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

(Mark One)

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

For the Year Ended: September 30, 1997

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

For the transition period from ______ to ______

                         Commission File Number 0-28076

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

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

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

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

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

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

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports); and (2) has been subject to such filing
requirements for the past 90 days.  Yes  X   No 
                                        ---     ---

As of December 16, 1997, the aggregate market value of the shares of common
stock of the registrant outstanding was $8,954,019. This figure is based on the
last known sales price of $43.00 per share, which sale took place during the
week of August 11, 1997. The number of shares of the registrant's common stock
outstanding as of December 16, 1997 was 208,233 shares.

                                       1
<PAGE>
 
The aggregate market value of the shares of common stock held by non-affiliates
of the registrant was $7,081,842 as of December 16, 1997.

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

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

(1)      Portions of Annual Report to Stockholders for the year ended September
         30, 1997, are incorporated into Part II, Items 5-8 and Part III, Item
         11, of this Form 10-K.

(2)      Portions of definitive Proxy Statement for the January 14, 1998 Annual
         Meeting of stockholders are incorporated into Part III, Items 10-13, of
         this Form 10-K.

                          PIONEER FINANCIAL CORPORATION

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

         Pioneer Federal Savings Bank, with assets of more than $74.0 million at
September 30, 1997, is the larger of the two thrift institutions in Winchester,
Kentucky. Pioneer Federal is a federally chartered stock savings bank which
conducts business from its corporate headquarters and home office in Winchester,
Clark County, Kentucky, and branch banking offices in Winchester and in Stanton,
Powell County, Kentucky. Pioneer Federal was chartered in 1885 by the
Commonwealth of Kentucky as the Winchester Building and Savings Association. In
1985, Pioneer Federal obtained a federal mutual savings bank charter and changed
its name to Pioneer Federal Savings Bank. As of June 30, 1987, Pioneer Federal
completed its conversion from a federal mutual to a federal stock savings bank.
The Bank is a member of the Federal Home Loan Bank System, and its deposits are
insured by the Savings Association Insurance Fund ("SAIF"), which is
administered by the Federal Deposit Insurance Corporation ("FDIC").

                                       2
<PAGE>
 
                                     PART I

Item 1.  Business

General

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

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

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

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

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

Market Area

         The Bank's primary market area consists of Clark and Powell Counties,
Kentucky which have populations of 30,000 and 12,000, respectively. This area is
primarily rural with a large amount of agri-business. The primary lending
concentration is in the 

                                       3
<PAGE>
 
Bank's market area, an area mainly comprised of the cities of Winchester and
Stanton. Historically, the economy in the Bank's market area has been dependent
on agriculture, agriculture-related industries and manufacturing. The largest
employers in the market area are East Kentucky Power and the Clark County Board
of Education.

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

Lending Activities

         Generally, federally chartered thrift institutions may invest up to 20%
of assets in secured or unsecured non-real estate loans for commercial,
corporate, business or agricultural purposes, up to 30% of assets in consumer
loans and up to 10% of assets in tangible personal property in order to engage
in equipment leasing. In addition, commercial real estate loans are not required
to be secured by first liens.

         Under FIRREA, the aggregate amount of non-residential real estate loans
which a federal savings institution may make may not exceed 400% of the
institution's capital as determined under the capital standards mandated by
FIRREA. Previously, such loans were permitted up to 40% of a savings
institution's assets. On September 30, 1997, the Bank was permitted to make non-
residential real estate loans aggregating approximately $35 million.

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

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

         Real Estate Loans. The loan-to-value ratio, maturity and other
provisions of the loans made by Pioneer Federal generally 

                                       4
<PAGE>
 
reflect the Bank's policy of making the maximum loan permissible consistent with
applicable regulations, sound lending practices, market conditions and the
Bank's underwriting standards.

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

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

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

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

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

                                       5
<PAGE>
 
held by the Bank. Many second mortgages are for home improvement purposes. More
and more frequently, in large part due to current tax laws, the Bank takes a
second mortgage on residential real property in cases where the residential
collateral would not be strictly necessary. These loans are classified as
consumer loans rather than as real estate loans as is consistent with federal
regulations. This is described in a separate paragraph.

         Pioneer Federal has a small number of VA-guaranteed and FHA- approved
loans in its loan portfolio. The Bank has outlets in which to process and
originate VA and FHA loans in any county in the State of Kentucky. The Bank's
current policy is to sell any VA or FHA loan which it originates. The Bank is an
approved Rural Housing Services lender and can originate RHS guaranteed loans in
any county in the State of Kentucky. The Bank's current policy is to sell any
RHS loan which it originates.

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

         Construction loans may be secured by collateral other than or in
addition to the real estate under construction (e.g. other real estate or
assignments of other types). These loans are classified by the Bank as either
real estate loans (in the case of a first lien mortgage) or consumer loans (in
the case of a second lien mortgage or an assignment of another type where the
value of the real estate is not the primary collateral). Pioneer Federal
generally makes construction loans only in those instances where it expects to
have the permanent loan on the property. At September 30, 1997, Pioneer Federal
had 11 construction loans outstanding, in the total amount of $1,074,654. All of
these loans were for single-family residences.

         Commercial Loans. The Bank offers loans secured by income-producing
real estate, primarily small office buildings, 

                                       6
<PAGE>
 
restaurants, and retail complexes. Depending on the collateral taken for the
loan, the Bank has, in the past, classified loans which are secured by income-
producing real estate as either real estate loans or a type of consumer loan
(e.g., second lien mortgage loan or assignment loan). Most of the loans secured
by mortgages on commercial real estate have terms of 10 to 25 years, with
interest adjustable annually. These mortgage loans are limited to 75% of the
value of the real estate, unless the borrower would qualify for an unsecured
loan, in which case a greater loan value (up to 85%) may be approved. Under
FIRREA, the Bank is permitted to make non-residential real estate loans up to
400% of capital; non-residential real estate loans in excess of such amount must
be approved by the Director of the Office of Thrift Supervision (OTS).

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

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

Loan Solicitation and Processing

         The Bank actively solicits mortgage loan applications from existing
customers, customer referrals, and persons making telephone calls and visits to
its offices. Applications are not taken over the telephone although in some
instances a combination of verbal (by telephone) and written (by mail)
applications are received. Upon receipt of a loan application from a prospective
borrower, a credit report and verifications of employment and income are
obtained. An appraisal of the real estate intended to secure the proposed loan
is made by outside appraisers, all of whom have been approved by the Board of
Directors. At September 30, 1997 staff appraisers are not being used, but staff
appraisers are making periodic construction inspections. Approved outside
appraisers are used for all loans to employees. Appraisals are prepared in
accordance with regulatory guidelines and follow accepted and established
appraisal practices as 

                                       7
<PAGE>
 
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.



