engaged in activities not
permissible for a bank holding company or acquire the securities of any
affiliate which is not a subsidiary.  The OTS has the discretion to treat
subsidiaries of the savings association as affiliates on a case-by-case basis.

     The Bank's authority to extend credit to its officers, directors, and
10% stockholders as well as entities that such persons control is currently
governed by Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O
promulgated by the Federal Reserve Board.  Among other things, these regulations
require such loans to be made on terms substantially similar to those offered to
unaffiliated individuals, place limits on the amounts of loans the Bank may make
to such persons based, in part, on the Bank's capital position, and require
certain approval procedures to be followed.  OTS regulations, with minor
variation, apply Regulation O to savings associations.

     Liquidity Requirements.  All savings associations are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less.  The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations.  As of September 30, 1996, the Bank's
liquidity ratio was 24.81%.

                                       30
<PAGE> 
     Liquid assets for purposes of this ratio include specific short term assets
(e.g., cash, certain time deposits, certain banker's acceptances, and short term
U.S. Government obligations), and long term assets (e.g., U.S. Government
obligations of more than one and less than five years, and state agency
obligations with a maximum remaining term of 24 months).  The regulations
governing liquidity requirements include as liquid assets: debt securities
hedged with forward commitments obtained from, or debt securities subject to
repurchase agreements with, members of the Bank of Primary Dealers in United
States Government Securities or banks whose accounts are insured by the FDIC;
debt securities directly hedged with a short financial future position; and debt
securities that provide the holder with a right to redeem the security at par
value, regardless of the stated maturities of the securities.  The OTS is also
authorized to designate as liquid assets certain mortgage-related securities
with less than one year to maturity.  Short term liquid assets currently must
constitute at least 1% of an association's average daily balance of net
withdrawable deposit accounts and current borrowings.  Monetary penalties may be
imposed upon associations for violations of liquidity requirements.

     Federal Home Loan Bank System.  The Bank is a member of the FHLB of
Cincinnati, which is one of 12 regional FHLBs that administer the home financing
credit function of savings associations.  Each FHLB serves as a reserve or
central bank for its members within its assigned region.  It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System.  It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB.  As of
September 30, 1996, the Bank had borrowed $698,798 from the FHLB of Cincinnati
to fund operations; there can be no assurances that additional borrowings will
not be made in the future.

     As a member, the Bank is required to purchase and maintain stock in the
FHLB of Cincinnati in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts, or similar obligations at
the beginning of each year.  As of September 30, 1996, the Bank had $508,800 in
FHLB stock, which was in compliance with this requirement.

     The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low-and moderate-income housing projects. These contributions have adversely
affected the level of FHLB dividends paid and could continue to do so in the
future.  For the fiscal year ended September 30, 1996, dividends paid by the
FHLB of Cincinnati to the Bank totaled $27,400.

     Federal Reserve System.  The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW, and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve Board may be used
to satisfy the liquidity requirements that are imposed by the OTS.  As of
September 30, 1996, the Bank was in compliance with its Federal Reserve Board
minimum reserve requirements.

     Savings associations have authority to borrow from the Federal Reserve Bank
"discount window", but Federal Reserve policy generally requires savings
associations to exhaust all OTS

                                       31
<PAGE> 
sources before borrowing from the Federal Reserve System.  The Bank had no such
borrowings at September 30, 1996.

FEDERAL TAXATION.

     The Company and the Bank file a consolidated tax return on a fiscal year
(September 30) basis.  Savings associations are subject to the provisions of the
Internal Revenue Code in the same general manner as other corporations.
However, savings associations such as the Bank, which meet certain definitional
tests and other conditions prescribed by the Code, may benefit from certain
favorable provisions regarding their deductions from taxable income for annual
additions to their bad debt reserve.  For purposes of the bad debt reserve
deduction, loans are separated into "qualifying real property loans", which
generally are loans secured by interests in real property, and nonqualifying
real property loans, which are all other loans.  The bad debt reserve deduction
with respect to nonqualifying loans must be based on actual loss experience.
The amount of the bad debt reserve deduction with respect to qualifying real
property loans may be based upon actual loss experience (the "experience
method") or a percentage of taxable income determined without regard to such
actual experience (the "percentage of taxable income method").  The Bank used
the percentage of taxable income method for the years ended September 30, 1995,
1994 and 1993.  The Bank is expected to use the percentage of taxable income
method for the year ending September 30, 1996.  The Bank determines the most
favorable way to calculate the deduction attributable to an addition to its bad
debt reserve on an annual basis.