                                       8
<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,
                                                             -----------------------------
                                                         1997                             1996
                                             ----------      -----------      ------------      -----------

                                               Amount          Percent           Amount           Percent

                                             ----------      -----------      ------------      -----------
Type of Loans:                                                   (Dollars In Thousands)
------------------------
<S>                                          <C>             <C>              <C>               <C>  
Real Estate:
One-to-four family residential                 $20,503          57.26%          $21,253           58.63%
Multi-family and commercial                      2,509           7.01%            3,641           10.05%
Agricultural                                       546           1.52%              565            1.56%
Construction                                     1,075           3.00%            1,808            4.99%

Consumer:
Commercial                                       4,397          12.28%            3,283            9.06%
Loans secured by deposits                          965           2.69%            1,048            2.89%
Home equity                                      2,000           5.59%            1,663            4.59%
Other secured                                    3,563           9.95%            2,711            7.48%
Unsecured                                          251           0.70%              271            0.75%
                                            ----------     ----------        ----------      ----------

Total loans receivable                          35,809         100.00%           36,243          100.00%

                                            ==========     ==========        ==========      ==========

Less:
Loans in process                                 (731)                            (403)
Allowance for loan losses                        (391)                            (382)
Deferred loan origination fees                   (196)                            (211)
                                            ----------                       ----------

Loans, receivable net                          $34,491                          $35,247

                                            ==========                       ==========
</TABLE> 


         Loan Maturity Schedule. The following table sets forth certain
information as of September 30, 1997 (the end of the most recent audit year
reported) regarding the dollar amount (in thousands of dollars) of loans
maturing in the Bank's portfolio based on contractual terms to maturity for both
fixed-rate and variable-rate instruments.


                                       9
<PAGE>
 
<TABLE> 
<CAPTION> 

                                                       Multi                                                           
                                                       Family                                              
                                                       Agricul-                                            
                                     1-4 Family        tural and                                           
                                     Residential       Commercial        Construction       Consumer         Total
                                       -------          -------            -------          -------         -------
                                                                       (In Thousands)
<S>                                  <C>               <C>               <C>               <C>             <C> 
Non-performing                        $    149         $    ---           $      3         $      3        $    155

                                       -------          -------            -------          -------         -------

Amounts Due:
  Within 3 months                          230                               1,072            1,713           3,015
  3 months to 1 year                         8                5                               1,561           1,574

                                       -------          -------            -------          -------         -------

Total due within 1 year                    238                5              1,072            3,274           4,589

                                       -------          -------            -------          -------         -------

After 1 year:
  1 to 3 years                             313              227                               2,445           2,985
  3 to 5 years                           1,157               50                               3,488           4,695
  5 to 10 years                          2,749              710                               1,058           4,517
  10 to 20 years                         7,833            1,514                                 131           9,478
  Over 20 years                          8,064              549                                 777           9,390

                                       -------          -------            -------          -------         -------

Total due after 1 year                  20,116            3,050                  0            7,899          31,065

                                       -------          -------            -------          -------         -------

Total amount due                      $ 20,503         $  3,055           $  1,075         $ 11,176        $ 35,809

                                       =======          =======            =======          =======

Less:
Loans in process                                                                                               (731)

Provision for loan losses                                                                                      (391)

Deferred origination fees                                                                                      (196)
                                                                                                            -------

Loans receivable, net                                                                                      $ 34,491

                                                                                                            =======
</TABLE> 


                                      10
<PAGE>
 
         The following table sets forth the dollar amount (in thousands of
dollars) of all loans due after one year from September 30, 1997 (the end of the
most recent audit year reported) which have predetermined (or fixed) interest
rates and which have floating or adjustable interest rates. Loans which are
contractually due within one year after September 30, 1997 are not included in
this table.

<TABLE> 
<CAPTION> 

                                                                                 Floating or
                                                          Fixed Rates           Adjustable Rates             Total

                                                        ----------------        ----------------        ----------------
                                                                                 (In Thousands)

<S>                                                    <C>                     <C>                     <C> 
One-to-four family residential                          $         6,509         $        13,607         $        20,116

Multi-family, agricultural and                                      559                   2,491                   3,050
commercial

Consumer                                                          3,910                   3,989                   7,899

Construction                                                          0                       0                       0

                                                        ----------------        ----------------        ----------------

                                                        $        10,978         $        20,087         $        31,065

                                                         ==============          ==============          ==============
</TABLE> 


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

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


                                      11
<PAGE>
 
         The Bank uses standard FHLMC/FNMA loan documents on all first mortgage
residential loans to enable the Bank to make sales in the secondary market when
market conditions warrant. Pioneer Federal retains the servicing of nearly all
of its loans sold in the secondary market, and collects servicing fees. The fees
received from this activity are included in "loan and other service fees, net"
in the financial statements incorporated by reference in this filing. See "Loan
Origination and Other Fees" below.

         Loan Commitments. Commitments for approved mortgage loans are made
orally or in writing. Loan commitments are made for permanent financing of
property under construction, and such commitments are usually outstanding for a
period of six to twelve months prior to the closing of the loan. Pioneer
exercises virtually all commitments it issues. As of September 30, 1997 Pioneer
Federal had $3.9 million in loans approved but not closed; none of these were
evidenced by written commitments. The Bank anticipated selling $1.2 million of
the loans approved but not closed. As of September 30, 1997 Pioneer Federal had
no formal commitments to sell loans.

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

         Pioneer Federal's loan origination fees are charged according to
amount, term, loan-to-value, type of loan and market conditions on conventional
residential mortgages and commercial real estate loans. The total amount of
deferred loan fees at September 30, 1997 was $196,000. Any deferred loan fees
not previously accounted for are recognized as income at the time the loan is
sold or paid off.

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

         The Bank receives other fees and charges relating to existing loans,
which include late charges, fees collected in connection with a change in
borrower or other loan modifications, and servicing fees for loans collected for
others. These fees and charges have not constituted a material source of income
in 



                                      12
<PAGE>
 
the past. Loan service fees as a percentage of net interest income were 7.5%,
6.5% and 6.0% for fiscal 1997, 1996 and 1995, respectively.

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

         Federal regulations require savings institutions to classify their
assets on the basis of quality on a regular basis. An asset is classified as
substandard if it is determined to be inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
An asset is classified as doubtful if full collection is highly questionable or
improbable. An asset is classified as loss if it is considered uncollectible,
even if a partial recovery could be expected in the future. The regulations also
provide for a special mention designation, described as assets which do not
currently expose a savings institution to a sufficient degree of risk to warrant
classification but do possess credit deficiencies or potential weaknesses
deserving management's close attention. Assets classified as substandard or
doubtful require a savings institution to establish general allowances for loan
losses. If an asset or portion thereof is classified loss, a savings institution
must either establish a specific allowance for loss in the amount of the asset
classified loss, or charge off such amount. Federal examiners may disagree with
a savings institution's classifications. If a savings institution does not agree
with an examiner's classification of an asset, it may appeal this determination
to the OTS Regional Director. Pioneer Federal regularly reviews its assets to
determine whether any assets require classification or re-classification. The
Board of Directors reviews and approves all classifications. At September 30,
1997, Pioneer Federal had loans designated special mention of $1,144,000 and
classified assets consisting of loans classified as substandard of $106,000,
none as doubtful and $2,500 as loss.

         Management will continue to actively monitor Pioneer Federal's asset
quality and will establish loan loss reserves and will charge off loans and
properties acquired in settlement of 


                                      13
<PAGE>
 
loans against the allowances for losses on such loans and such properties when
appropriate, and will provide specific loss allowances when necessary. Although
management believes it uses the best information available to make
determinations with respect to the allowances for losses, future adjustments may
be necessary if economic conditions differ substantially from the economic
conditions in the assumptions used in making the initial determinations.