     Under the experience method, the bad debt deduction may be based on (i) a
six-year moving average of actual losses on qualifying and non-qualifying loans
or (ii) a fill-up to the institution's base year reserve amount, which is the
tax bad debt reserve determined as of September 30, 1988.

    The percentage of specially computed taxable income that is used to compute
a savings association's bad debt reserve deduction under the percentage of
taxable income method (the "percentage bad debt deduction") is 8%.  The
percentage of bad debt deduction thus computed is reduced by the amount
permitted as a deduction for non-qualifying loans under the experience method.

     If an association's qualifying assets (generally, loans secured by
residential real estate or deposits, educational loans, cash and certain
government obligations) constitute less than 60% of its total assets, the
association may not deduct any addition to a bad debt reserve and generally must
include existing reserves in income over a four year period.  As of September
30, 1996, at least 60% of the Bank's assets were qualifying assets as defined in
the Code.  No assurance can be given that the Bank will meet the 60% test for
subsequent tax years.

     Earnings appropriated to the Bank's bad debt reserve and claimed as a tax
deduction will not be available for the payment of cash dividends or for
distribution to stockholders (including distributions made on dissolution or
liquidation), unless the Bank includes the amount in income, along with the
amount deemed necessary to pay the resulting federal income tax.  As of
September 30, 1996, the Bank had approximately $1.6 million of accumulated
earnings for which federal income taxes have not been provided.  If such amount
is used for any purpose other than

                                       32
<PAGE>
 
bad debt losses it will be subject to federal income tax at the then current
rate.

     On August 20, 1996, the President signed into law the Small Business Jobs
Protection Act. Included within this act were provisions repealing the
percentage of taxable income method of calculating a thrift's bad debt reserve
for tax purposes.  This method had permitted thrift institutions, such as the
Bank, who satisfied certain definitional tests and other conditions prescribed
by the Internal Revenue Code, to deduct an annual addition to their bad debt
reserve calculated as a percentage of taxable income.  Other financial
institutions generally were required to calculate their bad debt deduction based
upon actual loss experience (the "experience method").  As a result of the
elimination of the percentage of taxable income method, institutions that have
utilized such method will be required to recapture into taxable income post-1987
reserves in excess of the reserves calculated under the experience method, over
period of six years commencing in the first taxable year beginning after
December 31, 1995.  An institution will be able to defer recapture until up to
the third taxable year after December 31, 1995 if the dollar amount of the
institution's residential loan originations in each year is not less than the
average dollar amount of residential loan originations originated in each of the
six most recent years, disregarding the years with the highest and lowest
originations during such period.  For purposes of this test, residential loan
originations would not include refinancings and home equity loans.

     Beginning with the first taxable year beginning after December 31, 1995,
savings institutions, such as the Bank, will be treated the same as commercial
banks.  Institutions with $500 million or more in assets will only be able to
take a tax deduction when a loan is actually charged off. Institutions with less
than $500 million in assets will still be permitted to make deductible bad debt
additions to reserves, but only using the experience method.  The Bank has
provided deferred taxes on its post-1987 additions to the bad debt reserve and,
as a result, management does not expect that the recapture of the Bank's post-
1987 reserves will have a material adverse effect on the Bank's operations.

     Generally, for taxable years beginning after 1986, the Code also requires
most corporations, including savings associations, to utilize the accrual method
of accounting for tax purposes. Further, for taxable years ending after 1986,
the Code disallows 100% of a savings association's interest expense allocated to
certain tax-exempt obligations acquired after August 7, 1986. Interest expense
allocable to (i) tax-exempt obligations acquired after August 7, 1986 which are
not subject to this rule, and (ii) tax-exempt obligations issued after 1982 but
before August 8, 1986, are subject to the rule which applied prior to the Code
disallowing the deductibility of 20% of the interest expense.