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

         In December 1993 the banking regulatory agencies, including the OTS,
adopted a policy statement regarding maintenance of an adequate allowance for
loan and lease losses and an effective loan review system. This policy includes
an arithmetic formula for checking the reasonableness of an institution's
allowance for loan loss estimate compared to the average loss experience of the
industry as a whole. Examiners will review an institution's allowance for loan
losses and compare it against the sum of (i) 50% of the portfolio that is
classified doubtful; (ii) 15% of the portfolio that is classified as
substandard; and (iii) for the portions of the portfolio that have not been
classified (including those loans designated as special mention), estimated
credit losses over the upcoming twelve months given the facts and 


                                      14
<PAGE>
 
circumstances as of the evaluation date. This amount is considered neither a
"floor" nor a "safe harbor" of the level of allowance for loan losses an
institution should maintain, but examiners will view a shortfall relative to the
amount as an indication that they should review management's policy on
allocating these allowances to determine whether it is reasonable based on all
relevant factors.

         The following table sets forth an analysis of the Bank's allowance for
possible losses for the periods indicated.

<TABLE> 
<CAPTION> 
                                                 At or For the Year
                                                 Ended September 30,
                                                1997             1996
                                               ------           ------

                                                (Dollars in Thousands)

<S>                                            <C>             <C> 
Total loans outstanding                        $ 35,809        $ 36,243

                                                =======         =======

Average loans outstanding                      $ 35,059        $ 33,358

                                                =======         =======
                                                               
Allowance balance (at beginning of period)     $    382        $    352

Provision (credit):
  Residential                                                        57
  Consumer

Net charge-offs (recoveries):
  Residential                                                        31
  Consumer                                           (9)             (4)

                                                -------         -------

Allowance balance (at end of period)           $    391        $    382

                                                =======         =======

Allowance for loan losses as a percent of          1.09%           1.05%
total loans outstanding 

Net loans charged off as a percent of             (0.03)%          0.08%
average loans outstanding 
</TABLE> 


                                      15
<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,
                                             1997                    1996
                                            ------                   ------
                               
                                                 Percent of             Percent of
                                                 Loans to               Loans to
                                      Amount     Total Loans   Amount   Total Loans
                                      ------     ------        ------     ------
                               
                                                 (Dollars in Thousands)
<S>                                   <C>        <C>          <C>       <C>  
At end of period allocated to:

  Real estate mortgage:
    1-4 family residential            $  224       57.26%     $  224      58.63%
    Multi-family and commercial           27        7.01%         38      10.05%
    Agricultural                           6        1.52%          6       1.56%
    Construction (1)                      12        3.00%         19       4.99%
    Consumer (2)                         122       31.21%         95      24.77%
                                     
                                       -----      ------       -----     ------
Total allowances for loan losses      $  391      100.00%     $  382     100.00%
                                       =====      ======       =====     ======
</TABLE>                             

(1)  Includes $2,500 specific reserve attributable to a particular loan and not
     available for other loan losses.
(2)  Includes $2,706 specific reserve attributable to particular loans and not
     available for other loan losses.

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

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



                                      16
<PAGE>
 
institutions as part of examinations of such institutions by the FDIC, OTS or
other federal or state regulators. Results of recent examinations indicate that
these regulators may be applying more conservative criteria in evaluating real
estate acquired in settlement of such loans. While management believes Pioneer
Federal has established its existing loan loss allowances in accordance with
generally accepted accounting principles, there can be no assurances that
regulators, in reviewing Pioneer Federal's assets, will not make Pioneer Federal
increase its loan loss allowance, thereby negatively affecting Pioneer Federal's
reported financial condition and results of operations.

         The following table sets forth information with respect to the Bank's
non-performing assets for the periods indicated. During the periods shown, the
Bank had no restructured loans within the meaning of Statement of Financial
Accounting Standards No. 15.

                                      17
<PAGE>

<TABLE> 
<CAPTION> 
                                                         At September 30,
                                                      1997            1996
                                                     ------          ------
<S>                                                 <C>             <C>   
                                                    (Dollars in Thousands)

Loans accounted for on a non-accrual basis (1):
  Construction                                       $    3          $    3
  Consumer                                                3              15
                                                      -----           -----
Total                                                     6              18
                                                      -----           -----
Accruing loans which are contractually past due 
90 days or more (2):
  Mortgage loans:
    Permanent loans secured by 1-4 family
    dwelling units                                      149              91
    Construction                                          0               0
    All other mortgage loans                                            114

  Consumer
                                                      -----           -----
Total                                                   149             205
                                                      -----           -----
Total non-accrual and accrual loans                     155             223

Real estate owned (3)
                                                      -----           -----
Total non-performing assets                          $  155          $  223
                                                      =====           =====

Total non-performing loans to loans                    0.44%           0.62%
Total non-performing loans to total assets             0.21%           0.30%
Total non-performing assets to total assets            0.21%           0.30%
</TABLE> 
(1)      Non-accrual status denotes loans which management believes may have
         defined weaknesses whereby accrued interest is inadequately protected
         by the current net worth and paying capacity of the obligor, or of the
         collateral pledged.

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

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


                                      18
<PAGE>
 
Non-accrual loans

         Non-accrual loans at September 30, 1997 consisted of one fixed-rate
construction loan on residential property classified as loss and one fixed-rate
consumer loan classified as loss. The Savings Bank had no other non-performing
assets as of September 30, 1997.

Investment Activities

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

         The Bank invests in investment securities in order to diversify its
assets, manage cash flow, obtain yield and maintain the minimum levels of liquid
assets required by regulatory authorities. Such investments generally include
purchases of mortgage-backed securities, federal government and agency
securities and qualified deposits in other financial institutions.

         At September 30, 1997, the Bank's investment securities totaled $28.6
million, of which $20.6 million were invested in mortgage-backed securities
primarily issued by Government agencies. These types of investments are interest
rate sensitive, and in addition, are subject to prepayment risk. Prepayment risk
is the risk that the principal of the security will be prepaid in advance of the
normal maturity, and any remaining premium or discount incurred from the
purchase of the investment could have a negative impact on the yield earned on
those investments.

         It is management's intention, and Pioneer Federal has the ability, to
hold the majority of its investment security portfolio to maturity. In
accordance with SFAS No. 115, effective October 1, 1995, the Bank began
classifying securities as either held to maturity, available for sale, or
available for trade. Securities classified as held to maturity are carried at
their amortized cost. Securities classified as trading securities are carried at
fair value with any unrealized gain or loss included in net income. Securities
classified as available for sale are carried at fair value, with the net
unrealized gain 

                                      19
<PAGE>
 
or loss carried as a separate component of stockholders' equity. At September
30, 1997, the unrealized holding gains of $155, less the applicable deferred tax
of $53, is included as a separate component of stockholders' equity pursuant to
SFAS No. 115. The balance of investment securities are classified as held to
maturity, which are being held at cost, adjusted for amortization of premiums
and accretion of discounts over the term of the security using the level yield
method. For further information, see Note 2 of Notes to Consolidated Financial
Statements (page 28 of Exhibit 13 here to).

     The following table sets forth the carrying value of the Bank's investment
securities portfolio at the dates indicated.
<TABLE> 
<CAPTION> 
                                                           At September 30,
                                                     ----------      -----------
                                                        1997             1996
                                                     ----------      -----------
                                                       (Dollars In Thousands)
<S>                                                  <C>             <C>  
Investment securities available-for-sale:

  Mortgage-backed securities                             $3,302           $3,076
  SBA Pools                                               2,647            4,525
                                                     ----------      -----------
Total                                                     5,949            7,601
                                                     ----------      -----------
Investment securities held-to-maturity:

  Mortgage-backed securities                             17,343           22,147
  U.S. Government and federal agencies                    4,006              500
  Federal Home Loan Bank of Cincinnati,
    capital stock                                           555              509
  Municipal bonds                                           718              817
                                                     ----------      -----------
Total                                                    22,622           23,973
                                                     ----------      -----------
Total investment securities                             $28,571          $31,574
                                                     ==========      ===========
</TABLE> 
                                      20
<PAGE>
 
         The following table sets forth the scheduled maturities, carrying
values, market value and average yields for the Bank's investment portfolio at
September 30, 1997.
<TABLE> 
<CAPTION> 
                                      -One Year or Less-     -One to Five Years-    -Five to 10 Years-       -More than 10Years-    
                                     Carrying     Average    Carrying    Average    Carrying    Average     Carrying     Average    
                                       Value       Yield       Value      Yield       Value      Yield        Value       Yield     
                                     --------    --------    --------    --------   --------    --------    --------    --------    
Securities Available-for-Sale                                          (Dollars in Thousands)
<S>                                  <C>         <C>         <C>         <C>        <C>         <C>         <C>         <C> 
  Mortgage-backed securities                $0       0.00%          $0       0.00%          $0       0.00%      $3,302       7.62%  
  SBA Pools                                  0       0.00%           0       0.00%           0       0.00%       2,647       7.00%  
                                       -------     -------     -------     -------     -------     -------     -------     -------  
     Total                                   0       0.00%           0       0.00%           0       0.00%       5,949       7.35%  
                                       -------     -------     -------     -------     -------     -------     -------     -------

Securities Held-to-Maturity:

  Mortgage-backed securities                 5       9.13%       7,131       6.24%       2,304       7.76%       7,904       6.81%  
  U.S. Govt. and federal agencies        3,006       5.89%       1,000       5.89%           0       0.00%           0       0.00%  
  FHLB Stock                                 0       0.00%           0       0.00%           0       0.00%         555       7.06%  
  Municipal bonds                          100       5.40%         500       5.20%           0       0.00%         118       6.20%  
                                       -------     -------     -------     -------     -------     -------     -------     -------  
     Total                               3,111       5.87%       8,631       6.14%       2,304       7.76%       8,577       6.82%  
                                       -------     -------     -------     -------     -------     -------     -------     -------
  Total Investment Securities           $3,111       5.87%      $8,631       6.14%      $2,304       7.76%     $14,526       7.03%  
                                       =======     =======     =======     =======     =======     =======     =======     =======  

</TABLE> 


<TABLE> 
<CAPTION> 
                                               -Total Investments-           
                                         Carrying     Market      Average    
                                          Value       Value       Yield      
                                       ---------   ---------    ---------     
Securities Available-for-Sale                                                
<S>                                    <C>         <C>         <C> 
  Mortgage-backed securities             $3,302      $3,302       7.62%   
  SBA Pools                               2,647       2,647       7.00%   
                                        -------     -------     -------
     Total                                5,949       5,949       7.35%   
                                        -------     -------     -------                    
                                                                             
Securities Held-to-Maturity:                                                 
                                                                             
  Mortgage-backed securities             17,343      17,321       6.70%   
  U.S. Govt. and federal agencies         4,006       4,006       5.89%   
  FHLB Stock                                555         555       7.06%   
  Municipal bonds                           718         726       5.39%   
                                        -------     -------     -------                   
  Total Investment Securities            22,622      22,608       6.53%   
                                        -------     -------     -------                  
                                        $28,571     $28,557       6.70%   
                                        =======     =======     =======   
</TABLE> 

                                      21
<PAGE>
 
         Pioneer Federal is a member of the Federal Home Loan Bank System. As a
member of the System it is required to maintain an investment in capital stock
of the Federal Home Loan Bank. No ready market exists for such stock and it has
no quoted market value. For disclosure purposes, such stock is assumed to have a
market value which is equal to cost, which amounted to $555,300 at September 30,
1997.

Sources of Funds

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

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

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

         Savings deposits in Pioneer Federal Savings Bank as of September 30,
1997, were represented by the various types of savings programs described below.

                                      22
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                                      Minimum       Balance as of    Percentage of
                                                         Interest     balance       September 30,        Total
Category                                      Term       Rate (1)      Amount         1997 (2)         Deposits
 --------------------------------------  -------------   --------     --------     ---------------   ------------
<S>                                      <C>             <C>          <C>          <C>               <C> 
NOW Accounts                             None               1.93%          300            $14,003          21.68%
Regular Savings                          None               2.92%          100              9,482          14.68%
Money Market Accounts                    None               3.20%        2,500              1,796           2.78%

Certificates of Deposit:
Fixed Term, Fixed Rate                   7-31 days          4.00%          0                   10           0.02%
Fixed Term, Fixed Rate                   91 days            4.00%        1,000                306           0.47%
Fixed Term, Fixed Rate                   6 month            4.60%        1,000              3,819           5.91%
Fixed Term, Fixed Rate                   6 month            4.62%        1,000              2,199           3.40%
Fixed Term, Fixed Rate                   12 months          5.14%          500              9,565          14.81%
Fixed Term, Fixed Rate                   12 months          4.81%          500                268           0.41%
Fixed Term, Fixed Rate                   12 months          4.50%          *                    2           0.01%
IRA, Fixed Term, Fixed Rate              18 months          5.67%          100              2,086           3.22%
IRA, Fixed Term, Variable Rate           18 months          5.60%          100              4,029           6.25%
Fixed Term, Fixed Rate                   18 months          5.26%        1,000              6,801          10.53%
Fixed Term, Fixed Rate                   24 months          5.32%        1,000              5,232           8.10%
Fixed Term, Fixed Rate                   30 months          4.69%          *                   30           0.05%
Fixed Term, Fixed Rate                   36 months          5.82%        1,000              2,857           4.42%
Fixed Term, Fixed Rate                   48 months          4.86%          *                   26           0.04%
Fixed Term, Fixed Rate                   60 months          6.70%        5,000              1,946           3.02%
Fixed Term, Fixed Rate                   72 months          5.77%          *                  128           0.20%
                                                                                    --------------   ------------
                                                                                           $64,585        100.00%
                                                                                    ==============   ============
</TABLE> 
(1)      Represents weighted average interest rates
(2)      In thousands
  *      This type of certificate was no longer offered at September 30, 1997

                                      23
<PAGE>
 
         The following is a description of the types of accounts offered by the
Bank.

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

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

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

                                      24
<PAGE>
 
         Individual Retirement Accounts ("IRAs"). The Bank offers tax-deferred
Individual Retirement Accounts. Pioneer Federal offers certificates established
solely for IRA accounts which have a maturity of 18 months.