     The federal income tax returns of the Company and the Bank have not been
examined by the IRS during the past 10 years.

STATE TAXATION

     The Commonwealth of Kentucky imposes no income or franchise taxes on
savings institutions. Pioneer Federal is subject to an annual Kentucky ad
valorem tax.  This tax is .1% of the Bank's savings accounts, common stock,
capital and retained income with certain deductions allowed for amounts borrowed
by depositors and for securities guaranteed by the U.S. Government or certain


                                       33
<PAGE>
 
of its agencies.  For the fiscal year ended September 30, 1996, the amount of
such expense for the Bank was $64,790.

     The Corporation is subject to an annual license fee on capital employed and
income tax on its operations by the Commonwealth of Kentucky.  The annual
license fee is based on $2.10 per $1,000 of capital employed and the tax on
income ranges from 4% on the first $25,000 of taxable income to 8.25% on taxable
income in excess of $250,000.

ITEM 2.  PROPERTIES

     Pioneer Financial's and Pioneer Federal's main office is located at 25 East
Hickman Street, Winchester, Kentucky.  The building is a one story building of
contemporary design constructed in 1975 and expanded in 1978.  The building has
5,670 square feet, with six teller stations, one drive-in window (which serves
two lanes of traffic), five private offices, a Directors' Conference Room, a
kitchen, a large lobby, two restrooms, a walk-in vault, a storage room, and a
tellers' work area.  There are thirteen computer terminals at the main office.

     Pioneer Federal has a branch office at 17 East Pendleton Street, Stanton,
Kentucky. It consists of a brick-veneer modular building, constructed in 1980.
The building has 1,120 square feet, with two teller stations, one drive-in
window, one large private office, a kitchen, two restrooms, and a tellers' work
area. There are three computer terminals at the branch office.

     The Bank has a second branch in Winchester, Kentucky, at the corner of the
Bypass, (Kentucky Highway 1958) and Fulton Road.  This building is of a
contemporary design, with a concrete exterior.  The branch has a small kitchen,
2 restrooms, an office, conference room, safety deposit boxes and a walk-in
vault.  The Bypass branch has 7 computer terminals, 3 drive-in lanes and an
automatic teller machine (ATM).
<TABLE>
<CAPTION>
 
                            September 30,
                          1996         1995
                       -------------------------
<S>                    <C>         <C>
Land, buildings and
  improvements.......  $1,637,310     $1,599,420
 
Furniture, fixtures
  and equipment......     720,748        705,062
                       ----------     ----------
Total, at cost.......   2,358,058      2,304,482
Less accumulated
  depreciation.......   1,182,071      1,127,070
                       ----------     ----------
</TABLE>

                       $1,175,987     $1,177,412
                       ==========     ==========

                                       34
<PAGE>
 
ITEM 3.  LEGAL PROCEEDINGS

   Four shareholders combined to form East Kentucky Holdings, a general
partnership, in 1994. On July 24, 1994, the Savings Bank filed a lawsuit styled
Pioneer Federal Savings Bank v. Fred M. Higgins, Catherine H. Howard, Charles
-----------------------------------------------------------------------------
Lester Key, Phillip R. Perry, individually and d/b/a East Kentucky Holdings, a
------------------------------------------------------------------------------
Kentucky general partnership, (collectively, the "EKH Group") in the United
----------------------------                                               
States District Court, Eastern District of Kentucky, Civil Action No. 94-232.
The Complaint alleged that the EKH Group, acting in concert, engaged in a tender
offer with respect to the Bank's stock without complying with the disclosure and
filing requirements of Sections 14(d) and 14(e) of the Williams Act, the Change
in Bank Control Act and the applicable regulations.  Through that lawsuit, the
Bank sought an injunction requiring the EKH Group to cease their tender offer
activities, to comply with applicable laws and to restrict their activities with
respect to the Bank.