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

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

         The following table indicates the amount (in thousands) of the
certificates of deposit of $100,000 or more by time remaining until maturity at
September 30, 1997.
<TABLE> 
         <S>                                                  <C> 
         Three months or less:                                $  1,599
         More than three through six months:                     1,635
         More than six through twelve months:                    1,838
         Over twelve months:                                     1,919
                                                               -------
                                                              $  6,991
                                                               =======
</TABLE> 
         The following table sets forth the average balances and interest rates
based on month-end balances for demand deposits, passbook savings and time
deposits as of the dates indicated.
<TABLE> 
<CAPTION> 
                                                 Year Ended September 30,
                         1997                             1996
                       Average          Average         Average          Average
                       Balance           Rate           Balance            Rate
                       -------          -------         -------           ------
                                     (Dollars in Thousands)
<S>                   <C>              <C>             <C>              <C>    
Deposit Category:


Demand Accounts (1)    $16,745            2.10%         $18,783            2.93%
Passbook Accounts        9,583            2.91%           9,838            2.20%
Certificates            38,913            5.21%          39,497            5.37%
                       -------          -------         -------           ------
                       $65,241            4.06%         $68,118            4.13%
                       =======          =======         =======           ======
</TABLE> 
(1)  Non-interest bearing deposits are not in excess of 10% of total deposits.

                                      25
<PAGE>
 
Borrowings

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

         The FHLB of Cincinnati functions as a central reserve bank providing
credit for savings institutions and certain other member financial institutions.
As a member, the Bank is required to own capital stock in the FHLB and is
authorized to apply for advances on the security of such stock and certain of
its home mortgages and other assets (principally, securities which are
obligations of, or guaranteed by, the United States), provided certain standards
related to credit worthiness have been met. See "Regulation of the Bank --
Federal Home Loan Bank System."

Competition

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

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

         The Bank considers Clark and Powell Counties, Kentucky, to be its
primary market area for savings and mortgage loans. As of September 30, 1997,
there were eight other financial institutions located in these counties; one of
the eight is a thrift institution. Management believes that Pioneer Federal has
good community identification in the area, and feels that local ownership of the
Bank is an important factor contributing to the Bank's success. Nonetheless, the
Bank competes with much larger financial institutions in Clark County and nearby
Lexington, Kentucky. These competitors offer better loan rates and broader
customer services than the Bank from time to time due to their 

                                      26
<PAGE>
 
size, financial resources and competitive strategy.

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

Sale of Stanton Branch Deposits and Physical Facility

         On October 17, 1997, Pioneer Financial Corporation sold the deposits of
Pioneer Federal Savings Bank at its Stanton branch, together with the real
estate and improvements on which that branch was located, to Peoples Exchange
Bank of Beattyville, Kentucky, Inc. The decision to sell the deposits and
physical assets was made over a period of time and was not entered into lightly.
Pioneer Federal had opened its Stanton branch in 1980. The management of Pioneer
Federal wanted to increase its customer base east of Clark County for several
reasons.

         Unfortunately, the Stanton branch never proved as profitable as the
rest of the Bank. Management of Pioneer Federal continued to operate this branch
due to its commitment to providing service and competition in the Powell County
and Eastern Kentucky market. However, in 1997, additional competition moved into
that area, which no longer made Pioneer's presence in Powell County as important
to those residents. Of course, the presence of additional competition would
decrease the likelihood of Pioneer's future profitability in Powell County.

         When it became apparent that Peoples Exchange Bank was going to move
its main office to Powell County, and Peoples Exchange made an offer to purchase
Pioneer's physical building, together with its deposit base, the Board of
Directors reluctantly decided to make that sale. The price paid by Peoples
Exchange Bank was a good price, and the opportunity would likely not be
repeated. (See Note 17 of Notes to Consolidated Financial Statements.)

                                      27
<PAGE>
 
Subsidiaries

         Pioneer Federal Savings Bank has one service corporation subsidiary,
Pioneer Service Corporation ("PSC"). In August, 1978, Pioneer Federal formed PSC
and purchased all of its stock for $16,000. PSC was formed by the Bank for the
purpose of acquiring stock in Intrieve, Incorporated. Intrieve is a non-profit
corporation based in Cincinnati, Ohio, which provides on-line computer
processing and inquiry service to Pioneer Federal and other savings and loan
institutions in the region. To date, PSC has conducted no business activities.

Personnel

         As of September 30, 1997, the Bank had 24 full-time employees, and 9
part-time employees. The employees are not represented by a collective
bargaining unit. The Bank believes its relationship with its employees to be
good.

Impact of Inflation and Changing Prices

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

Year 2000 Concerns

         Many computer programs use two digits to identify the year in a date
field. When computations involve the year 2000 and subsequent years, these
programs could create erroneous results, or could fail. Pioneer Federal has
appointed a committee and instituted an action plan, to address any problems
which it might face regarding the year 2000, both in terms of computer hardware
and software. At present, Pioneer Federal's management does not consider that
the cost of remedying any such problems will be material. However, as the
committee progresses through its agenda, should this assessment of the costs of
remedy change so that said costs would materially affect the Company's future
financial results, then such will be reported.

                                       28
<PAGE>
 
Company Regulation

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

         QTL Test. As a unitary savings and loan holding company, the
Corporation generally will not be subject to activity restrictions, provided the
Bank satisfies the QTL test (See Qualified Thrift Lender Test, page 36). If the
Corporation acquires control of another savings association as a separate
subsidiary, it would become a multiple savings and loan holding company, and the
activities of the Corporation, and any of its subsidiaries (other than the Bank
or any other SAIF-insured savings association) would become subject to
restrictions applicable to bank holding companies unless such other associations
each also qualify as a QTL or were acquired in a supervised acquisition.

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

         Federal law generally provides that no "person", acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control", as that term is defined in OTS regulations, of a federally insured
savings institution without giving at least 60 days written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition.
Such an acquisition of control may be disapproved if it is determined, among
other things, that: (i) the acquisition would substantially lessen competition;
(ii) the financial condition of the acquiring person might jeopardize the
financial stability of the savings institution or prejudice the interest of its
depositors; or (iii) the competency, experience, 

                                       29
<PAGE>
 
or integrity of the acquiring person or the proposed management personnel
indicates that it would not be in the interests of the depositors or the public
to permit the acquisition of control by such person.

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

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

Bank Regulation

         General. The Bank is chartered as a federal savings bank under the Home
Owners' Loan Act, as amended (the "HOLA") which is implemented by regulations
adopted and administered by the OTS. As a federal savings bank, the Bank is
subject to regulation, supervision and regular examination by the OTS. The OTS
also has extensive enforcement authority over all savings institutions and their
holding companies, including the Bank and the Company. Federal banking laws and
regulations control, among other things, the Bank's required reserves,
investments, loans, mergers and consolidations, payment of dividends and other
aspects of the Bank's operations. The deposits of the Bank are insured by the
SAIF administered by the FDIC to the maximum extent provided by law ($100,000
for each depositor). In addition, the FDIC has certain regulatory and
examination authority over OTS-regulated savings institutions and may recommend
enforcement actions against savings institutions to the OTS. The supervision and
regulation of the Bank is intended primarily for the protection of the deposit
insurance fund and the Bank's depositors rather than for holders of the
Company's stock or for the Company as the holder of the stock of the Bank.

                                       30
<PAGE>
 
         Pioneer Federal must file reports with the OTS and the FDIC concerning
its activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the Savings Association
Insurance Fund ("SAIF") and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such regulations, whether
by the OTS, the FDIC or the United States Congress, could have a material
adverse impact on the Company and the Bank and their operations.

         Proposed Legislation. Legislation currently pending before the United
States Congress would, if enacted, require all federal savings institutions
(such as the Bank) to convert to a national bank or a state bank or savings bank
charter. In addition, the proposed legislation would cause the Company to be
regulated not as a savings and loan holding company, but rather as a bank
holding company or a "financial services" holding company (a new regulatory
classification created by the legislation). If the pending legislation were to
be adopted in its current form, it would eliminate certain advantages now
enjoyed by federal savings institutions, such as unrestricted interstate
branching.

         As consideration of the proposed legislation is in its early stages,
the Company cannot predict whether or in what form the legislation will be
enacted. However, based upon the provisions of the currently pending
legislation, the management of the Company does not believe that the enactment
of such legislation would have a material adverse effect on its financial
condition or results of operations.

         Business Activities. The Bank derives its lending and investment powers
from the HOLA and the regulations of the OTS thereunder. Under these laws and
regulations, the Bank may invest in mortgage loans secured by residential and
commercial real estate, commercial and consumer loans, certain types of
commercial paper and debt securities, and certain other assets. The Bank may
also establish service corporations that may engage in activities not otherwise
permissible for the Bank, including certain real estate equity investments and
securities and insurance brokerage. These investment powers are subject to
various limitations.

         Branching. Subject to certain limitations, OTS regulations currently
permit a federally chartered savings institution like 

                                       31
<PAGE>
 
the Bank to establish branches in any state of the United States, provided that
the federal savings institution qualifies as a "domestic building and loan
association" under the Internal Revenue Code. See "Qualified Thrift Lender
Test". The authority for a federal savings institution to establish an
interstate branch network would facilitate a geographic diversification of the
institutions's activities. However, recently proposed federal legislation could,
if enacted, restrict the Bank's ability to open branches in states other than
Kentucky. See "Proposed Legislation".

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

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

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

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

                                       32
<PAGE>
 
         The BIF/SAIF legislation did not specify an actual assessment but
stated that the total assessment would be equal to the amount necessary to
recapitalize the SAIF as of October 1, 1996. Institutions were assessed at the
rate of 65.7 basis points per $100 of SAIF-assessable deposits as of March 31,
1995. The BIF/SAIF legislation provided that the amount of the special
assessment is deductible under Section 162 of the Internal Revenue Code (the
"Code") in the year the assessment is paid. The BIF/SAIF legislation also
provided that section 172(f) of the Code will not apply to deductions taken
under section 162 of the Code for the special assessment. The Bank's assessment
amounted to approximately $435,000 before tax benefit, and such amount was
accrued in the financial statements as of September 30, 1996.

         As a result of the recapitalization of the SAIF by the 1996 Act, the
FDIC reduced the insurance assessment rate for SAIF-assessable deposits for
periods beginning on October 1, 1996. In 1997, the FDIC set the effective
insurance assessment rates for SAIF-insured institutions, such as the Bank, at
zero to 27 basis points. In addition, SAIF-insured institutions will be
required, until December 31, 1999, to pay assessments to the FDIC at an annual
rate of between 6.0 and 6.5 basis points to help fund interest payments on
certain bonds issued by the Financing Corporation ("FICO"), an agency of the
federal government established to recapitalize the predecessor to the SAIF.
During this period, BIF member banks will be assessed for payment of the FICO
obligations at one-fifth the annual rate applicable to SAIF member institutions.
After December 31, 1999, BIF and SAIF members will be assessed at the same rate
(currently estimated at approximately 2.4 basis points) to service the FICO
obligations.

         The 1996 Act also provides that the FDIC may not assess regular
insurance assessments for the SAIF unless required to maintain or to achieve the
designated reserve ratio of 1.25% except for such assessments on those
institutions that are not classified as "well-capitalized" or that have been
found to have "moderately severe" or "unsatisfactory" financial, operational or
compliance weaknesses. The Bank is classified as "well-capitalized" and has not
been found by the OTS to have such supervisory weaknesses.

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

         Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), plus purchased mortgage servicing rights
valued at the lower of the maximum percentage established by the OTS or the
amount 

                                       33
<PAGE>
 
includable in core capital. Core capital is defined as common stockholders'
equity (including retained earnings), noncumulative perpetual preferred stock
and majority interests in the equity accounts of consolidated subsidiaries, and
qualifying supervisory goodwill, less nonqualifying intangible assets.

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

         The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital (which is defined as core capital plus
supplementary capital) of 8.0% of risk-weighted assets. The components of
supplementary capital include, among other items, cumulative perpetual preferred
stock, perpetual subordinated debt, mandatory convertible subordinated debt,
intermediate-term preferred stock and the portion of the allowance for loan
losses not designated for specific loan losses. The portion of the allowances
for loan and lease losses includable in supplementary capital is limited to a
maximum of 1.25% of risk-weighted assets. Overall, supplementary capital is
limited to 100% of core capital. A savings association must calculate its
risk-weighted assets by multiplying each asset and off-balance sheet item by
various risk factors as determined by the OTS, which range from 0% for cash to
100% for delinquent loans, property acquired through foreclosure, commercial
loans and other assets.

         As of September 30, 1997, the Bank had tangible, core and risk-based
capital of $8.6 million, $8.6 million and $9.0 million, respectively, which
amounts significantly exceed all applicable fully phased-in regulatory capital
requirements of the OTS.

         OTS regulations set forth the methodology for calculating an Interest
Rate Risk (IRR) component which is added to the risk-based capital requirements
for OTS regulated thrift institutions. Generally, savings associations with a
greater than "normal" level of interest rate exposure will be subject to a
deduction 

                                       34
<PAGE>
 
from total capital for purposes of calculating their risk-based capital
requirement. Specifically, interest rate exposure will be measured as the
decline in net portfolio value due to a 200 basis point change in market
interest rates. The IRR component to be deducted from total capital is equal to
one-half the difference between an institution's measured exposure and the
"normal" level of exposure (which is defined as 2% of the estimated economic
value of its assets). Institutions, such as the Bank, with less than $300
million in assets and a risk-based capital ratio in excess of 12% are exempt
from deducting the IRR component.

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

         Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), the federal banking regulators are required to take prompt
corrective action in respect of depository institutions that do not meet certain
minimum capital requirements, including a leverage limit and a risk-based
capital requirement. All institutions, regardless of their capital levels, are
restricted from making any capital distribution or paying any management fees
that would cause the institution to become undercapitalized. As required by the
FDICIA, banking regulators, including the OTS, have issued regulations that
classify insured depository institutions by capital levels and provide that the
applicable agency will take various prompt corrective actions to resolve the
problems of any institution that fails to satisfy the capital standards.

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

                                       35
<PAGE>
 
association is prohibited from making a capital distribution if, after making
the distribution, the savings association would be undercapitalized (not meet
any one of its minimum regulatory capital requirements).