     The EKH Group filed a Counterclaim which sought to enjoin an alleged tender
offer by the Savings Bank, its officers, directors, agents and others acting in
concert with them.  The Counterclaim also requested the Court to order the
Savings Bank to declare a dividend to its shareholders, to seek competitive
bids for its legal services, to evaluate and disclose bona fide offers to
purchase the Bank, and to fully disclose and address any conflicts of interest
of the Bank's directors.

     Pioneer and the members of the EKH group entered into a Mutual Release and
Agreed Order of Dismissal of the civil matter.  The Savings Bank redeemed the
EKH stock at a price per share of $41.50 in July, 1996, following confirmation
from the Office of Thrift Supervision (OTS) that the redemption was consistent
with all statutes, rules, regulations, policies, directives or orders of the
OTS.

     The redemption included the 58,069 shares of stock of the EKH group and
6,175 shares of stock owned by the Corporation's chairman, Janet W. Prewitt, and
certain of those persons presumed to be acting in concert with her.  The
redemption of the shares of Ms. Prewitt, etc., is necessitated by the EKH
redemption to keep the ownership of the Corporation's stock by Ms. Prewitt and
those presumed to be acting in concert with her below 10% and thus avoid her
undergoing the personal expense and time involved in a control filing with the
OTS.

ITEM 4.  Submission of Matters to a Vote of Security Holders

     Not applicable.

                                    PART II

ITEM 5.  Market for Registrant's Common Equity and Related Stockholders Matters

     (a) Market Information. As of the date hereof, there is no established
public trading market for Pioneer Financial's common stock. The most recent sale
of Pioneer Financial's stock for which Pioneer Financial is aware of the
purchase price occurred during the week of November 25, 1996, with the price
share being $41.50.

                                       35
<PAGE>
 
     (b)  HOLDERS.  As of December 1, 1996, there were approximately 301 holders
of Shares of Pioneer Financial's common stock, par value $1 per share.

     (c) DIVIDENDS. During fiscal year 1996, Pioneer Financial's Board of
Directors declared quarterly dividends of 33 cents per share payable on December
15, 1995, and 35 cents per share payable on March 15, 1996, June 15, 1996 and
September 15, 1996 to shareholders of record as of December 1, 1995, March 1,
1996, June 1, 1996 and September 1, 1996, respectively. Total dividends paid in
fiscal 1996 amounted to $353,533.

     The Corporation may not declare or pay cash dividends on any of its stock
if the effect thereof would cause the Bank's net worth to be reduced below (1)
the amount required for the liquidation account established in connection with
its stock conversion, or (2) the net worth and capital distribution requirements
imposed by the OTS and FDIC. (see Note 8 to consolidated Financial Statements,
on pages 40 and 41 of the Corporation's Annual Report to Shareholders, Exhibit
13 hereto).

ITEM 6.  Selected Financial Data

     The information contained under the section captioned "Selected
Consolidated Financial and Other Data" on pages 4 and 5 of the Corporation's
Annual Report to Shareholders (Exhibit 13 hereto) is incorporated herein by
reference.

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
        of Operation

     The information contained in the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations" on pages 6
through 20 of the Corporation's Annual Report to Shareholders (Exhibit 13) is
incorporated herein by reference.

ITEM 8.  Financial Statement and Supplementary Data

     The financial statements and supplemental data contained on pages 21
through 47 of the Corporation's Annual Report to Shareholders (attached hereto
as Exhibit 13) as listed in Item 14, are incorporated herein by reference.

ITEM 9.  Changes in and Disagreements with Accountants on Accounting and
         Financial Disclosure

     (a)  Changes in Registrant's Certifying Accountant.  Not applicable.

     (b)  Disagreements with Accountants.  Not applicable.


                                    PART III

ITEM 10.  Directors and Executive Officers of Pioneer Federal

     Reference is made to "Election of Directors" from pages 5 through 8 of the
Proxy Statement

                                       36
<PAGE>
 
for the January 1997 annual meeting of stockholders (Exhibit 28(b) hereto).