         Qualified Thrift Lender Test. The Home Owners' Loan Act, as amended
("HOLA"), requires savings institutions to meet a Qualified Thrift Lender (QTL)
test. If the Bank maintains an appropriate level of Qualified Thrift Investments
("QTIs") (primarily residential mortgages and related investments, including
certain mortgage-related securities) and otherwise qualifies as a QTL, it will
continue to enjoy full borrowing privileges from the FHLB of Cincinnati. The
required percentage of QTIs is 65% of portfolio assets (defined as all assets
minus intangible assets, property used by the institution in conducting its
business and liquid assets equal to 10% of total assets). Certain assets are
subject to a percentage limitation of 20% of portfolio assets. In addition,
savings associations may include shares of stock of the FHLBs, Federal National
Mortgage Association ("FNMA"), and FHLMC as qualifying QTIs. Compliance with the
QTL test is determined on a monthly basis in nine out of every 12 months. As of
September 30, 1997, the Bank qualified as a QTL.

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

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

                                       36
<PAGE>
 
permissible for a bank holding company or acquire the securities of any
affiliate which is not a subsidiary. The OTS has the discretion to treat
subsidiaries of the savings association as affiliates on a case-by-case basis.

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

         Liquidity Requirements. All savings associations are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. As of September 30, 1997, the Bank's
liquidity ratio was 29.13%.

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

         Federal Home Loan Bank System. The Bank is a member of the FHLB of
Cincinnati, which is one of 12 regional FHLBs that administer the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for 

                                      37
<PAGE>
 
its members within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
loans to members (i.e., advances) in accordance with policies and procedures
established by the Board of Directors of the FHLB. As of September 30, 1997, the
Bank had borrowed $652,225 from the FHLB of Cincinnati to fund operations; there
can be no assurances that additional borrowings will not be made in the future.

         As a member, the Bank is required to purchase and maintain stock in the
FHLB of Cincinnati in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts, or similar obligations at
the beginning of each year. As of September 30, 1997, the Bank had $555,300 in
FHLB stock, which was in compliance with this requirement.

         The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low-and moderate-income housing projects. These contributions have adversely
affected the level of FHLB dividends paid and could continue to do so in the
future. For the fiscal year ended September 30, 1997, dividends paid by the FHLB
of Cincinnati to the Bank totaled $46,500.

         Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW, and Super
NOW checking accounts) and non-personal time deposits. The balances maintained
to meet the reserve requirements imposed by the Federal Reserve Board may be
used to satisfy the liquidity requirements that are imposed by the OTS. As of
September 30, 1997, the Bank was in compliance with its Federal Reserve Board
minimum reserve requirements.

         Savings associations have authority to borrow from the Federal Reserve
Bank "discount window", but Federal Reserve policy generally requires savings
associations to exhaust all OTS sources before borrowing from the Federal
Reserve System. The Bank had no such borrowings at September 30, 1997.

Federal Taxation

         The Company and the Bank file a consolidated tax return on a fiscal
year (September 30) basis. Thrift institutions are subject to the provisions of
the Code in the same general manner as other corporations. Prior to recent
legislation, institutions such as the Bank which met certain definitional tests
and other conditions prescribed by the Code benefitted from certain favorable
provisions regarding their deductions from taxable income for annual additions
to their bad debt reserve. For 

                                      38
<PAGE>
 
purposes of the bad debt reserve deductions, loans were separated into
"qualifying real property loans", which generally are loans secured by interests
in certain real property, and nonqualifying loans, which are all other loans.
The bad debt reserve deduction with respect to nonqualifying loans was based on
actual loss experience, although the amount of the bad debt reserve deduction
with respect to qualifying real property loans could be based upon actual loss
experience (the "experience method") or a percentage of taxable income
determined without regard to such deduction (the "percentage of taxable income
method"). Legislation recently signed by the President repealed the percentage
of taxable income method of calculating the bad debt reserve. The Bank
historically has elected to use the percentage method.

         Earnings appropriated to an institution's bad debt reserve and claimed
as a tax deduction are not available for distribution to shareholders (including
distributions made on dissolution or liquidation), unless such amount was
included in taxable income, along with the amount deemed necessary to pay the
resulting federal income tax. For information regarding additions to the tax bad
debt reserves, see Note 7 to Financial Statements.

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

State Taxation

         The Commonwealth of Kentucky imposes no income or franchise taxes on
savings institutions. Pioneer Federal is subject to an annual Kentucky ad
valorem tax. This tax is .1% of the Bank's savings accounts, common stock,
capital and retained income with certain deductions allowed for amounts borrowed
by depositors and for securities guaranteed by the U.S. Government or certain of
its agencies. For the fiscal year ended September 30, 1997, the amount of such
expense for the Bank was $65,545.

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

Item 2.  Properties

         Pioneer Financial's and Pioneer Federal's main office is located at 25
East Hickman Street, Winchester, Kentucky. The building is a one story building
of contemporary design constructed in 1975 and expanded in 1978. The building
has 5,670 square feet, with four teller stations, two drive-in windows (which
serve two lanes of traffic), five private offices, a 

                                      39
<PAGE>
 
Directors' Conference Room, a kitchen, a large lobby, two restrooms, a walk-in
vault, a storage room, and a tellers' work area. There are eleven computer
terminals at the main office.

         As of September 30, 1997 Pioneer Federal still owned a branch office at
17 East Pendleton Street, Stanton, Kentucky. It consisted of a brick-veneer
modular building, constructed in 1980. The building had 1,120 square feet, with
two teller stations, one drive-in window, one large private office, a kitchen,
two restrooms, and a tellers' work area. There were three computer terminals at
the branch office. Its value is included in the table below.

         The Bank also has a branch in Winchester, Kentucky, at the corner of
the Bypass (Kentucky Highway 1958) and Fulton Road. This building is of a
contemporary design, with a concrete exterior. The branch has a small kitchen,
two restrooms, an office, conference room, safety deposit boxes and a walk-in
vault. The Bypass branch has eight computer terminals, three drive-in lanes and
an automatic teller machine (ATM).

<TABLE> 
<CAPTION> 
                                             September 30,
                                        1997              1996
                                        ----------------------
<S>                                 <C>                <C> 
Land, buildings and
  improvements.......               $1,850,235         $1,637,310

Furniture, fixtures
  and equipment......                  790,987            720,748

                                     ---------          ---------
Total, at cost.......                2,641,222          2,358,058

Less accumulated
  depreciation.......                1,228,958          1,182,071

                                     ---------          ---------
                                    $1,412,264         $1,175,987
                                     =========          =========
</TABLE> 

Item 3.  Legal Proceedings

         Not applicable.

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

         Not applicable.

                                      40
<PAGE>
 
                                    PART II

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

      (a) Market Information. As of the date hereof, there is no established
public trading market for Pioneer Financial's common stock. The most recent sale
of Pioneer Financial's stock for which Pioneer Financial is aware of the
purchase price occurred during the week of August 11, 1997, with the price per
share being $43.00.

      (b) Holders. As of December 1, 1997, there were approximately 285 holders
of shares of Pioneer Financial's common stock, par value $1 per share.

      (c) Dividends. During fiscal year 1997, Pioneer Financial's Board of
Directors declared quarterly dividends of 35 cents per share payable on December
16, 1996, and 40 cents per share payable on March 15, 1997, June 16, 1997 and
September 15, 1997 to shareholders of record as of December 2, 1996, March 1,
1997, June 1, 1997 and September 1, 1997, respectively. Total dividends paid in
fiscal 1997 amounted to $322,761.

      The Corporation may not declare or pay cash dividends on any of its stock
if the effect thereof would cause the Bank's net worth to be reduced below (1)
the amount required for the liquidation account established in connection with
its stock conversion, or (2) the net worth and capital distribution requirements
imposed by the OTS and FDIC. (see Note 8 to Consolidated Financial Statements,
on page 36 of the Corporation's Annual Report to Shareholders, Exhibit 13
hereto).

Item 6.   Selected Financial Data

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

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

      The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 6 through 16 of the Corporation's Annual Report to Shareholders (Exhibit
13) is incorporated herein by reference.

                                      41
<PAGE>
 
Item 8.  Financial Statement and Supplementary Data

    The financial statements and supplemental data contained on pages 17 through
46 of the Corporation's Annual Report to Shareholders (attached hereto as
Exhibit 13) as listed in Item 14, are incorporated herein by reference.

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

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

    (b)  Disagreements with Accountants. Not applicable.

                                   PART III

Item 10. Directors and Executive Officers of Pioneer Federal

    Reference is made to "Election of Directors" from pages 5 through 7 of
the Proxy Statement for the January, 1998 annual meeting of stockholders
(Exhibit 28(b) hereto).

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

    Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 4 or 5 were
required for those persons, the Corporation believes that, since September 30,
1996, all filing requirements applicable to its executive officers, directors
and greater than ten-percent beneficial owners were complied with.

Item 11.  Executive Compensation

    (a) Cash Compensation. Reference is made to "Remuneration of Officers" on
pages 12 through 13 of the Proxy Statement (Exhibit 28(b) hereto, which is
incorporated herein by reference) for information with respect to the cash
compensation of the registrant's executive and other officers as a group.

    (b) Compensation Pursuant to Plans. The registrant has instituted a "401(k)"
retirement plan as of December 1, 1985. With respect to this plan, reference is
made to the section captioned "Remuneration of Officers" on pages 12 and 13 of
the

                                      42
<PAGE>
 
Proxy Statement (Exhibit 28(b) hereto) and Note 10 on page 38 of the financial
statements included in the Annual Report to Shareholders (Exhibit 13 hereto) for
details concerning this retirement plan. There is no contractual obligation for
the registrant to contribute sums to this plan. To date, Pioneer Federal has
contributed $242,420 to this 401(k) plan.

       (c) Employee Stock Ownership Plan. On October 31, 1994, the registrant
approved the establishment of an Employee Stock Ownership Plan (ESOP) in which
employees meeting age and service requirements are eligible to participate. The
ESOP is effective beginning January 1, 1994. The Board of Directors authorized
the funding of the ESOP with contributions of $38,488 and $30,512 for the years
ended September 30, 1997 and 1996 respectively.

       (d) Other Compensation.  Not applicable.

       (e) Compensation of Directors. Reference is made to "Directors' Fees" on
page 11 and "Election of Directors" on pages 5 to 8 of the Proxy Statement
(Exhibit 28(b) hereto) for the description of the remuneration paid to the
registrant's directors.

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

Item 12.   Security Ownership of Certain Beneficial Owners and Management

       Reference is made to "Voting Securities" on pages 2 through 4 of the
Proxy Statement (Exhibit 28(b) hereto, incorporated herein by reference) for
information pertaining to the security ownership of certain beneficial owners
and management.

Item 13.   Certain Relationships and Related Transactions

       (a) Transactions with Management and Others. Reference is made to
"Transactions Involving Directors and Officers" on page 14 of the Proxy
Statement (Exhibit 28(b) hereto, incorporated herein by reference) for
information with respect to transactions involving directors or executive
officers or members of their immediate families.

       (b) Certain Business Relationships. The registrant's Chairman of the
Board, Janet W. Prewitt, is an equity partner in the law firm of White, McCann &
Stewart, a general practice law firm located in Winchester, Kentucky, which
serves as general counsel to Pioneer Federal Savings Bank. Payments to that law
firm have not exceeded 5% of the registrant's consolidated gross revenues for
its last full fiscal year or any earlier year end. The dollar amount of fees
paid to the law firm for legal services provided in Pioneer Federal's last
fiscal year was $90,948. Of

                                      43
<PAGE>
 
this sum, $85,588 represented fees earned in connection with title examinations
for real estate loans, while the balance represented fees in foreclosure actions
and fees for quarterly and annual reports. Director Prewitt's compensation from
Pioneer Federal plus her share in the gross fees paid to the law firm has never
exceeded $60,000 in any fiscal year.

      (c) Indebtedness of Management. Reference is made to "Transactions
Involving Directors and Officers" on page 14 of the Proxy Statement for
information with respect to loans made to executive officers and directors.

      (d) Transactions with promoters. Not applicable.

                                    PART IV

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

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

Reports of Independent Certified Public Accountants

      Exhibit 13, page 17
      Exhibit 28(a)

Consolidated Statements of Financial Condition at September 30, 1997 and 1996

      Exhibit 13, page 18

Consolidated Statements of Income for the years ended September 30, 1997, 1996
and 1995

      Exhibit 13, page 19

Consolidated Statements of Stockholders' Equity for the years ended September
30, 1997, 1996 and 1995

      Exhibit 13, page 20

Consolidated Statements of Cash Flows for the years ended September 30, 1997,
1996 and 1995

      Exhibit 13, pages 21 and 22

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<PAGE>
 
Notes to Consolidated Financial Statements

         Exhibit 13, pages 23 through 46

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

         Exhibit 13              Annual Report to Stockholders
         Exhibit 28(a)           Manually signed Report of Miller, 
                                 Mayer, Sullivan & Stevens LLP
         Exhibit 28(b)           Proxy Statement for Annual Meeting to be 
                                 held January 14, 1998

         (b) No Form 8-K was filed in the fourth quarter of fiscal 1997.

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

         (d) Separate financial statements are not applicable.

                                      45
<PAGE>
 
                                  SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                PIONEER FINANCIAL CORPORATION,
                                WINCHESTER, KENTUCKY

Date:  December 16, 1997        BY /s/Janet W. Prewitt
                                  -------------------------------
                                  Janet W. Prewitt, Director and
                                  Chairman of the Board

Date:  December 16, 1997        BY /s/Carl C. Norton
                                  -------------------------------
                                  Carl C. Norton, Director and
                                  President

Date:  December 16, 1997        BY /s/Nancy M. Lawwill
                                  -------------------------------
                                  Nancy M. Lawwill, Director,
                                  and Treasurer

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

Date:  December 16, 1997        BY /s/William Cress
                                  -------------------------------
                                  William Cress, Director

Date:  December 16, 1997        BY /s/Ewart W. Johnson 
                                  -------------------------------
                                  Ewart W. Johnson, Director

Date:  December 16, 1997        BY /s/Nora M. Linville
                                  -------------------------------
                                  Nora M. Linville, Director

Date:  December 16, 1997        BY /s/Wayne M. Martin
                                  -------------------------------
                                  Wayne M. Martin, Director

Date:  December 16, 1997        BY /s/Thomas D. Muncie
                                  -------------------------------
                                  Thomas D. Muncie, Director

Date:  December 16, 1997        BY /s/Andrew J. Ryan
                                  -------------------------------
                                  Andrew J. Ryan, Director

Date:  December 16, 1997        BY /s/Robert G. Strode
                                  -------------------------------
                                  Robert G. Strode, Director