     Pursuant to Section 16(a) of the Securities Exchange Act of 1934, as
amended, the Corporation's executive officers and directors, and persons who own
more than ten percent of registered class of the Corporation's equity securities
are required to file reports of ownership with the OTS and the National
Association of Securities Dealers, Inc. Executive officers, directors and
greater than ten-percent shareholders are required by SEC regulation to furnish
the Corporation with copies of all Section 16(a) forms they file.

     Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 4 or 5 were
required for those persons, the Corporation believes that, since September 30,
1995, all filing requirements applicable to its executive officers, directors
and greater than ten-percent beneficial owners were complied with except that:
Mrs. Prewitt had, prior to the death of her father in August, 1996, reported his
6,000 shares as being beneficially owned by her (she having had the power to
vote those shares pursuant to Power of Attorney). Following Mr. White's death,
she failed to timely file the report reducing the number of shares beneficially
owned by her, but she has filed that report in the interim.

ITEM 11.  Executive Compensation

     (a)  Cash Compensation.  Reference is made to "Remuneration of Officers" on
pages 11 through 13 of the Proxy Statement (Exhibit 28(b) hereto, which is
incorporated herein by reference) for information with respect to the cash
compensation of the registrant's executive and other officers as a group.

     (b)  Compensation Pursuant to Plans.  The registrant has instituted a
"401(k)" retirement plan as of December 1, 1985.  With respect to this plan,
reference is made to the section captioned "Remuneration of Officers" on pages
11 and 12 of the Proxy Statement (Exhibit 28(b) hereto) and Note 10 on page 41of
the financial statements included in the Annual Report to Shareholders (Exhibit
13 hereto) for details concerning this retirement plan.  There is no contractual
obligation for the registrant to contribute sums to this plan.  To date, Pioneer
Federal has contributed $242,420 to this 401(k) plan.

     (c)   Employee Stock Ownership Plan.  On October 31, 1994, the registrant
approved the establishment of a Employee Stock Ownership Plan (ESOP) in which
employees meeting age and service requirements are eligible to participate.  The
ESOP is effective beginning January 1, 1994. The Board of Directors authorized
the funding of the ESOP with contributions of $30,512 and $24,425 for the years
ended September 30, 1996 and 1995 respectively.

     (d)  Other Compensation.  Not applicable.

     (e) Compensation of Directors. Reference is made to "Directors' Fees" on
page 10 and "Election of Directors" on pages 5 to 8 of the Proxy Statement
(Exhibit 28(b) hereto) for the description of the remuneration paid to the
registrant's directors.

     (f)  Termination of Employment and Change of Control Arrangement.  Not
applicable.

                                       37
<PAGE>
 
ITEM 12.  Security Ownership of certain Beneficial Owners and Management

     Reference is made to "Voting Securities" on pages 3 through 5 of the Proxy
Statement (Exhibit 28(b) hereto, incorporated herein by reference) for
information pertaining to the security ownership of certain beneficial owners
and management.

ITEM 13.  Certain Relationships and Related Transactions

     (a)  Transactions with management and others.  Reference is made to
"Transactions Involving Directors and Officers" on page 13 of the Proxy
Statement (Exhibit 28(b) hereto, incorporated herein by reference) for
information with respect to transactions involving directors or executive
officers or members of their immediate families.

     (b) Certain business relationships. The registrant's Chairman of the Board,
Janet W. Prewitt, is an equity partner in the law firm of White, McCann &
Stewart, a general practice law firm located in Winchester, Kentucky, which
serves as general counsel to Pioneer Federal Savings Bank. Payments to that law
firm have not exceeded 5% of the registrant's consolidated gross revenues for
its last full fiscal year or any earlier year end. The dollar amount of fees
paid to the law firm for legal services provided in Pioneer Federal's last
fiscal year was $103,969. Of this sum, $102,939 represented fees earned in
connection with title examinations for real estate loans, while the balance
represented fees in foreclosure actions and fees for quarterly and annual
reports. Director Prewitt's compensation from Pioneer Federal plus her share in
the gross fees paid to the law firm has never exceeded $60,000 in any fiscal
year.

     (c) Indebtedness of management. Reference is made to "Transactions
Involving Directors and Officers" on page 13 of the Proxy Statement for
information with respect to loans made to executive officers and directors.

     (d)  Transactions with promoters.  Not applicable.

                                    PART IV

ITEM 14.  Exhibits, Financial Statements Schedules, and Reports on Form 8-K

     (a)(1) and (2)  The following is a list of financial statements filed as a
part of this annual report and incorporated herein by reference, which financial
statements are contained in the Annual Report to Shareholders filed herewith as
Exhibit 13, and the pages on which those financial statements may be found.

Reports of Independent Certified Public Accountants
           Exhibit 13, page 21
           Exhibit 28(a)

Consolidated Statements of Financial Condition at September 30, 1996 and 1995
           Exhibit 13, page 22

                                       38
<PAGE>
 
Consolidated Statements of Income for the years ended September 30, 1996, 1995
and 1994
     Exhibit 13, page 23

Consolidated Statements of Stockholders' Equity for the years ended September
30,1996, 1995 and 1994
     Exhibit 13, page 24

Consolidated Statements of Cash Flows for the years ended September 30, 1996,
1995 and 1994
     Exhibit 13, pages 25 and 26

Notes to Consolidated Financial Statements
     Exhibit 13, pages 27 through 47



(a)(3)  The following exhibits are filed as a part of this report:

     Exhibit (13)        Annual Report to Stockholders
     Exhibit (28)(a)     Manually signed Report of Miller, Mayer, Sullivan &
                         Stevens LLP, and York, Neel & Company, LLP, joint
                         venturers
     Exhibit (28)(b)     Proxy Statement for Annual Meeting to be held January
                         8, 1997

     (b)  No Form 8-K was filed in the fourth quarter of Fiscal 1996.

     (c) See (a)(3) above for all exhibits filed.

     (d)  Separate financial statements are not applicable.

                                       39
<PAGE>
 
                                  SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<CAPTION>
                        PIONEER FINANCIAL CORPORATION,
                             WINCHESTER, KENTUCKY
<S>                               <C>
 
Date:  December 17, 1996                BY___________________________
                                        Janet W. Prewitt, Director and
                                        Chairman of the Board
 
Date:  December 17, 1996                BY___________________________
                                        Carl C. Norton, Director and
                                        President
 
Date:  December 17, 1996                BY___________________________
                                        Nancy M. Lawwill, Director,
                                        and Vice-President
 
Date:  December 17, 1996                BY__________________________
                                        Anthony D. Parrish, Treasurer
                                        (Principal Financial Officer)
</TABLE>

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>

<S>                               <C>
 
Date:  December 17, 1996                BY_________________________
                                        George Billings, Jr., Director
 
Date:  December 17, 1996                BY__________________________
                                        William Cress, Director
 
Date:  December 17, 1996                BY__________________________
                                        Ewart W. Johnson, Director
 
Date:  December 17, 1996                BY___________________________
                                        Nora M. Linville, Director
 
 
</TABLE>

                                       40
<PAGE>
 
<TABLE>

<S>                                     <C>
Date:  December 17, 1996                BY__________________________
                                        Wayne M. Martin, Director
 
Date:  December 17, 1996                BY___________________________
                                        Thomas D. Muncie, Director
 
Date:  December 17, 1996                BY__________________________
                                        Andrew J. Ryan, Director
 
Date:  December 17, 1996                BY___________________________
                                        Robert G. Strode, Director
</TABLE>

                                       41
<PAGE>
 
                               Index to Exhibits
Exhibit No.                       Description

Exhibit (13)       Annual Report to Stockholders

Exhibit (28)(a)    Manually signed Report of Miller, Mayer, Sullivan & Stevens 
                   LLP, and York, Neel & Company, LLP, joint venturers

Exhibit (28)(b)    Proxy Statement for Annual Meeting to be held January 8, 1997